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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Performance obligation

A performance obligation is a promise in a contract to transfer to the customer either 1 distinct goods/services or 2 a series of distinct goods/services

Inventories the highlights

Inventories the highlights as it says provides a high level summary of the accounting and financial reporting in respect of inventory.

See Inventories for IFRS for Small and Medium-sized entities, the complete IAS 2 Inventories standards is also available.

Inventory is also called stock in trade, or just stock. Inventories the highlights

Scope

Applies to all inventories except:

  • work in progress on construction and service contracts (IAS 11);
  • financial instruments (IAS 32 and IFRS 9); and
  • biological assets arising from agricultural activity (IAS 41).

Does not apply to the measurement of inventories held by:

  • producers of agricultural and forest products, and minerals and mineral products, that are measured at net realisable value in accordance with well-established practices in those industries;
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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