Take 1 stop for best read – 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.

Measurement uncertainty arises when a measure cannot be determined directly by observing prices in an active market and must instead be estimated.

The level of measurement uncertainty associated with a particular measurement basis may affect whether information provided by that measurement basis provides a faithful representation of an entity’s financial position and financial performance. A high level of measurement uncertainty does not necessarily prevent the use of a measurement basis that provides relevant information.

However, in some cases the level of measurement uncertainty is so high that information provided by a measurement basis might not provide a sufficiently faithful representation. In such cases, it is appropriate to consider selecting a different measurement basis that would also result in relevant information.

Financial reporting line

Measurement uncertainties disclosure

Financial instruments — disclosure only — no financial statement adjustment. Measurement uncertainty

For all financial instruments: fair value and methods and significant assumptions used to make estimate.

Long-lived assets.

For long-lived assets written down due to an impairment: “how fair value was determined.”

Stock-based compensation.

The method and significant assumptions used during the year to estimate the fair values of options, including specific elements. Measurement uncertainty

Investment accounting by not-for-profit organizations.

Methods and significant assumptions used to estimate the fair values of investments other than financial instruments (such as oil and gas properties and real estate).

Mortgage servicing rights.

The fair value of capitalized mortgage servicing rights and the methods and significant assumptions used to estimate that fair value. Measurement uncertainty

Post-employment benefit obligations other than pensions.

Defined benefit pension plans

Assumptions for discount rate, rate of compensation increase, long-term rate of return on plan assets, rate used to measure costs of benefits, and certain sensitivity-related assumption information. Measurement uncertainty

The disclosure of fair value of financial instruments requires companies to disclose the fair value of long-term debt and the related methods and significant assumptions used in making those estimates. Measurement uncertainty

Estimating the fair value of debt instruments not actively traded (such as notes payable to banks and debt of non-public companies) is simple and straightforward. For example, if a company’s creditworthiness has not changed since the debt was issued, it may be necessary only to identify the interest rate a lender would charge for a similar loan at the balance sheet date and apply that rate to the instrument’s future cash flows. Measurement uncertainty

While the resulting estimate may not be subject to significant uncertainty, the disclosures would nevertheless be substantial and extend beyond an estimate of fair value to include the methods and significant assumptions.

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Best Estimate ± Uncertainty

When scientists make a measurement or calculate some quantity from their data, they generally assume that some exact or “true value” exists based on how they define what is being measured (or calculated). Scientists reporting their results usually specify a range of values that they expect this “true value” to fall within. The most common way to show the range of values is:

measurement = best estimate ± uncertainty Measurement uncertainty

Food for thoughtMeasurement uncertainty

Try measuring the diameter of a tennis ball using the meter stick. What is the uncertainty in this measurement? Measurement uncertainty

Even though the meterstick can be read to the nearest 0.1 cm, you probably cannot determine the diameter to the nearest 0.1 cm. Measurement uncertainty

  • What factors limit your ability to determine the diameter of the ball?
  • What is a more realistic estimate of the uncertainty in your measurement of the diameter of the ball? Measurement uncertainty

Answers: It’s hard to line up the edge of the ball with the marks on the ruler and the picture is blurry. Even though there are markings on the ruler for every 0.1 cm, only the markings at each 0.5 cm show up clearly. I figure I can reliably measure where the edge of the tennis ball is to within about half of one of these markings, or about 0.2 cm. The left edge is at about 50.2 cm and the right edge is at about 56.5 cm, so the diameter of the ball is about 6.3 cm ± 0.2 cm.

Uncertainty in calibration

Not just to obtain a broader view on measurement uncertainty, its is no learn from it, what is it about uncertainty in calibration?

Being aware of the uncertainty related to the measurement is a very fundamental concept and you should not really make any measurements unless you are aware of the related uncertainty. Measurement uncertainty

It seems that the generic awareness of and interest in uncertainty is growing, which is great. Measurement uncertainty

The uncertainty of measurements can come from various sources such as: the reference measurement device used to make the measurement, environmental conditions, the operator making the measurements, the procedure and many other sources.

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There are several calibration uncertainty guides, standards and resources available out there, but these are mostly just full of mathematical formulas. Measurement uncertainty Measurement uncertainty

The uncertainty estimation and calculation are pretty complicated, but here it is tried to make some common sense out of it.

What is the uncertainty of measurement? Shortly and simply we can say that it is the “doubt” of the measurement, so it tells us howpiece of string good the measurement is. Every measurement we make has some “doubt” and we should know how much this “doubt” is, to decide if the measurement is good enough for the usage. Measurement uncertainty

It is good to remember that error is not the same as uncertainty. In calibration, when we compare our device to be calibrated against the reference standard, the error is the difference between these two readings. The error does not have meaning unless we know the uncertainty of the measurement. Measurement uncertainty

Classic “piece of string” uncertainty example

Let’s take a simple example to illustrate the measurement uncertainty in practice; we give the same piece of a string to three different people (one at a time) and ask them to measure the length of that string. There are no additional instructions given. They can all use their own tools and methods to measure it.

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More than likely, you will get three somewhat different answers, such as:

  • The first person says it is about 60 cm. He used a ten cm plastic ruler and measured the string once and came to this conclusion.
  • The second person says it is 70 cm. He used a three meter measuring tape and checked the results a couple of times to make sure he was right.
  • The third person says it is 67.5 cm, with an uncertainty of ±0.5 cm. He used an accurate measuring tape and measured the string multiple times to get an average and standard deviation. Then, he tested how much the string stretches when it is pulled and noticed that this has a small effect on the result.

Even this simple example shows that there are many things that effect the result of a measurement: the measurement tools that were used, the method/process that was used and the way that the person did the job.

So, the question you should be asking yourself is:

At your plant, when calibration work is performed, which of these three above examples will it be?

What kind of “rulers” are being used at your site and what are the measuring methods/processes?

If you just measure something without knowing the related uncertainty, the result is not worth much.

Hope it is helpful!!

Also read this: Calibration uncertainty for non-mathematicians


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General model of measurement of insurance contracts

Measurement uncertainty

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