ACF5956 · Advanced Financial Accounting
Measurement and Fair Value
Measurement and fair value is the Week 3 topic of ACF5956 Advanced Financial Accounting at Monash University, and one of the most heavily examined. It asks the hardest practical question in financial reporting: at what amount should an asset or liability be carried? An item can appear at its original historical cost, its current (replacement) cost, the present value of its future cash flows, or its fair value today — and the choice is contested, drifting steadily toward fair value. The governing standard, AASB 13 / IFRS 13, defines fair value as an exit (sell) price in an orderly transaction and sets out how to choose the market, which costs to deduct, and how to rank inputs in the Level 1–3 hierarchy. In the closed-book exam this is a calculation-and-journals question built on the revaluation model (AASB 116).
What this chapter covers
- 011. The four measurement bases — historical cost · current cost · present value · fair value
- 022. Relevance vs reliability — the trade-off that decides which basis to use
- 033. Fair value = exit price — sell price in an orderly transaction (AASB 13), not entry/replacement cost
- 044. Which market — principal market first; the most advantageous market only if there is no principal market
- 055. Which costs — choose the market net of all costs, but measure fair value net of transport only
- 066. The fair-value hierarchy — Level 1 (observable) → Level 3 (unobservable, model-based)
- 077. Three valuation approaches — market · cost · income (AASB 13)
- 088. The revaluation model (AASB 116) — surplus = fair value − carrying amount; the two journals
Worked example: revaluation model, market choice and fair value
- +1Annual depreciation = (cost − residual) ÷ life = (180,000 − 30,000) ÷ 6 = $25,000 per year.
- +1Accumulated depreciation to the end of Year 2 = 25,000 × 2 = $50,000, so the carrying amount = 180,000 − 50,000 = $130,000.
- +1Net proceeds in each market — deduct ALL costs, but only to choose the market: Market A = 150,000 − 2,000 − 1,500 = $146,500; Market B = 149,000 − 1,000 − 1,000 = $147,000.
- +1Most advantageous market = Market B (higher net, $147,000 > $146,500). Because there is no principal market, this is the market used — note B wins even though its sale price is lower.
- +1Fair value = sale price in Market B − transport only = 149,000 − 1,000 = $148,000. Do NOT subtract the $1,000 insurance — transaction costs are excluded from fair value.
- +1Revaluation surplus = fair value − carrying amount = 148,000 − 130,000 = $18,000. Journals: (1) Dr Accumulated depreciation 50,000 / Cr Equipment 50,000 to reset to the net $130,000; (2) Dr Equipment 18,000 / Cr Revaluation surplus (equity/OCI) 18,000.
Key terms
- Fair value
- The price that would be received to sell an asset (or paid to transfer a liability) in an orderly transaction between market participants at the measurement date (AASB 13). It is an exit (sell) price — not an entry or replacement price, and not a forced-sale price.
- Principal market
- The market with the greatest volume and level of activity for the asset. Fair value is measured here first; you only move on if there is no principal market.
- Most advantageous market
- The market that maximises the net proceeds from selling the asset (sale price less transport and all other transaction costs). It is used only when there is no principal market.
- Transport vs transaction costs
- Both are used to choose the most advantageous market (deduct all of them). But fair value itself is measured net of transport only — transaction costs such as commission, insurance and advertising are excluded from fair value.
- Fair-value hierarchy (Level 1/2/3)
- AASB 13's ranking of measurement inputs by observability. Level 1 = quoted prices in an active market for identical assets (most objective, no judgement); Level 2 = other observable inputs; Level 3 = unobservable, model-based inputs (most subjective).
- Revaluation surplus
- The excess of fair value over carrying amount when an asset is revalued upward under the revaluation model. It is credited to a revaluation surplus in equity (through other comprehensive income), not to profit or loss.
- Revaluation model (AASB 116)
- An accounting policy that carries property, plant and equipment at fair value less subsequent depreciation, as an alternative to the cost model. Increments go to the revaluation surplus in equity; a later decrement reverses that surplus before hitting profit or loss.
Measurement and Fair Value FAQ
What is the difference between fair value and historical cost?
Historical cost is the original transaction price paid for an asset; it is verifiable but goes stale, and it is not assumption-free (useful life, residual value and the depreciation pattern are all estimates). Fair value is the price to sell the asset today — an exit price under AASB 13. Fair value gives a more relevant balance sheet but its reliability depends on the market, and routing revaluations through income can add volatility. The choice between them is the relevance-versus-reliability trade-off.
How do I choose the market and compute fair value under AASB 13?
Use the principal market (greatest volume and activity) first. Only if there is no principal market do you use the most advantageous market — the one giving the highest net proceeds, found by deducting transport AND all other transaction costs. Then measure fair value as the sale price in that chosen market less transport only. Choosing the market and measuring fair value use two different nettings, so run them as separate calculations.
Why is a Level 1 fair value more reliable than a Level 3 fair value?
The difference is observability. A Level 1 input is a quoted, unadjusted price for an identical asset in an active market, so no management judgement is needed — examples are listed shares, foreign currency held, and actively-traded listed bonds. A Level 3 input is unobservable: the asset is unique or not actively traded and must be valued with a model plus subjective assumptions, which is open to bias. A measurement takes the level of its lowest significant input.
What journals record a revaluation increment under AASB 116?
Two entries, in order. First reset the asset to its net carrying amount: Dr Accumulated depreciation / Cr Asset for the accumulated depreciation to date (the net method). Then recognise the increment: Dr Asset / Cr Revaluation surplus (equity, through OCI) for fair value less the net carrying amount. Getting the order wrong, or crediting the surplus to profit instead of equity, loses the journal marks.
What is the single most common trap in this topic?
Confusing transport and transaction costs. To pick the most advantageous market you deduct every cost of selling (transport plus commission, insurance, advertising). But the fair value itself deducts transport only — the cost of getting the asset to the market. Students who net transaction costs out of fair value choose the right market and still report the wrong number. Also remember the 'no principal market' trigger and that fair value is an exit (sell) price, not a replacement cost.
Can AI help me with measurement and fair value?
Yes — ask Sia to walk through any measurement and fair value problem or concept step by step, the way Monash University tests it.
Studying with AI? Sia — free AI accounting tutor works through ACF5956 step by step.
Exam move
This is a calculation-and-journals topic, so drill the exam pattern until it is automatic: depreciate under the cost model, switch to the revaluation model, choose the market, measure fair value, compute the surplus, then post the two journals. Keep the two nettings apart — choose the market net of all costs, measure fair value net of transport only — because mixing them is the biggest source of lost marks. State the 'no principal market' trigger explicitly before you go to the most advantageous market, and remember fair value is an exit (sell) price, not a replacement cost. For the theory part, be able to explain the fair-value hierarchy in terms of observability (Level 1 needs no judgement; Level 3 is model-based) and give actively-traded examples only. In the journals, always reset accumulated depreciation first and send the revaluation surplus to equity through OCI, not to profit.
