Fair Value Measurement and its Impact on Net Income
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Questions and Answers

Which statement best describes the relevance of measuring an asset or liability at historical cost?

  • Historical cost is always greater than the carrying amount of an asset.
  • Historical cost reflects the consumption and impairment of an asset.
  • Historical cost is irrelevant in determining the value of an asset or liability.
  • Historical cost provides information about the price of the transaction that gave rise to the asset or liability. (correct)

    • When is measuring an asset or liability at historical cost considered relevant?

  • When the liability is greater than the consideration received minus transaction costs.
  • When the asset or liability was acquired in a recent transaction on market terms. (correct)
  • When the asset or liability is expected to provide sufficient economic benefits.
  • When the carrying amount of the asset exceeds its expected recovery amount.

    • What does historical cost reflect in terms of asset measurement?

  • Market value of the asset.
  • Future economic benefits of the asset.
  • Transaction costs associated with the asset.
  • Consumption and impairment of the asset. (correct)

    • Which of the following is NOT a factor considered in the measurement basis of value in use?

    <p>Expenses arising because historical cost is no longer recoverable</p> Signup and view all the answers

    Which of the following is NOT an income or expense arising on the initial recognition of an asset not acquired on market terms?

    <p>Expenses for costs incurred in fulfilling the liability</p> Signup and view all the answers

    What is the income equal to when fulfilling a liability at historical cost?

    <p>Historical cost of the liability fulfilled</p> Signup and view all the answers

    What is the income equal to when transferring a liability at fulfilment value?

    <p>Fulfilment value of the liability transferred</p> Signup and view all the answers

    Which measurement basis provides information about the cost at which an equivalent asset could be acquired or created at the measurement date or the consideration that would be received for incurring or taking on an equivalent liability?

    <p>Current cost</p> Signup and view all the answers

    Which measurement basis provides information about the present value of the estimated cash flows from the use of an asset and from its ultimate disposal?

    <p>Value in use</p> Signup and view all the answers

    Which measurement basis may have predictive value, particularly if the liability will be fulfilled, rather than transferred or settled by negotiation?

    <p>Fair value</p> Signup and view all the answers

    Which measurement basis reflects the cost of an asset consumed or about income from the fulfilment of liabilities, and can be used to derive current margins and predict future margins when price changes are significant?

    <p>Current cost</p> Signup and view all the answers

    According to the text, when an asset other than a financial asset is measured at historical cost, what gives rise to an expense?

    <p>Consumption of the asset</p> Signup and view all the answers

    According to the text, when the sale of an asset occurs, when is the expense recognized?

    <p>At the same time as the consideration for the sale is recognized as income</p> Signup and view all the answers

    According to the text, if a liability other than a financial liability is measured at historical cost, what gives rise to income?

    <p>Fulfillment of the liability</p> Signup and view all the answers

    According to the text, what information can be used to assess an entity's prospects for future net cash inflows?

    <p>All of the above</p> Signup and view all the answers

    Which one of the following reflects the current consideration for transferring a liability?

    <p>Income equal to current cost of the liability transferred</p> Signup and view all the answers

    Which one of the following is reflected in income and expenses from changes in fair value?

    <p>Value changes</p> Signup and view all the answers

    Which one of the following is NOT recognized except to the extent that the liability is onerous?

    <p>Income and expenses reflecting the effect of changes in prices</p> Signup and view all the answers

    Which one of the following may give rise to income or expenses on the initial recognition of a liability incurred or taken on not on market terms?

    <p>Income or expenses arising on the initial recognition of a liability incurred or taken on not on market terms</p> Signup and view all the answers

    Which one of the following statements is true about measuring assets and liabilities at fair value?

    <p>Fair value reflects market participants' current expectations about future cash flows.</p> Signup and view all the answers

    When an asset is measured at historical cost, what gives rise to an expense?

    <p>Consumption or sale of the asset</p> Signup and view all the answers

    Which one of the following is NOT a factor considered in the measurement basis of fair value?

    <p>Risk preferences</p> Signup and view all the answers

    What can information about interest earned on assets and interest incurred on liabilities measured at amortized cost provide?

    <p>Predictive and confirmatory value</p> Signup and view all the answers

    Which measurement basis provides information about the present value of the estimated cash flows from the use of an asset and from its ultimate disposal?

    <p>Fulfilment value (entity-specific assumptions)</p> Signup and view all the answers

    Which one of the following reflects the current consideration for transferring a liability?

    <p>Current cost</p> Signup and view all the answers

    Which one of the following is NOT recognized except to the extent that the liability is onerous?

    <p>Historical cost</p> Signup and view all the answers

    According to the text, what information can be used to assess an entity's prospects for future net cash inflows?

    <p>Income and expenses from changes in value in use</p> Signup and view all the answers

    Which of the following statements is true about measuring an asset or liability at historical cost?

    <p>It reflects the cost of an asset consumed or about income from the fulfillment of liabilities.</p> Signup and view all the answers

    When is measuring an asset or liability at historical cost considered relevant?

    <p>When the asset or liability was acquired on market terms.</p> Signup and view all the answers

    What does historical cost reflect in terms of asset measurement?

    <p>The cost of an asset consumed or about income from the fulfillment of liabilities.</p> Signup and view all the answers

    Which measurement basis provides information about the cost at which an equivalent asset could be acquired or created at the measurement date or the consideration that would be received for incurring or taking on an equivalent liability?

    <p>Current cost</p> Signup and view all the answers

    Which measurement basis reflects the cost of an asset consumed or about income from the fulfilment of liabilities, and can be used to derive current margins and predict future margins when price changes are significant?

    <p>Historical cost</p> Signup and view all the answers

    According to the text, what information can be used to assess an entity's prospects for future net cash inflows?

    <p>Value in use</p> Signup and view all the answers

    Which measurement basis may have predictive value, particularly if the liability will be fulfilled, rather than transferred or settled by negotiation?

    <p>Value in use</p> Signup and view all the answers

    Which of the following is reflected in income and expenses from changes in fulfilment value?

    <p>Expenses equal to the excess of the estimated cash outflows over the current cost of the liability</p> Signup and view all the answers

    What is the income equal to when fulfilling a liability at historical cost?

    <p>Expenses equal to the excess of the estimated cash outflows over the historical cost of the liability</p> Signup and view all the answers

    When is measuring an asset or liability at historical cost considered relevant?

    <p>When fulfilling a liability at historical cost</p> Signup and view all the answers

    Which one of the following may give rise to income or expenses on the initial recognition of a liability incurred or taken on not on market terms?

    <p>Income or expenses on the initial recognition of a liability incurred or taken on not on market terms</p> Signup and view all the answers

    Study Notes

    Historical Cost Measurement

    • Measuring an asset or liability at historical cost is considered relevant when it provides a faithful representation of the economic phenomena.
    • Historical cost reflects the original cost of acquiring an asset or incurring a liability.
    • When an asset is measured at historical cost, the consumption of the asset gives rise to an expense.

    Fulfilment Value Measurement

    • Fulfilment value is the amount that would be required to settle a liability at the measurement date.
    • The income equal to the fulfilment value when transferring a liability at fulfilment value.

    Fair Value Measurement

    • Fair value reflects the current consideration for transferring a liability or acquiring an asset.
    • Changes in fair value give rise to income and expenses.
    • Fair value provides information about the cost at which an equivalent asset could be acquired or created at the measurement date.

    Value in Use Measurement

    • Value in use reflects the present value of the estimated cash flows from the use of an asset and from its ultimate disposal.
    • Value in use may have predictive value, particularly if the liability will be fulfilled, rather than transferred or settled by negotiation.

    Amortized Cost Measurement

    • Amortized cost reflects the interest earned on assets and interest incurred on liabilities.
    • Information about interest earned on assets and interest incurred on liabilities can provide insights into an entity's prospects for future net cash inflows.

    Initial Recognition of Assets and Liabilities

    • Income or expenses may arise on the initial recognition of an asset or liability not acquired or incurred on market terms.
    • Except for onerous liabilities, gains or losses are not recognized on initial recognition.

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    Description

    Test your knowledge on fair value measurement and its impact on net income or expenses. Explore the concepts of value in use and fulfilment value in assessing asset values. Discover the significance of transaction costs in determining net income or expenses arising from sales or transfers.

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