How to approach it
- Use a two-column structure: each basis, then how it measures an asset and how it measures a liability.
- Cover historical cost and all three current value bases: fair value, value in use / fulfilment value, and current cost.
- For each, say whether it is entry or exit based, whether it is entity-specific, and how transaction costs are treated.
Key rules to apply
- Historical cost (asset): cost incurred to acquire it including transaction costs, updated for consumption and impairment. (Liability): consideration received less transaction costs, updated for interest and payments.
- Fair value: price to sell an asset or transfer a liability in an orderly market transaction at the measurement date; market-participant view; transaction costs not deducted.
- Value in use (assets) and fulfilment value (liabilities): present value of entity-specific cash flows, including the present value of transaction costs expected on disposal or fulfilment.
- Current cost (asset): cost of an equivalent asset at the measurement date, including transaction costs at that date. (Liability): consideration that would be received for an equivalent liability, less transaction costs.
Answer layout
| Basis | Asset | Liability |
|---|---|---|
| Historical cost | ||
| Fair value | ||
| Value in use / fulfilment value | ||
| Current cost |
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Covering only historical cost and fair value (examiners' point).
- Describing assets but never liabilities.
- Confusing current cost (entry) with fair value (exit).
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q4 without copying it.
Original practice question
One machine, four measurements
A machine bought three years ago for Rs 100m has a depreciated historical cost of Rs 70m. A similar used machine would cost Rs 85m to buy today plus Rs 2m of delivery and installation. In an orderly sale the machine would fetch Rs 78m before Rs 1m of selling costs. The present value of the cash flows the entity expects from using and then selling it, after the present value of selling costs, is Rs 82m.
Required: State the machine's measurement under each basis.
Worked solution
| Basis | Measurement | Why |
|---|---|---|
| Historical cost | Rs 70m | Original cost less depreciation |
| Current cost | Rs 87m | Entry price today including transaction costs |
| Fair value | Rs 78m | Exit price; selling costs not deducted |
| Value in use | Rs 82m | Entity-specific PV, after PV of disposal costs |
Answer: Rs 70m, Rs 87m, Rs 78m and Rs 82m respectively; the bases answer different questions, which is why the Framework lets standards choose.