Intangible Asset

Since intangible assets do not have a market, cost is used. IAS 38 prohibits the recognition of internally
generated intangible assets because it can only be raised in the balance sheet only on the capitalization
of its development cost.

Financial Instrument

The most dominant measurement model is historical cost. However, many resist it because it is
irrelevant. Although market prices are recommended, but management estimation may also be used (for
fair value). In order to establish a standardized standard, the IASB has established fair value usage to
provide relevant information to users of financial statements. This measurement is very complex. There
is no standard measurement model approved by standard makers in IAS 39. And then the Financial
instruments are divided into 4 types with different measurements.

CHALLENGES FOR STANDARD SETTERS

How to Calculate Fair Value Measurement

 In SFAS 157 there are examples of assessment techniques used to estimate fair value, including:

a. Market approach - The use of observation prices and information from actual transactions for
identical, similar or comparable assets or liabilities.

b. The income approach - Convert from future value to current value.

c. Cost approach - The value needed to change the capacity of a service.

 Three categories for inputs used for fair value estimation

a. Level 1 - Use the selected price for identical assets and liabilities in the recommended active market
whenever such information is available. The price does not need to be adjusted.

b. Level 2 - If the selected price for identical assets and liabilities in the recommended active market is
unavailable, then fair value should be estimated based on the selected price for similar assets and
liabilities in the active market. An adjustment is required on some differences.

c. Level 3 - If levels 1 and 2 are not available, or if the differences between asets and same liability can
not be objectively determined, fair values can be estimated using several assessment techniques
consistent with market approaches, revenues and costs.

Issues For Auditors

Auditing fair value make difficulties to the auditor as it requires the application of the valuation model
and the expert of the valuation itself. To create an effective audit approach, auditors have an important
role to ensure that measurements are appropriate and are not affected by manager incentives. The
auditor must know the processes of its client company and the controls in fair value measurement, and
the auditor should make an assessment of whether the measurement method and assumptions used
from the client company are appropriate and provide a strong foundation in fair value measurement.
There is potential for the auditor to be able for a legal suit if it fails to approach the fair value audit for
the asset as appropriate. The majority of the problems found are related to testing asset values using the
historical cost model. Specific situations that require the use of fair value for various asset types are in
business combinations.