Dana Dvorakova, Ph.D., Department of Financial Accounting and Auditing, University of Economics Prague, W. Churchill Square 4, Prague 3, 130 67, Czech Republic
Measurement is a core issue of financial accounting and reporting today. There are two important points in which in which we need assets and liabilities measured in financial accounting, i.e. on initial recognition and at a balance sheet day. At a balance sheet day there are two measurement concepts standing against each other: historical costs based on the measurement of assets and liabilities at purchase price (costs) that were incurred at the moment of the purchase, and the fair value measurement based on market prices. The measurement on initial recognition could be analogously based on the measurement in costs or in fair value. Many International Financial Reporting Standards (IFRS) are based on the fair value measurement concept. But most of these standards use the fair value measurement method only at a balance sheet day. On initial recognition assets and liabilities are measured usually at costs (excluding some financial instruments, biological assets and agricultural production). This paper is aimed primarily the fair value measurement on initial recognition. The IASB presented the discussion paper “Measurement Bases for Financial Accounting - Measurement on Initial Recognition” (November 2005). The described fair value measurement on initial recognition brings a significant change into accounting. A precedent for using this approach for non financial assets is included in IAS 41– Agriculture (3 years in effect). Some issues with an application of the fair value measurement of biological assets and agricultural production can be useful, after certain generalization, for other, non financial assets for which the requirement of the fair value measurement on initial recognition is completely new. The fair value measurement on initial recognition has been required by IAS 41 because a historical cost measurement is not able to cover the value of biological assets that is created particularly due to their biological transformation. The determination of fair value according to IAS 41 causes many problems, particularly when the alternative methods of the fair value assessment are used, e.g. IAS 41 requirements for the fair value assessment on the base of present value are questionable. Also a presumption that the fair value of agricultural produce can always be measured reliably can be confusing. This paper analyzes the issues connected with the application of the fair value measurement of biological assets of enterprises in the market environment of the Czech Republic. Furthermore, it generalizes possible problems and risks when measuring other, non financial assets at the fair value on initial recognition.