Valuation and measurements

Valuation

• Trade-off between relevance and reliability.
• Historical cost tend to be more reliable but less relevant.
• Market cost tend to be more relevant but less reliable.

Measurements
Financial reporting standards can be established taking an asset/liability approach or a revenue/expense approach.

Asset/liability approach

• It requires a definition of what constitutes an asset and what constitutes a liability. It values the elements at one point in time.

Revenue/expense approach

• It focuses more on the income statement. It relies on concepts such as the matching principle to determine profit. It values the changes between points in time.

Analyst need to do:

• Analyst need to keep up-to-date on how financial reporting standards are changing by:
• Monitoring professional journals and other sources eg IASB and FASB websites
• Use the disclosures about financial standards in the footnotes of financial statement.