Final answer:
Asset and debt measurement bases include the historical cost, replacement cost, and future-oriented methods. Each carries different advantages and disadvantages involving objectivity, market relevance, and estimation challenges.
Step-by-step explanation:
There are several ways to measure the value of assets and debts, with each method having its own advantages and disadvantages. The three primary measurement bases are:
- Historical Cost (Past-Oriented): This method records the asset or debt based on its original cost when it was incurred. An advantage of this method is its objectivity and verifiability. However, it may not reflect current market values, leading to potential misrepresentation of an asset's or debt's true value over time.
- Replacement Cost (Current-Oriented): This approach values an asset based on the cost of acquiring an asset of the same quality and condition in the current market. The main benefit is that it provides a more updated valuation, but it can be subjective and may involve significant estimation.
- Future Oriented (Future-Oriented): With this method, the value is based on expected future cash flows discounted to their present value. It is beneficial for reflecting the expected profitability of assets, but involves predictions and assumptions, which can introduce uncertainty and subjectivity.
Each measurement basis is chosen based on the nature of the financial asset, the purpose of valuation, and the principles of the accounting framework in use.