# Accounting as a Measurement Discipline-Valuation Principles, Accounting Estimates – CA Foundation Accounts Study Material

Accounting as a Measurement Discipline-Valuation Principles, Accounting Estimates – CA Foundation Accounts Study Material is designed strictly as per the latest syllabus and exam pattern.

## Accounting as a Measurement Discipline-Valuation Principles, Accounting Estimates – CA Foundation Accounts Study Material

Question 1.
Historical Cost
Historical Cost:

• It means acquisition price.
• According to this base, assets are recorded at an amount of cash or cash equivalent paid or the fair value of consideration given at the time of acquisition.
• Liabilities are recorded at the amount of proceeds received in exchange for the obligation. In some circumstances a liability is recorded at the amount of cash or cash equivalent expected to be paid to satisfy it in the normal course of business.

Example:

• On 1.1.1995, a businessman ‘Ram’ paid ₹ 5,00,000 to purchase the building, its acquisition price ₹ 5,00,000 is the historical cost of building.
• Loan taken from Bank ₹ 4,00,000 @ 15%, the liability will be recorded at the proceeds received ₹ 4,00,000.
Services received for which it is expected that ₹ 20,000 will be paid, hence liability will be recorded at ₹ 20,000.

This base is most commonly followed in accounting. Question 2.
Current Cost.
Current Cost:

• Current cost gives an alternative measurement base (for existing assets and liabilities).
• Assets are carried at the amount of cash or cash equivalent that would have to be paid if the same or an equivalent asset was acquired currently.
• Liabilities are carried at the un-discounted amount of cash or cash equivalents that would be required to settle the obligation currently.

Example:

• Take that as on 1.1.06, ‘Ram’ found that it would cost ₹ 15,00,000 to purchase that building. So as per current cost base the machine value is ₹ 15,00,000.
• Take also that as on 1.1.06 the bank announces a discount @10% on the loan amount if it is paid by 15 days starting from that day. So as per current cost base the value of bank loan is ₹ 3,60,000 (₹ 4,00,000 less 10% discount).

At foundation level of study you may not use it anywhere in Accounting.

Question 3.
Realisable Value.
Realisable Value:

• As per realisable value, assets are carried at the amount of cash or equivalent that could currently be obtained by selling the assets in an orderly disposal. Haphazard disposal may yield something less.
• Liabilities are carried at their settlement values; i.e., the undiscounted amounts of cash or cash equivalents expressed to be paid to satisfy the liabilities in the normal course of business.

Example:

• Suppose ‘Ram’ found that he can get ₹ 14,00,000 if he would sell the building purchased on 1.1.95. So the building should be recorded at ₹ 14,00,000 the realisable value in an orderly sale.
• Take also that ‘Ram’ found that he had no money to pay off the bank loan currently and will pay in the normal course. So the bank loan should be recorded at ₹ 4,00,000 the settlement value in the normal course of business.

You may find use of it only in Inventory Valuation which is valued at cost or net realisable value whichever is lower.

Question 4.
Present Value.
Present Value:

• As per present value, an asset is carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business.
• Liabilities are carried at the present discounted value of future net cash flows that are expected to be required to settle the liabilities in the normal course of business.

Example:
(1) Suppose we were talking as on 1.1.06 take it as time of reference. Now think the building purchased by ‘Ram’ on 1.1.95 can work for another 10 years and is supposed to generate cash @ ₹ 75,000 p.a. and scrap value ₹ 50,000.
Present value of building = 75,000 x 5.019 + 50,000 x .247 = 3,76,425 + 12,350 = ₹ 3,88,775

(2) Also that bank loan taken by ‘Ram’ is to be repaid as on 31.12.2010, annual interest is ₹ 60,000.
Present value of loan = 60,000 x 5.019 + 4,00,000 x.247 = 3,01,140 + 98,800 = ₹ 3,99,940
(For above discounting 15% rate has been assumed)

This also you may not use in your foundation study except small reference in goodwill valuation. The above used Present value factors (@15%) are available from Statistical tables. The calculation thereof is covered in Intermediate syllabus. Question 5.
Accounting Estimate.
Accounting Estimate:
Meaning:

• Accounting estimates are an essential part of accounting.
• Accounting is a process of recording, classifying and analyzing transactions and events with reference to an accounting period usually a year, whereas transactions and events may occur at different point of time and may have impact on longer periods hence requiring estimations.
• Example: Estimating life of fixed asset for depreciation, Estimating bad & doubtful debts etc.

Change in Accounting Estimate:
→ An estimate may have to be revised if –

• changes occur regarding the circumstances on which the estimate was based, or
• as a result of new information, more experience or subsequent developments.

→ The revision of the estimate is not an extraordinary item or a prior period item.

→ If sometimes, it is difficult to distinguish between a change in an accounting policy and a change in an accounting estimate, the change should be treated as a change in an accounting estimate, with appropriate disclosures.

→ The effect of a change in an accounting estimate should be included in the determination of net profit or loss in:

• the period of the change, if the change affects the period only; or
• the period of the change and future periods, if the change affects both.

→ A change in an accounting estimate may affect the current period only or both the current period and future periods.

→ For example, a change in the estimate of the amount of bad debts is recognised immediately and therefore affects only the current period.

→ However, a change in the estimated useful life of a depreciable asset affects the depreciation in the current period and in each period during the remaining useful life of the asset.

→ In both cases, the effect of the change relating to the current period is recognised as income or expense in the current period.

→ The effect, if any, on future periods, is recognised in future periods.

→ The nature and amount of a change in an accounting estimate which has a material effect in the current period, or which is expected to do so in subsequent periods, should be disclosed.

→ If it is impracticable to quantify the amount, this fact should be disclosed.

→ The effect of a change in an accounting estimate should be classified using the same classification in the statement of profit and loss as was used previously for the estimate.

Examples of changes in accounting estimates:

• Change in useful life of fixed assets.
• Actual bad debts turning out to be more or less than the provision.
• Actual liability turning out to be more than or less than the provision.
• Actual gratuity liability/retirement benefits turns out to be more than the provision.