Reference no: EM132934340

1. What alternative measures are used in the accounting to value items? Provide specific examples.

2. Why has the IASB chosen to use exit price as the primary measure of fair value?

3. The existence of a market is very important to determining fair value. What factors would indicate an appropriate market exists?

4. If it is determined that markets for the item under consideration are inactive, does that mean they cannot be fair valued? Discuss.

5. Describe the valuation techniques that can be used to fair value an asset, which method is preferred?

6. Describe the 3 levels of inputs that can be used in valuing an item under AASB 13/IFRS 13. How is the valuation level ultimately determined?

7. In light of the Conceptual Framework for Financial Reporting what are the broad arguments for and against the use of fair value and modified historic cost in accounting?

8. 10 years ago your organisation bought a block of land on the Perth foreshore for $500 000. Over the next two years an apartment block was constructed on the site at a cost of $5 000 000. The apartments are currently owned by your organisation and sublet to tenants on a variety of leases not longer than five years. You want to establish the fair value of the property using AASB 13/IFRS 13. You have ascertained the following information for your assessment:

I. Two separate expert valuations have been received. One valuer said the property was worth around $9 000 000 ($1 000 000 for the land and $8 000 000 for the building). The other valuer said it was worth $6 000 000 ($750 000 land value and $5 250 000 building value). Both valuers acknowledge that valuing the building in the current economic climate is difficult as there have been few sales of comparable buildings recently. They have used their experience of prior markets to estimate the values.

II. The current cost of replacing the building has been established as
$7 500 000, determined based on the current design with today's construction costs, including labour, materials and overhead.

III. Present value of future cash flows:
Average net cash inflows over next 20 years is estimated to be $650 000 per year, based on projected cash flows from rent, tax savings and expenditures. It is assumed after 20 years the building will need to be replaced, and the land will be worth $1 000 000. The current borrowing rate for the entity is 12%.

IV. Depreciation is currently being charged on a straight-line basis using the same assumptions presented in part III.
(a) Discuss each of the above four values as a basis for establishing fair value. In accordance with AASB 13/IFRS 13 which methodology do you believe is most appropriate? What additional information would you like to obtain to make a better estimate?

9. Why has the Global Financial Crisis created intense discussion about accounting for fair values?