Chapter 6: MEASUREMENT

Conceptual Framework in
Financial Reporting
 Measurement Bases
• Historical Cost • Current Value
– Fair value
– Value in use (for
assets) or Fulfilment
value (for liabilities)
– Current cost
 HISTORICAL COST
• Historical cost • Historical cost of
provides information assets is REDUCED
derived, at least in if they become
part, from the price impaired.
of the transaction or • Historical cost of
other event that liabilities is
gave rise to the item INCREASED if they
being measured. become onerous.
 HISTORICAL COST
• One way to apply a
historical cost
measurement basis
to financial assets
and financial
liabilities is to
measure them at… AMORTISED COST
 CURRENT VALUE
• provides information • includes
updated to reflect – Fair value
conditions at the – Value in use or
measurement date fulfilment value
– Current cost
 FAIR VALUE
• The price that would • It reflects market
be received to sell participants’ current
an asset, or paid to expectations about
transfer a liability, in the amount, timing
an orderly and uncertainty of
transaction between future cash flows.
market participants
at the measurement
date
 FAIR VALUE

• Refer to IFRS 13 for further guidance

https://www.ifrs.org/issued-standards/list-of-
standards/ifrs-13-fair-value-measurement/

https://www.ifrs.org/-/media/feature/supporting-
implementation/ifrs-13/education-ifrs-13-
eng.pdf
 VALUE IN USE (for assets)
FULFILLMENT VALUE
(for liabilities)
• It reflects entity-specific current expectations
about the amount, timing and uncertainty of
future cash flows
 VALUE IN USE (for assets)
IAS 36 par. 30
The following elements shall be reflected in
the calculation of an asset’s value in use:
a. An estimate of the future cash flows the
entity expects to derive from the asset;
b. Expectations about possible variations in
the amount or timing of those future cash
flows;
c. The time value of money, represented by
the current market risk-free rate of interest;
 VALUE IN USE (for assets)
IAS 36 par. 30
d. The price for bearing the uncertainty
inherent in the asset; and

e. Other factors, such as illiquidity, that

market participants would reflect in pricing the
future cash flows the entity expects to derive
from the asset.
 CURRENT COST

• It reflects the current amount that would be:

– Paid to acquire an equivalent asset
– Received to take on an equivalent liability
 Selecting a measurement
basis:
 It is necessary to consider the nature of the
information in both the statement of financial
position and the statement(s) of financial
performance.
 The relative importance of each factor to be
considered depends upon the facts and
circumstances of individual cases.
 Selecting a measurement
basis:
 Consideration of the factors and the cost
constraint is likely to result in the selection of
different measurement bases for different
assets, liabilities, income and expenses.
Factors to consider in selecting
a measurement basis
• Relevance is affected by:

 Characteristics of the asset or liability

 Contribution to future cash flows
Factors to consider in selecting
a measurement basis
• Faithful representation is affected by:

 Measurement inconsistency
 Measurement uncertainty
 Relevance

• Characteristics of the asset or liability

 The variability of cash flows

 Sensitivity of the value to market factors or
other risks
 For example, amortised cost cannot provide
relevant information about a derivative
 Relevance
• Contribution to future cash flows
 Whether cash flows are produced directly or
indirectly in combination with other economic
resources
 The nature of the entity’s business activities
 For example, if assets are used in
combination to produce goods or services,
historical cost can provide relevant
information about margins achieved in a
period
 Relevance
• If an asset is sensitive to market factors,
fair value might provide more relevant
information than historical cost.
• However, depending on the nature of the
entity’s business activities, and thus how
the asset is expected to contribute to
future cash flows, fair value might not
provide relevant information.
• This could be the case if the entity holds
the asset solely for use or to collect
contractual cash flows rather than for sale.
 Faithful Representation
• Measurement inconsistency
 If financial statements contain measurement
inconsistencies (accounting mismatch), those
financial statements may not faithfully
represent some aspects of the entity’s
financial position and financial performance
 Faithful Representation
• Measurement uncertainty
 Does not necessarily prevent the use of a
measurement basis that provides relevant
information
 But if too high might make it necessary to
consider selecting a different measurement
basis
 Faithful Representation
• A high level of measurement uncertainty
does not render a particular measurement
basis irrelevant.
• However, there can be a trade-off between
relevance and faithful representation.
 COST CONSTRAINT
 Cost constrains the selection of a
measurement basis, just as it constrains
other financial reporting decisions
 The Framework does not preclude the use of
different measurement bases for an asset or
a liability in the statement of financial position
and the related income and expenses in the
statement of financial performance.

 In most cases, using the same measurement

basis in both statements would provide the
most useful information.
 It would be normal for the IASB to select the
same measurement basis for the initial
measurement of an asset or a liability that
will be used for its subsequent measurement,
to avoid recognising a “day-2 gain or loss”
due solely to a change in measurement
basis.