More than one measurement basis

Sometimes, consideration of the factors described in Measurement choices for recording transaction may lead to the conclusion that more than one measurement basis is needed for an liability and for related expenses in order to provide relevant information that faithfully represents both the entity’s financial position and its financial performance.

In most cases, the most understandable way to provide that information is:… Continue reading

Factors specific to initial measurement

Measurement choices for recording transactions discusses factors to consider when selecting a measurement basis, whether for initial recognition or subsequent measurement. Here some additional factors to consider at initial recognition are considered.

At initial recognition, the cost of an asset acquired, or of a liability incurred, as a result of an event that is a transaction on market terms is normally similar to its fair value at that date, unless transaction costs are significant. Nevertheless, even if … Continue reading

IFRS Measurement requirements

The Standards in International Financial Reporting Standards (IFRS) are one collection of financial reporting practices. They keep important because of the growing number of companies around the world (especially listed companies) that are required to comply with them, and the growing number of countries, that continue to model their own more general financial reporting requirements on them.… Continue reading

Some challenges in measurement bases for financial reporting

When applied to financial reporting the term measurement can give a misleading impression of certainty and objectivity. In daily life, measurements are typically made of the physical characteristics of physical objects – such as height, weight, temperature and so on. If accurate measurement tools are employed, information of this sort is objective and uncontroversial (a ‘fact’). The subjects of measurement in financial reporting, however, are abstract concepts of uncertain meaning such as income and net assets (an ‘estimate’).

For this Continue reading

Prediction and measurement challenges

Many measurements in financial reporting involve predictions. For example:

  • A fixed asset’s remaining useful life is predicted in order to calculate its annual depreciation.
  • The recoverability of debts and the realisable value of stocks (or inventories) are predicted in order to confirm their balance sheet values.
  • The ultimate outcome of long-term contracts is predicted in order to decide what profits or losses should be recognised to date.
  • Future cash flows are predicted in order to calculate a fixed asset’s value
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Measurement choices for recording transactions

The measurement bases that will be considered here are:

All these bases are forms of accrual accounting – that is, they are intended to measure income as it is earned and costs as they are incurred, as opposed to simply recording cash flows. The … Continue reading

Historical cost measurement

The historical cost of an asset is the amount paid for it and the historical cost of a liability is the amount received in respect of it or the amount expected to be paid to satisfy it.

Historical cost accounting is interpreted to require that the amount at which an asset is stated in the accounts should not exceed the amount expected to be recovered from either its use or its sale (its recoverable amount). Historical cost as it is … Continue reading