Unit of account

The ‘Unit of account’ definition is used for both assets and liabilities in (un)grouping transactions for financial reporting purposes and is primarily used as a term to which recognition and measurement requirements are applied.

Explanatory example:

A lessee has leased an entire office building with five floors and accounted for that lease as a single separate lease component. Partway through the lease term, the lessee commits to a plan to sublease one of the five floors. In other words, the lessee will sublease a portion of what it has previously accounted for as a single unit of account.

The following table features several examples of how to determine the “identified asset” in arrangements where the unit of account is unclear or the customer’s right of use is not related to the asset’s primary purpose.

Description	Identified asset	Comments
Customer’s right to attach equipment to a utility pole	Utility pole	The space used by the customer is not physically distinct, and the customer’s right of use is not equivalent to the asset’s primary use, which is to suspend electrical transmission wires.
Customer’s right to attach equipment to a cell tower	Space on the cell tower	The space used by the customer is physically distinct, and the customer’s right of use is equivalent to the asset’s primary use, which is to accommodate multiple customers’ electronic communication equipment.
Customer’s right to display an advertisement on the side of a building	Building	The exterior wall used by the customer is not physically distinct, and the customer’s right of use is not equivalent to the asset’s primary use, which is to provide residential or commercial space for tenants’ use.
Customer’s right to display an advertisement on a billboard	Billboard	The billboard is a physically distinct asset, and the customer’s right of use is equivalent to the asset’s primary use, which is to display an advertisement.
Customer’s right to connect to the main pipeline via a pipeline lateral	Pipeline lateral	The lateral is a physically distinct asset. A segment of a pipeline that connects a single customer to the larger pipeline is an example of an identified asset. The customer’s right of use is equivalent to the asset’s primary use, which is to transport oil and gas.
Customer’s right to connect to the “last mile” of pipeline	Depends	If the “last mile” is mechanically separable from the rest of the pipeline, then it could be physically distinct. The customer’s right of use is equivalent to the asset’s primary use, which is to transport oil and gas.

The Conceptual Framework explains ‘unit of account‘ along some essential features captured in the following subjects:

1. Definition of unit of account

The unit of account is the right or the group of rights, the obligation or the group of obligations, or the group of rights and obligations, to which recognition criteria and measurement concepts are applied.

The objective in selecting a unit of account is to provide the most useful information that can be obtained at a cost that does not exceed the benefits. See also 3 below for more details.

2. Unit of account grouped along recognition criteria and measurement concepts

A unit of account is selected for an asset or liability when considering how recognition criteria and measurement concepts will apply to that asset or liability and to the related income and expenses. In some circumstances, it may be appropriate to select one unit of account for recognition and a different unit of account for measurement.

For example, contracts may sometimes be recognised individually but measured as part of a portfolio of contracts. For presentation and disclosure, assets, liabilities, income and expenses may need to be aggregated or separated into components.

A unit of account is selected for an asset or a liability after considering how recognition and measurement will apply, not only to that asset or liability, but also to the related income and expenses. The selected unit of account may need to be aggregated or disaggregated for presentation or disclosure purposes.

3. Transfer parts of an unit of account

If an entity transfers part of an asset or part of a liability, the unit of account may change at that time, so that the transferred component and the retained component become separate units of account (see derecognition).

Transfer of parts of an asset or liability needs to result in the proper parts (as per contract) to be removed from the statement of financial position and the proper parts remaining.

4. Providing useful information

A unit of account is selected to provide useful information, which implies that:

1. Relevant information

   the information provided about the asset or liability and about any related income and expenses must be relevant. Treating a group of rights and obligations as a single unit of account may provide more relevant information than treating each right or obligation as a separate unit of account if, for example, those rights and obligations:

   1. cannot be or are unlikely to be the subject of separate transactions;
   2. cannot or are unlikely to expire in different patterns;
   3. have similar economic characteristics and risks and hence are likely to have similar implications for the prospects for future net cash inflows to the entity or net cash outflows from the entity; or
   4. are used together in the business activities conducted by an entity to produce cash flows and are measured by reference to estimates of their interdependent future cash flows.

2. Faithful representation

   the information provided about the asset or liability and about any related income and expenses must faithfully represent the substance of the transaction or other event from which they have arisen. Therefore, it may be necessary to treat rights or obligations arising from different sources as a single unit of account, or to separate the rights or obligations arising from a single source. For example, if the rights or obligations in one contract merely nullify all the rights or obligations in another contract entered into at the same time with the same counterparty, the combined effect is that the two contracts create no rights or obligations.

3. Conversely, if a single contract creates two or more sets of rights or obligations that could have been created through two or more separate contracts, an entity may need to account for each set as if it arose from separate contracts in order to faithfully represent the rights and obligations.
4. Equally, to provide a faithful representation of unrelated rights and obligations, it may be necessary to recognise and measure them separately.

5. Useful information presentation

   The question remains how to present useful information, which is not an easy process. The above provides a possible check to improve information provided in financial statements.

5. Cost constraints

Just as cost constraints other financial reporting decisions, it also constrains the selection of a unit of account. Hence, in selecting a unit of account, it is important to consider whether the benefits of the information provided to users of financial statements by selecting that unit of account are likely to justify the costs of providing and using that information.

In general, the costs associated with recognising and measuring assets, liabilities, income and expenses increase as the size of the unit of account decreases. Hence, in general, rights or obligations arising from the same source are separated only if the resulting information is more useful and the benefits outweigh the costs.

The objective in selecting a unit of account is to provide the most useful information that can be obtained at a cost that does not exceed the benefits.

6. Separating or combining rights and obligations

Sometimes, both rights and obligations arise from the same source. For example, some contracts establish both rights and obligations for each of the parties. If those rights and obligations are interdependent and cannot be separated, they constitute a single inseparable asset or liability and hence form a single unit of account. For example, this is the case with executory contracts (see executory contracts).

Conversely, if rights are separable from obligations, it may sometimes be appropriate to group the rights separately from the obligations, resulting in the identification of one or more separate assets and liabilities. In other cases, it may be more appropriate to group separable rights and obligations in a single unit of account treating them as a single asset or a single liability.

Separating or combining rights and obligations needs to result in providing the best useful information without neglecting cost constraints.

7. Single unit of account versus offsetting

Treating a set of rights and obligations as a single unit of account differs from offsetting assets and liabilities.

Selecting a unit of account is not the same issue as offsetting. The question of offsetting arises after recognition and measurement have been applied to identified units of account for both an asset and a liability.

8. Possible units of account

Possible units of account include:

1. an individual right or individual obligation;
2. all rights, all obligations, or all rights and all obligations, arising from a single source, for example, a contract;
3. a subgroup of those rights and/or obligations—for example, a subgroup of rights over an item of property, plant and equipment for which the useful life and pattern of consumption differ from those of the other rights over that item;
4. a group of rights and/or obligations arising from a portfolio of similar items;
5. a group of rights and/or obligations arising from a portfolio of dissimilar items—for example, a portfolio of assets and liabilities to be disposed of in a single transaction; and
6. a risk exposure within a portfolio of items—if a portfolio of items is subject to a common risk, some aspects of the accounting for that portfolio could focus on the aggregate exposure to that risk within the portfolio.

These examples of possible units of account include factors that could determine which unit of account to use. It is suggested not to rank the factors by priority, because their relative importance depends on the specific features of the item that the entity is accounting for. No single ranking could determine the most useful unit of account consistently for a broad range of Standards.

The Conceptual Framework provides the following guidance [Conceptual Framework 4.49 – 4.55]:

A unit of account is selected for an asset or liability when considering how recognition criteria and measurement concepts will apply to that asset or liability and to the related income and expenses. In some circumstances, it may be appropriate to select one unit of account for recognition and a different unit of account for measurement.

For example, contracts may sometimes be recognised individually but measured as part of a portfolio of contracts. For presentation and disclosure, assets, liabilities, income and expenses may need to be aggregated or separated into components.

If an entity transfers part of an asset or part of a liability, the unit of account may change at that time, so that the transferred component and the retained component become separate units of account.

A unit of account is selected to provide useful information, which implies that:

1. the information provided about the asset or liability and about any related income and expenses must be relevant. Treating a group of rights and obligations as a single unit of account may provide more relevant information than treating each right or obligation as a separate unit of account if, for example, those rights and obligations:
   1. cannot be or are unlikely to be the subject of separate transactions;
   2. cannot or are unlikely to expire in different patterns;
   3. have similar economic characteristics and risks and hence are likely to have similar implications for the prospects for future net cash inflows to the entity or net cash outflows from the entity; or
   4. are used together in the business activities conducted by an entity to produce cash flows and are measured by reference to estimates of their interdependent future cash flows.
2. the information provided about the asset or liability and about any related income and expenses must faithfully represent the substance of the transaction or other event from which they have arisen. Therefore, it may be necessary to treat rights or obligations arising from different sources as a single unit of account, or to separate the rights or obligations arising from a single source (see paragraph 4.62). Equally, to provide a faithful representation of unrelated rights and obligations, it may be necessary to recognise and measure them separately.

Just as cost constrains other financial reporting decisions, it also constrains the selection of a unit of account.

Hence, in selecting a unit of account, it is important to consider whether the benefits of the information provided to users of financial statements by selecting that unit of account are likely to justify the costs of providing and using that information. In general, the costs associated with recognising and measuring assets, liabilities, income and expenses increase as the size of the unit of account decreases. Hence, in general, rights or obligations arising from the same source are separated only if the resulting information is more useful and the benefits outweigh the costs.

Sometimes, both rights and obligations arise from the same source. For example, some contracts establish both rights and obligations for each of the parties. If those rights and obligations are interdependent and cannot be separated, they constitute a single inseparable asset or liability and hence form a single unit of account.

For example, this is the case with executory contracts. Conversely, if rights are separable from obligations, it may sometimes be appropriate to group the rights separately from the obligations, resulting in the identification of one or more separate assets and liabilities. In other cases, it may be more appropriate to group separable rights and obligations in a single unit of account treating them as a single asset or a single liability.

Treating a set of rights and obligations as a single unit of account differs from offsetting assets and liabilities.

Possible units of account include:

1. an individual right or individual obligation;
2. all rights, all obligations, or all rights and all obligations, arising from a single source, for example, a contract;
3. a subgroup of those rights and/or obligations—for example, a subgroup of rights over an item of property, plant and equipment for which the useful life and pattern of consumption differ from those of the other rights over that item;
4. a group of rights and/or obligations arising from a portfolio of similar items;
5. a group of rights and/or obligations arising from a portfolio of dissimilar items—for example, a portfolio of assets and liabilities to be disposed of in a single transaction; and
6. a risk exposure within a portfolio of items—if a portfolio of items is subject to a common risk, some aspects of the accounting for that portfolio could focus on the aggregate exposure to that risk within the portfolio.
   Unit of account

IAS 37 includes a specific prohibition on recognizing provisions for future operating losses. A common issue in applying IAS 37 is distinguishing between:

• onerous obligations, for which the recognition of a provision is required; and
• future operating losses, for which the recognition of a provision is prohibited.

IAS 37 includes general guidance on the recognition and measurement of provisions for onerous contracts. An entity recognizes a provision when the unavoidable costs of meeting the obligations under a contract exceed the economic benefits to be received. However, IAS 37 also prohibits the recognition of a provision for future operating losses.

IFRS 13 Fair value measurement

In valuing non-financial assets, the concepts of unit of account and valuation premise are distinct, even though both concepts deal with determining the appropriate level of aggregation (or disaggregation) for assets and liabilities. The unit of account identifies what is being measured for financial reporting and drives the level of aggregation (or disaggregation) for presentation and disclosure purposes (e.g., whether classification in the fair value hierarchy is determined at the individual asset level or for a group of assets).

Valuation premise is a valuation concept that addresses how a non-financial asset derives its maximum value to market participants, either on a standalone basis or through its use in combination with other assets and liabilities.

Since financial instruments do not have alternative uses and their fair values typically do not depend on their use within a group of other assets or liabilities, the concepts of highest and best use and valuation premise are not relevant for financial instruments. As a result, the fair value for financial instruments should be largely based on the unit of account prescribed by the standard that requires (or permits) the fair value measurement.

The distinction between these two concepts becomes clear when the unit of account of a non-financial asset differs from its valuation premise. Consider an asset (e.g., customised machinery) that was acquired other than by way of a business combination, along with other assets as part of an operating line.

Although the unit of account for the customised machinery may be as a standalone asset (i.e., it is presented for financial reporting purposes at the individual asset level in accordance with IAS 16 Property, Plant and Equipment), the determination of the fair value of the machinery may be derived from its use with other assets in the operating line (see for additional discussion on the concept of valuation premise).

Unit of account is an accounting concept. It identifies what is being measured for financial reporting purposes. When applying IFRS 13, this drives the level of aggregation (or disaggregation) for presentation and disclosure purposes, for example, whether the information presented and disclosed in the financial statements is for an individual asset or for a group of assets.

Although the unit of account is generally determined in accordance with other IFRSs, IFRS 13 addresses the unit of account for Level 1 assets and liabilities.

IFRS 13 80 states that if “an entity holds a position in a single asset or liability (including a position comprising a large number of identical assets or liabilities, such as a holding of financial instruments) and the asset or liability is traded in an active market, the fair value of the asset or liability shall be measured within Level 1 as the product of the quoted price for the individual asset or liability and the quantity held by the entity.” By dictating that fair value must be determined based on PxQ, IFRS 13 effectively prescribes the unit of account as the individual asset or liability in these situations.

Unit of account

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