Need for accounting measurement the big 1

Need for accounting measurement

Need for accounting measurement provides a summary of the measurement bases in use in Financial Reporting
and the concepts behind these measurement bases.
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 last four are all forms of current value measurement.

In forming a judgment on the appropriateness of measurement bases, in literature, the overriding tests has been identified to be their cost-effectiveness and fitness for purpose. However, in the absence of direct evidence on these matters, it is usual to argue in terms of various secondary characteristics that ought to be relevant in assessing the quality of information (see the key indicators in What is useful information?).

The most important of these characteristics are generally considered to be relevance and faithful representation / reliability (older term).

For each basis, an outline is given of how it works and the relevance and faithful representation of the resulting measurements. The question of measurement costs is also considered briefly. In reading the analyses that follow, the following comments should be borne in mind.

Bases of measurement in financial reporting are not carved in stone. Different people have different views on how each basis should work, and meanings evolve as practice changes. Some readers may therefore find that the way a particular basis is described does not match how they understand it.

This does not mean either that their understanding is wrong or that the description in the report is wrong; views on these things simply differ.

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Related IFRS posts

Conceptual framework 2018 Measurements

Conceptual framework 2018 measurements is part of the explanations on the revised Conceptual Framework for Financial Reporting (the Conceptual Framework 2018) issued in 2018 by IASB. It describes various measurement bases, the information they provide and factors to consider when selecting a measurement basis. The 2010 Conceptual Framework did not include much guidance on measurement.Conceptual framework 2018 Measurements

 Conceptual Framework 2018Conceptual framework 2018 Measurements

The concepts developed in the Conceptual Framework 2018 are: Conceptual framework 2018 Measurements

  1. The objective of financial reporting Conceptual framework 2018 Measurements
  2. Qualitative characteristics of useful financial information Conceptual framework 2018 Measurements
  3. Financial statements and the reporting entity Conceptual framework 2018 Measurements
  4. The elements of financial statements Conceptual framework 2018 Measurements
  5. Recognition and derecognition Conceptual framework 2018 Measurements
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Fair value measurement

Fair Value Measurement can present significant challenges for preparers of financial statements, particularly because it involves using judgment and estimation. Further, it is the market participant view that shapes fair value, so preparers need to monitor whether the valuation models and assumptions they use for financial reporting appropriately reflect those of market participants.

Fair Value Measurement under IFRS 13:Fair value measurement

  1. defines fair value;
  2. sets out in a single IFRS a framework for measuring fair value; and
  3. requires disclosures about fair value measurements.

The definition of fair value focuses on assets and liabilities because they are a primary subject of accounting measurement. In addition, IFRS 13 is applied to an entity’s own equity instruments measured at fair value.

The … Read more

Retrospective or prospective application

Retrospective or prospective application

Retrospective or prospective application


Retrospective application – Applying a new accounting policy to transactions, other events, and conditions as if that policy had always been applied (change in accounting policy) (IAS 8 5).


Correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a prior period error had never occurred.

Prospective application of a change in accounting policy and of recognising the effect of a change in an accounting estimate, respectively, are:

  1. Applying the new accounting policy to transactions, other events and conditions occurring after the date as at which the policy is changed; and
  2. Recognising the effect of the change in the accounting estimate in the
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Measurement uncertainty

Measurement uncertainty - Uncertainty that arises when the result of applying a measurement basis is imprecise and can be determined only with a range.

Outcome uncertainty

Outcome uncertainty is uncertainty about the amount or timing of any inflow/outflow of economic benefits that will ultimately result from an asset or liability.

The cost of maintaining a measurement method

The cost of maintaining a measurement method – The costs of financial reporting measurement are not just the routine, recurring costs that an entity incurs directly. They also include one-off costs in setting up and documenting the relevant methods and systems and in training staff, and indirect expenses such as the costs of audit. The cost of maintaining a measurement method

Each basis of measurement has its advantages, and each may therefore be seen by a business’s managers as appropriate for its internal purposes – that is, for management information. Where a measurement basis is used for internal reporting, the incremental costs of using it for financial reporting (that is, for reporting to outsiders) will clearly be much less … Read more

Realisable value measurement

Realisable value measurement – An asset’s realisable value is the amount for which it could be sold, and a liability’s realisable value is the amount for which it could be settled. Realisable value measurements are often made on a net basis, and here realisable value will be considered in the sense of net realisable value; that is, net of selling costs (for assets) and grossed up for settlement costs (for liabilities). As the actual use of realisable value is limited, it is difficult to say exactly how it would be calculated in practice if it were applied to assets and liabilities generally.

The view could be taken that, in substance, realisable value and fair value are the same except that … Read more

Historical cost measurement

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 understood is therefore recoverable historical cost.

Recoverable amount is usually considered to be the higher of an asset’s realisable value and its value in use. The resulting recoverable historical cost tree for determining an asset’s recoverable Read more

Allocation to periods and assets

Allocation to periods and assetsAllocation to periods and assets – Many measurements in financial reporting involve allocations of costs and revenues to different accounting periods and different assets. These allocations inevitably include an element of arbitrariness and therefore subjectivity. Just to name a few obvious items:

  • Depreciation of fixed assets involves judgmental allocation decisions (See explanation below).
  • Where assets are bought for stock (or inventory) and subsequent resale, unless the cost of each one can be individually identified (or unless their purchase price never changes), calculation of a particular asset’s purchase price involves a judgmental allocation.
  • For measurements of discounted future liabilities, allocation to different accounting periods depends on the choice of an appropriate discount rate, which inevitably involves a significant element
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