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Paper 1 Principles and Practices of Accounting Theoretical Framework 1.31

quantity of identical goods at different dates. Money is not stable in the dimension as a
unit of measurement.

Thus, accounting is meant for generating information but, not a measurement disci-
pline due to the two factors discussed here.

1.19.1 Valuation Principles

There are generally four accepted measurement bases or valuation principles. These are:

ƒ Historical Cost: It means the acquisition price. Assets are recorded at an amount of
cash paid for acquisition. Liability is to be recorded at an amount expected to be paid
to discharge it.

ƒ Current Cost: It is an alternative measurement base. Assets are carried out at the
amount of cash or cash equivalent that have to be paid if the same or an equivalent asset
was acquired now (currently). Liabilities are carried at the undiscounted amount of cash
or cash equivalents that would be needed to settle the obligation now (currently).
ƒ Present Value: An asset is carried at the discounted present value of the future net
cash inflows that it is expected to generate in the normal course of business. Liabili-
ties are carried at the present discounted value of future net cash outflows that are
expected to be required to settle the obligations in the normal course of business.

ƒ Realisable Value: As per realisable value, assets are carried at the amount of cash or
cash equivalents that could currently be obtained by selling the assets in an orderly
disposal. Liabilities are carried at their settlement values; i.e. the undiscounted
amount of cash or cash equivalents expressed to be paid to satisfy the liabilities in
the normal course of business.

EXAMPLE 1.6

Mohan purchased a machinery amounting ₹ 1,00,000 on 1 April 2002. On 31 March
2020, similar machinery could be purchased for ₹ 2,00,000 but the realisable
value of the machinery (purchased on 1.4.2002) was estimated at ₹ 1,50,000. The
discounted future cash flows value was calculated as ₹ 1,20,000.

The current cost is ₹ 20,00,000 (cost of similar machinery).
The present value of the machine is ₹ 1,20,000 (value of discounted future cash flows).

Historical cost of machine is ₹ 1,00,000 (cost of machinery purchased).

Realisable value of machine is ₹ 1,50,000 (estimation of net realisable value).

1.19.2 Measurement of Accounting Estimates

Estimate means value that is found in the absence of precise means of measurement.
Estimation involves judgement to be made based on the latest available information.

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