The approach focuses on the balance sheet elements to address the issues arising from complex revenue recognition situations. The current standard is based on the assumed primacy of the income statement whereas the proposal is based on a balance sheet approach. The latter relates revenues (gains) to an increase in net assets (increase in ownership interest not resulting from new contributions from owners) rather than recognising revenue first, with the movement in net assets the residual. The change in focus would have to be linked, or even subsumed, in a new standard covering "substance over form" to enable gains on such items as sale and repurchase agreements to be covered, in addition to the more obvious revenue generating activities, in a single statement.
The other major change is in the area of measurement, defined as the process of assigning monetary amounts at which elements of the financial statements are to be recognised and reported (IASB, 2001, 99-100). There are several measurement bases currently used to different degrees and in varying combinations in financial statements, such as historical cost, current cost, net realisable (settlement value), and discounted present value. Historical cost is the measurement basis most commonly used, but it is usually combined with other measurement bases. The IASB at present does not include concepts or principles for selecting which measurement basis should be used for particular elements of financial statements or in particular circumstances. It merely provides some guidance through recommendations on qualitative characteristics (IASB, 2001, 101). By suggesting that fair value measurement in revenue recognition be adopted as an international standard, the new approach hopes to provide a basic framework that consistently addresses issues arising from complex cross-border transactions. The main problem is that not everyone agrees that financial statements should concern itself with calculating the value of a company, which is subjective, but rather with presenting the public with an objective, reliable measure of costs.
Question 2: Explain, analyse, and discuss: "Fair values are more relevant than alternative valuation bases, but less reliable".
Several standards, such as IAS 39, require companies to record a range of financial instruments at fair value on the balance sheet. Any changes in the value of those instruments must be reflected in the income statement, or shown in