VALUATION PRINCIPLES
VALUATION
PRINCIPLES
v There are four measurement base or valuation principles
1. Historical Cost- It means
acquisition price or purchase price. For example, Rs.7,00,000/- paid to
purchase the machine, here historical cost of machine is Rs.7,00,000/-.Under
this principle, assets are valued at an amount paid or fair market value at the
time of acquisition.
Accordingly Liabilities are recorded at the amount of the proceeds received in
exchange for the obligation. liability is recorded at the amount of proceeds
received in exchange for an obligation.
2. Current Cost- Assets are recorded
at the amount of cash or cash equivalents that would have to be paid if the
same or an equivalent asset has been acquired currently. Liabilities are
carried at the undiscounted amount of cash or cash equivalents that would be
required to be settle the obligation currently.
3. Realizable Value- Under this
principle, Assets are recorded or valued at amount which can be obtained if
assets are sold in open market. Liabilities are carried at their settlement
values; i.e. the discounted amounts of cash or cash equivalents expressed to be
paid to satisfy the liabilities in the normal course of business.
4. Present Value- Under this principle,
Assets are recorded at present discounted value of future net cash inflows that
is expected to generate in the normal course of business. Liabilities are
recorded at present discounted value of future net cash outflows which are
expected to be paid to settle liabilities in normal course of business.
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