Measurement: ©2018 John Wiley & Sons Australia LTD
Measurement: ©2018 John Wiley & Sons Australia LTD
Measurement: ©2018 John Wiley & Sons Australia LTD
Measurement
• Benefits of measurement:
1. It assists in making financial statements decision
useful.
2. Allows users to assess the financial performance
and financial position of the entity.
3. Allows users to compare the entity’s
performance and position over time.
4. Allows users to compare entities.
Measurement in accounting
• Measurement approaches:
– The Conceptual Framework does not provide
guidance as to which measurement bases should
be used.
– Feedback has been provided by the IASB regarding
the proposals associated with measurement.
– Historic cost is the most dominant measurement
base used by entities.
Measurement approaches
and the accounting standards
• Historical cost:
– Dominant measurement approach.
– Traditional historical cost essentially requires
items to be recorded at the amount at which:
• they were purchased
• or they were received.
– Transactions are based on the past.
Measurement approaches
and the accounting standards
• Historical cost:
– Less relevant, as it is not necessarily reflective of
the value of benefits (present and future).
– Produces information which is more faithfully
represented.
– More neutral as there is very little or no
estimation involved.
– Information produced is generally
understandable, but may less comparable.
Measurement and the quality of
accounting information
• Fair value:
– Information produced using fair value as the
measurement base is argued to be more relevant.
– The quoted market price for an item is an
objective method for determining the fair value of
an item and is more faithfully represented.
– Information produced using fair value is viewed as
being more understandable and comparable
(arguably).
Measurement and the quality of
accounting information
• Current cost:
– Information is more relevant than the use of
historical cost.
– Faithfully represented information due to the use
of actual current cost.
– Information is more difficult to interpret from a
decision usefulness perspective and therefore less
understandable.
– Values may be more comparable, but future
economic benefits may be less comparable.
Measurement and the quality of
accounting information
• Present value:
– Values are more relevant.
– Due to the estimation involved, assumptions and
judgement the approach lacks faithful
representation and neutral depiction.
– Less understandable as approach involves
complex estimations and formulas.
– Comparable (arguably) as amounts are discounted
to the present day and in current dollars.
Fair value
• Valuation methods:
– Income approach:
• Approximation of current market value is made
by estimating the future cash flows or income
and expenses.
Fair value
• Key points:
– Subjectivity and discretion involved in
determination of some values.
– Impact of measurement on achievement of other
organisational objectives.
Current measurement challenges
• Intangible assets:
– Initially measured at cost.
– What constitutes cost is different depending upon:
• whether the intangible was acquired separately
• acquired as part of a business combination
• internally generated.
– Measurement of intangible assets is complex and
variation exists.
Current measurement challenges
• Heritage assets:
– Considered to be a subset of property, plant and
equipment.
– No single definition but definitions follow the same
idea:
• these assets are of some sort of historical,
artistic, cultural or environmental significance
• are held and maintained for their contribution to
knowledge and for the benefit of present and
future generations.
Current measurement challenges
• Heritage assets:
– Issues:
• Should heritage assets be treated in the same
way as other tangible assets? Or should they be
treated as a liability?
• Are heritage assets capable of financial
measurement?
• Should heritage assets be financially measured?
Current measurement challenges
• Water assets:
– Developing reporting and assurance standards for
water resides with the national Water Accounting
Standards Board (WASB).
– Measurement and valuation:
• Number of issues associated with the
measurement or valuation of water as an asset.
Current measurement challenges
• Water assets:
– Measurement and valuation:
• Wide range of stakeholders:
– All have diverse interests.
– Economic, environmental and social factors
need to be considered.
• How should value be determined:
– Issues surrounding determination of value.
Current measurement challenges
• Water assets:
– Measurement and valuation:
• Water quality and recognition:
– Water is a limited natural resource which
needs to be managed.
– It must be given value and accounted for in
the same way as any other asset.
Summary