Some challenges in measurement bases for financial reporting

Some challenges in measurement bases for financial reporting – When applied to financial reporting the term measurement can give a misleading Some challenges in measurement bases for financial reporting impression of certainty and objectivity. In daily life, measurements are typically made of the physical characteristics of physical objects – such as height, weight, temperature and so on. If accurate measurement tools are employed, information of this sort is objective and uncontroversial (a ‘fact’). The subjects of measurement in financial reporting, however, are abstract concepts of uncertain meaning such as income and net assets (an ‘estimate’). Some challenges in measurement bases for financial reporting

For this reason alone, their measurement is always liable to be controversial.

All measurements in financial reporting are expressed in monetary terms and therefore purport to be measurements of value. However, value can mean different things. A particular asset might be valued at, for example, its historical cost, its replacement cost or its market value. It cannot be said that any one of these measurements is the one and only correct value for the asset. Each value, if the measurement is made properly, will be correct on the basis being used. In the conceptual framework, the financial reporting standard-setters refer to the different attributes of assets and liabilities, which give different values when measured. Historical cost, replacement cost and market value are all attributes in this sense.

The diversity of the purposes for which financial reporting information is used means that a basis of measurement appropriate for one purpose may not be appropriate for all other purposes. If you ask someone the question, ‘What is this company’s income?’, the reply ‘Why do you want to know?’ may be a sensible first step towards providing a useful answer. There is no single, right answer to the question. Some challenges in measurement bases for financial reporting

As said before financial reporting measurements are inherently a matter of judgment, subjectivity and convention. Measurements of transactions for financial reporting that are affected by one or more of these fundamental problems when one measurement technique is used may well be faced by another fundamental problem if an alternative technique is tried. For such items there is no escape from subjectivity in measurement. Some challenges in measurement bases for financial reporting

As part of this search for measurement bases always being liable for controversy let’s have a look in the hyperlinks into four sections deal respectively with the determination of separable assets, prediction, allocation to periods and assets, and identification of markets and transactions. Some challenges in measurement bases for financial reporting

At present, IFRS and other collections of financial reporting practices involve the measurement of different items within accounts on different bases. There is a case for eliminating these inconsistencies so that balance sheet and income statement (or profit and loss account) totals reflect items measured on a single basis, and therefore have a clearer meaning. However, the achievement of a consistent measurement basis within the accounts should not be an overriding objective. There are a number of reasons for this view. Some challenges in measurement bases for financial reporting

  • There are some items for which one basis or another seems to have particular strengths or weaknesses. For example, fair value seems to have particular weaknesses where there are no active markets; historical cost seems to be particularly weak for items (eg, certain financial instruments) that have a historical cost of zero. The use of just one measurement basis therefore imposes a one-club strategy on financial reporting, producing some item measurements that are useful and others that are much less so.
  • 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. Some challenges in measurement bases for financial reporting

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.

Some challenges in measurement bases for financial reporting provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit

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