Measurement basis

An identified feature of an item being measured (for example, historical cost, fair value or fulfilment value).

The result of measuring an asset, a liability or equity, or an item of income or expense, on a specified measurement basis.

The process of quantifying, in monetary terms, information about an entity’s assets, liabilities, equity, income and expenses.

The alternative measurement bases identified from a search of the accounting literature are: historical cost, current cost (reproduction cost and replacement cost), fair value, net realizable value and value in use. There are two sources of measurement uncertainty which can affect the reliability of a measurement: estimation uncertainty and economic indeterminacy.

In general, fair value is more relevant than the other identified bases on initial recognition. All of the alternative measurement bases other than fair value directly or indirectly incorporate entity-specific measurements. For this and other reasons, it is proposed that fair value should be used to measure assets and liabilities on initial recognition, provided it can be reliably measured. The analysis indicates that significant measurement uncertainty in measuring fair value exists in some common situations. Some of the problems identified include determining what constitutes a market and adducing evidence concerning what data inputs market participants would likely use when a market does not exist for the item in question.

It is  considered which measurement bases are acceptable substitutes for fair value when fair value cannot be measured reliably on initial recognition. Consistent with the fundamental proposition that the market value measurement objective provides superior information, the alternative measurement basis used should be the one that is most consistent with the market value measurement objective, provided it can be measured reliably and, when cost bases are used, the amount is expected to be recoverable.

In evaluating cost bases as possible substitutes for fair value on initial recognition, replacement cost is considered to be more relevant than reproduction cost, and both are considered more relevant than historical cost. Net realizable value and value in use are considered and rejected as substitutes for fair value on initial recognition. However, redefined concepts of realizable value and present value, applied as consistently as possible with the fair value measurement objective, are considered as possible estimates of, or substitutes for, fair value.

General model of measurement of insurance contracts

Measurement basis

Measurement basis

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