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ACCA Applied Skills · Financial Reporting · Recognition and measurement

Kestrel Ltd bought a machine on 1 January 20X1 for $500,000 with a ten-year life and no residual value. At 31 December 20X2 (after two years of straight-line depreciation), the machine's fair value is $450,000, and Kestrel's policy is to carry the machine at historical cost. Under the IFRS Conceptual Framework, which statement about the measurement basis is correct?

The machine is carried at $400,000. Historical cost is updated for depreciation: $500,000 less two years at $50,000 per year. Fair value of $450,000 is ignored because the entity's policy is historical cost, and depreciation is a normal feature of that basis.

  1. AThe machine is carried at $400,000, being cost less accumulated depreciationCorrect
  2. BThe machine is carried at $450,000, because current value must be used when it exceeds the carrying amount
  3. CThe machine is carried at $500,000, because depreciation is not a feature of historical cost
  4. DThe machine is carried at $350,000, because depreciation is based on fair value at the reporting date

Explanation

Under historical cost, an asset is carried at its original cost updated for consumption, here depreciation. Annual depreciation is $500,000/10 = $50,000, so after two years accumulated depreciation is $100,000 and the carrying amount is $400,000. Using $450,000 would wrongly apply a current value basis that the policy does not adopt.

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