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.

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Comparability – An enhancing qualitative characteristic that enables users to identify and understand similarities in, and differences among, items.

The Conceptual Framework provides the following guidance [Conceptual Framework 2.24 – 2.29]:

Users’ decisions involve choosing between alternatives, for example, selling or holding an investment, or investing in one reporting entity or another. Consequently, information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date.Comparability

Comparing Financial Statements between companies is the qualitative characteristic that enables users to identify and understand similarities in, and differences among, items. Unlike the other qualitative characteristics, comparability does not relate to … Read more

Accounting policies

Accounting policies: The specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.

Enhancing qualitative characteristic

Comparability, verifiability, timeliness and understand-ability are qualitative characteristics that enhance the usefulness of information that both is relevant and provides a faithful representation of what it purports to represent. The enhancing qualitative characteristics may also help determine which of two ways should be used to depict a phenomenon if both are considered to provide equally relevant information and an equally faithful representation of that phenomenon.

Faithful representation

Faithful representation - Financial information that faithfully represents the phenomena that it purports to represent, i.e. more than its sheer legal form.

Fundamental qualitative characteristics

Fundamental qualitative characteristics that financial information must possess to make it useful to the primary users of general purpose financial reports

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.

Presentation and disclosure

Presentation and disclosure are the terms used to describe how information about assets, liabilities, equity, income and expenses is provided in the accounts.

Qualitative characteristic

Qualitative characteristic is a characteristic that makes financial information more useful to the primary users of general purpose financial reports.