Need for accounting measurement the big 1

Need for accounting measurement
Need for accounting measurement provides a summary of the measurement bases in use in Financial Reporting
and the concepts behind these measurement bases.
The measurement bases that will be considered here are:

All these bases are forms of accrual accounting – that is, they are intended to measure income as it is earned and costs as they are incurred, as opposed to simply recording cash flows. The last four are all forms of current value measurement.

In forming a judgment on the appropriateness of measurement bases, in literature, the overriding tests has been identified to be their cost-effectiveness and fitness for purpose. However, in the absence of direct evidence on these matters, it is usual to argue in terms of various secondary characteristics that ought to be relevant in assessing the quality of information (see the key indicators in What is useful information?).

The most important of these characteristics are generally considered to be relevance and faithful representation / reliability (older term).

For each basis, an outline is given of how it works and the relevance and faithful representation of the resulting measurements. The question of measurement costs is also considered briefly. In reading the analyses that follow, the following comments should be borne in mind.

Bases of measurement in financial reporting are not carved in stone. Different people have different views on how each basis should work, and meanings evolve as practice changes. Some readers may therefore find that the way a particular basis is described does not match how they understand it.

This does not mean either that their understanding is wrong or that the description in the report is wrong; views on these things simply differ.

Read more

Related IFRS posts

Historical cost measurement

Historical cost measurement – The historical cost of an asset is the amount paid for it and the historical cost of a liability is the amount received in respect of it or the amount expected to be paid to satisfy it.

Historical cost accounting is interpreted to require that the amount at which an asset is stated in the accounts should not exceed the amount expected to be recovered from either its use or its sale (its recoverable amount). Historical cost as it is understood is therefore recoverable historical cost.

Recoverable amount is usually considered to be the higher of an asset’s realisable value and its value in use. The resulting recoverable historical cost tree for determining an asset’s recoverable Read more

Allocation to periods and assets

Allocation to periods and assetsAllocation to periods and assets – Many measurements in financial reporting involve allocations of costs and revenues to different accounting periods and different assets. These allocations inevitably include an element of arbitrariness and therefore subjectivity. Just to name a few obvious items:

  • Depreciation of fixed assets involves judgmental allocation decisions (See explanation below).
  • Where assets are bought for stock (or inventory) and subsequent resale, unless the cost of each one can be individually identified (or unless their purchase price never changes), calculation of a particular asset’s purchase price involves a judgmental allocation.
  • For measurements of discounted future liabilities, allocation to different accounting periods depends on the choice of an appropriate discount rate, which inevitably involves a significant element
Read more

Some challenges in measurement bases for best 1 in quality IFRS reporting

Some challenges in measurement bases

for best 1 in quality IFRS reporting

– When applied to financial reporting the term measurement can give a misleading Some challenges in measurement basesimpression 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’).

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

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.

Read more

Related IFRS posts

Challenges in financial reporting

Challenges in financial reporting – There are specific problems that affect the different bases of measurement available to financial reporting: historical cost, value to the business, fair value, realisable value and value in use. How the different bases work will be considered separately, but it will be helpful to look first at some issues that generally beset financial reporting measurement.

When applied to financial reporting the term measurement can give a misleading 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. The subjects of … Read more