Too many measurement techniques?
What makes a good measurement method?
Its cost should be justified by the benefits of reporting that information to users
It should be the minimum necessary to provide relevant information
It should mean infrequent changes (any necessary changes clearly explained)
The same method for initial and subsequent measurement (for comparability and consistency purposes)
The existing Conceptual Framework worryingly provides very little guidance on measurement
Why not use one measurement basis for everything?
It may not provide the most relevant information to users - (although many call for the use of current values to provide the most relevant information)
What methods do IFRSs therefore use?
Fair value, historical cost, present value and net realisable value.
Different information from different measurement bases may be relevant in different circumstances.
So what's wrong with this?
Different measurement bases may mean the totals in financial statements have little meaning.
Using 'Current Value'
Profit orientated businesses turn has market input values (inventory for example) into market output values (sales of finished products)
Therefore current market values should play a key role in measurement.
This would be the most relevant measure of assets and liabilities for financial reporting purposes. (in these circumstances)
Mixed Measurement Approach
The IASB favour a mixed measurement approach - the most relevant method is selected.
Investors feel that this approach is consistent with how they analyse financial statements
Maybe its problems of mixed measurement are outweighed by the greater relevance achieved.
IFRS 9 requires the use of cost in some cases and fair value in other cases
IFRS 15 essentially applies cost allocation
Measurement uncertainty of an item should be considered when assessing whether a particular measurement basis provides relevant information.
However, most measurement is uncertain and requires estimation.
For example, recoverable value for impairment, depreciation estimates and fair value measures at level 2 and 3 under IFRS 13.
The IASB thinks that the level of measurement uncertainty that makes information lack relevance depends on the circumstances and can only be decided when developing particular standards.
Cash-flow-based measurement can be used to customise measurement bases, which can result in more relevant information but it may also be more difficult for users to understand. As a result the Exposure Draft does not identify those techniques as a separate category.
Areas of debate about measurement include:
Entry and exit values
Entity specific values
Entity's business model
For example, property can be measured at historical cost or fair value depending upon the business model.
The IASB believes that when selecting a measurement basis, the amount is more relevant if the way in which an asset or a liability contributes to future cash flows is considered. The IASB considers that the way in which an asset or a liability contributes to future cash flows depends, in part, on the nature of the business activities.
Seems to be the easiest but what about...
Exchanges of assets
Current values have a variety of alternative valuation methods. These include:
Market value (least ambiguous)
Value in Use
In the main, the details of how these different measurement methods are applied, are set out in each accounting standard.