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 2018 Conceptual 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
  6. Measurement Conceptual framework 2018 Measurements
  7. Presentation and disclosure Conceptual framework 2018 Measurements
  8. Concepts of capital and capital maintenance Conceptual framework 2018 Measurements

As a reminder, the Conceptual Framework is not a standard, and none of the concepts override the concepts or requirements in any standard. The purpose of the Conceptual Framework is to assist the Board in developing standards, to help preparers develop consistent accounting policies where there is no applicable standard in place and to assist all parties to understand and interpret the standards.

MEASUREMENT

In developing the revised Conceptual Framework, the Board considered whether a single measurement basis should be mandated. However, it concluded that different measurement bases could provide useful information to users in different circumstances. Therefore, two categories of measurement basis were identified: Conceptual framework 2018 Measurements

  • Historical cost measurement basis Conceptual framework 2018 Measurements
  • Current value measurement basis Conceptual framework 2018 Measurements

Monetary terms

Elements recognised in financial statements are quantified in monetary terms. This requires the selection of a measurement basis. A measurement basis is an identified feature—for example, historical cost, current value, fair value or fulfilment value—of an item being measured. Applying a measurement basis to an asset or liability creates a measure for that asset or liability and for related income and expenses. Conceptual framework 2018 Measurements

Different measurement bases

Consideration of the qualitative characteristics of useful financial information and of the cost constraint is likely to result in the selection of different measurement bases for different assets, liabilities, income and expenses. Conceptual framework 2018 Measurements

Implementation of the measurement basis

A Standard may need to describe how to implement the measurement basis selected in that Standard. That description could incl Conceptual framework 2018 Measurements ude: Conceptual framework 2018 Measurements

  1. specifying techniques that may or must be used to estimate a measure applying a particular measurement basis; 
  2. specifying a simplified measurement approach that is likely to provide information similar to that provided by a preferred measurement basis; or
  3. explaining how to modify a measurement basis, for example, by excluding from the fulfilment value of a liability the effect of the possibility that the entity may fail to fulfill that liability (own credit risk).

Historical cost

Historical cost measures provide information about elements that is derived from the historical price of the transaction or event that gave rise to the item being considered for measurement; so, for an asset, this would be the cost incurred in acquiring/creating the asset. Conceptual framework 2018 Measurements

For a liability, this would be the value of the consideration received to incur/take on the liability. The historical cost of both an asset and a liability will be updated over time to depict, for example, any consumption of the asset or fulfilment of the liability, or the impact of any events that cause the asset to become impaired or the liability onerous. Conceptual framework 2018 Measurements

Current value

Current value measures provide monetary information about assets, liabilities and related income and expenses, using information updated to reflect conditions at the measurement date. Because of the updating, current values of assets and liabilities reflect changes, since the previous measurement date, in estimates of cash flows and other factors reflected in those current values. Unlike historical cost, the current value of an asset or liability is not derived, even in part, from the price of the transaction or other event that gave rise to the asset or liability.

– Fair value Measurement introduction

Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (IFRS 13). 

Fair value reflects the perspective of market participants—participants in a market to which the entity has access. The asset or liability is measured using the same assumptions that market participants would use when pricing the asset or liability if those market participants act in their economic best interest. Conceptual framework 2018 Measurements

This price includes: Conceptual framework 2018 Measurements

  • Estimates of future cash flows, Conceptual framework 2018 Measurements
  • Possible variations in the estimated amount or timing of future cash flows, Conceptual framework 2018 Measurements
  • The time value of money, Conceptual framework 2018 Measurements
  • The price for bearing the uncertainty inherent in the cash flows (a risk premium or risk discount),
  • Other factors, for example, liquidity risk, if market participants would take those factors into account in the circumstances,
  • For a liability, the possibility that the entity may fail to fulfil its liability (own credit risk).
  • Transaction costs are not included in fair value, either or acquisition or disposal. This does not prevent the IASB from requiring measurement at fair value less costs to sell: for example in IFRS 5 on assets held for sale, IAS 36 on the impairment of assets, or IAS 41 on biological assets and agricultural products.
– Value in use (assets) and fulfilment value (liabilities)

Value in use is the present value of the cash flows, or other economic benefits, that an entity expects to derive from the use of an asset and from its ultimate disposal. Fulfilment value is the present value of the cash, or other economic resources, that an entity expects to be obliged to transfer as it fulfils a liability. Those amounts of cash or other economic resources include not only the amounts to be transferred to the liability counterparty, but also the amounts that the entity expects to be obliged to transfer to other parties to enable it to fulfil the liability. 

These current values are entity-specific (unlike fair value, which is a market value). As they cannot be observed directly, they are determined using cash-flow-based measurement techniques.

Because value in use and fulfilment value are based on future cash flows, they do not include transaction costs incurred on acquiring an asset or taking on a liability. However, any transaction costs an entity expects to incur on the ultimate disposal of the asset or on fulfilling the liability are taken into account.

– Current cost Measurement introduction Measurement introduction

The current cost of an asset is the cost of an equivalent asset at the measurement date, comprising the consideration that would be paid at the measurement date plus the transaction costs that would be incurred at that date. The current cost of a liability is the consideration that would be received for an equivalent liability at the measurement date minus the transaction costs that would be incurred at that date.

Current cost, like historical cost, is an entry value: it reflects prices in the market in which the entity would acquire the asset or would incur the liability. Hence, it is different from fair value, value in use and fulfilment value, which are exit values. However, unlike historical cost, current cost reflects conditions at the measurement date.

Selection of a measurement basis Measurement

Selection of a measurement basis – the factors to be considered in selecting a measurement basis are in line with the qualitative characteristics of useful information – relevance and faithful representation:

– Relevance

A measurement basis produces relevant information when the following aspects are taken into account:

  • The characteristics of the element: for example, the nature or the variability of cash flows and whether the value of the asset or liability is sensitive to market factors or other risks;
    Note that this and the following criterion are taken from IFRS 9 on financial instruments.
  • How that asset or liability contributes to future cash flows, in particular due to the nature of the entity’s business activities.
    This criterion is the IASB’s response to proponents of taking the business model into account in IFRSs.
– Faithful representation

Faithful representation does not mean that measures must be perfectly accurate in all respects: the limitations and/or descriptions of an estimated value may supplement it in a way that meets this target. Additionally, in order to faithfully represent the activities of a entity, the same measurement basis can be required for associated assets and liabilities.

The Conceptual Framework details ways of enhancing faithful representation that can be brought by the other characteristics – comparability, verifiability, timeliness and understandability. Several measurement bases applied to the same element may be relevant either with:

  • One recognition method for the statement of financial position (generally historical cost) and another in the notes (generally fair value):
    For example, this applies to:
    • Investment property accounted for at cost, whose fair value must be shown in the notes,
    • Biological assets accounted for at cost because their fair value cannot be reliably determined, and for which, where possible, entities are asked to provide a range of values within which fair value is likely to sit,
    • Financial instruments accounted for at amortized cost, whose fair value must be shown in the notes.
      However, when tangible and intangible assets are recognized using the revaluation method, the notes must indicate, for each asset class concerned, the amount that would have appeared in the statement of financial position under the cost model.
  • One measurement basis on the statement of financial position (generally fair value or a current value ) and another in profit or loss (generally historical cost ), the difference between the two measurement methods being recognized in Other Comprehensive Income.
    This applies to financial instruments (held to collect and sell under IFRS 9.

When selecting a measurement basis, the entity needs also to consider the nature of the information – whether it will be presented in the statement of financial position and/or the statement(s) of financial performance. Cost will also constrain the selection of a measurement basis.

The Board acknowledges that consideration of all these factors is likely to result in the selection of different measurement bases for different assets, liabilities, income and expenses.

– Pro’s and cons

Historical cost can provide relevant information about assets and liabilities and the price of the transaction that gave rise to each. One example of historical cost would be amortised cost.

A current value measurement basis on the other hand reflects conditions at the measurement date and not the price of the transaction that gave rise to the asset or liability.

Current value measurement bases have different characteristics. Fair value for example reflects a price that would be received or paid for selling an asset or transferring a liability from the perspective of market participants. Value in use (for assets) and fulfilment value (for liabilities) on the other hand reflect the present value of future cash flows which are based on entity-specific assumptions.

Fair value, value in use and fulfilment value are described as exit values, whereas current cost is – like historical cost – an entry value. Unlike fair value, value in use and fulfilment value, current cost takes into account transaction costs that would be incurred at the date the asset or liability is measured, based on the cost that an equivalent asset or liability would have.

Conceptual framework 2018 Measurements

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