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Hello dear tutor
Hope that you are well
I have some questions about IFRS 13 as follows:
“You shouldnt deduct transaction costs when you use principal market assumptions but you may include it in the calcuations if you use the most advantageous market”
1-is there any logic behind exclusion of transaction cost from calculations in principal market?
2-is it NECESSARY to include transaction costs in our calculations when we use the most advantageous market or it is optional to do this(as it is said you “may”….)?
3-there are 3 approaches and 3 levels(for inputs)…
Is it correct to say:
In order to find F.V, we must use inputs(based on their priority ie try to use level 1 as much as it is possible) for each approach we select?please explian me the differences between these 3 levels and 3 approaches if it is possible…4-is there any priority for these 3 approaches?
Thanks alot
1) In a level 1 measurement, the price is from an active market quote and those quotes would tend to be a range with emphasis on the high / low figures
Think of the active market where shares are being bought and sold on a stock exchange
The low price quoted represents the amount that you could expect to receive from a sale of those shares whereas the high price is the amount that you would have to pay
The difference in the prices is known as the “jobber’s turn” and is similar to (but not the same as) the transaction costs
In a level 2 measurement, there are no such quoted active market prices so there is no spread of prices against which to measure. Pick a price and take transaction costs into account
Does that explain the logic?
2) Here’s the definition of “Most advantageous market” – The market that maximises the amount that would be received to sell the asset or minimises the amount that would be paid to transfer the liability, after taking into account transaction costs and transport costs
It would seem from that that transaction costs must be taken into account
3 and 4) You would first consider whether there was a active quoted market price available against which to measure.
Failing that, you would consider a non-quoted active market if such existed
Failing that, you’re into level 3 where “…using the best information available in the circumstances” is used as a last resort
OK?
Many thanks for your advices…I think i have no problem wirh 1&2 but i have one more question:
There are 3 valuation techniques:
1-market approach
2-cost approach
3-income approachWhat are the differences between these 3 approaches and those 3 inputs?
Thank you in advance
Is this not enough for you?
“market approach – uses prices and other relevant information generated by market transactions involving identical or comparable (similar) assets, liabilities, or a group of assets and liabilities (e.g. a business)
cost approach – reflects the amount that would be required currently to replace the service capacity of an asset (current replacement cost)
income approach – converts future amounts (cash flows or income and expenses) to a single current (discounted) amount, reflecting current market expectations about those future amounts.”
This is an extract from the IASPLUS website – it’s a wonderful source of information concerning accounting standards!
Dear sir,
The notes mention that the fair value of finished goods and WIP should be calculated as net selling price less reasonable profit margin.
But isn’t inventory valued at lower of cost and net realisable value?
What does reasonable profit margin mean here?
Thank you
It’s not always an easy nor precise exercise to arrive at “cost”
IAS 2 states ‘The standard cost and retail methods may be used for the measurement of cost, provided that the results approximate actual cost. [IAS 2.21-22]”
It actually uses the word ‘approximates’ indicating that precision is not always possible. This is in line with the whole of financial reporting and auditing where ‘near enough is close enough’
“What does reasonable profit margin mean here?”
It means that, where an entity regularly achieves reported gross profitability of, say, 22% then inventory valuation can be calculated as inventory selling price x 78%
If that same entity regularly achieves 22% gross profits, then it would be UNreasonable to deduct only, say, 14%
Sir, thank you for the explanation. I do understand that this method is to find the cost of inventory.
So the lower of cost and NRV method of finding the value of the inventory for consolidation still apply, right?
Yes … but that will never be asked in an exam – it’s an F3 area and highly improbable to appear in these later exams except by way of the examiner specifying, for example, that at the date of acquisition the inventory of the acquiree was undervalued by, say, $4,000
Hi Mike!
I’m confusing that the difference between value in use and FV from income approach
FV is price that would be received to sell assets
But income approach same to value in use of assetPlease explain this for me
Thank you, sir
Hi,
The income approach is very similar to the value in use of an asset.
Thanks
@P2-D2 said:
Hi,The income approach is very similar to the value in use of an asset.
Thanks
Thank sir, but I don’t understand that.
FV is price that would be received to sell assets.
Why FV is valuated by use asset
It seem inconsistent
Thanks for your help
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