The cost of maintaining a measurement method

The cost of maintaining a measurement method – The costs of financial reporting measurement are not just the routine, recurring costs that an entity incurs directly. They also include one-off costs in setting up and documenting the relevant methods and systems and in training staff, and indirect expenses such as the costs of audit. T he cost of maintaining a measurement method

Each basis of measurement has its advantages, and each may therefore be seen by a business’s managers as appropriate for its internal purposes – that is, for management information. Where a measurement basis is used for internal reporting, the incremental costs of using it for financial reporting (that is, for reporting to outsiders) will clearly be much less than would otherwise be the case. The cost of maintaining a measurement method

A good deal of historical cost information is prepared for management purposes, as every business needs to record the actual costs it incurs and its realised income, even if it then goes on to build on that by using information prepared on other bases. Usually, therefore, the additional preparation costs of historical cost financial reporting information are relatively low.

Value to the business is typically more costly than historical cost, as work has to be done to ascertain replacement costs, and to adjust for differences in asset lives and service potential. At a time of rising prices, impairment tests are also likely to be more critical than they would be for historical cost, and so have to be performed more thoroughly. However, as with any basis, if the business is using value to the business for management purposes, most of these costs would be incurred anyway. The cost of maintaining a measurement method

The cost of maintaining a measurement method Whether fair value is relatively expensive or inexpensive depends largely on how far measurements can be taken from active markets and whether the business uses fair value information for management purposes. Where information can be taken from active markets and management is using fair values anyway, fair value for financial reporting should be relatively cheap. Where these conditions do not apply, fair value will probably be more expensive than historical cost. The same points apply to realisable value, in so far as it resembles fair value.

Predicting cash flows for value in use is probably simpler than making the detailed item-by-item calculations required for other bases, e.g, historical cost, because it has to be done at the level of the business entity (or cash-generating unit), rather than asset by asset and liability by liability. Some businesses prepare value in use information for management purposes. Where they do not, value in use measurements for financial reporting would obviously add to costs.

Unfortunately, for many business assets and liabilities, items that are affected by one type of fundamental measurement problem are also affected by another. For example, calculating the depreciated historical cost of plant and machinery can involve significant subjectivity because predictions of the future are involved in estimating its remaining useful life and judgemental decisions have to be made on how its cost will be allocated; and subjective decisions that ignore problems of jointness may have to be taken in calculating recoverable amounts for particular assets.

But typically there are no active markets for second-hand plant and machinery, so current market prices would not provide an alternative source of objective measurement information. Indeed, some would argue that fixed assets generally provide the most difficult and pervasive practical problems in financial reporting measurement.

Similarly, liabilities for which there are no markets – such as liabilities for active defined benefit pension schemes and for reinstatement costs – are often precisely those for which historical cost calculations also face difficulties as they depend on subjective estimates of costs to be met in the possibly distant future.

There is no neat symmetry, therefore, in the fundamental problems of financial reporting measurement. For some items, it is possible to find a measurement technique that avoids fundamental problems, but for others they seem to be unavoidable no matter what technique is employed.

There are many business assets and liabilities for which there are not active markets, and for many of these, where values cannot be taken directly from current market prices, judgements of allocation and prediction, and subjective decisions that ignore problems of jointness, cannot be avoided. While for such items there are no reliable measurements, this does not mean that it would be best to leave them out of the accounts. An unreliable measurement is often better than none.

The cost of maintaining a measurement method 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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