More than one measurement basis

More than one measurement basis Sometimes, consideration of the factors described in Measurement choices for recording transaction may lead to the conclusion that more than one measurement basis is needed for an asset or liability and for related income and expenses in order to provide relevant information that faithfully represents both the entity’s financial position and its financial performance. More than one measurement basis

In most cases, the most understandable way to provide that information is:

  1. to use a single measurement basis both for the asset or liability in the statement of financial position and for related income and expenses in the statement(s) of financial performance; and More than one measurement basis
  2. to provide in the notes additional information applying a different measurement basis.

However, in some cases, that information is more relevant, or results in a more faithful representation of both the entity’s financial position and its financial performance, through the use of:

  1. a current value measurement basis for the asset or liability in the statement of financial position; and
  2. a different measurement basis for the related income and expenses in the statement of profit or loss (see Profit or loss and Other comprehensive income Conceptual Framework 7.17–7.18).

In selecting those measurement bases, it is necessary to consider the factors discussed in Measurement choices for recording transaction.

In such cases, the total income or total expenses arising in the period from the change in the current value of the asset or liability is separated and classified (see Classification of income and expense and Profit or loss and Other comprehensive income Conceptual Framework 7.14 – 7.19) so that: More than one measurement basis

  1. the statement of profit or loss includes the income or expenses measured applying the measurement basis selected for that statement; and
  2. other comprehensive income includes all the remaining income or expenses. As a result, the accumulated other comprehensive income related to that asset or liability equals the difference between: More than one measurement basis
    1. the carrying amount of the asset or liability in the statement of financial position; and
    2. the carrying amount that would have been determined applying the measurement basis selected for the statement of profit or loss.

The choice of a single measurement basis is likely to achieve less consistency in substance than may be immediately obvious. The blanket use of a single measurement basis could lead to increased
variability and inconsistency, particularly in the reliability, of measurements. The allegation that using more than one measurement basis leads to ‘mixing apples and pears’ can be countered by saying that the use of a single basis would mean mixing ‘good and bad apples’ and making the whole barrel bad.

The difficulty of achieving consistency can be further illustrated through the example of fair value. Because the range of assets and liabilities for which there are active markets is limited, a range of expedients tends to be used to estimate what fair value would have been if there had been an active market. These include value in use, replacement cost, realisable value and even historical cost (on the argument that, in the absence of any other evidence, what you paid for something, especially if you bought it recently, may be the best indication available of what it is worth). Similar patches and workarounds tend to evolve for any measurement basis the more widely it is applied in practice.

Although lack of consistency in the measurement basis within accounts might be expected to be a problem, many users seem content to employ information prepared on mixed bases, and find it useful. Possibly they use it in a pragmatic way, aware that there are trade-offs between relevance and reliability and other qualities, without seeking to attach any purity of meaning to the numbers.

These arguments are not intended to override empirical evidence to the contrary. If examination of the cost-effectiveness of different approaches to measurement shows that consistency of bases within the accounts is the most sensible approach, then it should be accepted and enforced. But the working hypothesis here is that on the evidence available to date, a mixed approach to measurement should not be ruled out.

It is also possible that the cost-benefit equation for how particular assets should be measured might work out differently in different locations. For example, some stock exchanges provide more efficient (and therefore more reliable) markets than others; some property markets are more liquid than others; and so on. So fair values (and realisable values) will vary in reliability from location to location for different types of asset. It is therefore possible that it would make sense to measure a particular type of asset (or liability) in different ways depending on where the asset (or liability) is located.

More than one measurement basis

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