EXERCISE 2–1 Financial statements are inexorably moving to a model where all assets and liabilities will be measured on the basis of fair value rather than historical cost.

Required:

a. Discuss the conceptual differences between historical cost and fair value.

b. Discuss the merits and demerits of the two alternative measurement models.

c. What types of assets (or liabilities) more readily lend themselves to fair value measurements? Can we visualize a scenario where all assets are measured using fair value?

d. What are the likely effects of adopting the fair value model on reported income?