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Research Report
ACF3491 Advance Financial Accounting Theory and Practice Assignment 1

TABLE OF CONTENTS

ABSTRACT...................................................................................................................................................... 3 INTRODUCTION ............................................................................................................................................. 4 METHODOLOGY ............................................................................................................................................ 4 DISCUSSION................................................................................................................................................... 5 MIX MEASUREMENT MODEL ........................................................................................................................ 6 Advantages6 Disadvantages.7 CONCLUSION................................................................................................................................................. 8 RECOMMENDATION: .................................................................................................................................... 8 REFRENCE LIST.10

ABSTRACT

The following research report aims to examine the effect of mix measurement model component used to measure the financial instruments. Through studying different academic journal articles, the report will identify and explain whether this model should be adopted in the business, it will further examine the implications this model related to performance of the company and determine its financial position, report will also relate the problems encountered while using this model. However, in the end it is concluded that this model is acceptable and widely used.

INTRODUCTION

Companies have started to adopt mix measurement model wherein different measurement bases are applied to different degrees and in varying combinations during preparations of the financial statements. For the purpose of this report the company Challenger Limited is taken as an example and analysis is made after carefully analyzing the statement of financial position and the supplementary notes and disclosures provided in the companys year-end annual report for 2013. Also in this report is seen the advantages and disadvantages of the mix measurement model in comparison to single measurement model. However in the end it is concluded that a mix measurement model is better.

METHODOLOGY

Qualitative method of research was adopted in this research report where theories and literature from academic journal articles and professional articles were examined to evaluate and elaborate the mix measurement model. Also the financial reports of Challenge Limited is been taken as a base for research of different measurement bases applied to the assets.

DISCUSSION
Challenger Limited is an investment managed firm committed to providing its customers with financial security in retirement. As a listed company it must provide general-purpose financial report, as its annual report for 2013 consists of the consolidated statement of financial position, consisting of the aggregated position of the company as at 31st June 2013, which will be analyzed in this report. Since Australian companies are given a range of bases to utilize in measuring the monetary value elements of financial statements that are to be carried out in the balance sheet and income statement CGF utilizes varied measurement bases for various accounts. To analyze this statement the following two accounts will be assessed. Investment Property: (Challenger Limited, 2013) annual reports states that it is initially recognized at cost, including transaction costs. Subsequent to initial recognition, the non-current asset account of Investment Properties is recognized at fair value, meaning that the asset is recorded at the value at which it would be exchanged between knowledgeable and willing parties at an arms length transaction. The value of this asset keeps on fluctuating in accordance with the market conditions. Since the asset is held to gain long term rental yields its value is considered in investment decisions and reflected accordingly in the balance sheet enhancing the characteristic of timeliness. Therefore, it could have strong impacts on the creditworthiness of the business which is important to the users to make useful decisions without any bias.

Plant and Equipment: They are stated at cost, or deemed cost, less accumulated depreciation and impairment losses. Thus, they are recorded at the amount of cash paid i.e. its fair value at the time of acquisition (Challenger Limited, 2013).

The Plant and Equipment being recorded at historical cost making sure that the users are aware of the asset being acquired at the original cost and then depreciated on straight line basis. The information is unbiased and able to create a significant difference in decision making process.

MIX MEASUREMENT MODEL

The objective of financial reporting is to create a communication framework to assist users in making economic decisions. Whether the mix measurement model used for financial instruments is appropriate or not is addressed in this report.

ADVANTAGES: A mixed measurement model represents principle based approach proving that different entities may follow different business models (International Banking Federation [IBFED], 2008). It is because they are high level general statements leaving room for discussion and can widely be adopted by auditors. This mixed model is more likely to result in useful reporting providing investors with better information for evaluating financial institutions. According to a global survey by PricewaterhouseCoopers (PwC) most investors prefer a mixed measurement model for accounting of financial instruments. They preferred a model with fair value reporting for shorter lived instruments and amortized cost reporting for longer lived instruments since the information better reflects an entity's underlying business and economic reasons for holding an instrument (According to a global survey, 2010). Also the International Accounting Standards Board prefers this model as it divides the financial instruments into those intended to be traded and those to be held to maturity (Bostwick & Fahnestock, 2011). Assigning a cost model to a particular financial instrument is easy when classification of asset is made. The main advantage of this model is that it is well established and understood and reflects the information underlying different business models and internal risk management strategies.

On the other hand if a single measurement model is being adopted i.e. fair value, present value or historical cost method any one of them being adopted to measure the financial instruments market expectation of future cash flow, (Ferlauto, McGowan, Rankin &Stanton, 2012) predicted that such a measure will be always the most relevant and reliable if markets are complete and in perfectly competitive equilibrium. In such a situation, a unique market value can be attributed to every asset and liability, so a single measurement method is appropriate. (Whittington, 2010) points that unfortunately, in reality, markets are not perfect and complete, so that this ideal

information is not available and thus a single measurement model cannot be adopted to measure the financial instruments again supporting the concept that a mix measurement model is better.

According to Federal Accounting Standards Advisory Board some individuals believe that under mixed measurement approach some assets or liabilities are reported at initial amounts and others at remeasured amounts, serves a wider range of decision-making needs than either of the two measurement approaches alone. Ultimately, which measurement approach is more useful depends on the types of transactions and other events that have occurred and the information needed for the decisions to be made rather, when the goal is to help ensure that reported information meets several financial reporting objectives in response to the various decisionmaking needs of a range of users, it is necessary to accept that different measurement methods may be appropriate to convey useful information (Federal Accounting Standards Advisory Board [FASAB], 2011).

(Lane, 2008) concludes that relevant performance reporting will never be achieved if the framework for financial reporting sticks rigidly to either an amortized cost model or a fair value model. Instead, IBFED suggests that a mixed measurement model (amortized cost and fair value) is more likely to result in useful reporting. Finally, just as different costs for different purposes has long been accepted as being appropriate for assisting management decisions, so different measures for different purposes is appropriate for financial accounting. For example, as Penman (2007) demonstrates, cost measures may provide useful margins on turnover for predicting operating cash flows in a going concern business, whereas fair values may be a more direct and reliable means of valuing a portfolio of marketable investments.

DISADVANTAGES: However, there are certain opponents to the mix measurement model. The use of mix measurement model is unappealing and creates difficulty for the users. Using different bases for measuring financial instruments complicates the interpretation of accounting summary amounts making it difficult to distinguish between accounting induced income or expense from economic income or expense (Barth, 2007). Thus, some have regarded as the fair

value method better as it meets the conceptual framework criteria better. Its also been argued that using these model businesses might use the base that reflects the disclosed earnings to their best realization of gains. (Bostwick et al., 2011) argue that if an entity expects to hold a financial asset to maturity, then the amortized cost or the present value of future cash flows is more appropriate than market value (if there is a market value) or if the financial asset is likely to be sold or is not to be held to maturity, then reporting it at the market value is appropriate (art3).

A single measurement model would provide with consistency within accounts avoiding mismatching and more meaningful information. Also, using this model the comparison between different entities becomes easy (Rankin et al., 2012).

CONCLUSION
Historical Cost represents the real value of items at the date of their entering the company. But any significant change thereon makes the cost inaccurate and thus inappropriate for making decisions and financial position (Cozma, 2004). Fair value measurement includes lack of a clear definition of fair value, lack of verifiability, the ability for management to affect fair value estimates (Daniele & McCarthy, 2006). Under these circumstances the accounts dont always reflect the most relevant information. The conflict between relevance and credibility is the central accounting issue. Thus, owing to the problems seen by some measurement bases a single measurement model cannot be chosen to measure the financial instruments.

As a mixed model tends to report each element of the financial statements at the value most appropriate for that item, fair value nor historical cost, alone, is the optimal measurement model. Thus, concluding that a mix measurement model better serves the user with relevant and reliable information needed to make the economic decisions.

RECOMMENDATION:
A measurement model that fulfills the basic characteristic of relevance, reliability, understandability and timeliness is the best model to measure the financial instruments. Researchers or businesses should adopt a mixed model approach wherein they should improve

the inputs used in the valuation process for fair value information and come up with a model that is soundly based on conceptual framework and provides relevant information to the users. Also it should be relevant and reliable through representational faithfulness (Bostwick et al., 2011). The inputs used are important as they determine the final value of the asset and liability thus creating a valuation process is equally important to from a model free from errors and reflecting the true market condition. The new model will enable entities to better reflect their risk management activities in their financial statements.

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Reference List
Text Book Ferlauto, K., McGowan, S., Rankin, M., & Stanton, P., (2012). Contemporary Issues in Accounting. Australia: John Wiley and Sons Australia Ltd. Articles Barth, M.E., (2007). Standard-setting measurement issues and the relevance of research (Research Report). Accounting and Business Research; International Accounting Forum. International Banking Federation,. (2008). Accounting for financial instruments conceptual paper. London. Bostwick, E.D., & Fahnestock, R.T., (2011). Fair Value Accounting and the Conceptual Framework, 18 (1), 449-458. Cozma, I.D., (2004). Historical Cost versus Fair Value. Romania: University of Oradea Danile, T.M., & McCarthy, I.N., (2006). Ethical Implications in Reporting Fair Value in Financial Statements. New York, United States: The Peter J. Tobin College of Business, St. Johns University. Whittington, G., (2010). Measurement in Financial Reporting. Accounting, Finance and Business studies, 46 (1), 104- 109 Penman, S. H., Financial Reporting Quality: Is Fair Value a Plus or a Minus?, Accounting and Business Research, Special Issue: International Accounting Policy Forum, 2007. Federal Accounting Standards Advisory Board. (2011). Measurement of elements of Accrual Basis Financial Statements in periods after Initial Recording. United States: United States Publishing Service. Investors favor mix measurement model. (2010, June 14). The Accountant. Retrieved from: http://www.theaccountant-online.com/news/investors-favour-mixed-measurement-model Reports Challenger Limited. (2013). Annual Report 2013. Australia.