Assessment item 1: Short Critical Essays Value : 15% Due date : 15 April 2019 Return date : 29 April 2019 Length : 2,500 words (guide) Submission method : Turnitin Question 1 - 4 marks (750 words)...

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Running Header: Assessment item 1 – Short Critical Essays
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Assessment item 1 – Short Critical Essays
Assessment item 1 – Short Critical Essays
Assessment item 1 – Short Critical Essays
Question 1
The accounting system of historical cost is based up on notions that historical transaction prices shall form an appropriate basis for measurement with respect to the preparation as well as the presentation of the financial statements (Kamal, 2015). This system of accounting shall require that all of the transactions which are entered in by the entity shall be initially recorded as well as presented within the financial statements on the basis of prices of original transaction, that is, actual amounts in money, or else the money's worth that is paid or else received for completing the transactions. As per the accounting system of historical cost, entities shall continue in using historical cost in being basis for valuing the items till point of sale, or else liquidation (Kamal, 2015).
Deegan (2014, p. 171) cites Chambers (1966) in arguing that the information concerning historical cost essentially suffers from the problems concerning relevance during times of rising prices. In essence, what this means is that historical cost hinges on the assumption that money holds constant level of purchasing power. The key elements concerning economy that essentially make this assumption to be less valid as compared to when the system of historical cost     was initially developed include the following – [i] specific price level changes, that is, shifts on account of consumer preferences, technological advances, [ii] inflation in terms of general price level changes, and [iii] fluctuation over exchange rates (Henderson et al., 2015).
In essence, within an economic environment characterized by rising prices, the relevance of historical cost system is questionable as the current value of an asset shall be different as compared to its historical cost. The other concerns in this context includes the problems relating to additivity, that is, aggregating the assets together which are bought in different times, possibility of overstating the profits during the rising prices period with the distribution concerning the profits resulting in the erosion pertaining to the operating capacities, and inclusion of holding gains that have accrued over previous periods within current period income shall distort the operating results of the current year (Henderson et al., 2015).
Despite these issues, the accounting system of historical cost continues to be the predominantly used methodology over many years till date. However, the recent changes in accounting standards have started to embrace the fair values to be the basis for measurement. Despite the same, various assets continue to be measured in the basis of historical cost. To take an example, inventory is measured in terms of lower of the cost as well as net realisable values, property / plant / equipment is measured using cost model instead of fair value, etc. (Collier, 2015).
In effect, the alternate system of fair value represents the measurement approach for assets / liabilities which at present in employed an increasing trend across various accounting standards. As per the accounting standards of IASB concerning fair value, fair value can be defined as the price which shall be received for selling the said asset or else paid for transferring the liability by way of the orderly transaction in between the participants of the concerned market at specific measurement date. The definition for fair value employs varied different terms which shall require additional consideration in specific the notions of orderly transaction as well as the participants of market. IASB defines orderly transaction in being the transaction which shall assume exposure towards market for specific period prior to measurement date for allowing the marketing related activities which are usual as well as customary with respect to transactions entailing the assets / liabilities and it shall not be forced transaction. IASB defines participants of market to buyers as well as sellers who are independent from one other, knowledgeable, have reasonable levels of understanding with respect to asset / liability, as well as that the said transaction used all of the information available, and shall be willing / have ability for entering in the transaction with respect to asset / liability (Collier, 2015).
In effect the options available to companies include the following: [i] accounting system on the basis of historical cost that shall entail the use of historical cost with respect to current registration for transactions as well as to draft the financial statements, [ii] accounting system on the basis of fair value that shall entail the use of fair value with respect to current registration for transactions as well as to draft the financial statements, and [iii] mixed form of accounting system on the basis of historical cost as well as just value that shall entail the use of historical cost as well as, in certain instances, just value, with respect to current registration for transactions as well as to draft the financial statements.
Question 2
The Deegan (2014, p. 258) makes...