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.

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.

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.

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.

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.

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.

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.

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

Food for thought Measurement uncertainty

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

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.

  • 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?

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.

General model of measurement of insurance contracts

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