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ACCA Applied Skills · Financial Reporting · Recognition and measurement

Orion Ltd is considering which basis to use for an investment in quoted equity shares that it holds to sell when it needs cash. The shares trade in an active market. Applying the Conceptual Framework's factors for selecting a measurement basis, which basis is likely to give the most relevant information?

Fair value is likely to give the most relevant information. The shares generate cash flows directly through sale rather than through combined use with other assets, and the active market price makes the measure observable with low measurement uncertainty, so it represents the asset faithfully.

  1. AHistorical cost, because it is the most verifiable
  2. BFair value, because the cash flows arise directly from sale and the price is observable in an active marketCorrect
  3. CValue in use, because the shares are used with other assets
  4. DFulfilment value, because the shares are a liability-like item

Explanation

Cash flows from the shares arise directly from their sale or dividends and not from use with other assets, so fair value is relevant. An active market means low measurement uncertainty and a faithful representation. Value in use and fulfilment value apply to assets used in operations and to liabilities respectively, so they are wrong. Historical cost would be out of date.

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