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MEASUREMENT BASES FOR FINANCIAL ACCOUNTING

Measurement on Initial Recognition


Discussion Paer
CONTENTS Pages
Summary......................................................................................................................................4
Invitation to Comment..............................................................................................................12
PART I: MEASUREMENT BASES PROJECT....................................................................1
C!a"ter 1 # Pur"o$e o% Pro&e't an( S'o"e............................................................................1
Purose an! Imortance""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#$
%&at Does Measurement Encomass'"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#$
%&( Do Stan!ar! Setters Nee! to A!!ress t&e Bases o) Measurement'""""""""""""""""""#*
Scoe"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""+,
Inter!een!enc( o) Recognition an! Measurement""""""""""""""""""""""""""""""""""""""""""""""""""+#
Stages o) t&e Pro-ect""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""+.
Some Consi!erations Relating to Measurement on Initial Recognition"""""""""""""""""""+.
Anal(tical Aroac&""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""+/
De!ucti0e Anal(sis""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""+/
In!ucti0e Anal(sis"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""+1
Terminolog(""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""+1
C!a"ter 2 # Criteria %or Eva)uation......................................................................................2
2e( Asects o) Concetual Frame3or4s""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""+5
O6-ecti0es o) Financial Reorting"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""+5
7ualitati0e C&aracteristics""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""+*
Economic Puroses an! T&eir Em6o!iment in 8Assets9 an! 8Lia6ilities9"""""""""""""""..
Concets o) Caital an! Caital Maintenance""""""""""""""""""""""""""""""""""""""""""""""""""""""""""./
Cost:Bene)it Constraints"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""".1
Summar( o) Criteria"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""".$
Limitations o) Frame3or4 Concets""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""".$
E;ternal C&anges an! De0eloments"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""".*
Summar( < Basis )or Anal(sis""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""=#
PART II: MEASUREMENT ON INITIA* RECO+NITION..............................................42
C!a"ter , # Po$$i-)e Ba$e$ %or Mea$urement on Initia) Re'o.nition.................................42
De)ining Initial Recognition""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""=+
Possi6le Bases o) Measurement on Initial Recognition""""""""""""""""""""""""""""""""""""""""""""""""""""""""=+
I!enti)ie! Alternati0es"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""=+
Present >alue"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""=.
Possi6le Com6inations o) Measurement Bases"""""""""""""""""""""""""""""""""""""""""""""""""""""""""==
I!enti)ie! Alternati0es De)ine!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""==
?istorical Cost"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""=/
Rero!uction Cost an! Relacement Cost""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""=$
Net Reali@a6le >alue"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""=*
>alue in Use"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""=*
Fair >alue""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""/,
Deri0al >alue"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""/.
C!a"ter 4 # +enera) Con'e"tua) Ana)y$i$ / Mar0et v$. Entity S"e'i%i' Mea$urement
O-&e'tive$...................................................................................................................................11
Aroac& to Concetual Anal(sis"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""//
Mar4et 0s" Entit( Seci)ic Measurement""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""/1
Mar4et >alue O6-ecti0e"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""/1
Entit( Seci)ic Measurement O6-ecti0es""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""1#
Comaring Mar4et an! Entit( Seci)ic O6-ecti0es"""""""""""""""""""""""""""""""""""""""""""""""""""11
A Preliminar( E0aluation""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""1*
C!a"ter 1 # +enera) Con'e"tua) Ana)y$i$ / 2a)ue A%%e'tin. Pro"ertie$ an( Mar0et
Sour'e$........................................................................................................................................,
De)ining t&e Asset or Lia6ilit( to 6e Measure! on Initial Recognition""""""""""""""""""""""""""""""""$1
>alue A))ecting Proerties"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""$1
T&e Unit o) Account""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""$*
Determining t&e Aroriate Mar4etAsB""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""5=
Entr( an! E;it Mar4ets an! Relate! Issues"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""5=
Ot&er Mar4etCRelate! Consi!erations"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""*+
Transaction Costs""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""*$
C!a"ter 3 # +enera) Con'e"tua) Ana)y$i$ / Re)ia-i)ity....................................................141
De)ining Relia6ilit("""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#,#
Estimation Uncertaint(""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#,+
Distinguis&ing Estimation Uncertaint( )rom Ris4CRelate! >olatilit("""""""""""""""""""""#,+
Tolerance )or Estimation Uncertaint("""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#,=
Economic In!eterminac("""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#,/
Disclosure""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#,$
+
C!a"ter # Ana)y$i$ o% A)ternative Mea$urement Ba$e$...................................................111
Fair >alue"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""###
Relia6ilit( Limitations"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""##+
?istorical Cost"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#.,
Rele0ance""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#.,
?istorical Cost as a Su6stitute )or Fair >alue on Initial Recognition"""""""""""""""""""""#.5
Current Cost D Rero!uction Cost an! Relacement Cost"""""""""""""""""""""""""""""""""""""""""""""""""#=/
Rele0ance""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#=/
Current Cost as a Su6stitute )or Fair >alue on Initial Recognition"""""""""""""""""""""""""#//
Net Reali@a6le >alue"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#/5
Rele0ance""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#/5
Net Reali@a6le >alue as a Su6stitute )or Fair >alue on Initial Recognition""""""""""""#1+
>alue in Use"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#1.
Rele0ance""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#1.
>alue in Use as a Su6stitute )or Fair >alue on Initial Recognition"""""""""""""""""""""""""#11
Deri0al >alue"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#1*
Rele0ance""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#1*
Deri0al >alue as a Su6stitute )or Fair >alue on Initial Recognition""""""""""""""""""""""#$1
C!a"ter 5 # A Synt!e$i$........................................................................................................16
Eu!ging Relia6ilit( D Some General Consi!erations"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#$*
Disclosure o) Measurement Uncertaint("""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#5,
Proce!ures an! Controls""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#5,
Rele0anceCRelia6ilit( Tra!eCo))""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#5,
A Proose! Measurement ?ierarc&( on Initial Recognition"""""""""""""""""""""""""""""""""""""""""""""""#5#
Estimates o) Fair >alue D Le0els # an! +""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#5#
Su6stitutes )or Fair >alue D Le0els . an! ="""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#5=
NonCRecognition < T&e Onl( Otion %&en t&e Con!itions o) Le0els #C= Cannot 6e
Met""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#5$
Future Researc&"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#5$
Aen!ices
Glossar( o) Signi)icant Terms Use!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""Aen!i; #
Note on Concetual Frame3or4s"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""Aen!i; +
Some Consi!erations on Determining Cost as a Su6stitute )or Fair >alue on Initial
Recognition"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""Aen!i; .
List o) Re)erences"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""Aen!i; =
.
Summary
T&is ro-ect &as 6een un!erta4en 6( sta)) o) t&e Cana!ian Accounting Stan!ar!s Boar! at t&e
reFuest o) t&e IASB an! its liaison national stan!ar! setting artners"
PART 1: T7E PROJECT AS A 87O*E .. ..... %%%%%
Pur"o$e an( Im"ortan'e o% Pro&e't
T&e urose o) t&is ro-ect is to un!erta4e a reliminar( in0estigation o) measurement 6ases
)or assets an! lia6ilities t&at are recogni@e! in )inancial statements" T&e ro-ect is inten!e! to
ro0i!e t&e IASB an! its liaison national stan!ar! setting artners 3it& a soun! concetual
6asis )or initiating acti0e ro-ects toG
re0ise an! e;an! t&e measurement asects o) t&eir concetual )rame3or4sH an!
imro0e t&e measurement reFuirements o) t&eir )inancial reorting stan!ar!s 6(
groun!ing t&ose reFuirements on a co&erent concetual )oun!ation"
T&e ro-ect &as 6een un!erta4en 6ecause e;isting measurement stan!ar!s an! ractices are
inconsistent an! a num6er o) ma-or measurement issues remain unsettle!" Some e;isting
stan!ar!s re)lect more or less ar6itrar( mi;e! measurement comromisesH en!ing resolution o)
con)licting 0ie3s on aroriate measurement 6ases" T&e co0erage o) measurement in e;isting
concetual )rame3or4s is 0er( limite! an! out o) !ate" Ma-or !e0eloments &a0e ta4en lace
since t&ese )rame3or4s 3ere ut in lace t&at &a0e signi)icant imlications )or accounting
measurement" T&ese inclu!e !e0eloments in )inance t&eor( an! caital mar4etsH t&e
alication o) resent 0alue an! statistical ro6a6ilit( rincilesH )air 0alue measurement
racticesH an! comuter an! in)ormation tec&nolog("
Sta.e$ o% Pro&e't
T&e ro-ect 3ill rocee! in stages" T&e )irst stage in0ol0es anal(@ing ossi6le 6ases )or
measurement on initial recognition o) assets an! lia6ilities" T&is stage is t&e )ocus o) t&is aer"
Measurement on initial recognition is imortant in its o3n rig&tH an! t&e aerIs anal(ses an!
roose! rinciles )or measurement on initial recognition la( t&e )oun!ation )or su6seFuent
stages"
Su6seFuent stages 3ill in0ol0e anal(ses o) ossi6le 6ases )or reCmeasurement o) e;isting assets
an! lia6ilities 3&en accounting stan!ar!s reFuire reCmeasurement Ainclu!ing measurement o)
assets t&at are recogni@e! to 6e imaire!B"
Criteria %or Eva)uation
T&e criteria )or e0aluating alternati0e measurement 6ases are !eri0e! )rom t&e e;isting
concetual )rame3or4s o) t&e IASB an! its liaison national stan!ar! setting artners" T&ese
criteria are 6ase! on t&e )rame3or4sI !ecision use)ulness o6-ecti0esH Fualitati0e c&aracteristics
o) use)ul )inancial in)ormation Ain articularH rele0ance an! relia6ilit(BH an! t&e concets o)
8assets9 an! 8lia6ilities9 Aan! t&eir cas&CeFui0alent )lo3s attri6utesB" T&ese criteria are
interrete! an! alie! in lig&t o) t&e !e0eloments in t&eor( an! ractice re)erre! to a6o0e"
PART II: MEASUREMENT ON INITIA* RECO+NITION
Po$$i-)e Ba$e$ o% Mea$urement on Initia) Re'o.nition
%&ile t&ere &as 6een muc& !e6ate an! !isagreement on t&e merits o) !i))erent measurement
6asesH t&ere seems to 6e general agreement on 3&at t&e 6roa! alternati0es are" T&is aer
rooses t&atH )or t&e uroses o) measurement on initial recognitionH t&e( are t&e )ollo3ingG
?istorical cost
Relacement cost
Rero!uction cost
Net reali@a6le 0alue
>alue in use
Fair 0alue
Deri0al 0alue
Present 0alue !oes not aear on t&is list 6ecause it is not a measurement 6asis" Rat&erH it is a
)rame3or4 rincile t&at can 6e alie! to estimate a num6er o) t&e a6o0e measurements" T&e
resent 0alue )ormulation is imortant 6ecause it catures &o3 e;ecte! )uture cas& )lo3s an!
t&e time 0alue o) mone( an! atten!ant ris4s enter into t&e 0aluation o) assets an! lia6ilities" It is
imortant to assess &o3 !i))erent measurement 6ases ma( 6e reasone! to incororate t&e
resent 0alue rincile"
%or4ing !e)initionsH using e;isting IASB terminolog( as a starting re)erence ointH &a0e 6een
roose! )or eac& o) t&ese measurement 6ases" A rimar( o6-ecti0e o) t&is aer is to ro0i!e
an in)orme! 6asis )or imro0ing an! con)orming t&e essential terms an! !e)initions o) t&e
IASB an! its liaison national stan!ar! setting artners"
Con'e"tua) Ana)y$i$ / Re)evan'e
T&is aer rooses t&at t&ere are t3o )un!amental sources o) !i))erences 6et3een
measurements o) assets an! lia6ilities on initial recognitionG
AaB Mar4et 0ersus entit( seci)ic measurement o6-ecti0esJ an!
A6B Di))erences in !e)ining t&e 0alue a))ecting roerties o) assets an! lia6ilities 3it&in
ercei0e! entr( 0alueH e;it 0alue an! mar4et 0alue conte;ts"
Market vs. Entity Specific Measurement Objectives
T&e mar4et 0alue measurement o6-ecti0e is to measure an asset or lia6ilit( at t&e rice t&at
3oul! 6e e;c&ange! )or it un!er cometiti0e mar4et con!itionsH re)lecting t&e mar4etIs
/
e;ectations as to t&e amountsH timing an! uncertaint( o) )uture cas& )lo3s !iscounte! at
mar4et rates o) return )or commensurate ris4" T&e aer anal(@es t&e essential roerties o)
mar4et 0alue"
An entit( seci)ic measurement o6-ecti0e loo4s to t&e e;ectations o) t&e reorting entit(H
3&ic& e;ectations ma( !i))er signi)icantl( )rom t&ose imlicit in a mar4et rice" An( measure
o) an asset or lia6ilit( t&at !i))ers )rom its mar4et 0alue must 6e 6ase!H e;licitl( or imlicitl(H
on entit( seci)ic e;ectations t&at !i))er )rom t&ose o) t&e mar4et"
T&e aer conclu!es t&atH )or e;ternal )inancial reorting urosesH t&e mar4et 0alue
measurement o6-ecti0e &as imortant Fualities t&at ma4e it more rele0ant t&an entit( seci)ic
measurement o6-ecti0es on t&e initial recognition o) assets an! lia6ilities" Primar( among t&ese
Fualities is t&at cometiti0e mar4et )orces ser0e to resol0e !i0erse entit( seci)ic e;ectations
to a single rice )or an asset or lia6ilit( t&at imartiall( re)lects all u6licl( a0aila6le
in)ormation on t&e measurement !ate" T&is roose! conclusion resumes t&e e;istence o) a
mar4et )or an asset or lia6ilit( on initial recognitionH or )ailing t&e e;istence o) an o6ser0a6le
mar4etH t&e a6ilit( to relia6l( estimate 3&at t&e mar4et rice 3oul! 6e i) a mar4et !i! e;ist"
T&e roose! conclusion is not inten!e! to !en( t&at t&ere ma( 6e signi)icant in)ormation
0alue to in0estors an! ot&er e;ternal users o) )inancial statements in 4no3ing t&e intentionsH
e;ectationsH an! assumtions o) t&e management o) an entit( 3&en t&e( !i))er )rom t&ose
imlicit in mar4et 0alue on initial recognition" ?o3e0erH it is roose! t&at suc& entit( seci)ic
in)ormation is more aroriatel( t&e su6-ect o) searate )orecasts or sulementar(
!isclosures"
Value Affecting Properties and Market Sources
T&e a riori e;ectation reasone! )rom t&e mar4et 0alue o6-ecti0e is t&at t&ere can 6e onl( one
mar4et 0alue )or an asset or lia6ilit( on an( measurement !ate" For t&is to 6e trueH aarent
!i))erences 6et3een e;it 0alue At&e amount )or 3&ic& an asset coul! 6e reali@e! or a lia6ilit(
coul! 6e settle!B an! entr( 0alue At&e amount )or 3&ic& an asset coul! 6e 6oug&t or a lia6ilit(
coul! 6e incurre!B must 6e attri6uta6le to one or 6ot& o) t&e )ollo3ing sourcesG
AaB Di))erences 6et3een t&e assets an! lia6ilities tra!e! in !i))erent mar4ets" Aarentl(
!i))erent entr( an! e;it rices )or an asset or lia6ilit( ma( 6e !ue toH sometimes su6tleH
!i))erences 6et3een t&e asset or lia6ilit( t&at is tra!e! in an 8entr(9 mar4et an! t&e asset
or lia6ilit( t&at is tra!e! in an 8e;it9 mar4et"
A6B Entit( seci)ic c&arges or cre!its" Some !i))erences 6et3een e;it an! entr( 0alues o)
assets an! lia6ilities are !ue to entit( seci)ic c&arges or cre!its" Un!er t&e mar4et 0alue
measurement o6-ecti0eH t&ese 3oul! 6e treate! as e;enses or income Aor er&as in
some cases as !irect c&arges or cre!its to eFuit(B on initial recognition" Un!er an entit(
seci)ic o6-ecti0eH t&e( mig&t Fuali)( )or inclusion in t&e measurement o) t&e asset or
lia6ilit( !een!ing on managementIs e;ectationsH intentionsH an! assumtions"
Transaction costs are a common e;amle"
1
T&is roose! e;lanation o) !i))erences 6et3een e;itH entr( an! mar4et 0alues o) an asset or
lia6ilit( on initial recognition )ocuses attention on t&e )ollo3ing issuesG
%&at are t&e !e)ining roerties o) an asset or lia6ilit( t&at a))ect its mar4et 0alue'
%&at mar4et Aor mar4etsB ma( e;ist )or assets an! lia6ilities 3it& similar roerties to
t&ose o) t&e asset or lia6ilit( to 6e measure!H an! i) t&ere is more t&an one mar4etH 3&at
ma( e;lain an( !i))erences in t&eir rices'
%&at is t&e nature o) costs t&at are incurre! to carr( out transactionsH an! are t&e( entit(
seci)ic costs t&at can 6e !istinguis&e! )rom mar4et 0alue'
Value Affecting Properties
T&e 0alue a))ecting roerties o) a contractual asset or lia6ilit( )lo3 )rom t&e contractH 3&ic&
ro0i!es t&e 6asis )or !eri0ing e;ecte! cas& )lo3s an! !e)ining an! ricing t&e ris4s to 3&ic&
t&e asset or lia6ilit( is e;ose!" T&e 0alue a))ecting roerties o) a nonCcontractual asset
inclu!es its natureH location an! con!ition on t&e measurement !ate"
Some 6elie0e t&at lia6ilities &a0e uniFue roerties t&at !i))er )rom t&eir asset counterarts"
T&is aer reasons t&at a romise to a( &as t&e same mar4et 0alue a))ecting roerties on
recognition 3&et&er it is an asset or a lia6ilit(H an! t&at t&e cre!it stan!ing o) t&e issuer enters
into t&e mar4etIs !etermination o) its )air 0alue as an asset or a lia6ilit("
A 0ital reCcon!ition in !etermining t&e 0alue a))ecting roerties o) assets an! lia6ilities is to
!e)ine t&e unit o) account" T&is aer a!!resses unit o) account issues relating to ort)olio
creation an! le0els o) aggregation" Pen!ing )urt&er stu!( 6e(on! t&e scoe o) t&is aerH it is
roose! t&atG
T&e aroriate in!i0i!ual item or ort)olio unit o) account on initial recognition is
generall( t&e unit o) account in 3&ic& t&e reorting entit( acFuires an asset or incurs a
lia6ilit(" T&at unit o) account can generall( 6e e;ecte! to re)lect t&e 0alue a))ecting
roerties o) t&at asset or lia6ilit( on its initial recognition"
T&e aroriate le0el o) aggregation )or nonCcontractual assets on initial recognition is
t&e lo3est le0el o) aggregation at 3&ic& an i!enti)ia6le asset is rea!( )or use in a cas&
generating rocess"
Markets and Market Sources
De)ining an! al(ing t&e mar4et measurement o6-ecti0e reFuires t&at a num6er o) issues 6e
a!!resse!" T&ese inclu!e !e)ining 8mar4et9H an! !e)ining an! un!erstan!ing AiB a su))icienc( o)
in)ormation con!itionH AiiB in)ormation as(mmetr(H AiiiB mar4et accessi6ilit(H an! Ai0B multile
mar4ets"
T&is aer rooses t&e )ollo3ing !e)inition o) 8mar4et9G
$
A 6o!( o) 4no3le!gea6leH 3illingH armIs lengt& arties carr(ing on su))icientl(
e;tensi0e transactions to ac&ie0e t&e eFuili6rium rice re)lecting t&e mar4et e;ectation
o) earning or a(ing t&e mar4et rate o) return )or commensurate ris4 on t&e
measurement !ate"
It is resume! t&at mar4et articiants &a0e reasona6le access to u6licl( a0aila6le
in)ormationH an! t&at t&ere must 6e a minimum le0el o) u6lic in)ormation a6out an asset or
lia6ilit( to ena6le a mar4et" T&is !oes not reclu!e t&e ossi6ilit( o) in)ormation as(mmetr(
a))ecting t&e mar4et rice )or an asset or lia6ilit(" In)ormation as(mmetr( e;ists 3&en some
mar4et articiants &a0eH or are t&oug&t to &a0eH in)ormation a6out 0alueCa))ecting roerties
o) an asset or lia6ilit( t&at is not a0aila6le to ot&er mar4et articiants"
T&is aer suggests t&atH in man( casesH t&e 6est mar4et or eFui0alent source on initial
recognition 3ill 6e t&at in 3&ic& t&e asset or lia6ilit( to 6e measure! 3as acFuire! or incurre!H
6ecause t&e assets or lia6ilities tra!e! in t&ese mar4ets 3ill generall( &a0e t&e same 0alue
a))ecting roerties as t&e asset or lia6ilit( to 6e measure! on initial recognition" ?o3e0erH
t&ere are some situations in 3&ic& t&ere 3ill 6e no suc& entr( mar4et A)or e;amleH )inis&e!
goo!s in0entor( o) an acFuire! 6usinessBH or 3&ere entr( mar4et rices ma( not 6e )ull(
aroriate Aossi6l(H )or e;amleH in resect o) !eosit lia6ilities an! certain er)ormance
lia6ilitiesB" In certain o) t&ese cases t&e most aroriate ricing source ma( 6e an e;it mar4et
or eFui0alent" In an( caseH it is necessar( to i!enti)( an! a!-ust )or an( !i))erences 6et3een t&e
)air 0alue a))ecting roerties o) mar4et tra!e! assets or lia6ilities an! t&e asset or lia6ilit( to 6e
measure! on t&e measurement !ate"
7uestions &a0e 6een raise! 3it& resect to mar4et accessi6ilit(H an! some stan!ar!s ro0i!e
t&at it is inaroriate to measure t&e mar4et 0alue o) an asset or lia6ilit( on t&e 6asis o) a
mar4et t&at is not accessi6le to t&e reorting entit(" It is imortant to !e)ine care)ull( 3&at is
meant 6( mar4et accessi6ilit( an! 3&et&er it ma( ta4e !i))erent )orms 3it& !i))erent
imlications )or accounting measurement" Some &a0e associate! accessi6le mar4et 0alues 3it&
amounts t&at 3oul! 6e recei0e! or ai! to imme!iatel( reali@e or settle an asset or lia6ilit( on a
measurement !ate" Suc& amounts are not mar4et 0alues i) t&e( are !etermine! on t&e 6asis o)
reCe;isting contractual rea(ment ro0isions or otion e;ercise rices rat&er t&an oen
mar4et transactions" T&ere is no imlication in t&e mar4et measurement o6-ecti0e 3it& resect
to e;ectations )or reali@ingH settlingH &ol!ingH or using an( asset or lia6ilit(H 6e(on! t&e general
mar4et e;ectation o) &ig&est an! 6est use"
T&e ossi6ilit( t&at !i))erent mar4ets coul! e;ist 3it& !i))erent rices )or i!entical assets or
lia6ilities seems inconsistent 3it& t&e roosition t&at t&ere can 6e onl( one mar4et or
eFui0alent 0alue )or an asset or lia6ilit( on a measurement !ate" ?o3e0erH it is ac4no3le!ge!
t&at multile mar4ets )or i!entical assets or lia6ilities ma( e;ist as a result o) legislationH
regulator( reFuirementsH or licensing arrangements t&at imose mar4et access restrictions" T&is
aer rooses t&at researc& 6e un!erta4en on multile mar4et situations )or similar assets or
lia6ilitiesH t&e nature an! causes o) rice !i))erences 6et3een t&emH an! t&eir imlications )or
mar4et 0alue measurement"
5
Transaction Costs
Transaction costsH !e)ine! as costs t&at mar4et articiants 3oul! not 6e e;ecte! to 6e
comensate! )orH !o not a))ect mar4et 0alues" ?o3e0erH un!er an entit( seci)ic measurement
o6-ecti0eH suc& costs mig&t 6e a!!e! to t&e measure o) an assetH or 6e !e!ucte! )rom t&e
measure o) a lia6ilit(H on initial recognition on t&e 6asis o) in!i0i!ual entit( e;ectations t&at
!i))er )rom mar4et e;ectations"
Con'e"tua) Ana)y$i$ 9 Re)ia-i)ity
T&e relia6ilit( o) accounting measurements is 6ase! on t&ree attri6utesG reresentational
)ait&)ulnessH neutralit(H an! 0eri)ia6ilit(" O) t&eseH t&e 6asic un!erinning is ro0i!e! 6(
reresentational )ait&)ulness" T&e aroriate starting oint )or an anal(sis o) t&e relia6ilit( o) a
measurement 6asis is to e;amine 3&at it urorts to reresentH 3&ic& is its measurement
o6-ecti0e" Relia6ilit( is t&en assesse! in terms o) &o3 3ell measurement 6ases are a6le to
reresent 3&at t&e( urort to reresent" T&is aer rooses t&atH 3&en more t&an one
measurement 6asis ac&ie0es an acceta6le le0el o) relia6ilit(H t&e most rele0ant o) t&ese 6ases
s&oul! 6e selecte!"
Limitations on measurement relia6ilit( result )rom measurement uncertaint(H 3&ic& e;ists 3&en
t&e measure o) an asset or lia6ilit( on a measurement !ate coul! 6e a 0ariet( or range o)
!i))erent reasona6l( ossi6le or -usti)ia6le amounts" T3o sources o) measurement uncertaint(
are i!enti)ie!G
Estimation uncertaint(H 3&ic& in0ol0es estimates a6out uncertain e;isting con!itions or
)uture outcomes"
Economic in!eterminac(H 3&ic& arises 3&en t&e economic &enomenon to 6e measure!
cannot 6e !e)ine! in su))icientl( concrete terms to ermit 0ali! Fuanti)ication At&at isH
some signi)icant 0alue a))ecting roert( o) an asset or lia6ilit( is un4no3n an!
un4no3a6leB"
It is 3ell recogni@e! an! accete! t&at accounting measurement cannot a0oi! some !egree o)
estimation uncertaint(" T&e relia6ilit( o) a measurement estimation s&oul! 6e -u!ge! on t&e
6asis o) t&e )acts an! t&e 0ali!it( o) assumtions on t&e measurement !ateH an! not necessaril(
6( t&e su6seFuent outcome" It is imortant to !istinguis& estimation uncertaint( )rom 0olatilit(
resulting )rom ta4ing ris4s"
A 6asic economic in!eterminac( in0ol0es ar6itrar( allocations or attri6utions" T&e ro6lem
arises 3&en a measurement 6asis reFuires t&at t&e cost or 0alue o) an item 6e allocate! among
t3o or more assets or lia6ilities" T&is is 4no3n as t&e 8oneCtoCman(9 attri6ution ro6lem" It &as
6een 3ell !emonstrate! t&at t&ere can 6e no uniFue nonCar6itrar( solution to a oneCtoCman( or
to a man(CtoCman( allocation"
T&is aer rooses t&at t&e a6ilit( to ro0i!e use)ul !isclosures a6out t&e measurement
uncertaint( o) a measurement 6asis is an imortant )actor in assessing its relia6ilit(" More
seci)icall(H it is roose! t&at a measurement 6asis s&oul! not 6e consi!ere! unrelia6le solel(
*
6ecause it &as 3i!e range o) measurement uncertaint(H i) 0ali! an! use)ul in)ormation can 6e
ro0i!e! t&at ena6les users to un!erstan! an! e0aluate t&e uncertaint("
Com"arative Ana)y$i$ o% I(enti%ie( Mea$urement Ba$e$
Eac& o) t&e i!enti)ie! measurement 6ases is e;amine! in lig&t o) t&e rece!ing concetual
anal(sis" T&e )ollo3ing general conclusions are roose!G
Fair 0alue s&oul! 6e t&e measurement o6-ecti0e on initial recognition o) assets an!
lia6ilities" T&e o6-ecti0e o) )air 0alue is to re)lect t&e mar4et 0alue o) an asset or
lia6ilit( on a measurement !ate" I) t&ere is no o6ser0a6le mar4et rice )or t&e asset
or lia6ilit(H t&e )air 0alue o6-ecti0e is to estimate 3&at t&e mar4et rice 3oul! 6e i)
a mar4et e;iste!"
Ma-or measurement uncertainties arise in estimating t&e )air 0alue o) certain assets
an! lia6ilities on initial recognition 3&en t&ere is no !irectl( o6ser0a6le mar4et
rice" It is conclu!e! t&at )air 0alue cannot 6e relia6l( measure! in some common
initial recognition situations" In suc& casesH it is roose! t&at a su6stitute
measurement 6asis 6e selecte! t&at can 6e relia6l( estimate!" Suc& su6stitute 6asis
s&oul! 6e selecte! t&at is most consistent 3it& t&e )air 0alue measurement
o6-ecti0eH an! it s&oul! 6e alie! on a 6asis t&at is as consistent as ossi6le 3it&
t&e )air 0alue measurement o6-ecti0e" Su6stitute 6ases s&oul! 6e !escri6e! an!
e;laine! in terms o) 3&at t&e( areH an! not urorte! to 6e )air 0alue" A
measurement t&at is materiall( !een!ent on entit( seci)ic e;ectations t&at
cannot 6e !emonstrate! to 6e consistent 3it& mar4et e;ectations !oes not meet t&e
con!itions )or 6eing !escri6e! as )air 0alue"
A Pro"o$e( Mea$urement 7ierar'!y on Initia) Re'o.nition
Estimates of Fair Value Levels 1 and
It is roose! t&at t&e )air 0alue o) an asset or lia6ilit( can 6e estimate! 3it& an acceta6le
le0el o) relia6ilit( on initial recognition 3&en eit&er o) t&e )ollo3ing con!itions is metG
Le0el # C T&ere is an o6ser0a6le mar4et rice )or assets an! lia6ilities t&at are i!entical or
similar to t&e asset or lia6ilit( to 6e measure! on or near t&e time o) initial recognitionH an!
aroriate a!-ustment consistent 3it& mar4et e;ectations can 6e ma!e )or AiB an( !i))erences
6et3een t&e mar4et tra!e! assets or lia6ilities an! t&e asset or lia6ilit( to 6e measure! an! AiiB
an( time !i))erence"
Le0el + D Failing an o6ser0a6le mar4et rice meeting t&e con!itions o) Le0el #H t&ere is an
accete! mo!el )or estimating t&e mar4et rice o) t&e asset or lia6ilit( to 6e measure! on initial
recognitionH an! all material inuts to t&e mo!el re)lect o6ser0a6le mar4et rices or relia6l(
measura6le &enomena t&at can 6e e;ecte! to 6e t&e 6asis o) mar4et articiantsI
!eterminations 3it&in t&e mo!el"
#,
Su!stitutes for Fair Value Levels " and #
Le0el . D Estimates o) current costG Failing t&e a6ilit( to estimate )air 0alue 3it& acceta6le
relia6ilit( At&at isH to meet t&e con!itions o) Le0els # or +BG
AaB an asset s&oul! 6e measure! on initial recognition at its current costH ro0i!e! t&at t&is
amount can 6e relia6l( estimate! an! can 6e reasona6l( e;ecte! to 6e reco0era6leJ an!
A6B a lia6ilit( s&oul! 6e measure! on initial recognition at its current consi!eration amountH
ro0i!e! t&at t&is amount can 6e relia6l( estimate! an! can 6e reasona6l( e;ecte! to
reresent t&e amount o3e!"
It ma( 6e resume! t&at a relia6le &istorical cost measure o) an asset or lia6ilit( 3ill 6e a
reasona6le measure o) its current cost on initial recognitionH unless t&ere is ersuasi0e e0i!ence
t&at a !i))erent current rero!uction cost is relia6l( estima6le" T&e aer rooses t&at met&o!s
)or attri6uting costs to assets or lia6ilities on initial recognition 6e selecte! to 6e as consistent
as ossi6le 3it& t&e )air 0alue measurement o6-ecti0e"
Le0el = D Mo!els or tec&niFues t&at !een! signi)icantl( on entit( seci)ic e;ectationsG I) t&e
con!itions o) Le0els #H +H or . cannot 6e metH an asset or lia6ilit( s&oul! 6e measure! on initial
recognition on t&e 6asis o) an accete! mo!el or tec&niFue" To t&e e;tent t&at relia6le mar4etC
6ase! !ata are una0aila6leH t&e measurement mo!el or tec&niFue s&oul! use relia6l( estima6le
entit( seci)ic !ata t&at are not inconsistent 3it& o6ser0a6le mar4et e;ectations"
T&e imlication o) t&e a6o0e measurement &ierarc&( is t&atH i) none o) t&e a6o0e measurement
alternati0es can 6e alie!H t&e 6asic con!itions )or t&e recognition o) an asset or lia6ilit( &a0e
not 6een met"
##
Invitation to Comment
T&is Discussion Paer is 6eing issue! )or comment 6( t&e International Accounting Stan!ar!s
Boar! AIASBB" T&e Discussion Paer reresents t&e )irst stage o) a ro-ect to a!!ress t&e
measurement o) assets an! lia6ilities t&at are recogni@e! in )inancial statements"
T&e ro-ect is 6eing un!erta4en 6( t&e sta)) o) t&e Cana!ian Accounting Stan!ar!s Boar! on
6e&al) o) t&e IASB an! its liaison national stan!ar! setting artners" Its urose is to e;amine
)inancial accounting measurement o6-ecti0es an! alternati0e measurement 6ases in lig&t o)
!e0eloments t&at &a0e ta4en lace in t&eor( an! ractice o0er t&e (ears" T&is Paer )ocuses on
measurement on initial recognition o) assets an! lia6ilities" It is inten!e! t&at su6seFuent stages
3ill a!!ress reCmeasurement o) assets an! lia6ilities su6seFuent to initial recognitionH inclu!ing
measurement o) imaire! assets"
T&e IASB an! its liaison national stan!ar! setting artners recognise t&at t&e e;isting
measurement )rame3or4 )or )inancial accounting is incomlete an! out o) !ateH an! t&at a
num6er o) e;isting measurement stan!ar!s nee! to 6e rea!!resse!" T&e Boar! 6elie0es t&at
t&ere is an urgent nee! to rea!!ress accounting measurement rincilesH an! it inten!s to gi0e
t&is ro-ect &ig& riorit("
T&e IASB &as not (et !eli6erate! t&e issuesH anal(sesH an! roosals set out in t&is Discussion
Paer" T&e Boar! inten!s to use t&e PaerH along 3it& t&e comments recei0e! on itH in re0ising
an! e;an!ing t&e measurement asects o) its concetual )rame3or4H an! in imro0ing t&e
measurement reFuirements o) e;isting an! )uture IASB stan!ar!s"
Comments s&oul! 6e su6mitte! 6( :;ATE<. All resonses 3ill 6e ut on t&e u6lic recor!
unless t&e reson!ent reFuests con)i!entialit(" ?o3e0erH suc& reFuests 3ill not normall( 6e
grante! unless suorte! 6( goo! reasonH suc& as commercial con)i!ence" I) commentators
reson! 6( )a; or emailH it 3oul! 6e &el)ul i) t&e( coul! also sen! in a &ar! co( o) t&eir
resonse 6( ost"
Comments s&oul! re)era6l( 6e sent 6( ECMail to :SPECI=>< or a!!resse! in 3riting toG
:SPECI=><

Comments are soug&t on an( asect o) t&is Discussion Paer" Ans3ers to t&e )ollo3ing
Fuestions an! t&e reasons )or t&ose ans3ers 3oul! 6e articularl( &el)ul"
Pro&e't a$ a 8!o)e
7#" Do (ou agree 3it& t&e nee! )or t&is ro-ect Asee aragra&s 5C##B' I) notH lease e;lain
(our reasons )or !isagreeing"
#+
7+" Do (ou agree 3it&G
AaB T&e inten!e! uroses o) t&is ro-ect Asee aragra& .B'

A6B T&e roose! scoe o) t&e ro-ect Asee aragra&s #+C#/B'

AcB Proosals 3it& resect to stagesH an! articularl( 3it& )ocusing )irst on measurement on
t&e initial recognition o) assets an! lia6ilities Asee aragra&s #1C++B'
A!B T&e roose! anal(tical aroac& Aaragra&s +.C+$B'
Please e;lain reasons )or an( !isagreements an! an( c&anges t&at (ou 3oul! ma4e"
7." Criteria )or e0aluating alternati0e measurement 6ases are !eri0e! )rom t&e e;isting
concetual )rame3or4s o) t&e IASB an! its liaison national stan!ar! setting artners Asee
aragra&s +5C/$B" T&ese &a0e 6een interrete! an! alie! in lig&t o) !e0eloments in t&eor(
an! ractice Ae;laine! at aragra&s /5C1=B" Do (ou agree 3it& t&ese criteria an! t&e roose!
6asis )or concetual anal(sis' I) notH lease e;lain 3&( notH an! in!icate 3&at c&anges (ou
3oul! ma4e"
Mea$urement on Initia) Re'o.nition
7=" Do (ou agree t&at t&e list o) i!enti)ie! ossi6le measurement 6ases Asee aragra&s 15C$.B
sets out t&e 6ases t&at s&oul! 6e consi!ere!' I) notH lease in!icate an! e;lain an( c&anges
t&at (ou 3oul! ma4e"
7/" Do (ou agree 3it& AiB t&e !e)inition o) 8initial recognition9 Asee aragra&s 11C1$B an! AiiB
t&e 3or4ing terms an! !e)initionsH an! suorting interretationsH o) eac& o) t&e i!enti)ie!
measurement 6ases Asee aragra&s $1C*1B' I) notH lease e;lain 3&at c&anges (ou 3oul!
ma4e" In articularH !o (ou &a0e an( comments on t&e term 8)air 0alue9 an! its !e)inition Ain
lig&t o) t&e !iscussion at aragra&s *+C*.B'
71" T&e aer rooses t&at t&ere are t3o )un!amental sources o) !i))erences 6et3een
measurements o) assets an! lia6ilities on initial recognitionG
AaB mar4et 0ersus entit( seci)ic measurement o6-ecti0esH an!
A6B !i))erences in !e)ining t&e 0alue a))ecting roerties o) assets an! lia6ilities 3it&in
ercei0e! entr(H e;itH an! mar4et 0alue conte;ts Asee aragra& *$B"

T&is roosal an! its concetual imlications are t&e su6-ect o) c&aters =C/" Do (ou agree 3it&
t&is roosal as !e0eloe! an! e;laine! in t&ese t3o c&aters' I) notH lease ro0i!e t&e 6asic
reasons )or (our !isagreements or reser0ationsH an( !i))erent roosals t&at (ou mig&t ma4eH
an! &o3 t&ese mig&t 6e e;amine! an! teste!"
#.
7$" T&e aer anal(ses t&e mar4et 0alue measurement o6-ecti0e an! t&e essential roerties o)
mar4et 0alue"
AaB Do (ou 6elie0e t&at t&e aer &as reasona6l( !e)ine! t&e mar4et 0alue o6-ecti0e an! t&e
essential roerties o) mar4et 0alue )or )inancial statement measurement uroses Asee
aragra&s **C##, an! +.1C+=,B' I) notH lease e;lain 3&( notH an! 3&at c&anges (ou
3oul! rooseH or !i))erent or a!!itional consi!erations t&at (ou t&in4 nee! to 6e
a!!resse!"
A6B Do (ou agree 3it& t&e roose! !e)inition o) 8mar4et9 Asee aragra&s #,$C##,B' I)
notH lease e;lain 3&( (ou !isagreeH an! in!icate an( c&anges (ou 3oul! ma4e an!
an( issues t&at (ou 6elie0e s&oul! 6e gi0en a!!itional consi!eration"
AcB Do (ou agree 3it& t&e )air 0alue measurement o6-ecti0e as roose!H an! its !eri0ation
)rom t&e mar4et 0alue o6-ecti0e Asee aragra& ###B'
75" Do (ou agree 3it& t&e !e)inition an! !iscussion o) entit( seci)ic measurement o6-ecti0es
Asee aragra&s ##+C##1B an! t&eir relations&i to management intent Asee aragra&s ##$C
#+#B' I) notH lease e;lain 3&( (ou !isagree"
7*" Do (ou agree 3it& t&e comarison o) mar4et an! entit( seci)ic o6-ecti0es Asee aragra&
#++B an! 3it& t&e roose! conclusion t&at t&e mar4et 0alue measurement o6-ecti0e &as
imortant Fualities t&at ma4e it more rele0ant t&an entit( seci)ic measurement o6-ecti0es )or
assets an! lia6ilities on initial recognition Asee aragra&s #+.C#.,B' I) notH lease e;lain (our
osition"
7#," T&e aer reasons t&at t&ere can 6e onl( one )air 0alue )or an asset or lia6ilit( on a
measurement !ate" It suggests t&at aarent !i))erences in 0alue can generall( 6e e;ecte! to 6e
attri6uta6le to
AaB !i))erences 6et3een t&e 0alue a))ecting roerties o) assets or lia6ilities tra!e! in
!i))erent mar4etsH or
A6B entit( seci)ic c&arges or cre!its Asee aragra&s #.#C#.5B"
Do (ou agree 3it& t&is reasoning an! e;ectation' I) notH lease e;lain 3&( (ou !isagree"
7##" Do (ou agree 3it& t&e aerIs !iscussion o) 0alue a))ecting roerties Asee aragra&s
#.*C#=#B' I) notH lease e;lain 3&( (ou !isagree"
7#+" Do (ou agree t&at a romise to a( &as t&e same )air 0alue on initial recognition 3&et&er
it is an asset or a lia6ilit(H an! t&at t&e cre!it stan!ing o) t&e issuer o) a romise to a( enters
into t&e !etermination o) t&at )air 0alue 3it& t&e same e))ect 3&et&er it is an asset or lia6ilit(
Asee aragra&s #=+C#=$B' I) (ou !o not agreeH lease e;lain t&e 6asis )or (our !isagreement"
#=
7#." T&e aer ma4es t&e )ollo3ing roosals 3it& resect to !e)ining t&e unit o) account o)
t&e asset or lia6ilit( to 6e measure! on initial recognitionG
AaB T&e aroriate in!i0i!ual or ort)olio unit o) account on initial recognition is generall(
t&e unit o) account in 3&ic& t&e reorting entit( &as acFuire! t&e asset or incurre! t&e
lia6ilit( Asee aragra&s #=*C#/=B"
A6B T&e aroriate le0el o) aggregation )or nonCcontractual assets on initial recognition is
t&e lo3est le0el o) aggregation at 3&ic& an i!enti)ia6le asset is rea!( )or use in a cas&
generating rocess Asee aragra&s #/$C#1#B"
Do (ou agree 3it& t&ese roosals 3it&in t&e ca0eats an! !iscussion resente!' I) notH lease
e;lain 3&(H an! in 3&at resectsH (ou !isagree"
7#=" T&e Paer suggests t&atH in man( casesH t&e 6est mar4et or eFui0alent source on initial
recognition 3ill 6e t&at in 3&ic& t&e asset or lia6ilit( to 6e measure! 3as acFuire! or issue!"
?o3e0erH it notes some signi)icant situations in 3&ic& a !i))erent source ma( 6e aroriateH
an! it rooses researc& into ossi6le multile mar4ets Asee aragra&s #1=C#5+B" Do (ou agree
t&at t&e aer ro0i!es a reasona6le anal(sis o) mar4et sources an! t&eir imlications on initial
recognition' I) notH lease ro0i!e reasons )or !isagreeingH an! in!icate an( a!!itional anal(sis
or researc& (ou 3oul! t&in4 s&oul! 6e carrie! out"
7#/" T&e aer raises an! !iscusses issues relating to in)ormation as(mmetr( Asee aragra&s
#5.C#5$BH 6i!Cas4e! srea!s Asee aragra& #55BH an! mar4et accessi6ilit( Asee aragra&s #5*C
#*+B" Do (ou agree 3it& t&e anal(ses ro0i!e! on t&ese issues an! roose! )air 0alue
measurement imlications' I) notH lease e;lain 3&( (ou !isagreeH an! in 3&at resects (ou
)in! t&e anal(ses !e)icient"
7#1" T&e aer conclu!es t&at transaction costsH as !e)ine!H are not art o) t&e )air 0alue o) an
asset or lia6ilit( on initial recognition Asee aragra&s #*.C+,,B" Do (ou agree 3it& t&e
roose! !e)inition o) transaction costs' Do (ou agree 3it& t&e a6o0e conclusion' I) (ou
!isagreeH lease e;lain (our reasons an! 3&at (ou 6elie0e t&e imlications o) (our !i))erent
osition 3oul! 6e )or )air 0alue measurement o) assets an! lia6ilities on initial recognition"
7#$" Do (ou agree 3it& t&e roosal t&atH 3&en more t&an one measurement 6asis ac&ie0es an
acceta6le le0el o) relia6ilit(H t&e most rele0ant o) t&ese 6ases s&oul! 6e selecte! Asee
aragra& +,+B' I) notH lease e;lain 3&( (ou !isagreeH an! in!icate &o3 (ou 3oul! settle
tra!eCo))s 6et3een t&e rele0ance an! relia6ilit( o) alternati0e measurement 6ases"
7#5" Do (ou agree 3it& t&e t3o roose! sources o) limitations on measurement relia6ilit( D
estimation uncertaint( an! economic in!eterminac( D an! suorting !iscussion Asee
aragra&s +,=C+#1B' I) notH lease e;lain (our osition"
7#*" Do (ou agree 3it& t&e roosal t&at t&e a6ilit( to ro0i!e use)ul !isclosures a6out t&e
in)ormation uncertaint( o) a measurement 6asis is an imortant )actor in assessing its relia6ilit(
#/
Asee aragra&s +#$C+++B' I) notH lease e;lain 3&( (ou !isagreeH an! (our osition on t&e
relations&i 6et3een !isclosure an! measurement relia6ilit("
7+," Do (ou agree t&at )air 0alue s&oul! 6e t&e measurement o6-ecti0e on initial recognition o)
assets an! lia6ilitiesH an! t&ere)ore s&oul! 6e use! 3&en it can 6e estimate! 3it& acceta6le
relia6ilit( Asee anal(ses o) )air 0alue an! alternati0e 6ases in c&ater $B'
7+#" Do (ou agree t&at )air 0alue is not caa6le o) relia6le estimation in some common
situations on initial recognition Asee aragra&s +.+C+$/B' More seci)icall(H !o (ou agree t&atG

AaB A single transaction e;c&ange rice s&oul! not 6e accete! to 6e eFual to )air 0alue
unless t&ere is ersuasi0e e0i!ence t&at it is Asee aragra&s +=+C+/#BH an!
A6B A measurement mo!el or tec&niFue cannot 6e consi!ere! to ac&ie0e a relia6le
estimation o) t&e )air 0alue o) an asset or lia6ilit( 3&en t&e estimate is materiall(
!een!ent on entit( seci)ic e;ectations t&at cannot 6e !emonstrate! to 6e
consistent 3it& mar4et e;ectations Asee aragra&s +1+C+15B'
Please ro0i!e e;lanations )or (our ositions on t&ese Fuestions i) t&e( !i))er signi)icantl(
)rom t&e ositions an! suorting arguments resente! in t&e aer"
7++" Do (ou agree 3it& t&e aerIs anal(ses an! conclusions 3it& resect to t&e comarati0e
rele0ance an! relia6ilit( o) &istorical cost Asee aragra&s +$1C.#/B H rero!uction cost an!
relacement cost Asee aragra&s .#1C./$BH net reali@a6le 0alue Asee aragra&s ./5C.$#BH
0alue in use Asee aragra&s .$+C.55BH an! !eri0al 0alue Asee aragra&s .5*C=,/B'
Please ro0i!e reasons )or an( !isagreementsH an! an( a!0ice (ou ma( &a0e as to a!!itional
anal(sis or researc& t&at (ou 6elie0e s&oul! 6e carrie! out"
7+." T&e aer !iscusses su6stitutes )or )air 0alue 3&en t&e )air 0alue o) an asset or lia6ilit(
cannot 6e relia6l( estimate! on initial recognition"
AaB Do (ou agree t&atH 3&en ot&er measurement 6ases are use! as su6stitutes )or )air 0alue
on initial recognitionH t&e( s&oul! 6e alie! on 6ases as consistent as ossi6le 3it& t&e
)air 0alue measurement o6-ecti0e Asee aragra& =,$ an! suorting !iscussion in
c&ater $B'
A6B Do (ou &a0e an( comments on t&e suggestions in Aen!i; . )or al(ing cost
attri6ution met&o!s 3it&in t&e conte;t o) t&e )air 0alue measurement o6-ecti0e'

7+=" Do (ou agree 3it& t&e roose! &ierarc&( )or t&e measurement o) assets an! lia6ilities on
initial recognition Asee c&ater 5B' I) notH lease e;lain (our reasons )or !isagreeing an! 3&at
(ou mig&t roose"
7+/" Do (ou &a0e an( comments on t&e roosals )or )urt&er researc& Asee aragra& =.+B'
#1

PART I: MEASUREMENT BASES PROJECT
C!a"ter 1 # Pur"o$e o% Pro&e't an( S'o"e
Pur"o$e an( Im"ortan'e
#" At t&e reFuest o) t&e IASBH t&e Cana!ian Accounting Stan!ar!s Boar! AAcSBB &as
agree! t&at its sta)) un!erta4e a reliminar( in0estigation o) measurement 6ases in
)inancial accounting" T&is researc& ro-ect is un!erta4en on t&e 6asis o) inut )romH an!
!iscussions 3it&H t&e IASB an! its liaison national stan!ar! setting artners"
+" Part I Ac&aters # an! +B a!!resses t&e 6asis )or t&e ro-ect as a 3&ole" Part II Ac&aters
.C5B a!!resses in !etail t&e )irst stage o) t&e ro-ect D measurement on initial
recognition"
." T&e urose o) t&e ro-ect is to i!enti)(H consi!erH an! ma4e recommen!ations 3it&
resect toH issues relate! to t&e selection o) an aroriate 6asisH or set o) 6asesH )or
measuring assets an! lia6ilities recogni@e! in )inancial statements" T&e ro-ect is
inten!e! to ro0i!e t&e IASB an! its liaison national stan!ar! setting artners 3it& a
6asis )or initiating acti0e ro-ects toG
re0ise an! e;an! t&e measurement asects o) t&eir concetual )rame3or4sJ an!
imro0e t&e measurement reFuirements o) t&eir )inancial reorting stan!ar!s 6(
groun!ing t&ose reFuirements on a co&erent concetual )oun!ation"
T&e ro-ect ma( also ro0i!e insig&ts on relate! !isclosure matters"
=" In anal(@ing ossi6le measurement 6ases an! t&e 3a(s in 3&ic& t&e( mig&t 6e alie!H
searatel( or in com6inationH t&e ro-ect 3ill i!enti)( an! e0aluate t&e un!erl(ing
o6-ecti0es o) t&ose 6ases an! t&eir 4e( attri6utes"
#$
Wat !oes Measurement Encompass"
/" T&e IASB Frame3or4 statesG
8Measurement is t&e rocess o) !etermining t&e monetar( amounts at 3&ic& t&e
elements o) t&e )inancial statements are to 6e recognise! an! carrie! in t&e
6alance s&eet an! income statement" T&is in0ol0es t&e selection o) t&e articular
6asis o) measurement"9 Aaragra& **B
Ot&er concetual )rame3or4s go )urt&er to in!icate t&at measurement also in0ol0es
selecting t&e monetar( unit Aencomassing t&e currenc( in 3&ic& t&e monetar( unit is to
6e e;resse! an! t&e translation o) amounts !enominate! in ot&er currenciesH an! an(
urc&asing o3er a!-ustments to t&e monetar( unitB"
1" Measurement is necessar( in )inancial accounting in t&e )ollo3ing circumstancesG
AaB Initial recognition o) an item in )inancial statements A3it& 8recognition9 !e)ine!
in t&e IASB Frame3or4 as 8K t&e rocess o) incororating in t&e 6alance s&eet
or income statement an item t&at meets t&e !e)inition o) an element an! satis)ies
t&e criteria )or recognition K9 Aaragra& 5+B"
A6B ReCmeasurement o) a re0iousl( recogni@e! asset or lia6ilit(H 3&en e0ents or
circumstances are consi!ere! to reFuire it" ReCmeasurement ma( 6e consi!ere!
necessar(H )or e;amleH to re)lect recogni@e! asset imairmentH an! t&e
s(stematic a!-ustment o) t&e carr(ing amounts o) certain assets an! lia6ilities to
re)lect current 0alues"
$" For t&e uroses o) t&is aerH t&e reCmeasurement o) e;isting assets or lia6ilities
Asometimes re)erre! to as 8)res&Cstart measurements9B is !e)ine! in t&e Glossar( o)
terms in t&e FASBIs Statement o) Financial Accounting Concets No" $H $sing Cas%
Flo& 'nformation and Present Value in Accounting Measurements A8CON $9BG
8Measurements in erio!s )ollo3ing initial recognition t&at esta6lis& a ne3 carr(ing
amount unrelate! to re0ious amounts an! accounting con0entions"9 ReCmeasurements
e;clu!e c&anges in t&e carr(ing amounts o) assets or lia6ilities resulting )rom
#5
amorti@ation or accruals" For e;amleH t&e !ereciation o) t&e cost o) a )i;e! asset to its
estimate! resi!ual 0alue o0er its estimate! use)ul li)e an! t&e accrual o) interest on a
monetar( asset or lia6ilit( carrie! on a cost 6asis are not consi!ere! to 6e reC
measurements"
Wy !o Standard Setters #eed to Address te $ases of Measurement"
5" E;isting measurement stan!ar!s an! ractices are inconsistentH an! a num6er o)
signi)icant measurement issues remain unsettle! or &a0e 6een !ealt 3it&
unsatis)actoril(" In articularG
AaB Certain stan!ar!s ermit a c&oice 6et3een )un!amentall( !i))erent measurement
6ases" For e;amleH IAS #1H Propert() Plant and E*uipmentH an! IAS =,H
'nvestment Propert(H eac& ermit enterrises to c&oose 6et3een cost 6ase! an!
)air 0alue 6ase! measurement"
A6B Some items are accor!e! inconsistent measurement treatments in accounting
stan!ar!s" For e;amleH IASB an! FASB stan!ar!s !i))er on t&e measurement o)
imaire! assetsH an! t&ere are con)licting treatments o) )inancing costs in t&e
measurement o) sel)Cconstructe! assets un!er 0arious sets o) stan!ar!s"
AcB Some stan!ar!s re)lect more or less ar6itrar( mi;e! measurement comromises
en!ing resolution o) con)licting 0ie3s on aroriate measurement 6asesH as in
t&e current stan!ar!s on )inancial instruments an! &e!ge accounting"
T&e lac4 o) an agree!H co&erent set o) measurement 6ases an! suorting t&eor( &as
seriousl( ime!e! a!0ancement o) accounting stan!ar!s"
*" T&e measurement ro0isions in e;isting concetual )rame3or4s are limite! an! out o)
!ate" T&e section o) t&e IASB Frame3or4 entitle! 8Measurement o) t&e Elements o)
Financial Statements9 is e;tremel( 6rie)H consisting o) t&ree aragra&s" It notesG
#*
8T&e measurement 6asis most commonl( a!ote! 6( entities in rearing t&eir
)inancial statements is &istorical cost" T&is is usuall( com6ine! 3it& ot&er
measurement 6ases"9 Aaragra& #,#B
#," T&e IASB Frame3or4 lists )our ossi6le 6asesG &istorical costH current costH reali@a6le
AsettlementB 0alueH an! resent 0alue" Fair 0alue is not inclu!e! in t&is listH alt&oug& it is
use! in se0eral IASB stan!ar!s" Present 0alue is liste! as i) it 3ere a searate
measurement 6asis in itsel)H rat&er t&an a met&o!olog( t&at can 6e use! to estimate
measurements un!er se0eral !i))erent 6ases" Paragra& #,, o) t&e IASB Frame3or4
o6ser0es t&atG 8A num6er o) !i))erent measurement 6ases are emlo(e! to !i))erent
!egrees an! in 0ar(ing com6inations in )inancial statements"9 ?o3e0erH it ro0i!es no
concetual 6asis )or !etermining 3&en or un!er 3&at circumstances a articular
measurement 6asis s&oul! 6e use!"
##" Concetual )rame3or4s in ot&er -uris!ictions &a0e similar limitationsH e;cet t&at t&ose
o) t&e FASB an! U"2" Accounting Stan!ar!s Boar! AASBB are )urt&er !e0eloe! in
certain resects" In articularG
AaB T&e FASB issue! CON $ in +,,," It ro0i!es a )rame3or4 )or using cas& )lo3s
an! t&e rinciles t&at it reasons s&oul! go0ern t&e use o) resent 0alueH 6ot& in
measurements on initial recognition an! 3&en )res&Cstart measurements are
reFuire!" It conclu!es t&at t&e onl( o6-ecti0e o) resent 0alue in suc&
measurements is to estimate )air 0alue Aaragra& +/B"
A6B T&e U"2" ASBIs Statement of Principles for Financial +eportingH issue! in
#***H conclu!es t&at !i))erent measurement 6ases 3ill 6e rele0ant in !i))erent
circumstancesH an! it rooses t&at 3&en a current 0alue is aroriateH t&e
8!eri0al 0alue9 concet Aalso 4no3n as t&e 80alue to t&e 6usiness9 concetB is
most rele0ant Aaragra&s 1"1C1"*B"
T&e concets statements o) t&e FASB an! ASB cite! a6o0e seem to 6e esousing
!i))erent measurement 6asesH at least in resect o) reCmeasurementsH alt&oug& t&e
)rames o) re)erence )or t&e t3o statements are some3&at !i))erent"
+,
S'o"e
#+" T&e )ocus o) t&is reliminar( in0estigation is on essential rimar( issuesH 3it& !e)erral
o) 3&at are consi!ere! to 6e secon! or!er issues to later stages o) anal(sis or )or
consi!eration in ot&er ro-ects" %it& t&is in min!H t&is reliminar( in0estigation !oes
not !eal 3it&G
AaB c&anges in t&e urc&asing o3er o) t&e monetar( unitH i"e"H in)lation:!e)lation
e))ects Aalt&oug& consi!eration 3ill 6e gi0en to t&e relati0e a6ilities o) !i))erent
measurement 6ases to re)lect t&e e))ects o) seci)ic rice c&angesBJ
A6B t&e imlications o) !i))erent measurement 6ases )or reorting )inancial
er)ormance D t&is is t&e su6-ect o) a searate international ro-ect Aalt&oug&
income reorting imlications o) asset an! lia6ilit( measurement 3ill 6e
consi!ere!H recogni@ing t&at some measurement 6ases are remise! in art on
certain income recognition an! caital maintenance concetsBJ
AcB )oreign currenc( translation issuesJ
A!B income ta; issues Ain ot&er 3or!sH it 3ill 6e assume! )or t&e uroses o)
simli)(ing anal(sis in t&is aer t&at t&ere are no income ta;esBJ
AeB issues uniFue to articular in!ustriesJ or
A)B assets an! lia6ilities arising )rom nonCarmIs lengt& transactions"
Stan!ar!s relate! to t&e a6o0e toics ma( 3ell reFuire some reconsi!eration !een!ing
on t&e outcome o) t&e anal(sis o) measurement 6ases"
#
%nterdependency of &ecognition and Measurement
#." T&is ro-ect a!!resses measurement 6ases )or assets an! lia6ilities t&at are recogni@e!
in )inancial statements" It !oes not !eal 3it& 3&en assets or lia6ilities s&oul! 6e
#
NotC)orCro)it acti0ities in t&e ri0ate sectorH u6lic sector or go0ernment are also not inclu!e! 3it&in
t&e scoe o) t&is ro-ect since IASB stan!ar!s are not !esigne! to a!!ress t&em" T&e acti0ities o)
go0ernment 6usiness enterrises !o )all 3it&in t&e scoe o) t&e ro-ect 6ecause IASB stan!ar!s are
alica6le to suc& entities APreface to 'nternational Financial +eporting StandardsH aragra& *B"
+#
recogni@e! initiall( or 3&en reCmeasurement o) e;isting assets or lia6ilities s&oul! ta4e
lace" It also !oes not a!!ress t&e 6asis )or measuring amounts reFuire! in
sulementar( )inancial statement !isclosuresH alt&oug& some o) t&e !iscussion ma( 6e
ertinent to t&at issue" Rat&erH t&e Fuestion o) 3&at is an aroriate measurement 6asis
is consi!ere! to arise 3&en accounting stan!ar!s reFuire initial recognition or reC
measurement"
#=" ?o3e0erH t&ere are signi)icant inter!een!encies 6et3een recognition an! measurement
t&at cannot 6e ignore!" In articularH one o) t&e criteria )or recognition o) an asset or
lia6ilit( is t&at 8t&e item &as a cost or 0alue t&at can 6e measure! 3it& relia6ilit(9
AIASB Frame3or4H aragra& 5.A6BB" T&e concetual )rame3or4s o) t&e national
stan!ar! setter artners in t&is ro-ect all contain a similar con!ition" One mig&t 6e
temte! to argue t&atH since measurement relia6ilit( is a con!ition )or recognitionH it
)alls 3it&in t&e am6it o) recognition concets an! rinciles rat&er t&an 3it&in t&is
ro-ect to a!!ress measurement 6ases )or assets an! lia6ilities t&at &a0e 6een
recogni@e!" T&is argument is not 0er( con0incingH &o3e0erH 6ecause relia6ilit( is
clearl( an essential consi!eration in assessing ossi6le measurement 6ases" T&us
measurement relia6ilit(H an! its inter!een!ent imlications )or recognition an!
measurementH are consi!ere! to 6e 3it&in t&e scoe o) t&is reliminar( in0estigation"
#/" In a!!itionH t&ere seem to 6e some signi)icant inconsistencies 6et3een certain o) t&e
ossi6le measurement 6ases an! e;isting recognition concets an! stan!ar!s" T3o suc&
inconsistencies areG
AaB A num6er o) concetual )rame3or4s &ol! t&at t&e recognition o) an asset
Alia6ilit(B s&oul! 6e !een!ent on it 6eing ro6a6le t&at associate! )uture
6ene)its Asacri)icesB 3ill )lo3 to A)romB t&e enterrise"
+
Un!er t&e )air 0alue
measurement 6asisH t&e ro6a6ilit( o) )uture 6ene)it enters into t&e
!etermination o) )air 0alue"
A6B T&ere ma( 6e Fuestions relating to reconciling recognition an! measurement
rinciles 3&en an agree! measure o) t&e reco0era6le 0alue o) an asset is less
+
SeeH )or e;amleH IASB Frame3or4H aragra&s 5.H 5/H an! *#"
++
t&an its carr(ing 0alue 6ut stan!ar!s )or recognition o) imairment !ela( t&e
recognition o) t&at lo3er 0alue"
%&ile t&is in0estigation o) measurement 6ases 3ill not a!!ress 3&en assets or lia6ilities
s&oul! 6e initiall( recogni@e! or reCmeasure!H it 3ill note aarent inconsistencies
6et3een e;isting recognition criteria an! measurement 6asesH an! ma4e a reliminar(
assessment o) t&eir ossi6le imlications )or measurement an! recognition"
Sta.e$ o% t!e Pro&e't
#1" T&e reliminar( in0estigation 3ill rocee! in stages" T&e )irst stage in0ol0es anal(@ing
alternati0e 6ases )or measurement on initial recognition o) assets an! lia6ilitiesH 3&ic&
is t&e su6-ect o) Part II o) t&is aer" Su6seFuent stages 3ill anal(@e alternati0e 6ases
)or reCmeasurement o) e;isting assets an! lia6ilities 3&en accounting stan!ar!s reFuire
reCmeasurementH an! 3ill inclu!e consi!eration o) measurement uon t&e recognition o)
asset imairment"
#$" Stage # is to 6e comlete! an! t&e results consi!ere! 6e)ore su6seFuent stages are
un!erta4enH 6ecause t&e results o) t&e anal(ses un!er Stage # coul! &a0e imortant
imlications )or reCmeasurement"
Some 'onsiderations &elating to Measurement on %nitial &ecognition
Significance of 'ssues
#5" Some ma( 6elie0e t&at t&ere are )e3 su6stanti0e issues regar!ing measurement on
initial recognition o) assets an! lia6ilities" T&e( ma( e;ect t&at !i))erent measurement
6asesH )or e;amleH &istorical cost an! )air 0alueH are li4el( to (iel! t&e same or 0er(
similar 0alues on initial recognition"
#*" In )actH t&ere are signi)icant circumstances in 3&ic& material !i))erences can arise" As
one e;amleH suose t&at an enterrise constructs a lant )or 3&ic& it !etermines t&e
&istorical cost to 6e #"/ millionH 3&ile its )air 0alue is !etermine! to 6e #", million" I)
+.
t&ese are 6ot& 4no3n an! 0eri)ia6le amountsH 3&ic& 6asis A&istorical cost or )air 0alueB
mig&t 6e reasone! to 6e t&e more aroriate measurement' O) courseH t&e c&oice o)
ossi6le measurement 6ases &ere is not t&is simle" Coul! it !een!H )or e;amleH on
3&et&er t&e enterrise 6elie0e! it coul! reco0er t&e #"/ million &istorical cost )rom its
)uture oerations an!H i) soH 3&at s&oul! 6e t&e 6asis )or !etermining t&is reco0era6le
0alue at t&e time o) initial recognition' Furt&erH &o3 !e)ensi6le is t&e cost
!etermination o) #"/ million' Certainl(H t&ere are signi)icant Fuestions in t&eor( an!
ractice relate! to !e)ining t&e 6asis o) cost measurement on initial recognitionH )or
e;amleH t&e treatment o) AiB interest on !e6t )inancing Aan! er&as also on t&e cost o)
eFuit( caitalBH AiiB construction ine))iciencies Aor e))icienciesB an! 3&at t&e( s&oul! 6e
measure! againstH an! AiiiB t&e 6asis )or o0er&ea! allocations"
+," T&ere are also signi)icant issues relating to t&e !e)inition o) t&e )air 0alue measurement
6asis t&at coul! result in Fuestions a6out t&e #", million amount in t&e e;amle a6o0e"
S&oul! it 6e an estimate o) its mar4et entr( 0alueJ i) soH s&oul! t&is inclu!e t&e amounts
o) transaction costsH legal costsH ta;esH real estate commission c&arges an! ot&er costs
t&at 3oul! &a0e to 6e incurre! 6( t&e 6u(er in an armIs lengt& urc&ase transaction'
Alternati0el(H s&oul! t&e o6-ecti0e o) t&e )air 0alue measurement 6asis 6e to estimate
t&e mar4et e;it 0alueJ t&at isH t&e mar4et selling rice )or t&e lant at t&e time o) its
initial recognition' AAn! 3&at are t&e sources o) !i))erences 6et3een entr( an! e;it )air
0alues'B Eac& o) t&ese ossi6ilities &as a!0ocatesH an! e;isting stan!ar!s an! t&e
t&in4ing suorting t&em !i))er su6stantiall( on a num6er o) t&ese 6asic matters"
+elations%ip to +e,measurement
+#" %&ile it &as 6een agree! t&at it is most ro!ucti0e to )ocus )irst on measurement on
initial recognitionH t&ere is not a clean !i0ision 6et3een initial measurement an! reC
measurement" T&e a!otion o) articular measurement 6ases on initial recognition ma(
limit or reclu!e some alternati0es on reCmeasurement" T&ere)oreH an( conclusions
reac&e! 3it& resect to measurement on initial recognition are necessaril( tentati0e an!
3ill 6e reCassesse! 3&en t&eir otential imlications )or reCmeasurement are consi!ere!"
+=
Measurement of Asset'mpairment
++" Alternati0e 6ases o) measuring imaire! assets 3ill 6e a!!resse! as art o) t&e
su6seFuent anal(sis o) reCmeasurement" T&e measurement o) asset imairment is
closel( connecte! 3it& measurement on initial recognition o) assetsH in t&at imairment
coul! e;ist 0irtuall( simultaneousl( 3it& initial recognitionH an! it 3ill 6e seen t&at
reco0era6le 0alue !eterminations ser0e as a c&ec4 on some measures o) asset 0alue on
initial recognition" ?o3e0erH since reco0era6le 0alue measurements on asset
imairment in0ol0e signi)icant a!!itional issuesH t&e( are consi!ere! to 6e 6est a!&ere!
as art o) t&e reCmeasurement stage"
Ana)yti'a) A""roa'!
+." A comre&ensi0e anal(sis o) ossi6le measurement 6ases reFuires 6ot& a !e!ucti0e
A8to !o3n9B an! an in!ucti0e A86ottom u9B anal(sis" Bot& )acets o) t&is anal(sis are
6ase! in large art on inuts recei0e! )romH an! e;c&anges o) 0ie3s 3it&H t&e IASB an!
its liaison national stan!ar! setting artners"
!eductive Analysis
+=" T&e ro-ect sta)) &as recei0e! aersH concetual )rame3or4sH 6ac4groun! an!
re)erence materials )rom t&e sta))s o) t&e IASB an! its liaison national stan!ar! setting
artners t&at t&e( 6elie0e! s&oul! 6e stu!ie! in assessing measurement 6ases" T&e
ro-ect sta)) &as also consi!ere! issues relating to measurement t&at &a0e 6een
a!!resse! in recent stan!ar!s an! roosals o) t&e IASB an! liaison national stan!ar!
setters" Accete! )rame3or4 concets ro0i!e t&e 6asic oint o) !eartureH articularl(
t&e !ecision use)ulness o6-ecti0e o) accountingH t&e Fualitati0e c&aracteristics o) use)ul
)inancial in)ormationH an! concets o) 8assets9 an! 8lia6ilities9 Asee t&e anal(sis o)
t&ese concets in !e0eloing criteria )or e0aluating measurement 6ases in aragra&s
+5C/=B"
+/
%nductive Analysis
+/" T&e AcSB ro-ect sta)) also recei0e! in)ormation on e;isting stan!ar!s an! ractice on
measurement )rom eac& artner stan!ar! setter" T&e urose o) t&e anal(sis o) t&ese
stan!ar!s is to &el inG
ensuring i!enti)ication o) ma-or measurement aroac&es an! atten!ant issues as
3ell as imortant !i))erences in t&in4ing an! t&e ossi6le 6ases )or t&emJ an!
esta6lis&ing a 6asis )or testing 3&et&er an! &o3 alternati0e measurement
aroac&es coul! 6e alie! to t(ical situations"
+1" T&is aer conclu!es t&at a !e!ucti0e Ato !o3nB aroac& is most use)ul in !e0eloing
concetual t&eories an! &(ot&eses concerning t&e 0arious ossi6le measurement 6ases"
T&e in!ucti0e anal(sis is e;ecte! to ser0e rimaril( as a 8realit( c&ec49 on t&e
concetual anal(sis an! tentati0e 3or4ing conclusions !eri0e! )rom it" It is em&asi@e!
t&at t&e in!ucti0e anal(sis o) current stan!ar!s &as not 6een carrie! out in great !et& in
t&is reliminar( in0estigationH 6ut onl( in so )ar as to tr( to i!enti)( ma-or issues t&at
nee! to 6e a!!resse!"
(erminology
+$" Di))erent terms &a0e 6een use! in 0arious -uris!ictions to !escri6e t&e same
measurement 6asesH an! certain terms Asuc& as 8)air 0alue9B &a0e 6een !e)ine! in
some3&at !i))erent 3or!s" Some o) t&ese !e)initions are !ate!H in t&at t&e( !o not
re)lect !e0eloments t&at &a0e 6een recogni@e! in t&e !e)initions use! in some
-uris!ictions" Aen!i; # sets out a glossar( o) signi)icant terms an! !e)initions use! in
t&is aer" One o6-ecti0e o) t&is aer is to roose a common set o) terms an!
!e)initions t&at are consistent 3it& t&e un!erl(ing measurement 6ases an! suorting
concets"
+1
C!a"ter 2 # Criteria %or Eva)uation
+5" An e0aluation o) ossi6le measurement 6ases reFuires an agree! set o) criteria t&at can
6e alie! to eac& ossi6ilit(" %it&out re0iousl( agree! criteria )or e0aluationH an(
comarison o) measurement 6ases 3ill 6e un)ocuse! an! less li4el( to ac&ie0e
consensus aroun! a articular 6asis or set o) 6ases" T&e same set o) criteria must 6e
alie! to all o) t&e 6ases to o6tain a use)ul result" T&e criteria s&oul! 6e in!een!ent
o) t&e 0arious measurement 6ases to 6e e0aluate!H in or!er to minimi@e an( 6ias in t&e
e0aluation" Accor!ingl(H t&e )irst ste in t&e anal(sis is to esta6lis& e0aluation criteria"
+*" T&is aer rocee!s on t&e 6asis t&at t&ese criteria s&oul! 6e !e0eloe! )romH an! 6e
consistent 3it&H t&e o6-ecti0es )or )inancial reortingH Fualitati0e c&aracteristicsH an!
elements o) )inancial statements t&at are containe! in t&e e;isting concetual
)rame3or4s o) accounting stan!ar! setters" T&e concetual )rame3or4s o) t&e IASB an!
its liaison national stan!ar! setting artners 3ere !esigne! to ro0i!e t&e )oun!ation )or
t&e !e0eloment o) soun! accounting recognitionH measurementH resentationH an!
!isclosure rinciles an! stan!ar!s" T&usH t&ese concetual )rame3or4s s&oul! ro0i!e
t&e rimar( source o) criteria )or e0aluating measurement 6ases" T&e IASB an! its
liaison national stan!ar! setting artners &a0e a!ote! similar o6-ecti0es )or )inancial
reortingH Fualitati0e c&aracteristics o) use)ul )inancial in)ormationH an! !e)initions o)
elements o) )inancial statements" Primar( re)erence 3ill 6e ma!e to t&e IASB
Frame3or4H 6ut re)erence 3ill 6e ma!e to t&e )rame3or4s o) liaison national stan!ar!
setting artners 3&ere t&e( ro0i!e a!!itional in)ormation or are )urt&er !e0eloe! in
some resects t&at &a0e imlications )or measurement"
.
.
See Aen!i; +H Note on Concetual Frame3or4sH )or a comarati0e anal(sis o) certain asects o)
t&e concetual )rame3or4s o) t&e IASBH AustraliaH Cana!aH Ne3 Lealan!H t&e Unite! 2ing!om an!
t&e Unite! States"
+$
?ey A$"e't$ o% Con'e"tua) =rame@or0$
Objectives of )inancial &eporting
.," T&e )rame3or4s 6egin 3it& a statement o) t&e o6-ecti0es o) )inancial reorting" T&e
IASB Frame3or4H in common 3it& t&ose o) its artner national stan!ar! settersH
i!enti)ies !ecision use)ulness as t&e rimar( o6-ecti0e" Paragra& #+ statesG
8T&e o6-ecti0e o) )inancial statements is to ro0i!e in)ormation K t&at is use)ul
to a 3i!e range o) users in ma4ing economic !ecisions"9
.#" T&e 6asic o6-ecti0e o) !ecision use)ulness is generall( !e)ine! to gi0e rominence to
use)ulness )or re!icti0e urosesH an! to )ee!6ac4 0alue in relation to re!icti0e
uroses Asee )ollo3ing !iscussion on rele0anceB" ?o3e0erH all )rame3or4s also
mention a ste3ar!s&i o6-ecti0e" T&e IASB Frame3or4 Aaragra& #=B o6ser0es t&atG
8Financial statements also s&o3 t&e results o) t&e ste3ar!s&i o) managementH
or t&e accounta6ilit( o) management )or t&e resources entruste! to it" T&ose
users 3&o 3is& to assess t&e ste3ar!s&i or accounta6ilit( o) management !o so
in or!er t&at t&e( ma( ma4e economic !ecisionsJ t&ese !ecisions ma( inclu!eH
)or e;amleH 3&et&er to &ol! or sell t&eir in0estment in t&e enterrise or 3&et&er
to reaoint or relace t&e management"9
.+" T&e FASB Statement o) Financial Accounting Concets No" +H -ualitative
C%aracteristics of Accounting 'nformation A8CON +9BH em&asi@es t&atG
8K !ecision ma4ing an! ste3ar!s&i are interrelate! accounting o6-ecti0es"
In!ee!H t&e ste3ar!s&i role o) accounting ma( 6e 0ie3e! as su6or!inate to an!
a art o) t&e !ecision ma4ing roleH 3&ic& is 0irtuall( all encomassing"9
Aaragra& +5B
.." Ste3ar!s&i &as come to 6e !e)ine! in 6roa! terms" FASB Statement o) Financial
Accounting Concets No" #H .!/ectives of Financial +eporting !( 0usiness Enterprises
A8CON #9BH o6ser0esG
+5
8Management o) an enterrise is erio!icall( accounta6le to t&e o3ners not onl(
)or t&e custo!( an! sa)e4eeing o) enterrise resources 6ut also )or t&eir
e))icient an! ro)ita6le use an! )or rotecting t&em to t&e e;tent ossi6le )rom
un)a0ora6le economic imacts o) )actors in t&e econom( suc& as in)lation or
!e)lation an! tec&nological an! social c&anges"9 Aaragra& /,B
*ualitative 'aracteristics
.=" 7ualitati0e c&aracteristics are t&e attri6utes t&at ma4e t&e in)ormation ro0i!e! in
)inancial statements use)ulJ t&e( gi0e in)ormation !ecision use)ulness" T&e IASB
Frame3or4 states t&at t&e )our rincial Fualitati0e c&aracteristics are un!erstan!a6ilit(H
rele0anceH relia6ilit(H an! comara6ilit(" T&e )rame3or4s o) artner national stan!ar!
setters i!enti)( t&e same )un!amental FualitiesH alt&oug& t&ere are some !i))erences
6et3een t&ese )rame3or4s in &o3 t&e attri6utes o) t&ese Fualities are !e0eloe! an!
!escri6e! Asee Aen!i; +B"
$nderstanda!ilit(
./" It is consi!ere! essential t&at )inancial statement in)ormation 6e un!erstan!a6le 6(
users" ?o3e0erH it is em&asi@e! t&atG
8For t&is uroseH users are assume! to &a0e a reasona6le 4no3le!ge o) 6usiness
an! economic acti0ities an! accounting an! a 3illingness to stu!( t&e
in)ormation 3it& reasona6le !iligence"9 AIASB Frame3or4H aragra& +/B
+elevance
.1" Financial in)ormation is consi!ere! to 6e rele0ant 8K 3&en it in)luences t&e economic
!ecisions o) users K9 AIASB Frame3or4H aragra& +1B" Paragra&s =1C/$ o) t&e
FASBIs CON + ela6orate on t&is c&aracteristic" In articularH CON + !escri6es
rele0ance in t&e )ollo3ing termsG
8To 6e rele0ant to in0estorsH cre!itorsH an! ot&ers )or in0estmentH cre!itH an!
similar !ecisionsH accounting in)ormation must 6e caa6le o) ma4ing a
+*
!i))erence in a !ecision 6( &eling users to )orm re!ictions a6out t&e outcomes
o) astH resentH an! )uture e0ents or to con)irm or correct e;ectations"9
Aaragra& =$B
T&usH rele0ance is generall( consi!ere! to encomass t3o )un!amental !imensions
re!icti0e 0alue an! )ee!6ac4 0alue" T&e )rame3or4s o) some national stan!ar! setters
consi!er timeliness to 6e an imortant attri6ute o) rele0ance"
=
PREDICTI>E >ALUE
.$" T&e IASB Frame3or4 states in artG
8T&e economic !ecisions t&at are ta4en 6( users o) )inancial statements reFuire an
e0aluation o) t&e a6ilit( o) an entit( to generate cas& an! cas& eFui0alents an! o)
t&e timing an! certaint( o) t&eir generation"9 Aaragra& #1B
8In)ormation a6out t&e economic resources controlle! 6( t&e entit( an! its
caacit( in t&e ast to mo!i)( t&ese resources is use)ul in re!icting t&e a6ilit(
o) t&e entit( to generate cas& an! cas& eFui0alents in t&e )uture"9 Aaragra& #1B
.5" To sa( t&at accounting in)ormation &as re!icti0e 0alue is not to sa( t&at it must itsel)
6e a re!iction" Paragra& +5 o) t&e IASB Frame3or4 notesG 8To &a0e re!icti0e 0alueH
in)ormation nee! not 6e in t&e )orm o) an e;licit )orecast"9 Paragra& =5 o) CON +
)urt&er o6ser0esG 8In)ormation a6out t&e resent status o) economic resources or
o6ligations or a6out an enterriseIs ast er)ormance is commonl( a 6asis )or
e;ectations AConcets Statement #H aragra& =+B"9 FASB Statement o) Financial
Accounting Concets No" /H +ecognition and Measurement in Financial Statements of
0usiness Enterprises A8CON /9B goes on to em&asi@e t&atG
8A statement o) )inancial osition !oes not urort to s&o3 t&e 0alue o) a
6usiness enterrise M)ootnote omitte!N 6utH toget&er 3it& ot&er )inancial
statements an! ot&er in)ormationH s&oul! ro0i!e in)ormation t&at is use)ul to
=
T&e IASB Frame3or4 also in!icates t&at timeliness is an imortant attri6uteH 6ut it sets it out as a
general constraint on rele0ant an! relia6le in)ormation Aaragra& =.B"
.,
t&ose 3&o !esire to ma4e t&eir o3n estimates o) t&e enterriseIs 0alue"9
Aaragra& +$B
FEEDBAC2 >ALUE
.*" Paragra& +$ o) t&e IASB Frame3or4 an! correson!ing material in ot&er )rame3or4s
!iscuss t&e con)irmator( role o) )inancial in)ormation" CON + statesG
8In)ormation t&at 3as not 4no3n re0iousl( a6out a ast acti0it( clearl( re!uces
uncertaint( a6out its outcomeH an! in)ormation a6out ast acti0ities is usuall( an
in!isensa6le oint o) !earture )or attemts to )oresee t&e conseFuences o)
relate! )uture acti0ities"9 Aaragra& /+B
+elia!ilit(
=," 8In)ormation &as t&e Fualit( o) relia6ilit( 3&en it is )ree )rom material error an! 6ias
an! can 6e !een!e! uon 6( users to reresent )ait&)ull( t&at 3&ic& it eit&er urorts
to reresent or coul! reasona6l( 6e e;ecte! to reresent"9 AIASB Frame3or4H
aragra& .#B
=#" Relia6ilit( ma( 6e consi!ere! to &a0e t&ree interrelate! asects
/
G
AaB Reresentational )ait&)ulness D t&e correson!ence o) a measure 3it& t&e
economic &enomenon t&at it urorts to reresent"
A6B Neutralit( D )ree!om )rom 6ias"
AcB >eri)ia6ilit( D 4no3le!gea6le an! in!een!ent o6ser0ers Ainclu!ing au!itorsB
3oul! concur as toH )or e;amleH t&e amount resulting )rom al(ing a articular
measurement 6asisH 3it&in a reasona6le !egree o) recision"
/
T&ese t&ree asects are e;licitl( state! in some )rame3or4sH )or e;amle in t&ose o) t&e FASB an!
t&e Cana!ian Accounting Stan!ar!s Boar!H 6ut are set out in some3&at !i))erent terms in some ot&er
)rame3or4s Asee Aen!i; +H Note on Concetual Frame3or4sB" T&e IASB Frame3or4 i!enti)ies
8)ait&)ul reresentation9 an! 8neutralit(9 an! a!!s 8su6stance o0er )orm9 Ainclu!e! 6( ot&ers in
reresentational )ait&)ulnessBH an! 8ru!ence9 an! 8comleteness9 Ainclu!e! 6( ot&ers as art o) t&e
concet o) neutralit(B" T&e IASB Frame3or4 !oes not seci)icall( i!enti)( 80eri)ia6ilit(9H 6ut it !oes
mention )ree!om )rom material error as an element o) relia6ilit("
.#
REPRESENTATIONAL FAIT?FULNESS
=+" CON + statesG
8Reresentational )ait&)ulness is correson!ence or agreement 6et3een a measure
or !escrition an! t&e &enomenon it urorts to reresent" In accountingH t&e
&enomena to 6e reresente! are economic resources an! o6ligations an! t&e
transactions an! e0ents t&at c&ange t&ose resources an! o6ligations" M)ootnote
omitte!N Clearl(H muc& !een!s on t&e meaning o) t&e 3or!s Ourorts to
reresentI K" 9 Aaragra&s 1.C1=B
=." CON + illustrates 3&at is inten!e! 6( re)erence to otential allocation !i))iculties in
!etermining t&e cost o) acFuiring assetsH o6ser0ing t&atG 8T&usH it ma( not 6e certain
t&at t&e cost )or t&e asset in t&e enterriseIs recor!s !oes )ait&)ull( reresent its cost9
Aaragra& 1/B" Suorting e;lanations also em&asi@e t&atG
In)ormation is reresentationall( )ait&)ul onl( 3&en it is )ree o) !eli6erate
misreresentations an! measurements 6ase! on t&e )orm rat&er t&an t&e su6stance o)
an item"
In man( circumstances amounts nee! not 6e !etermine! 3it& er)ect recision an!
accurac( to 6e reresentationall( )ait&)ulJ a 3ellC6ase! estimate is o)ten suita6le )or
t&e uroses o) )inancial statement users"
1
NEUTRALITP
==" In assessing neutralit(H t&e concet o) ru!ence Aor conser0atismB nee!s to 6e ut in
conte;t" 8Pru!ence is t&e inclusion o) a !egree o) caution in t&e e;ercise o) t&e
-u!gements nee!e! in ma4ing t&e estimates reFuire! un!er con!itions o) uncertaint(H
suc& t&at assets or income are not o0erstate! an! lia6ilities or e;enses are not
un!erstate!9 AIASB Frame3or4H aragra& .$B" ?o3e0erH it is em&asi@e! t&at t&e
e;ercise o) ru!ence !oes not ermit t&e !eli6erate un!erstatement o) assets or
o0erstatement o) lia6ilitiesH 6ecause t&e )inancial statements 3oul! t&en not 6e neutral"
1
See commentar( in t&e IASB Frame3or4H aragra&s ..C./J CON +H aragra&s 1.C$1J an! U"2"
Statement of Principles for Financial +eportingH aragra&s ."*C."#="
.+
Neutralit( also encomasses comletenessJ t&at isG 8To 6e relia6leH in)ormation in
)inancial statements must 6e comlete 3it&in t&e 6oun!s o) materialit( an! cost9 AIASB
Frame3or4H aragra& .5B"
Compara!ilit(
=/" Comara6ilit( isG 8T&e Fualit( o) in)ormation t&at ena6les users to i!enti)( similarities
in an! !i))erences 6et3een t3o sets o) economic &enomena9 ACON +H Glossar( o)
termsB" T&e IASB Frame3or4 states t&at users must 6e a6le to comare )inancial
in)ormation o) an enterrise t&roug& time an! 6et3een !i))erent entities Aaragra& .*B"
Economic Purposes and (eir Embodiment in +Assets, and +-iabilities,
=1" Elements o) )inancial statements are t&e 6uil!ing 6loc4s 3it& 3&ic& )inancial statements
are constructe!" T&e resumtion is t&at to meet t&e a6o0e o6-ecti0es an! Fualitati0e
c&aracteristics o) use)ul )inancial in)ormationH )inancial statements s&oul! ro0i!e
in)ormation a6out t&e economic resources AassetsB an! t&e claims to t&ose resources
Alia6ilities an! eFuit(B" T&e )ocus o) t&is ro-ect is on 8assets9 an! 8lia6ilities9 6ecause
t&ese are t&e rimar( su6-ect o) accounting measurement" T&e IASB Frame3or4
Aaragra& =*B !e)ines t&ese elements as )ollo3sG
8An asset is a resource controlle! 6( t&e entit( as a result o) ast e0ents an! )rom
3&ic& )uture economic 6ene)its are e;ecte! to )lo3 to t&e entit("9
8A lia6ilit( is a resent o6ligation o) t&e entit( arising )rom ast e0entsH t&e
settlement o) 3&ic& is e;ecte! to result in an out)lo3 )rom t&e entit( o)
resources em6o!(ing economic 6ene)its"9
T&e e))ects o) alternati0e measurement 6ases on reorte! income an! eFuit( 3ill also 6e
ta4en into account"
=$" T&e concetual )rame3or4s )or )inancial reorting are )oun!e! on resume! economic
uroses o) 6usiness enterrises" It is resume! t&atH )or )inancial reorting urosesH
..
t&e rimar( urose o) 6usiness enterrises is to create 3ealt&
$
H 3&ic& is e;resse! in
terms o) mone( an! is ultimatel( concei0e! as comman! o0er cas&H or claims to
e;ecte! )uture cas& or eFui0alent )lo3s" T&usH an enterrise ma( 6e resume! to
in0est in assetsH regar!less o) t&eir )ormH )or t&e )uture net cas&CeFui0alent )lo3s t&at
t&e( can 6e e;ecte! to generate
5
" T&e FASBIs CON # recogni@es t&is in o6ser0ingG
8Peole engage in in0estingH len!ingH an! similar acti0ities rimaril( to increase
t&eir cas& resources" T&e ultimate test o) success Aor )ailureB o) t&ose acti0ities
is t&e e;tent to 3&ic& t&e( return more Aor lessB cas& t&an t&e( cost" M)ootnote
omitte!N9 Aaragra& .5B
8Business enterrisesH li4e in0estors an! cre!itorsH in0est cas& in noncas&
resources to earn more cas&"9 Aaragra& .*B
Alt&oug& in0estors an! cre!itors are generall( intereste! in net cas&CeFui0alent )lo3s o)
t&e entit( as a 3&oleH
*
t&ose amounts are t&e aggregate o) a num6er o) in!i0i!ual cas&C
eFui0alent )lo3s relate! to in!i0i!ual assets an! lia6ilitiesH or relate! grous o) assets
an! lia6ilitiesH 3it&in t&e entit("
=5" T&usH in)ormation on t&e amounts A0alueBH timing an! uncertaint( o) cas&CeFui0alent
)lo3s is consi!ere! to 6e t&e rimar( )ocus o) )inancial accounting" A conseFuence o)
t&is is t&at 8assets9 Aultimatel(H economic resources re)lecting e;ecte! !irect or in!irect
cas& )lo3s or eFui0alent 6ene)itsB an! 8lia6ilities9 Aresent o6ligations re)lecting
e;ecte! out)lo3s o) economic resourcesH ultimatel( cas& or eFui0alent )lo3sB are t&e
6asic su6-ect matter o) )inancial accounting measurement" Since it is t&e cas&C
$
Business enterrises create 3ealt& t&roug& t&e ro!uction an! sale o) goo!s an! t&e ro0ision o)
ser0ices" T&e 0arious means o) creating 3ealt& !o not a))ect t&e urose o) 6usiness enterrises"
5
Assets ma( contri6ute in 0arious 3a(sH !irectl( or in!irectl(H to an enterriseIs )uture net cas&C
eFui0alent )lo3s" For e;amleH some assets ma( 6e acFuire! )or resaleH ot&ers to a!! !irectl( to t&e
ro!uction o) goo!s )or saleH an! ot&ers to re!uce cas& out)lo3s t&at 3oul! ot&er3ise 6e reFuire!H
)or e;amleH 6( re!ucing t&e cost o) oerations"
*
T&is generali@ation is not true in all cases" For e;amleH some cre!itors 3it& securit( interests in
seci)ic assets or grous o) assets ma( 6e more intereste! in t&e cas&CeFui0alent )lo3s associate!
3it& t&ose assets t&an t&e cas&CeFui0alent )lo3s o) t&e entit( as a 3&ole"
.=
eFui0alent e;ectations attri6ute o) assets an! lia6ilities t&at is t&e rimar( )ocus o)
6usiness acti0itiesH it seems aroriate to conclu!e t&at t&is attri6ute s&oul! 6e t&e
rimar( )ocus o) accounting measurement"
#,
=*" A )ocus on cas&CeFui0alent e;ectations is not inten!e! to iml( t&at t&e aroriate
6asis )or measuring in!i0i!ual assets an! lia6ilities is necessaril( an e;it 0alue suc& as
net reali@a6le 0alue" T&e relations&i 6et3een t&e e;ecte! cas&CeFui0alent )lo3s o) an
enterrise as a 3&oleH or o) 6usiness segmentsH an! t&e contri6ution o) in!i0i!ual assets
an! lia6ilities to t&ose )lo3s is a comle; issue t&at is !iscusse! in su6seFuent c&aters
o) t&is aer"
'oncepts of 'apital and 'apital Maintenance
/," Most concetual )rame3or4s inclu!e some !iscussion o) alternati0e concets o) caital
an! caital maintenance AseeH )or e;amleH IASB Frame3or4H aragra&s #,+C##,B" T&e
relations&i 6et3een caital maintenance concets an! ossi6le 6ases )or measuring
assets an! lia6ilities nee!s to 6e clearl( un!erstoo!" T&e concet o) caital maintenance
a!ote! )or )inancial accounting uroses !e)ines &o3 net income is to 6e !etermine!"
From a caital maintenance ersecti0eH net income is t&e increase in t&e reorte! 0alue
o) an entit(Is net assets in a erio! a)ter an( ro0ision necessar( to maintain its caital"
T&e 6asis )or measuring caital to 6e maintaine! !etermines t&e 6asis )or !istinguis&ing
return on caital Anet incomeB )rom return o) caital"
/#" T&e e0aluation o) alternati0e caital maintenance concets as a 6asis )or !etermining
net income to 6e reorte! is outsi!e t&e scoe o) t&is aer" ?o3e0erH t&e selection o) a
6asis )or measuring t&e assets an! lia6ilities o) an entit( &as imlications )or t&e
measurement o) caital to 6e maintaine!H an! !i))erent measurement 6ases &a0e
!i))erent caital maintenance attri6utes" For e;amleH t&e IASB Frame3or4 notes t&atG
8T&e &(sical caital maintenance concet reFuires t&e a!otion o) t&e current
cost 6asis o) measurement" T&e )inancial caital maintenance concetH &o3e0erH
#,
T&is is not to sa( t&at an entit(Is 6alance s&eet can cature all in)ormation a6out its e;ecte! )uture
cas& or cas& eFui0alent )lo3s"
./
!oes not reFuire t&e use o) a articular 6asis o) measurement" Selection o) t&e
6asis un!er t&is concet is !een!ent on t&e t(e o) )inancial caital t&at t&e
enterrise is see4ing to maintain"9 Aaragra& #,1B
T&usH it is imortant to consi!er an( caital maintenance imlications o) articular
measurement 6ases" In a!!itionH conclusions reac&e! on aroriate asset an! lia6ilit(
measurement 6ases ma( reFuire some c&anges to e;isting concetual )rame3or4
!iscussions o) caital maintenance"
'ost.$enefit 'onstraints
/+" T&e IASB Frame3or4 states t&atG 8T&e 6ene)its !eri0e! )rom in)ormation s&oul!
e;cee! t&e cost o) ro0i!ing it9 Aaragra& ==B" Ot&er )rame3or4s contain similar
statements" All )rame3or4s note t&e !i))iculties o) 6alancing costs an! 6ene)itsH an!
ac4no3le!ge t&at t&is is su6stantiall( a -u!gmental rocess" Bot& 6ene)its an! costs
ma( 0ar( consi!era6l( !een!ing on t&e circumstances an! t&e nature o) t&e asset or
lia6ilit( 6eing measure!" Alt&oug& t&e rocess o) 6alancing costs an! 6ene)its is
su6-ecti0e an! articularl( !i))icult to !o in t&e a6stractH it is clearl( an imortant
criterion in e0aluating measurement 6ases"
/." In consi!ering cost:6ene)it constraintsH it is imortant to i!enti)( t&e 0arious t(es o)
costs an! 3&o 6ears t&emH an! t&e 0arious t(es o) 6ene)its an! 3&o en-o(s t&em" Most
o) t&e costs o) ro0i!ing )inancial in)ormation )all initiall( on t&e enterriseH 3&ile t&e
6ene)its are recei0e! 6( 6ot& t&e enterrise an! e;ternal users o) t&e in)ormation" In
articularH t&e users o) )inancial statements !eri0e a rimar( 6ene)it o) )inancial
in)ormation in ma4ing an! con)irming re!ictions" T&e costs to enterrises are
generall( more !irectl( o6ser0a6le an! Fuanti)ia6le t&an 6ene)itsH 6ut t&is !oes not
mean t&at t&ese 6ene)its are less imortant" For e;amleH imro0e! )inancial
in)ormation )or users t&at re!uces in)ormation uncertaint( an! increases !ecision
use)ulness can &a0e a su6stantial economic 6ene)it in re!ucing t&e cost o) caital o)
6usiness enterrisesH an! er&as in contri6uting to imro0ing t&e cre!i6ilit( o) caital
mar4ets" As 3ellH consi!eration s&oul! 6e gi0en to ossi6le e))ects o) alternati0e
.1
accounting measurements on t&e costs o) anal(sis an! interretation o) )inancial
in)ormation"
##
Summary of 'riteria
/=" In summar(H t&e rimar( criteria )or e0aluating ossi6le measurement 6asesH !eri0e!
)rom t&e concetual )rame3or4sH areG
#" Decision use)ulness
+" 7ualitati0e c&aracteristics o) use)ul in)ormation
Un!erstan!a6ilit(
Rele0ance re!icti0e 0alueH )ee!6ac4 0alueH timeliness
Relia6ilit( reresentational )ait&)ulnessH neutralit(H 0eri)ia6ilit(
Comara6ilit(
." Concets o) assets an! lia6ilities
?o3 t&e e;ecte! cas&CeFui0alent )lo3 attri6ute o) assets an! lia6ilities is
measure!
=" Cost:6ene)it consi!erations
*imitation$ o% =rame@or0 Con'e"t$
//" T&e a6o0e )inancial reorting o6-ecti0esH Fualitati0e c&aracteristicsH an! !e)initions o)
elements esta6lis& t&e agree! )un!amental Fualities o) use)ul )inancial in)ormation"
T&e( narro3 t&e rationall( acceta6le ossi6ilitiesH 6ut t&e( are not su))icientH in
t&emsel0esH )or ac&ie0ing agreement on a single measurement 6asis or on &o3 to
!etermine 6et3een !i))erent 6ases in !i))erent circumstances" T&e ina6ilit( o)
concetual )rame3or4s to resol0e measurement issues &as 6een o6ser0e! earlierH in
aragra&s 5C##" T&e )ollo3ing statement in t&e Pre)ace to t&e IASB Frame3or4
strongl( suggests t&at t&at )rame3or4 is not inten!e! to resol0e measurement issuesG
8T&is Frame3or4 &as 6een !e0eloe! so t&at it is alica6le to a range o) accounting
##
Paragra&s #..C#== o) CON + !iscuss t&ese an! ot&er costs an! 6ene)its t&at 3ill 6e ta4en into
accountH at least in general termsH in e0aluating alternati0e measurement 6ases"
.$
mo!els an! concets o) caital an! caital maintenance9 Alast sentence o) t&e )inal
aragra&B"
/1" More seci)icall(H e;isting )rame3or4 o6-ecti0es 3oul! aear to 6e caa6le o)
!i))erent interretations in suort o) !i))erent measurement 6ases" For e;amleH t&e
re!icti0e 0alue o) a )air 0alue measurement is remise! on t&e caital mar4etIs
e;ectations to ac&ie0e t&e mar4et rate o) return )or eFui0alent ris4 at t&e measurement
!ateH 3&ile a 0alue in use measurement is 6ase! on managementIs Aentit( seci)icB
intentions an! e;ectations" A rigorous assessment o) t&ese cometing interretations
reFuires re)erence to economic t&eories an! e0i!ence o) user nee!s 6e(on! 3&at is
seci)icall( a!!resse! in t&e a6o0e concetual )rame3or4 o6-ecti0es an! concets" As
3ellH t&e concetual )rame3or4s all ac4no3le!ge t&at Fualitati0e c&aracteristics can 6e
in con)lict in articular circumstances" For e;amleH 3&at scores &ig& on rele0ance
ma( score lo3 on relia6ilit(" T&e )rame3or4s comment on t&e nee! )or tra!eCo))s 6ut
ro0i!e little in!ication o) &o3 muc& 3eig&t s&oul! 6e gi0en to in!i0i!ual )actors
#+
or
ot&er gui!ance on ma4ing tra!eCo))s"
/$" Some ma( )eel t&at )rame3or4 o6-ecti0es an! suorting concets are out o) !ate in
some signi)icant resectsH an! s&oul! 6e rea!!resse!" It isH &o3e0erH 6e(on! t&e scoe
o) t&is ro-ect to tr( to !o t&is" Ne0ert&elessH it seems imortant to assess 3&at seminal
!e0eloments &a0e ta4en lace since t&ese )rame3or4 concets 3ere ut in lace t&at
ma( enric& t&e e0aluation o) measurement 6ases in )inancial accounting 3it&in t&e
general conte;t o) e;isting )rame3or4 )oun!ations"
EAterna) C!an.e$ an( ;eve)o"ment$
/5" T&e )ollo3ing aragra&s summari@e ma-or areas o) recent c&ange an! !e0eloment
t&at &a0e signi)icant imlications )or accounting measurement t&eor( an! ractice" T&e
#+
T&e Australian an! U"S" concetual )rame3or4s lace more em&asis on t&e rele0ance an! relia6ilit(
o) )inancial in)ormationH relati0e to un!erstan!a6ilit( an! comara6ilit(H 3&ereas t&e IASBH
Cana!ianH Ne3 Lealan! an! U"2" )rame3or4s consi!er all )our c&aracteristics as essentiall( arallel
consi!erations"
.5
c&anges an! !e0eloments &a0e ten!e! to al( more !irectl( or more rea!il( to
)inancial assets an! lia6ilities t&an to nonC)inancial assets an! lia6ilities"
/*" Present 0alue t&eor( &as 6een e;ten!e! an! alie! more 3i!el( in measuring assets
an! lia6ilities" CON $ &as ma!e a articularl( imortant contri6ution in t&is areaH as
&a0e stu!ies o) some ot&er stan!ar!s setters Ain articularH t&e U"2" ASB #**$ %or4ing
PaerH 1iscounting in Financial +eportingB" T&ere are no3 man( e;amles o) t&e
alication o) resent 0alue concets in accounting stan!ar!s" ?o3e0erH suc& stan!ar!s
0ar( in t&eir alication o) resent 0alue concets Ain t&e 6asis )or estimation o) cas&
)lo3s an! t&e !etermination o) interest ratesB" %it& t&e e;cetion o) CON $ in t&e
Unite! States an!H to a limite! e;tentH t&e U"2" Statement of Principles for Financial
+eportingH t&e relations&i o) resent 0alue rinciles to ossi6le measurement 6ases
&as not 6een a!!resse! in concetual )rame3or4s"
1," Glo6al caital mar4ets &a0e emerge! an! contri6ute! to a!0ances in )inance t&eor( an!
ractice relating to ricing assets an! lia6ilitiesH an! atten!ant ris4s A)or e;amleH otion
ricing an! its alications to emlo(ee stoc4 otionsH an! t&e concet o) real otionsB"
In a!!itionH !e0eloments in caital mar4ets &a0e )eature! t&e creation o) increasingl(
so&isticate! !eri0ati0es an! ot&er instrumentsH as 3ell as )inancing an! 6usiness
arrangementsH to isolate an! arcel out articular ris4s" T&is &as )orce! accounting
stan!ar! setters to tr( to a!at or re!e0elo tra!itional accounting recognition an!
measurement aroac&esH 3&ic& &a0e ro0en to 6e ina!eFuate in !ealing 3it& t&ese
&enomena" T&ese e))ortsH in turnH &a0e &ig&lig&te! t&e nee! to un!erstan! 6etter an!
!e)ine t&e logical connections 6et3een accounting an! t&e )inance an! caital mar4et
ricing an! ris4 management concetsH an! t&e economic o6-ecti0es t&at &a0e le! to t&e
creation o) t&ese instruments an! arrangements"
1#" More seci)icall(H e;tensi0e 3or4 &as 6een un!erta4en on t&e )air 0alue measurement o)
)inancial instrumentsH 3it& articular re)erence to un!erl(ing rinciles an! mo!els
!eri0e! )rom caital mar4ets an! )inance t&eor(" T&ere &as 6een a gro3ing 6o!( o)
emirical researc& into t&e in)ormation 0alue o) )air 0alue measurements in relation to
.*
cost an! ot&er measurements A)or e;amleH see t&e u6lications o) t&e FASBH t&e
International Accounting Stan!ar!s CommitteeH Steering Committee on Financial
InstrumentsH an! t&e Eoint %or4ing Grou o) Stan!ar! Setters on measuring )inancial
instruments at )air 0alueB"
1+" Increasingl(H statistical ro6a6ilit( t&eor( &as 6een integrate! into accounting
measurement A)or e;amleH in t&e use o) 8e;ecte! 0alue9 ro6a6ilit( 3eig&te!
estimates in accounting )or lia6ilit( ro0isionsB"
1." A!0ances in comuter an! in)ormation tec&nolog( &a0e ena6le! rai! an! cost e))icient
rocessing o) masses o) !ata an! comle; calculations" T&ese a!0ances &a0e in turn
ena6le!H )or e;amleH measurement mo!eling t&at coul! not &a0e 6een contemlate! in
ractice a )e3 (ears ago"
1=" T&ese !e0eloments !o not seem to 6e inconsistent 3it& t&e a6o0e note! concetual
)rame3or4 o6-ecti0esH Fualitati0e c&aracteristicsH or t&e essence o) t&e !e)initions o)
8assets9 an! 8lia6ilities9" Rat&erH t&e( s&oul! ser0e to &el enlig&ten an! )ocus t&e
alication o) t&ese 6asic concetual )rame3or4 criteriaH summari@e! at aragra& /=H
to t&e e0aluation o) alternati0e measurement 6ases" In so !oingH t&ese 6roa!er resent
0alueH )inanceH caital mar4etsH an! statistical ro6a6ilit( !imensions ma( &el to
o0ercome t&e limitations o) e;isting concetual )rame3or4 o6-ecti0es an! suorting
concets"
Summary # Ba$i$ %or Ana)y$i$
1/" T%is paper evaluates possi!le measurement !ases against t%e accounting conceptual
frame&ork criteria noted in paragrap%s 2,3# interpreted in lig%t of t%e e4isting
kno&ledge of t%e areas of development referred to in paragrap%s 32,5"6
=,
PART II: MEASUREMENT ON INITIA* RECO+NITION
C!a"ter , # Po$$i-)e Ba$e$ %or Mea$urement on Initia) Re'o.nition
;e%inin. Initia) Re'o.nition
11" Initial recognition o) an asset or lia6ilit( commonl( occurs at t&e instant 3&en an
e;c&ange transaction ta4es lace t&at results in an entit( acFuiring t&e asset or incurring
t&e lia6ilit(" Some assetsH &o3e0erH are !e0eloe! o0er a erio! o) timeJ t&at isH t&e(
reFuire some time an! e))ort to lanH !e0eloH acFuire comonentsH constructH installH
testH an! generall( ut in a osition to 6e use! in a cas& generating rocess"
1$" For t%e purposes of t%e follo&ing anal(sis of measurement on initial recognition)
7initial recognition8 is considered to include an( time period necessar( to make an
asset read( for use in a cas% generating process6
Po$$i-)e Ba$e$ o% Mea$urement on Initia) Re'o.nition
%dentified Alternatives
15" An e;tensi0e 6o!( o) literature e;ists on ossi6le asset an! lia6ilit( measurement 6ases
an! t&e un!erl(ing o6-ecti0es o) eac&" Muc& o) t&is literature 3as !e0eloe! t3ent(C
)i0e or more (ears ago in resonse to !issatis)action 3it& con0entional &istorical cost
accounting in t&e )ace o) in)lation an! 3i!esrea! rice c&anges" For t&e most artH t&is
literature re!ates t&e !e0eloments note! at aragra&s /5C1=" %&ile t&ere &as 6een
muc& !e6ate an! !isagreement on t&e merits o) !i))erent measurement 6asesH t&ere
seems to 6e general agreement on 3&at t&e 6roa! alternati0es are" T&is aer rocee!s
on t&e 6asis t&atH )or t&e uroses o) measurement on initial recognitionH t&e( are t&e
)ollo3ingG
?istorical cost
Relacement cost
Rero!uction cost
=#
Net reali@a6le 0alue
>alue in use
Fair 0alue
Deri0al 0alue
1*" T&is list o) alternati0e measurement 6ases &as 6een !e0eloe! on t&e 6asis o) a general
4no3le!ge o) t&e a6o0e note! accounting literatureH an! consi!eration o) t&e
measurement sections o) e;isting accounting concetual )rame3or4s an! 0arious aers
an! u6lications in!icate! 6( t&e IASB an! its liaison national stan!ar! setting
artners"
#.
Present Value
$," Present 0alue !oes not aear on t&is list 6ecause it is not a measurement 6asis in itsel)"
Rat&erH it is a )rame3or4 rincile t&at can 6e alie! to estimate a num6er o) t&e a6o0e
measurements in certain circumstances" T&e resent 0alue )ormulation is 0er( imortant
6ecause it catures &o3 e;ecte! )uture cas& )lo3s an! t&e time 0alue o) mone( an!
atten!ant ris4s enter into t&e 0aluation o) assets an! lia6ilities" Since t&e cas&C
eFui0alent e;ectations attri6ute o) assets an! lia6ilities is a rimar( )ocus o)
accounting measurement Asee aragra& =5BH t&e resent 0alue )ormulation ro0i!es a
)oun!ation )or e0aluating &o3 t&is attri6ute ma( 6e incororate! 3it&in !i))erent
measurement 6ases"
Possible 'ombinations of Measurement $ases
$#" Some ma( 6elie0e t&at !i))erent measurement 6ases are aroriate in !i))erent
circumstancesH or ma( a!0ocate measurements t&at mi; attri6utes o) t3o or more o) t&e
#.
T&e IASB an! its liaison national stan!ar! setting artners 3ere eac& as4e! to ro0i!e aers an!
re)erences to u6lications t&at t&e( 6elie0e! s&oul! 6e consi!ere! in a!!ressing measurement
o6-ecti0es in )inancial accounting" T&e sources t&at 3ere seci)icall( consi!ere! are liste! in
Aen!i; =H List o) Re)erences"
=+
a6o0e 6ases" T&e concetual an! ractical )oun!ations )or t&ese 6elie)s 3ill 6e
consi!ere! as art o) t&e anal(sis o) t&e alternati0e measurement 6ases"
1eprival Value
$+" Deri0al 0alue is an aroac& t&at com6ines t&ree measurement 6ases Arelacement
costH 0alue in useH an! net reali@a6le 0alueB into an integrate! measurement )rame3or4"
T&e case )or !eri0al 0alue is 6ase! on a t&eor( o) rational management 6e&a0iour )or
!etermining 3&en eac& o) t&e t&ree measurement 6ases is aroriate" T&is aer
consi!ers !eri0al 0alue searatel( )ollo3ing an e;amination o) t&e )un!amental
roerties o) eac& o) its comonent measurement 6ases"
.t%er Com!inations of Measurement 0ases
$." No ot&er comre&ensi0e measurement )rame3or4s com6ining t3o or more o) t&e a6o0e
alternati0e measurement 6ases &a0e 6een i!enti)ie!"
I(enti%ie( A)ternative$ ;e%ine(
$=" %&ile t&ere aears to 6e general agreement on t&e 6roa! measurement 6ases liste! in
aragra& 15H a re0ie3 o) accounting stan!ar!s o) t&e IASB an! its liaison national
stan!ar! setting artners an! ot&er rominent accounting literature in!icates t&at t&ere
are 0ariations in terminolog( an! !e)initionsH an! t&at certain o) t&ese measurement
6ases are oen to some3&at !i))erent interretations" Inconsistent or loose usage o)
terms ma( o6scure imortant issues an! !i))erences o) 0ie3" It is t&ere)ore imortant to
agree on common terminolog( an! !e)initions" A rimar( o6-ecti0e o) t&is aer is to
ro0i!e an in)orme! 6asis )or imro0ing an! con)orming t&e essential terms an!
!e)initions o) t&e IASB an! its liaison national stan!ar! setting artners"
$/" Follo3ing are t&e 3or4ing terms an! !e)initions a!ote! )or t&e uroses o) t&is aer
)or eac& o) t&e a6o0e measurement 6ases" For t&e most artH t&ese terms an! !e)initions
are 6ase! on t&ose currentl( 6eing use! in IASB stan!ar!sH 3it& t&e mo!i)ications an!
interretati0e comments t&at are note! an! e;laine! 6elo3" T&e mo!i)ications are
=.
ma!e rimaril( to imro0e clarit( or to remo0e re!un!ancies an! inconsistencies"
Signi)icant i!enti)ie! !i))erences in terms an! !e)initions aearing in t&e literature o)
t&e liaison national stan!ar! setting artners o) t&e IASB &a0e 6een ta4en into
consi!eration as !iscusse! 6elo3" T&e )ollo3ing !e)initions ro0i!e t&e 6asis )or t&e
anal(sis o) t&e comarati0e attri6utes o) alternati0e measurement 6ases in su6seFuent
sections o) t&is aer"
/istorical 'ost
$1" ?istorical costG Assets are recor!e! at t&e )air 0alue o) t&e consi!eration gi0en to
acFuire t&em at t&e time o) t&eir acFuisition" Lia6ilities are recor!e! at t&e )air 0alue o)
t&e consi!eration recei0e! in e;c&ange )or t&e o6ligations at t&e time t&e( 3ere
incurre!"
$$" T&is is 6ase! on t&e !e)inition o) 8&istorical cost9 in t&e IASB Glossar( an! t&e IASB
Frame3or4 at aragra& #,,AaBH 3it& t&e )ollo3ing c&angesG
AaB T&e IASB !e)inition statesG 8Assets are recor!e! at t&e amount o) cas& or cas&
eFui0alents ai! or t&e )air 0alue o) t&e consi!eration gi0en K"9 It is roose!
t&at t&e 3or!s 8cas& or cas& eFui0alents ai!9 are re!un!ant 6ecause t&e amount
o) cas& or cas& eFui0alents ai! s&oul! al3a(s 6e eFual to t&e )air 0alue o)
consi!eration gi0en"
A6B T&e IASB !e)inition statesG 8Lia6ilities are recor!e! at t&e amount o) rocee!s
recei0e! in e;c&ange )or t&e o6ligation"9 T&e 3or!s 8t&e amount o) rocee!s
recei0e!9 are relace! 6( 8t&e )air 0alue o) t&e consi!eration recei0e!9 in or!er
to 6e more recise an! consistent 3it& t&e !e)inition o) &istorical cost )or assets"
AcB T&e IASB !e)inition goes on to a!!G 8" " " or in some circumstances A)or
e;amleH income ta;esBH at t&e amounts o) cas& or cas& eFui0alents to 6e ai! to
satis)( t&e lia6ilit( in t&e normal course o) 6usiness"9 T&is &rase &as 6een
omitte! )rom t&e a6o0e !e)inition 6ecause it seems to 6e !escri6ing an e;ecte!
==
0alue measurement rat&er t&an one t&at is consistent 3it& t&e &istorical cost
o6-ecti0e"
$5" T&is !e)inition is similar to !e)initions currentl( use! 6( t&e IASBIs liaison national
stan!ar! setting artners" ?o3e0erH some asects o) it aear to 6e oen to !i))erent
interretations" For t&e uroses o) t&is aerH t&e a6o0e !e)inition is a!ote! on t&e
6asis o) t&e )ollo3ing interretati0e commentsG
AaB 8t&e )air 0alue o) t&e consi!eration gi0en9" Most !e)initions re0ie3e! contain
3or!s to t&is e))ect" ?o3e0erH some stan!ar! settersI !e)initions A)or e;amleH
Ne3 Lealan!IsB in!icate t&at t&e &istorical cost o) an asset is t&e accumulation
o) costs t&at can 6e attri6ute! to t&e assetH 3&ic& can inclu!e allocations o) costs
A)or e;amleH )i;e! asset o0er&ea!sB t&at 3ere incurre! some time in t&e ast" A
num6er o) accounting stan!ar!s an! ractices are consistent 3it& t&is latter
interretationH 3&ic& seems !i))icult to reconcile )ull( 3it& t&e 0ie3 t&at t&e
&istorical cost o) an asset s&oul! 6e t&e )air 0alue o) t&e consi!eration gi0en at
t&e !ate t&at t&e asset 3as acFuire!" T&isH an! certain ot&er !i))erences in 0ie3s
as to &o3 t&e &istorical cost measurement 6asis s&oul! 6e interrete!H 3ill 6e
e;amine! in c&ater $"
A6B 8to acFuire9" It is assume! t&at t&is s&oul! 6e interrete! to encomass all
ossi6le means o) acFuisitionH inclu!ing simle cas& e;c&ange transactionsH
installationH constructionH !e0elomentH an! asset 6etterment acti0ities"
AcB Amorti@ation an! imairment ro0isions" T&e term 8&istorical cost9 is assume!
to 6e t&e amount 6e)ore an( ro0isions )or imairment or amorti@ation o)
interest or !ereciation" I) an asset or lia6ilit( amount is inten!e! to inclu!e
suc& ro0isions or amorti@ationH its !escrition 3ill 6e aroriatel( mo!i)ie!H
suc& as 8&istorical cost less accumulate! !ereciation9"
$*" T&e term 8&istorical cost 6asis9 &as sometimes 6een use! to encomass measurement
met&o!s t&at !o not meet t&e !e)inition ro0i!e! a6o0e" For e;amleG
=/
carr(ing lia6ilities o) uncertain amount Aro0isionsB at t&e resent 0alue o) t&e
currentl( e;ecte! amount reFuire! to settle t&e o6ligation rat&er t&an t&e rocee!s
originall( recei0e! At&ere ma( 6e no rocee!s recei0e! in resect o) some
ro0isionsBJ an!
3riting assets !o3n 6elo3 cost Aor amorti@e! costB to re)lect imairments"
Deen!ing on t&e nature o) t&e !i))erences )rom &istorical costH t&e resulting 6ases are
o)ten !escri6e! in suc& terms as 8mo!i)ie! &istorical cost9H 8lo3er o) cost an! mar4et9H
or as a 8mi;e! measurement 6asis9" >arious mo!i)ications o) t&e &istorical cost 6asis
3ill 6e consi!ere! in anal(@ing t&e comarati0e attri6utes o) alternati0e measurement
6ases in c&ater $ o) t&is aer"
&eproduction 'ost and &eplacement 'ost
5," Rero!uction cost Ao) an assetBG T&e most economic current acFuisition cost o)
relacing an e;isting asset 3it& an i!entical one"
Relacement cost Ao) an assetBG T&e most economic current acFuisition cost o) relacing
an e;isting asset 3it& an asset o) eFui0alent ro!ucti0e caacit( or ser0ice otential"
5#" IASB stan!ar!s &a! !e)ine! relacement cost as 8K t&e current acFuisition cost o) a
similar assetH ne3 or use!H or o) an eFui0alent ro!ucti0e caacit( or ser0ice otential9
AIAS #/"#.B"
#=
T&is !e)inition em6o!ies t&e t3o current cost measurement 6asesH 3&ic&
are usuall( searatel( !e)ine! in t&e aut&oritati0e literature o) ot&er stan!ar! settersG
AaB 8t&e current acFuisition cost o) a similar assetH ne3 or use!9 is commonl(
re)erre! to as 8rero!uction cost9H an! &as 6een more recisel( !e)ine! as 8t&e
current cost o) relacing an e;isting asset K 3it& an i!entical one9"
#/
T&e a6o0e
3or4ing !e)inition a!!s t&e 3or!s 8most economic9" T&is is roose! to ma4e it
consistent 3it& t&e accete! !e)inition o) 8relacement cost9H an! to !istinguis&
it )rom t&e &istorical cost measurement o6-ecti0e on initial recognition" T&e )air
#=
IAS #/ &as 6een 3it&!ra3n e))ecti0e Eanuar( #H +,,/H 3it& t&e result t&atH as o) t&at !ateH t&e term is
no longer !e)ine! in IASB stan!ar!s"
#/
See 9o%ler:s 1ictionar( for Accountants) 1t& e!ition"
=1
0alue o) consi!eration gi0en )or an asset Aits &istorical costB 3ill not necessaril(
eFual t&e most economic cost to rero!uce it on initial recognition"
A6B 8t&e current acFuisition cost K o) an eFui0alent ro!ucti0e caacit( or ser0ice
otential9 is usuall( re)erre! to as 8relacement cost9" T&is amount is normall(
consi!ere! to 6e t&e lo3est or most economic cost at 3&ic& t&e eFui0alent
ro!ucti0e caacit( or ser0ice otential coul! 6e o6taine! on t&e measurement
!ate"
#1
T&usH it is imortant to !istinguis& t&ese t3o !i))erent 6ases" T&e )irst 3ill 6e re)erre!
to in t&is aer as 8Rero!uction cost9H an! t&e secon! as 8Relacement cost9" T&ese
t3o 6ases are commonl( re)erre! to in t&e literature on accounting )or c&anging rices
as 8current cost9 6ases"
5+" T&e a6o0e !e)initions are interrete! on t&e 6asis o) t&e )ollo3ing commentsG
AaB T&e concet o) 8acFuisition9 s&oul! 6e interrete! in t&e same 6roa! sense as
note! un!er &istorical cost a6o0e"
A6B Some sources re)er to 8!ereciate! relacement cost:rero!uction cost9" T&is is
not consi!ere! a searate measurement 6asisH an! t&e term is not use! in t&is
aer" Rat&erH t&e concets o) 8relacement cost9 an! 8rero!uction cost9 can
6e resume! to mean t&e current acFuisition cost o) an asset in its lace an!
con!ition on t&e measurement !ateH an! t&us can 6e resume! to )actor in an(
!iminution in amount t&at 3oul! result )rom 3ear an! tear an! o6solescence"
5." T&e lia6ilit( eFui0alent o) relacement an! rero!uction cost is not !e)ine! in IASB
stan!ar!sH an! t&e ro-ect sta)) is not a3are t&at it &as 6een !e)ine! in t&e aut&oritati0e
literature o) ot&er artner national stan!ar! setters" One aut&or reasons t&at it is
aroriatel( !e)ine! as t&e 8current consi!eration amount9"
#$
T&is ma( 6e resume!
#1
For e;amleH IASB Agen!a Paer .H Measurement , A +evie& of Alternatives) Eune +,,#H !e)ines
relacement cost as 8t&e most economic cost t&at an entit( 3oul! incur in relacing t&e ser0ice
otential o) an asset at t&e 6alance s&eet !ate"9
#$
An!re3 Lennar!H Lia!ilities and %o& to account for t%em; an e4plorator( essa() eseciall(
aragra&s ++C.+"
=$
to 6e t&e )air 0alue o) t&e consi!eration t&at t&e o3ing entit( 3oul! &a0e recei0e! i) t&e
lia6ilit( &a! 6een incurre! 6( it on t&e measurement !ate" T&is is t&e concet t&at is
assume! )or t&e uroses o) t&is aer"
#et &eali0able Value
5=" Net reali@a6le 0alue Ao) an assetBG T&e estimate! selling rice in t&e or!inar( course o)
6usiness less t&e estimate! costs o) comletion an! t&e estimate! costs necessar( to
ma4e t&e sale"
5/" T&is is t&e !e)inition in t&e IASB Glossar(H )rom IAS +"1 an! IAS +"$ It is !e)ine! in
similar terms 6( ot&er stan!ar! setters an! in ot&er aut&oritati0e literature" It &as
sometimes 6een !escri6e! as 8net selling 0alue9 an! 8net mar4et 0alue9" %&ile not
e;licit in t&e a6o0e !e)initionH it is resume! to 6e a current 0alueH t&at isH t&e 0alue on
t&e measurement !ate" AgainH t&e eFui0alent lia6ilit( !e)inition !oes not seem to &a0e
6een )ormall( !e)ine! in accounting literatureH 6ut it is roose! t&at it ma( 6e !e)ine!
as t&e estimate! rice in t&e or!inar( course o) 6usiness to o6tain release )rom a
lia6ilit( lus t&e estimate! costs necessar( to carr( out t&e release transaction"
Value in 1se
51" >alue in use Ao) an assetBG T&e resent 0alue o) estimate! )uture cas& )lo3s e;ecte! to
arise )rom t&e continuing use o) an asset an! )rom its !isosal at t&e en! o) its use)ul
li)e"
5$" T&is is t&e !e)inition in t&e IASB Glossar(H )rom IFRS /"A" Ot&er stan!ar! setters an!
accounting literature generall( use t&is term an! !e)ine it essentiall( as a6o0e" T&is
!e)inition !oes not state 3&ose e;ectations s&oul! 6e t&e 6asis )or !etermining 0alue
in use" Base! on its use in stan!ar!s an! racticeH it seems generall( to 6e resume!
t&at t&e o6-ecti0e is to re)lect t&e 6est estimates o) )uture cas& )lo3s o) t&e reorting
entit(Is management"
#5
?o3e0erH t&e 0alue in use measurement 6asis seems o)ten to 6e
#5
T&is is e;licit in t&e Australian Accounting Stan!ar!s Boar! !e)inition o) 0alue in use as 8t&e
resent 0alue o) t&e estimate! net cas& in)lo3s t&at t&e entit(Is management or go0erning 6o!(
=5
interrete! in terms o) !iscounting t&ese management estimates using rates t&at re)lect
current mar4et assessments o) t&e time 0alue o) mone( an! ris4s commensurate 3it&
t&ose o) t&e asset"
#*
T&is ossi6le interretation 3ill 6e )urt&er e;amine! in c&ater $ o)
t&is aer" >alue in use &as 6een concei0e! in aut&oritati0e literature onl( in t&e conte;t
o) assets" ?o3e0erH some &a0e suggeste! t&at t&e lia6ilit( eFui0alent is t&e resent
0alue o) estimate! cas& )lo3s e;ecte! to 6e ai! to satis)( a lia6ilit(" One aut&or &as
!escri6e! t&is as t&e 8cost o) er)ormance9 measure o) a lia6ilit("
+,
)air Value
55" Fair 0alueG T&e amount )or 3&ic& an asset or lia6ilit( coul! 6e e;c&ange! 6et3een
4no3le!gea6leH 3illing arties in an armIs lengt& transaction"
5*" T&is is t&e e;isting IASB !e)inition t&at is consistentl( use! in its stan!ar!s Asee t&e
IASB Glossar(BH 3it& one c&ange" T&e IASB !e)inition states 8or a lia6ilit( settle!9H
3&ereas t&e !e)inition a6o0e !e)ines )air 0alue in terms o) t&e amount )or 3&ic& eit&er
an asset or a lia6ilit( coul! 6e e;c&ange!" T&is c&ange a0oi!s t&e imlication t&at t&e
)air 0alue o) a lia6ilit( is necessaril( t&e amount )or 3&ic& it coul! 6e settle!H t&at isH its
e;it 0alue" In ot&er 3or!sH t&is aer a!ots a 3or4ing !e)inition o) t&e )air 0alue
measurement 6asis e;resse! in neutral terms as t&e amount t&at coul! 6e e;c&ange!H
3it&out seeming to 6e limite! to an e;itH as oose! to an entr(H mar4et rice" T&is
concet o) e;c&ange is alica6le to 6ot& assets an! lia6ilities"
*," T&e a6o0e !e)inition is generall( consistent 3it& &o3 t&e term 8)air 0alue9 &as 6een
!e)ine! an! use! in most stan!ar! setting -uris!ictions"
AaB It is consistent 3it& t&e !e)inition in t&e U"2" ASBIs FRS $H Fair Values in
Ac*uisition AccountingH asG 8t&e amount at 3&ic& an asset or lia6ilit( coul! 6e
e;ects to generate )rom t&e assetIs )uture use an! su6seFuent !isosal9" See Fair Value) 1eprival
value and 1epreciated +eplacement CostH Sta)) PaerH Fe6ruar( +,,#H age 1"
#*
See )or e;amleH IAS .1H aragra&s //C/1"
+,
An!re3 Lennar!H Lia!ilities and %o& to account for t%em; an e4plorator( essa() aragra&s +$ an!
.+"
=*
e;c&ange! in an armIs lengt& transaction 6et3een in)orme! an! 3illing artiesH
ot&er t&an in a )orce! or liFui!ation sale"9 See also t&e Cana!ian Accounting
Stan!ar!s Boar! !e)initionG 8t&e amount o) t&e consi!eration t&at 3oul! 6e
agree! uon in an armIs lengt& transaction 6et3een 4no3le!gea6leH 3illing
arties 3&o are un!er no comulsion to act"9
+#
A6B %&ile some recent FASB stan!ar!s an! roosals aear to &a0e assume! an
e;it 0alue o6-ecti0eH its 6asic !e)inition in CON $ is neutral in allo3ing )or
eit&er an e;it or entr( 0alue interretationG 8Fair 0alue o) an asset Aor lia6ilit(BG
T&e amount at 3&ic& t&at asset Aor lia6ilit(B coul! 6e 6oug&t Aor incurre!B or
sol! Aor settle!B in a current transaction 6et3een 3illing artiesH t&at isH ot&er
t&an in a )orce! or liFui!ation sale"9
++
*#" T&e !e)initions in aragra& *, go 6e(on! t&at o) t&e IASB in seci)(ing arties t&at
are 8un!er no comulsion to act9 or transactions t&at are 8ot&er t&an in a )orce! or
liFui!ation sale9" It is resume! )or t&e uroses o) t&is aer t&at t&ese Fualities are
em6o!ie! in t&e 3or!s o) t&e a6o0e IASBC6ase! !e)inition t&at re)er to t&e amount t&at
coul! 6e e;c&ange! 6et3een 83illing arties in an armIs lengt& transaction9H on t&e
resumtion t&at 3illing arties at armIs lengt& can 6e un!er no comulsion to act ot&er
t&an in t&eir o3n sel) interest an! t&at an armIs lengt& transaction 6et3een 3illing
arties e;clu!es a )orce! or liFui!ation sale"
*+" It is 3ell accete! t&at t&e o6-ecti0e o) )air 0alue measurement is to reresent t&e
mar4et rice o) an asset or lia6ilit( at t&e measurement !ate" I) t&ere is no o6ser0a6le
mar4et rice at t&e measurement !ate )or t&e asset or lia6ilit( to 6e measure!H t&e )air
0alue o6-ecti0e is to estimate 3&at t&e mar4et rice 3oul! 6e i) t&ere 3ere a mar4et"
+.
+#
SeeH )or e;amleH C'CA <and!ook) aragra& .51,",/A)B"
++
T&e FASB E;osure Dra)tH Fair Value Measurement) rooses t&is neutral !e)initionG 8Fair 0alue is
t&e rice at 3&ic& an asset or lia6ilit( coul! 6e e;c&ange! in a current transaction 6et3een
4no3le!gea6leH unrelate! 3illing arties9 Aaragra& =B"
+.
T&e FASBIs CON $ statesH )or e;amleH t&at a resent 0alue estimate o) )air 0alue 8s&oul! attemt to
cature t&e elements t&at ta4en toget&er 3oul! comrise a mar4et rice i) one e;iste!H t&at isH )air
0alue9 Aaragra& +/B"
/,
T&is aer accets t&at )air 0alue em6o!ies t&is mar4et 0alue measurement o6-ecti0e"
T&e mar4et 0alue measurement o6-ecti0eH an! t&e attri6utes o) cometing mar4et )orces
t&at !e)ine itH are e;amine! in a later section o) t&is aer Asee aragra&s **C##,B"
*." It is nota6leH &o3e0erH t&at t&e accete! !e)inition o) 8)air 0alue9 set out in aragra&C
55 ma4es no mention o) t&e mar4et 0alue measurement o6-ecti0e" It mig&t 6e conten!e!
t&at t&is o6-ecti0e is imlicit in t&e !e)initionH reasoning t&at 84no3le!gea6leH 3illing
artiesH in an armIs lengt& transaction9 s&oul! 6e e;ecte! to arri0e at t&e mar4et rice
)or an asset or lia6ilit(" ?o3e0erH t&e terms 84no3le!gea6le9H 83illing9H an! 8armIs
lengt&9 are oen to interretations )or t&e uroses o) accounting measurement t&at ma(
not 6e consistent 3it& t&e mar4et 0alue measurement o6-ecti0e" Some &a0e suggeste!
t&at t&e mar4et 0alue measurement o6-ecti0e s&oul! 6e ma!e e;licit in t&e term use! to
!escri6e t&e 6asisH or in t&e !e)inition" More seci)icall(G
/#
Some &a0e suggeste! t&at t&e term 8)air 0alue9 6e relace! 6( 8mar4et 0alue9H
8mar4et eFui0alent 0alue9H or 8)air mar4et 0alue9 so as to 6e more clearl( consistent
3it& t&e mar4et rice measurement o6-ecti0e
+=
" Discussions 3it& t&e IASB an! its
liaison natural stan!ar! setting artners at an earl( stage o) t&is ro-ect in!icate! no
suort )or relacing t&e term 8)air 0alue9"
Some &a0e suggeste! t&at t&e a6o0e !e)inition o) )air 0alue s&oul! 6e relace! 6( a
!e)inition t&at e;licitl( incororates t&e mar4et 0alue o6-ecti0e
+/
" One ossi6ilit(
isG
T&e amount )or 3&ic& an asset or lia6ilit( coul! 6e e;c&ange! in a mar4et in
3&ic& articiants are 4no3le!gea6leH 3illing arties transacting at armIs
lengt&"
T&ese suggestions )or relacing t&e term 8)air 0alue9 an! seci)icall( incororating t&e
mar4et 0alue measurement o6-ecti0e 3it&in its !e)inition &a0e not 6een a!ote! in t&is
aer" It is resume! t&at t&e term an! !e)inition set out at aragra& 55H can an! s&oul!
6e interrete! to em6o!( t&e mar4et 0alue measurement o6-ecti0e"
!eprival Value
*=" Deri0al 0alue Ao) an assetBG T&e loss t&at an entit( 3oul! su))er i) it 3ere !eri0e! o)
an asset" It is t&e lo3er o) relacement cost an! reco0era6le amount on t&e
measurement !ateH 3it& reco0era6le amount 6eing t&e &ig&er o) 0alue in use an! net
reali@a6le 0alue"
+=
A term commonl( use! 6( 0aluators is 8)air mar4et 0alue9" T%e 'nternational =lossar( of 0usiness
Valuation Terms !e)ines )air mar4et 0alue as 8t&e riceH e;resse! in terms o) cas& eFui0alentsH at
3&ic& roert( 3oul! c&ange &an!s 6et3een a &(ot&etical 3illing an! a6le 6u(er an! a
&(ot&etical 3illing an! a6le sellerH acting at armIs lengt& in an oen an! unrestricte! mar4etH 3&en
neit&er is un!er comulsion to 6u( or sell an! 3&en 6ot& &a0e reasona6le 4no3le!ge o) t&e rele0ant
)acts9 Aem&asis a!!e!B"
+/
T&ese inclu!e some mem6ers o) t&e Cana!ian Accounting Stan!ar!s Boar!H 3&o 6elie0e t&at t&e
term 8)air 0alue9 is a source o) muc& misun!erstan!ing" See also Appraisal 'nstitute +esponse; Fair
Value Measurements E4posure 1raftH Setem6er $H +,,=H su6mitte! to t&e FASBH ages = an! $C5"
/+
*/" T&e term is not !e)ine! or use! in IASB stan!ar!s" T&e a6o0e !e)inition is essentiall(
t&at set out an! e;laine! in t&e U"2" ASBIs Statement of Principles for Financial
+eportingH c&ater 1H an! is also 4no3n as 80alue to t&e 6usiness9"
*1" T&e U"2" Statement of Principles for Financial +eporting also e;lains t&at t&e arallel
6asis )or lia6ilities is 8relie) 0alue9 Aaragra& 1"*B" It &as 6een roose! t&at t&e relie)
0alue measurement 6asis )or a lia6ilit( 6e !e)ine! as t&e &ig&er o) current consi!eration
amount an! settlement amountH 3it& settlement amount 6eing !e)ine! as t&e lo3er o)
t&e current cost o) er)ormance an! t&e current cost o) release )rom t&e lia6ilit("
+1
+1
An!re3 Lennar!H Lia!ilities and %o& to account for t%em; an e4plorator( essa(H eseciall(
aragra&s .+C.." T&is aer also ro0i!es insig&ts into t&e alication o) net reali@a6le 0alueH 0alue
in use an! !eri0al 0alue concets to lia6ilities"
/.
C!a"ter 4 # +enera) Con'e"tua) Ana)y$i$ / Mar0et v$. Entity S"e'i%i'
Mea$urement O-&e'tive$
A""roa'! to Con'e"tua) Ana)y$i$
*$" T&e concetual anal(sis is set out in t&e )ollo3ing stesG
AaB C&aters = an! / ro0i!e a general concetual anal(sis o) t&e roose!
un!erinnings o) measurement o6-ecti0es t&at are )un!amental to assessing 3&at
alterati0e measurement 6ases urort to reresentH an! t&ere)oreH to assessing
t&eir rele0ance )or measuring assets an! lia6ilities on initial recognition"
+$
T&is
aer rooses t&at t&ere are t3o )un!amental sources o) !i))erences 6et3een
asset an! lia6ilit( measurement 6ases on initial recognitionG AiB mar4et 0ersus
entit( seci)ic measurement o6-ecti0esH an! AiiB !i))erences in !e)ining t&e 0alue
a))ecting roerties o) assets an! lia6ilities 3it&in ercei0e! entr( 0alueH e;it
0alueH an! mar4et 0alue conte;ts" T&ese t3o sources are e;amine! along 3it&
t&eir roose! imlications )or measurement on initial recognition"
A6B C&ater 1 ro0i!es a general concetual anal(sis o) relia6ilit(" T&is in0ol0es
i!enti)(ing an! a!!ressing t&e 6asic )actors t&at limit &o3 3ell measurements
are a6le to reresent 3&at t&e( urort to reresent"
C&ater $ t&en anal(@es eac& o) t&e i!enti)ie! measurement 6ases" T&e general
concetual anal(sis o) c&aters =C1 ro0i!es t&e )rame3or4 )or consi!ering t&e
comarati0e merits an! limitations o) eac& o) t&e i!enti)ie! 6ases )or measuring assets
an! lia6ilities on initial recognition"
*5" T&e anal(sis in c&aters =C/ rocee!s on t&e assumtion t&at assets an! lia6ilities are
caa6le o) relia6le measurement on initial recognition un!er all i!enti)ie! measurement
6ases" T&is simli)(ing assumtion is ma!e to )acilitate consi!eration o) t&e 6asic
economic roerties o) measurement alternati0es 3it&out 6eing !istracte! 6( relia6ilit(
+$
T&e term 8rele0ance9 is use! in t&e )ollo3ing anal(sis in a general sense to incororate t&e
Fualitati0e c&aracteristics o) un!erstan!a6ilit(H rele0anceH an! comara6ilit( t&at &a0e 6een !escri6e!
in aragra&s ./C.* an! =/"
/=
issues" Issues relating to t&e a6ilities o) measurement 6ases to meet t&e recognition
con!ition )or relia6le measurement are a!!resse! in c&ater 1"
Mar0et v$. Entity S"e'i%i' Mea$urement O-&e'tive$
Market Value Objective
**" Un!er t&e mar4et 0alue measurement o6-ecti0eH an entit( loo4s to mar4et rices o)
assets an! lia6ilitiesH 3&ic& are 6ase! on mar4et e;ectations 3it& resect to t&e
amountsH timing an! uncertaint( o) )uture cas& )lo3s" An entit( seci)ic measurement
o6-ecti0e loo4s to t&e e;ectations o) management o) t&e reorting entit(" T&ese
e;ectations ma( !i))er in some signi)icant resects )rom t&ose o) t&e mar4et" A
measurement ma( 6e urel( mar4et 6ase! or urel( entit( seci)ic" Alternati0el(H some
asects o) a articular measurement coul! 6e )oun!e! on entit( seci)ic e;ectations
an! ot&er asects on mar4et e;ectations A)or e;amleH a resent 0alue estimation o) t&e
0alue o) an asset mig&t re)lect entit( managementIs estimates o) t&e timing an! amounts
o) )uture cas& )lo3s !iscounte! at mar4et interest ratesB" T&ere)oreH it is imortant to
!etermine 3&et&erH or in 3&at resectsH a measurement 6asis is )oun!e! on mar4et or
entit( seci)ic e;ectations an! assumtions" T&e e0aluation o) t&e aroriateness o)
t&e mar4et 0ersus an entit( seci)ic measurement o6-ecti0e reFuires t&at t&e essential
roerties o) eac& 6e clearl( !e)ine! in relation to t&e ot&er"
#,," A comarison o) entit( seci)ic an! mar4et measurement o6-ecti0es starts 3it& t&e )act
t&at in!i0i!ual mar4et articiants &a0e t&eir o3n 0ie3s an! e;ectations a6out
in!i0i!ual assets an! lia6ilities" Di))erent entities can 6e e;ecte! to &a0e !i))erent
oinions o) t&e 0alue o) an asset or lia6ilit( at an( gi0en time" Mar4et e;c&ange
transactions ser0e to resol0e t&e !i))erent e;ectations an! ris4 re)erences o) in!i0i!ual
entities into a single rice at an( oint in time" It is imortant to un!erstan! &o3 mar4et
rocesses 3or4 to ac&ie0e t&is resolutionH 6ecause t&is &els in i!enti)(ing t&e essential
!i))erences in t&e roerties o) mar4et an! entit( seci)ic o6-ecti0es" T&ese roerties
ma( t&en 6e e0aluate! against t&e criteria set out at aragra&s +5C/="
//
Market Prices and Efficient Markets
#,#" Finance literature re)ers to t&e 8e))icient mar4et rice9H 3&ic& is usuall( !e)ine! as t&e
rice t&at )ull( an! 3it&out 6ias imoun!s all u6licl( a0aila6le in)ormation" In an
e))icient mar4etH cometiti0e articiants 3ill !ri0e t&e mar4et rice o) an asset to an
eFuili6rium rice t&at re)lects t&e e;ectation t&at t&e asset 3ill earn t&e current
a0aila6le mar4et rate o) return )or eFui0alent ris4" In ot&er 3or!sH a 6u(er in an
e))icient mar4et can e;ect to earn t&e current mar4et rate o) return relati0e to t&e
mar4etIs assessment o) t&e )uture cas& )lo3s an! t&e ris4 ta4enH no more an! no less"
+5
All assets an! lia6ilities tra!e! in e))icient mar4ets 3ill &a0e t&eir mar4et rices
!etermine! on t&e 6asis o) t&is e;ectationH 6ecause an( e;ectation o) a !i))erent
return 3ill 6e Fuic4l( ar6itrage! a3a(" SuoseH )or e;amleH t&at u6licl( a0aila6le
in)ormation in!icates t&at a tra!e! securit( is un!er rice!H t&at isH t&at it 3ill earn a
return t&at is suerior to t&e current mar4et rate o) return t&at is a0aila6le in t&e
mar4etlace )or eFui0alent ris4" It can 6e e;ecte! t&at 6u(ers 3ill imme!iatel( enter
t&e mar4et to acFuire t&at securit(H t&us 6i!!ing u t&e rice until it reac&es t&e
eFuili6rium rice at 3&ic& it is e;ecte! to (iel! t&e current mar4et ris4Ca!-uste! rate o)
return"
#,+" In an e))icient mar4et t&e !i0erse e;ectations an! ris4 re)erences o) otential 6u(er
an! seller interests are resol0e! into a single mar4et eFuili6rium rice" T&is eFuili6rium
rice 3ill re)lect t&e mar4etIs e;ectation o) t&e &ig&est an! 6est use o) an assetH in t&e
sense t&atG
arties 3&o &a0e &ig&er ri0ate e;ectations o) t&e 0alue o) t&e asset At&at isH
6elie0e t&at it is un!er rice!B 3ill &a0e acFuire! itH an! ma( &a0e entere! into
contractual commitments or otions t&at 3ill increase in 0alue i) t&e asset mar4et
rice increasesJ an!
+5
SeeH )or e;amleH Ste&en ?" PenmanH Financial Statement Anal(sis and Securit( ValuationH
ages $,C$#H )or a 6rie) !escrition o) t&is e))icient mar4ets rocess"
/1
arties 3&o &a0e lo3er ri0ate e;ectations At&at isH 6elie0e t&at it is o0errice!B
3ill &a0e !isose! o) t&e assetH an! ma( &a0e entere! into contractual commitments
or otions t&at 3ill increase in 0alue i) t&e asset mar4et rice !eclines"
#,." O) courseH as e0ents un)ol! an! ne3 in)ormation 6ecomes a0aila6leH articiantsI
ositions an! e;ectations 3ill c&angeH so t&at e))icient mar4et rices 3ill 6e constantl(
a!-usting to3ar!s ne3 eFuili6riums" In an e))icient mar4etH an itemIs eFuili6rium rice
3ill re)lect mar4et articiantsI collecti0e assessment o) all in)ormation a0aila6le in t&e
mar4etlace"
#,=" In e))icient mar4etsH caital is )ungi6le an! mo0es 6et3een in0estment oortunitiesH so
t&at rices o) all mar4et tra!e! assets an! lia6ilities re)lect t&e same e;ecte! return )or
eFui0alent ris4 at an( gi0en !ate" AgainH an( im6alances in mar4et return e;ectations
as 6et3een !i))erent in0estments 3ill 6e Fuic4l( ar6itrage! a3a("
#,/" ?o3e0erH t&ere are man( cases in 3&ic& assets an! lia6ilities !o not &a0e o6ser0a6le
mar4et rices in e))icient mar4etsH an! not man( mar4ets are )ull( e))icient" T&ere is
also su6stantial e0i!ence o) 8rice 6u66les9 in 3&ic&H in retrosect at leastH it seems t&at
e0en 3ell regulate!H oen an! acti0e mar4ets 3ere !ecei0e! or !i! not )ull( imoun!
a0aila6le in)ormation" Man( asset an! lia6ilit( e;c&anges ta4e lace in mar4ets t&at are
su6-ect to some imer)ections"
#,1" Some Fuestion t&e rele0ance o) mar4et rices )or accounting uroses gi0en t&eir
0ulnera6ilit( to mar4et imer)ections an! ossi6le irrational 6e&a0iorH articularl( 3&en
seculations lea! to 8rice 6u66les9" Some &a0e a!0ocate! allo3ing a!-ustments to tr(
to re!uce reorte! 0olatilit( an! o0erstate!H seculati0e mar4et 0alues" Suc&
a!-ustments must necessaril( in0ol0e AiB ta4ing a !i))erent 0ie3 to t&at o) t&e mar4etH or
AiiB instituting some ar6itrar( a!-ustment rocessH suc& as some a0eraging o) mar4et
0alues o0er some time erio!" T&e )ormer in0ol0es su6stituting an entit( seci)ic
measurementH an! is t&ere)ore to 6e e0aluate! in consi!ering entit( seci)ic alternati0es
to )air 0alue" %it& resect to AiiBH an( a!-ustment rocessH suc& as a0eragingH must
/$
necessaril( 6e ar6itrar( an! su6-ecti0e" It results in secon! guessing t&e mar4et 6(
su6stituting t&e results o) t&e a!-ustment rocess )or t&e -u!gment o) t&e mar4etlace"
Some &a0e conten!e! t&at mar4et rices ten! to )ollo3 c(clical atternsH 6ut emirical
e0i!ence &as generall( suorte! t&e remise un!erl(ing mar4ets t&eor( t&at mar4et
rices ten! to )ollo3 a 8ran!om 3al49J t&at isH t&at rices ten! to mo0e in an un6iase!
manner in resonse to ne3 in)ormation"
Essential Properties of Market Value
#,$" Base! on t&e a6o0e anal(sisH t&is aer rooses t&at t&e mar4et 0alue measurement
o6-ecti0e is to re)lect t&e rice )or an asset or lia6ilit( t&at 3oul! result )rom an oen
an! acti0e cometiti0e mar4et rocess" It is roose! )or t&e uroses o) !e)ining t&is
o6-ecti0e t&at 8mar4et9 6e !e)ine! as )ollo3sG
A !od( of kno&ledgea!le) &illing) arm:s lengt% parties carr(ing on sufficientl(
e4tensive e4c%ange transactions in an asset or lia!ilit( to ac%ieve its
e*uili!rium price) reflecting t%e market e4pectation of earning or pa(ing t%e
market rate of return for commensurate risk on t%e measurement date6
T&is is t&e rice t&at 3oul! 8clear t&e mar4et9H t&at isH t&e rice t&at 3oul! eFuate
sul( an! !eman! )or t&e asset or lia6ilit( on t&e measurement !ateH assuming a 6o!(
o) 4no3le!gea6leH 3illingH armIs lengt& 6u(ers an! sellers"
#,5" T&e roose! mar4et 0alue measurement o6-ecti0e &as as its starting oint a
con0entional !ictionar( !e)inition o) 8mar4et9" >e!ster:s Enc(clopedic $na!ridged
1ictionar( of t%e Englis% Language A#*5*B inclu!es t&is !e)inition 8K a 6o!( o)
ersons carr(ing on e;tensi0e transactions in a articular commo!it("9
+*
T&is 6asic
!e)inition is e;an!e! a6o0e to incororate t&e a6o0e mar4et rice eFuili6rium
con!ition an! t&e accete! Fualities o) 8)air 0alue9 At&at isH t&e in0ol0ement o)
4no3le!gea6leH 3illingH armIs lengt& artiesB"
+*
T&is is one o) a num6er o) !e)initions o) 8mar4et9" T&e a6o0e !e)inition )ocuses on 3&at comrises a
mar4etH 3&ic& is to 6e !istinguis&e! )rom ot&er common uses o) t&e 3or!H )or e;amleH to mar4et
Aattemt to sellB a goo! or ser0ice"
/5
#,*" T&e meaning to 6e ascri6e! to t&e 3or! 84no3le!gea6le9 in t&e a6o0e roose!
!e)inition is central to un!erstan!ing t&e mar4et 0alue measurement o6-ecti0e" It is
roose! t&at t&e o6-ecti0e s&oul! 6e to re)lect t&e rice t&at 3oul! result in a mar4et o)
3illing armIs lengt& arties 3&o &a0e access to u6licl( a0aila6le in)ormation an!
e;ertise" Some ma( Fuestion 3&et&er 84no3le!gea6le9 s&oul! 6e !e)ine! in terms o)
ri0ate in)ormation as 3ell as u6licl( a0aila6le in)ormationH 3&ic& &as imlications )or
t&e treatment o) in)ormation as(mmetr(" In)ormation as(mmetr( e;ists 3&en some
mar4et articiants &a0eH or are t&oug&t 6( ot&ers to &a0eH in)ormation on t&e 0alue o)
an asset or lia6ilit( t&at is not a0aila6le to ot&er articiants" T&e concet o)
84no3le!gea6le9 an! issues relating to in)ormation as(mmetr( are )urt&er a!!resse! in
later sections o) t&is aer AseeH in articularH aragra&s #5.C#5$ an! +.*C+=,B"
##," T&ere ma( also 6e Fuestions as to 3&at meaning to ascri6e to t&e term 83illing armIs
lengt& arties9 in !e)ining t&e mar4et 0alue measurement o6-ecti0e" T&e term is use! in
t&e conte;t o) resuming t&at t&e a6ilities an! moti0ations o) articiants are
!etermine! 6( cometiti0e mar4et con!itions an! t&eir in!i0i!ual ro)it ma;imi@ation
goalsH ris4 re)erencesH an! e;ectations" T&e mar4et 0alue o6-ecti0e resumes t&at
articiants are not un!er an( comulsion to transact at !isa!0antage! rices as a resultH
)or e;amleH o) 6eing un!er t&e control o) anot&er art(H or 6eing su6-ect to legal
constraints or insol0enc( con!itions"
Fair Value in +elation to Market Value
###" T&e o6-ecti0e o) )air 0alueH as !e)ine! an! e;laine! earlier in t&is aer Asee aragra&
*+BH is to reresent t&e mar4et 0alue o) an asset or lia6ilit( on a measurement !ate" I)
t&ere is no o6ser0a6le mar4et riceH t&e o6-ecti0e o) )air 0alue is to estimate 3&at t&e
mar4et rice 3oul! 6e i) a mar4et )or t&at asset or lia6ilit( e;iste! on t&e measurement
!ate" Potential limitations in relia6l( estimating )air 0alue At&at isH in )ait&)ull(
reresenting t&e mar4et measurement o6-ecti0eB are e;amine! in c&ater $"
/*
Entity Specific Measurement Objectives
##+" An entit( seci)ic measurement o) an asset or lia6ilit( ma( !i))er )rom its mar4et rice
6ecause o) !i))erent e;ectations as to amounts or timing o) )uture cas& )lo3sH ris4
assessments or re)erencesH or !iscount rates" An( measurement o) an asset or lia6ilit(
t&at !i))ers )rom its mar4et 0alue must 6e 6ase!H e;licitl( or imlicitl(H on entit(
seci)ic e;ectations or assumtions t&at !i))er )rom t&ose o) t&e mar4et" To illustrateG
AaB Suose t&at an entit( recogni@es a lia6ilit( )or 3arranties on t&e ro!ucts it
sells" An entit( seci)ic measure o) t&e lia6ilit( 3oul! !i))er )rom its mar4et
0alue i) management o) t&e entit( e;ects to ser0ice t&e 3arranties o6ligation at
a lo3er cost t&an is imlicit in t&e mar4et rice"
A6B Suose t&at an entit( recogni@es an asset A)or e;amleH lant or eFuimentB at a
costC6ase! amount t&at is more or less t&an its mar4et 0alue on t&e !ate o) initial
recognition" Per&as t&e entit( constructe! t&e asset itsel) at a cost t&at is more
or less t&an t&e amount )or 3&ic& it coul! &a0e urc&ase! t&e asset in t&e
mar4etlace" In t&is caseH t&e entit( must 6e resuming reco0era6ilit( )rom
)uture cas& generating acti0ities t&at !i))ers )rom t&e &ig&est an! 6est use
e;ectation imlicit in t&e mar4et rice" For e;amleH i) t&e recogni@e! amount
e;cee!s mar4et 0alueH t&en t&e entit( ma( 6e e;ecting t&at it can ac&ie0e
&ig&er cas& in)lo3s t&an t&e mar4et e;ectsH or er&as it is content to earn a
rate o) return t&at is less t&an t&e mar4et rate o) return )or eFui0alent ris4"
##." CON $ o6ser0es t&at an entit( seci)ic alternati0e to a mar4etC6ase! measurementG
AaB a!!s )actors t&at are not contemlate! in t&e rice o) a mar4et transaction )or t&e
asset or lia6ilit( in FuestionH A6B inserts assumtions ma!e 6( t&e entit(Is
management in t&e lace o) t&ose t&at t&e mar4et 3oul! ma4eH an!:or AcB
e;clu!es )actors t&at 3oul! 6e contemlate! in t&e rice o) a mar4et transaction"
State! !i))erentl(H eac& alternati0e eit&er a!!s c&aracteristics to t&e asset or
lia6ilit( )or 3&ic& mar4etlace articiants 3ill not a( or e;clu!es
c&aracteristics )or 3&ic& mar4etlace articiants !eman! an! recei0e
a(ment"9 Aaragra& .#B
1,
##=" T&ere are a num6er o) reasons 3&( t&e cas& )lo3s t&at an entit( e;ects to recei0e )rom
a articular assetH or to a( on a articular lia6ilit(H ma( !i))er )rom t&e amounts
imlicit in t&e mar4et rice o) t&e asset or lia6ilit(" T&ese inclu!e
.,
G
AaB T&e entit(Is management mig&t inten! a !i))erent use o) an assetH or a !i))erent
settlement o) a lia6ilit(H t&an t&e &ig&est an! 6est use imlicit in t&e mar4et
rice" As an e;amleH an entit(Is management mig&t inten! to oerate a
roert( as a 6o3ling alle( Aan! 6ase its 0alue on initial recognition on t&e
resent 0alue o) cas& )lo3s t&at it 6elie0es 3ill 6e generate! )rom t&at 6usinessBH
3&ile t&e mar4etlace ma( consi!er its &ig&est an! 6est use to 6e a ar4ing lot"
ManagementIs !i))erent intentions ma( 6e 6ase!H )or e;amleH on its 6elie) t&at
it &as insi!e in)ormation or e;ertise t&at is suerior to t&at o) ot&er mar4et
articiants"
A6B T&e entit(Is management mig&t inten! to accet an! manage a lia6ilit(H suc& as
a ro!uct 3arrant(H internall( in t&e e;ectation t&at it 3ill !o so more
e))icientl( t&an is imlicit in t&e mar4et rice"
AcB T&e entit( mig&t &ol! secial re)erencesH suc& as ta; or @oning 0ariances in
resect o) a roert(H t&at are not a0aila6le to ot&ers in t&e mar4etlace"
A!B T&e entit( mig&t &ol! in)ormationH tra!e secretsH or rocesses t&at its
management e;ects 3ill ena6le it to reali@eH or a0oi! a(ingH cas& )lo3s t&at
!i))er )rom t&e e;ectations o) ot&ers in t&e mar4etlace"
AeB T&e entit( mig&t e;ect to 6e a6le to reali@e or a( amounts t&roug& t&e use o)
internal resources" For e;amleH an entit( t&at manu)actures materials t&at it
uses in articular rocesses ma( 6e a6le to manu)acture t&ose materials at a cost
lo3er t&an t&e mar4et rice c&arge! to ot&ers" An entit( t&at c&ooses to satis)( a
lia6ilit( 3it& internal resources ma( a0oi! t&e mar4u or anticiate! ro)it
c&arge! 6( outsi!e contractors"
##/" Eac& o) t&e items liste! in t&e rece!ing aragra& reresents an a!0antage or
!isa!0antage t&at an entit( ercei0es t&at it &as relati0e to ot&ers in t&e mar4etlace"
.,
T&e )ollo3ing !iscussion is 6ase! on t&at in CON $H aragra&s .+ an! .."
1#
Certainl( man( entities 3ill &a0e some a!0antages an! !isa!0antages relati0e to ot&ers
in t&e mar4etlace" Onl( time 3ill tell 3&et&er an entit(Is e;ectations regar!ing )uture
cas& )lo3s 3ill 6e reali@e!H inclu!ing t&ose attri6uta6le to an( a!!itionalH unrecogni@e!
intangi6le assets" T&e Fuestion is 3&et&erH an! i) so 3&enH an entit(Is e;ecte!
a!0antages or !isa!0antages relati0e to mar4et 0alues s&oul! 6e recogni@e! an!
measure!" In articularH s&oul! asset an! lia6ilit( measurement on initial recognition
re)lect an entit(Is e;ecte! a!0antages or !isa!0antages t&at are not )actore! into
mar4et ricesH or s&oul! measurement re)lect t&e mar4etIs e;ectations'
##1" %&en an entit( measures an asset or lia6ilit( on initial recognition at its mar4et riceH
an( entit( seci)ic a!0antage or !isa!0antage relati0e to t&e mar4et rice 3ill 6e
reorte! in net income as 0alue a!!e! or lost in su6seFuent erio!s 3&en it is
recogni@e! in t&e mar4etlace" Mar4etlace recognition 3ill 6e re)lecte! in su6seFuent
erio!s as reali@e! gains or lossesH or as unreali@e! gains or losses i) t&e mar4et 0alue o)
t&e asset or lia6ilit( su6seFuentl( c&anges to recogni@e t&e a!0antage or !isa!0antage
an! t&e asset or lia6ilit( is reCmeasure! at t&at 0alue" In contrastH 3&en an entit(
measures an asset or lia6ilit( on initial recognition using an entit( seci)ic
measurementH t&e entit(Is anticiate! a!0antages or !isa!0antages are em6e!!e! in t&e
initial measurement o) t&e asset or lia6ilit(" In t&at caseH t&e net income reorte! in
su6seFuent erio!s 3ill 6e a))ecte! onl( to t&e e;tent t&at amounts reali@e! or settle! on
t&e asset or lia6ilit( ro0e to 6e !i))erent )rom its entit( seci)ic 0alue"
.#
Management 'ntent
##$" Some 6elie0e t&at t&e measurement o) assets or lia6ilities on initial recognition s&oul!
6e consistent 3it& managementIs intentions )or t&e use or reali@ation o) an assetH or 3it&
resect to &o3 a lia6ilit( 3ill 6e settle!" ManagementIs intentions can lea! to
.#
Bot& mar4et 6ase! an! entit( seci)ic measurement o6-ecti0es coul! result in recogni@ing gains an!
losses on initial recognition o) an asset or lia6ilit(" In ot&er 3or!sH neit&er o6-ecti0e rules out t&e
ossi6ilit( o) an entit( acFuiring an asset or incurring a lia6ilit( )or consi!eration t&at is more or less
t&an t&e measurement o) t&e asset or lia6ilit( on initial recognition" ?o3e0erH t&e circumstances in
3&ic& gains an! losses arise on initial recognitionH an! t&eir amountsH coul! !i))er signi)icantl( as
6et3een mar4et an! entit( seci)ic measurements"
1+
e;ectations t&at !i))er )rom t&ose imlicit in t&e mar4et rice o) t&e asset or lia6ilit("
For e;amleH measurement o) a 6uil!ing on initial recognition at an amount in e;cess o)
its mar4et 0alue 3oul! result 3&en management inten!s to use t&e 6uil!ing )or a
urose t&at it 6elie0es 3ill (iel! suerior cas& )lo3s to t&ose resume! in t&e
e;ectation o) &ig&est an! 6est use imlicit in t&e mar4et rice" As anot&er e;amleH an
entit(Is intention to use a !eri0ati0e as a &e!ge against )uture rice increases o) a
commo!it( to 6e urc&ase! at a )uture time is reasone! 6( some to -usti)( measurement
o) t&e commo!it( on its acFuisition at t&e rice 3&en t&e &e!ge 3as ta4en out rat&er
t&an at its mar4et rice on t&e !ate o) acFuisition"
##5" Some 6elie0e t&at measurements re)lecting management intent are more use)ul to
in0estors an! cre!itors t&an mar4et 0alues" Arguments ma!e in suort o) t&is 6elie)
inclu!eG
AaB Management 4no3s more a6out its 6usiness t&an t&e mar4et generall(" An
entit( seci)ic measurement o) assets an! lia6ilities in!icates 3&at management
e;ects t&e resent 0alue o) t&e entit(Is )uture cas& )lo3s to 6eH 3&ic& some
users o) )inancial statements 6elie0e is more &el)ul t&an mar4et e;ectations in
constructing a 0aluation o) t&at entit("
A6B Management 3oul! 6e &el! accounta6le relati0e to its o3n lans an!
e;ectationsH 3it& t&e result t&at !i))erences )rom its e;ectations 3ill 6e
re)lecte! in reorte! net income o) erio!s su6seFuent to t&e initial
measurement o) t&e assets an! lia6ilities"
##*" Ot&ers 6elie0e t&at accounting measurements 6ase! on managementIs intent are not as
use)ul as mar4et 0alues to in0estors an! cre!itors" Arguments in suort o) t&is 6elie)
inclu!eG
AaB T&e mar4et 0alue o) an asset or lia6ilit( re)lects t&e collecti0e 4no3le!ge an!
e;ectations o) all mar4et articiantsH rat&er t&an t&e 4no3le!geH intent an!
e;ectations o) t&e reorting entit(" T&e strengt& o) t&e mar4et 0alue
measurement o6-ecti0e is t&at it reresents t&e -u!gment o) an oen an! acti0e
1.
cometiti0e mar4et rocess in0ol0ing 4no3le!gea6le an! 3illing armIs lengt&
articiants on t&e 6asis o) all u6licl( a0aila6le in)ormation"
A6B Managements 3oul! 6e &el! accounta6le relati0e to imartial mar4et 0alues )or
assets an! lia6ilities t&at are comara6le 6et3een entities an! o0er time" In ot&er
3or!sH similar assets or lia6ilities 3ill &a0e similar mar4et 0alues on a
measurement !ate" In contrastH management intent 6ase! measurements o)
similar assets or lia6ilities ma( 6e signi)icantl( !issimilarH re)lecting !i))erences
in entit( intentions an! e;ectations" It can 6e 0er( !i))icult or imossi6le )or
e;ternal users to i!enti)( an! e0aluate t&e e))ects o) t&ese !i))erences on a
measurement !ate in or!er to ma4e 0ali! comarisons 6et3een entities an! o0er
time"
#+," T&e e;clusion o) management intent )rom accounting measurement un!er t&e mar4et
measurement o6-ecti0e s&oul! not 6e construe! to 6e Fuestioning entit( managementsI
rationalit( or goo! )ait& in e;ercising t&eir !iscretion an! -u!gment in ma4ing entit(
seci)ic measurements" Suorters o) entit( seci)ic measurement o6-ecti0es 6elie0e
t&at rational management 6e&a0ioural resumtions can ro0i!e an a!eFuate 6asis )or
ensuring t&at in!i0i!ual entit( intentions an! e;ectations are 3it&in rationall(
-usti)ia6le 6oun!s in relation to current economic con!itions an! resources" T&is isH in
artH a Fuestion o) t&e relia6ilit( )or e;ternal )inancial reorting uroses o)
measurement 6ases t&at rel( on rational management e;ectationsH 3&ic& Fuestion is
consi!ere! in assessing t&ese 6ases in c&ater $" Putting relia6ilit( consi!erations asi!eH
t&e essential Fuestion in t&is section is 3&et&er an entit( seci)ic measurement
o6-ecti0eH 3&ic& re)lects management intentionsH coul! &a0e suerior rele0ance to t&e
mar4et 0alue o6-ecti0e in measuring assets an! lia6ilities on initial recognition )or
e;ternal )inancial reorting uroses"
#+#" In consi!ering 3&at role management intent s&oul! la( in accounting measurementH it
is imortant to consi!er t&e e;tent to 3&ic& it &as 6een accete! or re-ecte! in ot&er
asects o) accountingH an! an( 6ases ro0i!e! )or t&is accetance or re-ection" T&e
)rame3or4s o) t&e IASB an! some national stan!ar! setters !o ma4e some re)erences to
1=
intent an! e;ectations" ?o3e0erH t&e )rame3or4s eit&er !o not seci)( 3&ose intent or
e;ectations s&oul! 6e alie!H or t&e( !iscuss intent an! e;ectations in a conte;t t&at
!oes not ro0i!e !irection on t&eir role in accounting measurement" Some in!i0i!ual
accounting stan!ar!s eit&er reFuire or ermit entities to measure assets an! lia6ilities on
t&e 6asis o) managementIs intent or e;ectationsH 3&ile ot&ers reFuire or ermit a
mar4et 6ase! measurement"
.+
T&ere seems to 6e no reasone! concetual 6asis -usti)(ing
t&e aarentl( con)licting ositions ta4en in t&ese stan!ar!s"
..
'omparing Market and Entity Specific Objectives
#++" T&e )ollo3ing ta6le ro0i!es summar( o6ser0ations concerning t&e alication o) t&e
criteria ot&er t&an relia6ilit( set out in aragra&s +5C/= to mar4et an! entit( seci)ic
measurement o6-ecti0es )or assets an! lia6ilities on initial recognition" T&ese
o6ser0ations are inten!e! to 6e !escriti0e rat&er t&an e0aluati0eJ a reliminar(
e0aluation is resente! in aragra&s #+.C#.," It is em&asi@e! t&at consi!eration o)
t&e general imlications o) relia6ilit( criteria in aragra&s =,C== is not re)lecte! in t&e
o6ser0ations 6elo3 6ut is a!!resse! searatel( in c&ater 1"
Criteria Mar4et o6-ecti0es Entit( seci)ic o6-ecti0es
Ste3ar!s&i
Aaragra&s .#C
..B
Entit( management is
accounta6le against t&e mar4et
0alue o) an asset or lia6ilit( on
initial recognition" Gains or
losses 3ill 6e recogni@e! to t&e
Entit( management is
accounta6le against its o3n
e;ectationsH assumtionsH an!
intentions as t&e( are re)lecte!
in t&e measurement o) assets
.+
E;amles 3it&in t&e 6o!( o) IASB stan!ar!s inclu!e t&e reFuirement in IAS .$H Provisions)
Contingent Lia!ilities and Contingent AssetsH )or an entit( to !etermine a ro0ision 6ase! on its 6est
estimate o) t&e e;ecte! )uture cas& )lo3s reFuire! to settle t&e o6ligationH an! t&e reFuirement in
IAS .*H Financial 'nstruments; +ecognition and MeasurementH )or an entit( to measure certain
)inancial assets an! lia6ilities at )air 0alue Aan! t&e otion to measure ot&ers at )air 0alueB" T&ere are
a num6er o) ot&er e;amles o) 6ot& aroac&es in t&e stan!ar!s o) t&e IASB an! its liaison national
stan!ar! setting artners"
..
One rominent an! contro0ersial issue relating to )air 0alue 0ersus measures re)lecting management
intent on initial recognition o) assets an! lia6ilities is &e!ge accounting" SeeH in articularH t&e
!iscussion o) t&is issue in Eoint %or4ing Grou o) Stan!ar! SettersH 1raft Standard and 0asis for
Conclusions , Financial 'nstruments and Similar 'tems) aragra&s $"#C$"++"
1/
Criteria Mar4et o6-ecti0es Entit( seci)ic o6-ecti0es
e;tent t&at t&e mar4et 0alue o)
an asset Alia6ilit(B on initial
recognition !i))ers )rom t&e
amount t&at &as 6een ai! to
acFuire it Arecei0e! on
incurring itB" T&e e))ects o)
an( entit( seci)ic a!0antages
or !isa!0antages 3ill aear as
a gain or loss onl( 3&en t&e(
are reali@e! or re)lecte! in
mar4et 0alue"
an! lia6ilities on initial
recognition" An entit(Is
ercei0e! a!0antages or
!isa!0antages relati0e to t&e
mar4et 3ill 6e re)lecte! in t&at
measurement"
Un!erstan!a6ilit(
Aaragra& ./B
E))icient mar4ets concets an!
relate! caital mar4ets )inance
literature ro0i!e t&e
)rame3or4 )or un!erstan!ing
t&e economic roerties o) t&e
mar4et 0alue measurement
o6-ecti0e"
T&e un!erstan!a6ilit( o) entit(
seci)ic measurements !een!s
on t&e a!eFuac( o) in)ormation
ro0i!e! a6out managementIs
intentionsH assumtionsH an!
e;ectationsH an! on &o3
measurements are !eri0e! t&e
re)rom"
Rele0ance
Aaragra& .1B
T&e a6ilit( to in)luence
rational economic !ecisions is
6ase! on t&e !ecision
use)ulness Fualities note!
6elo3 Are!icti0e 0alue an!
)ee!6ac4 0alueBH 3&ic& in turn
are )oun!e! on t&e
resumtion t&at a mar4et
0alue &as economic su6stance
6ecause it re)lects t&e results o)
oen mar4et )orces in0ol0ing
4no3le!gea6le an! 3illing
armIs lengt& articiants 3&o
&a0e access to all u6licl(
a0aila6le in)ormation at t&e
measurement !ate"
T&e a6ilit( to in)luence
rational economic !ecisions is
6ase! on t&e !ecision
use)ulness Fualities note!
6elo3 Are!icti0e 0alue an!
)ee!6ac4 0alueBH 3&ic& in turn
are )oun!e! on t&e
resumtion t&at an entit(
seci)ic 0alue imoun!s
in)ormation 4no3n to
management at t&e
measurement !ateH inclu!ing
managementIs ercetion o)
a!0antages or !isa!0antages
accruing to t&e entit( t&at ma(
not 6e 4no3n u6licl("
Pre!icti0e 0alue
Aaragra&s .$C
.5B
Pre!icti0e 0alue is )oun!e! on
e;ectations o) t&e rate o)
return a0aila6le in t&e
mar4etlace )or commensurate
ris4 on t&e measurement !ateH
su6-ect to t&e 0olatilit( arising
)rom t&e ris4s in&erent in t&e
asset or lia6ilit("
Pre!icti0e 0alue is remise! on
t&e e;ectations an!
assumtions o) management o)
t&e reorting entit( on t&e
measurement !ateH an! t&us
3ill !een! on suc& )actors as
in!i0i!ual entit( 4no3le!ge
6asesH ris4 tolerancesH
management otimism or
11
Criteria Mar4et o6-ecti0es Entit( seci)ic o6-ecti0es
essimismH an! ossi6l(H on
incenti0es )or 6iasing suc&
e;ectations an! assumtions"
Fee!6ac4 0alue
Aaragra& .*B
Fee!6ac4 0alue results )rom
t&e comarison o) re0iousl(
e;ecte! mar4et rates o) return
3it& eit&er actual mar4et
outcomes or re0ise! mar4et
e;ectations"
Fee!6ac4 0alue results )rom
t&e comarison o)
managementIs re0ious
e;ectations a6out t&e returns
on an asset or lia6ilit( 3it&
eit&er actual mar4et outcomes
or re0ise! management
e;ectations"
Comara6ilit(
Aaragra& =/B
#" Measurements consistentl(
reresent t&e same economic
roert(H i"e"H t&e mar4etIs
eFuili6rium rice re)lecting t&e
mar4etIs e;ectations o) )uture
cas& )lo3s !iscounte! at t&e
ris4Ca!-uste! rate o) return
a0aila6le on t&e measurement
!ate"
+" Measurements are
una))ecte! 6( &o3 an asset or
lia6ilit( is acFuire! or
incurre!H or 6( t&e nature o)
t&e entit( or its inten!e! use o)
t&e asset or lia6ilit("
Comara6ilit( is !i))icult
6ecause measurements are
6ase! on in!i0i!ual entit(
e;ectationsH assumtionsH an!
intentions t&at are 0aria6le
o0er time an! 6et3een entitiesH
as note! un!er 8re!icti0e
0alue9 a6o0e"
Concets o)
8assets9 an!
8lia6ilities9H an!
t&eir em6o!iment
o) t&e cas&C
eFui0alent
e;ectations
attri6ute
Aaragra&s =1C
=*B
Mar4et 0alue measurement o)
assets an! lia6ilities is
consistent 3it& !e)ine!
)rame3or4 concetsH on t&e
6asis t&at it re)lects t&e
mar4etIs e0aluation o) t&e
amountsH timingH an!
uncertaint( o) cas&CeFui0alent
)lo3s as em6o!ie! in t&e
mar4etIs measure o) t&e
resent 0alue o) e;ecte! cas&
)lo3s !iscounte! )or time an!
ris4 at t&e measurement !ate"
Entit( seci)ic measurement o)
assets an! lia6ilities is
consistent 3it& !e)ine!
)rame3or4 concetsH on t&e
6asis t&at it re)lects
managementIs cas& )lo3
e;ectationsH 3&ic& are su6-ect
to t&e consi!erations note!
un!er 8re!icti0e 0alue9
a6o0e"
Caital
maintenance
Aaragra&s /,C/#
Caital maintenance roerties
are 6ase! on measuring caital
Aassets less lia6ilitiesB on initial
recognition at an amount t&at
3ill maintain caitalIs a6ilit(
Caital maintenance roerties
!een! on t&e articular
measurement 6asis selecte!
an! on management
e;ectationsH assumtionsH an!
1$
Criteria Mar4et o6-ecti0es Entit( seci)ic o6-ecti0es
to earn t&e e;ecte! mar4et
rate o) return )or
commensurate ris4"
intentions use! in al(ing t&at
6asis"
Cost:6ene)it
constraints
Aaragra&s /+C
/.B
Not su6-ect to in)orme!
anal(sis 3it&out consi!eration
o) seci)ic circumstances"
Not su6-ect to in)orme!
anal(sis 3it&out consi!eration
o) seci)ic circumstances"
A Preliminary Evaluation
#+." It ma( 6e reasone! t&at 6ot& mar4et an! entit( seci)ic measurement o6-ecti0es can
ro0i!e use)ul in)ormation )or in0estorsI an! ot&er usersI economic !ecision uroses"
In articularG
AaB A )inancial statement userIs a6ilit( to re!ict t&e cas& )lo3 generating a6ilit( o)
an entit( ma( 6e en&ance! 6( &a0ing 6ot& entit( managementIs Aentit( seci)icB
an! t&e mar4etIs 0aluation o) an asset or lia6ilit("
A6B A )inancial statement userIs a6ilit( to assess t&e ste3ar!s&i o) management )or
t&e resources entruste! to it ma( 6e imro0e! 6( &a0ing in)ormation an!
un!erl(ing measurements o) assets an! lia6ilities on initial recognition t&at
re)lect 6ot& management an! mar4et e;ectations" A user ma( t&en 6e a6le to
e0aluate management 6ot& against its o3n e;ectations an! t&ose o) t&e
mar4etlace"
#+=" ?o3e0erH 3&en t&e entit( seci)ic an! mar4et e;ectations )or an asset or lia6ilit(
!i))erH it is not ossi6le to &a0e t&e 6ene)its o) 6ot& in a single measurement" T&is
3oul! aear to lea0e t3o ossi6ilitiesG
AaB One measurement o6-ecti0e or t&e ot&er is more aroriate )or all assets an!
lia6ilities on initial recognition in all circumstances"
A6B Eac& measurement o6-ecti0e is aroriate on initial recognition in !i))erent
circumstances or )or !i))erent t(es o) assets or lia6ilities"
15
#+/" Possi6ilit( A6B 3oul! reFuire a soun! 6asis )or !istinguis&ing 3&en one o6-ecti0e or t&e
ot&er is more aroriate on initial recognition" Anal(sis to t&is oint !oes not suggest
an( 6ases )or ma4ing t&is !istinction" ?o3e0erH t&e ossi6ilit( s&oul! not 6e lost sig&t
o)H an! s&oul! 6e 4et in min! in anal(@ing t&e i!enti)ie! alternati0e measurement 6ases
in c&ater $"
.=
In rincileH ossi6ilit( A6B seems li4el( to 3arrant serious consi!eration
onl( i) it cannot 6e conclu!e! t&at one or ot&er o) t&ese t3o 6roa! measurement
o6-ecti0es is concetuall( suerior )or all assets an! lia6ilities in all circumstances"
#+1" %it& resect to ossi6ilit( AaBH t&e c&oice 6et3een t&e mar4et an! entit( seci)ic
o6-ecti0es on initial recognition ma( 6e ut in t&e )orm o) t&e )ollo3ing FuestionG
Assuming t&at eac& o6-ecti0e can 6e measure! 3it& acceta6le relia6ilit( on
initial recognition o) an asset or lia6ilit(H s&oul! a rational in0estor or ot&er
)inancial statement user 6e e;ecte! to re)er measurement on t&e 6asis o) t&e
mar4et o6-ecti0e or t&e entit( seci)ic o6-ecti0e'
#+$" T&e )oregoing anal(sis in!icates t&at t&e !istinction 6et3een mar4et an! entit( seci)ic
o6-ecti0es is not -ust imortantH 6ut )un!amental to measurement o) assets an! lia6ilities
on initial recognition" A clear !ecision nee!s to 6e ma!e 6et3een t&ese t3o o6-ecti0es"
#+5" T%is paper proposes) !ased on t%e a!ove conceptual anal(sis) t%at t%e market
measurement o!/ective %as important *ualities t%at make it superior to entit( specific
measurement o!/ectives) at least on initial recognition6 Primar( among t%ese *ualities
is t%at competitive market forces &ork to resolve diverse e4pectations of various
entities: managements to a single price t%at impartiall( reflects all pu!licl( availa!le
information on an( given measurement date6 As a result) market values of assets and
lia!ilities all reflect t%e present value of future e4pected cas% flo&s to (ield t%e current
market rate of return for commensurate risk6 T%is gives measurements a *ualit( of
compara!ilit( over time and as !et&een entities6 An entit( specific measurement does
not reflect t%e effects of market forces) !ut rat%er is su!/ect to t%e vagaries of individual
entit( e4pectations) intentions) and assumptions6 T%is is not to den( t%at t%ere are
.=
For e;amleH some &a0e a!0ocate! t&at t&e &istorical cost 6asis is aroriate )or assets t&at are
inuts to ro!ucti0e cas& generating rocessesH 3&ile )air 0alue is aroriate )or )inancial assets"
market vagaries or t%at a particular entit(:s e4pectations ma( prove to !e more correct
t%an t%ose of t%e market6 T%e *uestion comes do&n to &%et%er it is more useful to
financial statement users for assets and lia!ilities to !e measured on initial recognition
on t%e !asis of entit( intentions and e4pectations or on market values6 T%is paper
proposes t%at t%e anal(sis to t%is point indicates t%at t%e more useful financial
statement measurement o!/ective on initial recognition for investors and ot%er e4ternal
users is t%at entities !e measured against market values and su!/ect to t%e discipline of
t%e marketplace) rat%er t%an to entities: individual e4pectations6
#+*" It is em&asi@e! t&at t&is roosition is su6-ect to reCe0aluation 6ase! on )urt&erH more
seci)icH anal(sis to )ollo3H an! alies onl( to measurement on initial recognition"
AlsoH t&e tentati0e 3or4ing conclusion is not inten!e! to !en( t&at t&ere ma( 6e
signi)icant a!!itional in)ormation 0alue to in0estors an! ot&er e;ternal users o) )inancial
statements in 4no3ing t&e intentionsH e;ectationsH an! assumtions o) t&e management
o) an entit( 3&en t&e( !i))er )rom t&ose imlicit in mar4et 0alue on initial recognition"
?o3e0erH t&e a6o0e anal(sis suggests t&at suc& entit( seci)ic in)ormation is more
aroriatel( t&e su6-ect o) )orecasts or sulementar( !isclosuresH rat&er t&an 6eing
t&e 6asis )or measuring assets an! lia6ilities on initial recognition )or e;ternal )inancial
reorting uroses"
#.," Some mig&t 6e temte! to conclu!e t&at t&is tentati0e 3or4ing conclusion s&oul! 6e
eFuall( 0ali! )or reCmeasurements o) assets an! lia6ilitiesH 6ecause t&e )un!amental
concetual anal(sis a6o0e ma( seem to 6e alica6le to 6ot&" ?o3e0erH )urt&er
anal(sis is nee!e! 6e)ore an( conclusions 3it& resect to reCmeasurement coul! 6e
a!0ance!"
C!a"ter 1 # +enera) Con'e"tua) Ana)y$i$ / 2a)ue A%%e'tin. Pro"ertie$ an(
Mar0et Sour'e$
#.#" Tra!itionall(H measurement 6ases &a0e 6een classi)ie! an! e0aluate! in term o) 3&et&er
t&e( are 8entr(9 or 8e;it9 0alues" An entr( 0alue is a measure o) t&e amount )or 3&ic&
an asset coul! 6e 6oug&t or a lia6ilit( coul! 6e incurre!" An e;it 0alue is a measure o)
t&e amount )or 3&ic& an asset coul! 6e reali@e! or a lia6ilit( coul! 6e settle!"
./

#.+" A large 6o!( o) accounting literature &as 6een concerne! 3it& t&e comarati0e merits
an! !ra36ac4s o) 0arious entr( an! e;it 0alue mo!els" In articularH muc& &as 6een
3ritten on cometing t&eories )or t&e 0aluation o) assets an! lia6ilities in0ol0ing AiB
comre&ensi0e current entr( 0alue mo!elsH )or e;amleH as a!0ocate! 6( E!3ar!s an!
Bell
.1
J an! AiiB comre&ensi0e current e;it 0alue mo!elsH )or e;amleH mo!els a!0ocate!
6( C&am6ers
.$
an! 6( Sterling
.5
"
#.." T&e accete! concets o) 8assets9 an! 8lia6ilities9 ma( seem to &a0e an e;it 0alue
orientation 6ecause t&e( are !e)ine! in terms o) )uture economic 6ene)itsH ultimatel(
cas& or cas& eFui0alentsH to )lo3 to an entit( AassetsB or to )lo3 )rom an entit(
Alia6ilitiesB"
.*
It &as 6een reasone! earlier Asee aragra& =5B t&at t&e cas& eFui0alent
e;ectation attri6ute o) assets an! lia6ilities s&oul! 6e t&e )ocus o) accounting
measurement" ?o3e0erH some conten! t&at entr( 0alues 6etter cature t&is attri6ute
t&an e;it 0aluesH in at least some signi)icant situations"
=,

./
T&e roose! !e)initions o) t&ese terms are inten!e! to 6e consistent 3it& general use in accounting
literature" SeeH )or e;amleH !e)initions in 9o%ler:s 1ictionar( for AccountantsH 1
t&
e!ition"
?o3e0erH t&e terms seem not to 6e !e)ine! in IASB or ot&er national stan!ar!s"
.1
E" O" E!3ar!s an! P" %" BellH T%e T%eor( and Measurement of 0usiness 'ncome6
.$
R" E" C&am6ersH Accounting) Evaluation and Economic 0e%aviour) an! Accounting for 'nflation;
Met%ods and Pro!lems6
.5
R" R" SterlingH T%eor( of t%e Measurement of Enterprise 'ncome6
.*
SeeH )or e;amleH t&e IASB !e)initions o) t&ese terms in IASB Frame3or4H aragra& =*"
=,
SeeH )or e;amleH P&ili %" BellH CVA) CCA and CoCoA; <o& Fundamental are t%e 1ifferences?
#.=" T&e anal(sis o) t&e mar4et 0alue measurement o6-ecti0e in t&e re0ious c&ater uts t&e
tra!itional entr(Ce;it 0alue !e6ate into a !i))erent ersecti0e" Seci)icall(H t&e mar4et
0alue o6-ecti0e !oes not en0isage t&at t&ere coul! 6e !i))erent entr( an! e;it mar4et
A)airB 0alues )or t&e same asset or lia6ilit( at t&e same time" T&e !e)inition o) 8)air
0alue9 set out at aragra& 55H reasone! )rom t&e mar4et 0alue o6-ecti0eH is 8t&e amount
)or 3&ic& an asset or lia6ilit( coul! 6e e;c&ange! 6et3een 4no3le!gea6leH 3illing
arties in an armIs lengt& transaction9 Aun!erlining em&asis a!!e!B" T&e )air 0alue o)
an asset or lia6ilit( esta6lis&es t&e entr( 0alue to t&e 6u(er an! t&e e;it 0alue to t&e
seller in t&at mar4et"
=#
It seems )un!amentall( inconsistent 3it& t&e remises o) oen
cometiti0e mar4ets to e;ect t&at i!entical items coul! 6e 6oug&t an! sol! in !i))erent
mar4ets at !i))erent rices at t&e same time" 2no3le!gea6le an! 3illing 6u(ers an!
sellers at armIs lengt& s&oul! 6e e;ecte! to ar6itrage a3a( suc& !i))erences Fuic4l("
#./" T%us) t%e a priori e4pectation reasoned from t%e market value o!/ective is t%at t%ere can
!e onl( one market @fairA value for an asset or lia!ilit( on an( measurement date6
=+
For
t&is to 6e trueH aarent !i))erences 6et3een e;it an! entr( 0alues o) assets an!
lia6ilities must 6e attri6uta6le to one or 6ot& o) t&e )ollo3ing sourcesG
AaB Di))erences 6et3een t&e assets an! lia6ilities tra!e! in !i))erent mar4ets"
Aarentl( !i))erent entr( an! e;it rices )or an asset or lia6ilit( ma( 6e !ue toH
sometimes su6tleH !i))erences 6et3een t&e asset or lia6ilit( t&at is tra!e! in an
8entr(9 mar4et an! t&e asset or lia6ilit( t&at is tra!e! in an 8e;it9 mar4et"
A6B Entit( seci)ic c&arges or cre!its" Some !i))erences 6et3een e;it an! entr(
0alues o) assets an! lia6ilities are !ue to entit( seci)ic c&arges or cre!its"
Un!er t&e mar4et 0alue measurement o6-ecti0eH t&ese 3oul! 6e treate! as
e;enses or income Aor er&as in some cases as !irect c&arges or cre!its to
eFuit(B on recognition" Un!er an entit( seci)ic measurement o6-ecti0eH t&e(
=#
T&is ignores transaction costs 3&ic&H it 3ill 6e reasone!H s&oul! 6e e;clu!e! )rom 8)air 0alue9" T&e
6asis )or t&is conclusion an! Fuestions relating to t&e treatment o) transaction costs are a!!resse! at
su6seFuent aragra&s#*.C+,,"
=+
T&is is not to sa( t&at t&ere ma( not 6e a range o) measurement uncertaint( in estimating t&e )air
0alue o) a articular asset or lia6ilit(" ?o3e0erH t&at is a !i))erent issue relating to relia6le
measura6ilit(H 3&ic& is t&e su6-ect o) searate consi!eration in c&ater 1"
mig&t Fuali)( )or inclusion in t&e measurement o) t&e asset or lia6ilit(
!een!ing on managementIs e;ectationsH intentionsH an! assumtions"
Transaction costs reresent a articular case in oint reFuiring consi!eration Asee
consi!eration o) relate! issues at aragra&s #*.C+,,B"
#.1" It is necessar( to consi!er 3&et&er t&e roosition in aragra& #./ is 0ali! in t&e real
3orl!H an! 3&et&er t&e a6o0e roosals as to t&e sources o) aarent !i))erences can 6e
su6stantiate!" Some ma( FuestionH )or e;amleH 3&et&er certain mar4et ine))iciencies
ma( result in !i))erent entr( an! e;it )air 0alues )or essentiall( t&e same assets an!
lia6ilities on a measurement !ate"
#.$" A t&oroug& e;amination o) t&e cases )or an! against t&e roosition reFuires researc&
into t&e nature an! causes o) !i))erent rices in !i))erent mar4ets )or aarentl( similar
assets an! lia6ilitiesH to assess 3&et&er t&ese !i))erences can 6e e;laine! 6( !i))erences
in t&e un!erl(ing assets an! lia6ilities or 6( entit( seci)ic e))ects" It is suggeste! t&at
t&e 6asis )or suc& researc& lies in a!!ressing t&e )ollo3ing FuestionsG
%&at are t&e essential roerties o) an asset or lia6ilit( t&at 3ill a))ect its
measurement on initial recognitionH inclu!ing 3&at s&oul! 6e t&e unit o) account'
%&at mar4et Aor mar4etsB ma( e;ist )or assets an! lia6ilities 3it& similar roerties
to t&ose o) an asset or lia6ilit( to 6e measure!H an! i) t&ere is more t&an one mar4etH
3&at ma( e;lain an( !i))erences in t&eir rices'
%&at is t&e nature o) costs t&at are incurre! to carr( out transactions' Are t&e(
entit( seci)ic costs t&at can 6e !istinguis&e! )rom )air 0alue'
#.5" It 3ill 6e seen t&at t&ese FuestionsH an! t&e issues t&e( e;oseH are imortant in t&eir
o3n rig&t in assessing t&e mar4et 0alue measurement o6-ecti0eH an! in relating t&is
o6-ecti0e to alternati0e entit( seci)ic o6-ecti0es"
;e%inin. t!e A$$et or *ia-i)ity to -e Mea$ure( on Initia) Re'o.nition
Value Affecting Properties
#.*" T&e )irst ste in measuring t&e mar4et or entit( seci)ic 0alue o) an asset or lia6ilit( is
to i!enti)( recisel( t&e 0alue a))ecting roerties o) t&at asset or lia6ilit( on t&e
measurement !ate" Assets an! lia6ilities ma( 6e classi)ie! into t3o general grousG
AaB contractual A6roa!l( construe! to inclu!e 3ritten or oral agreements an!
contracts imlie! 6( an enterriseIs actions or 6( custom or racticeBH an!
A6B nonCcontractual A&(sical an! intangi6le assets 3&ose 0alue lies in t&eir use or
saleB"
T&e 0alue a))ecting roerties o) a contractual asset or lia6ilit( ultimatel( )lo3 )rom t&e
contractH 3&ic& ro0i!es t&e 6asis )or !eri0ing e;ecte! cas& )lo3s an! !e)ining an!
ricing t&e ris4s to 3&ic& t&e asset or lia6ilit( is e;ose!" T&e 0alue a))ecting
roerties o) a nonCcontractual asset A3&ic& coul! 6e a tangi6le asset suc& as lant an!
eFuimentH or an intangi6le asset suc& as a atentB coul! inclu!e its natureH locationH an!
con!ition on t&e measurement !ate"
#=," Some insig&ts into )air 0alue a))ecting roerties an! t&eir 0alue imlications ma( 6e
!ra3n )rom )inance t&eor( an! mar4et ricing ractices Aeseciall( )rom )actors an!
assumtions use! in resent 0alue an! otion ricing mo!elsBH
=.
an! t&e t&eories an!
tec&niFues o) actuaries an! ro)essional 0aluators" T&e )inance an! mar4et ricing
literature relates most !irectl( to )inancial instruments" InC!et& stu!( o) t&e 0alue
a))ecting roerties o) assets an! lia6ilities is 6e(on! t&e reliminar( in0estigation
scoe o) t&is aer"
=.
Some logical alications o) t&is t&eor( an! ractices can 6e seen inH )or e;amleH FASB CON $J t&e
Eoint %or4ing Grou o) Stan!ar! SettersH 1raft Standard and 0asis for Conclusions Financial
'nstruments and Similar 'temsH eseciall( aragra&s .=1C./=J an! in recent !eli6erations o) t&e
IASB an! FASB on t&e 0aluation o) emlo(ee stoc4 otions"
#=#" Entit( seci)ic interretations o) t&e 0alue a))ecting roerties o) an asset or lia6ilit(
ma( !i))er )rom t&ose o) t&e mar4etlaceH since managementIs intentionsH assumtionsH
an! e;ectations ma( !i))er )rom t&ose imlicit in mar4et rices" As an e;amleH an
entit( ma( &a0e a !i))erent 0ie3 o) t&e con!ition o) a &(sical asset t&an ot&er mar4et
articiants an!H as a conseFuenceH mig&t &a0e a &ig&er or lo3er e;ectation o) its
0alue"
Lia!ilities B Special Considerations
#=+" Some 6elie0e t&at lia6ilities &a0e certain uniFue roerties t&at !i))er )rom t&eir asset
counterarts" T&e( conten! t&at t&ese uniFue roerties &a0e imortant measurement
imlicationsH so t&at a articular romise to a( coul! &a0e a !i))erent 0alue as a
lia6ilit( t&an it &as as an asset on t&e measurement !ate"
#=." T&is contention is not consistent 3it& t&e concet o) )air 0alue as it &as 6een !e0eloe!
to t&is oint" Reasoning 3it&in t&e mar4et 0alue measurement o6-ecti0eH t&e )air 0alue
o) a romise to a( is its e;c&ange rice in t&e mar4etlace" T&is e;c&ange rice is t&e
same )or 6u(er an! seller articiants" It is t&e rice t&at 3oul! 6e ai! 6( a 6u(er an!
recei0e! 6( a seller" ConseFuentl(H t&e )air 0alue o) a romise to a( on a measurement
!ate is t&e same amount )or 6ot& t&e entit( t&at &as 6oug&t it an! &ol!s it as an asset an!
t&e entit( t&at &as issue! it an! )or 3&om it is a lia6ilit(" T&e Fuestion is 3&et&er t&ere
are some )actors relating to lia6ilities t&at gi0e cause to ret&in4 t&is e;ectation"
#==" A articular Fuestion relates to t&e treatment o) an entit(Is cre!it ris4 in measuring its
lia6ilities" T&is &as 6een a contro0ersial issue among accountants an! actuaries" T&e
mar4et e;c&ange rice )or a romise to a( 3illH o) courseH )actor in t&e mar4etIs
e0aluation o) t&e issuerIs a6ilit( to a( an! an( collateral or ot&er securit( ro0i!e!"
T&usH an unsecure! romise to a( 6( an issuer 3it& lo3 cre!it stan!ing in t&e
mar4etlace 3ill &a0e a lo3er )air 0alue on a measurement !ate t&an an i!entical
romise to a( 6( an issuer 3it& a &ig& cre!it stan!ing" Some 6elie0e t&at lia6ilit(
measurements s&oul! e;clu!e issuer cre!it ris4" T&e( 6elie0e t&at t&e measurement
o6-ecti0e )or lia6ilities s&oul! 6e )un!amentall( !i))erent )rom t&at )or assets" More
seci)icall(H t&e( argue t&at it is not reasona6le )or an entit( to measure its lia6ilities on
t&e e;ectation t&at t&ere is some ris4 t&at it 3ill not meet its o6ligations" Rat&erH t&e(
conten!H lia6ilities s&oul! 6e measure! on t&e 6asis o) managementIs intention to rea(
its lia6ilities in )ullH an! management s&oul! 6e accounta6le )or managing t&e entit(
3it& t&is intention an! e;ectation"
#=/" T&is argument re)lects a articular entit( management ersecti0e t&at is inconsistent
3it& rational mar4et e;ectations" Suorters o) t&is argument must a!!ress t&e )act t&at
an issuer o) an unsecure! romise to a( in e;c&ange )or cas& in t&e mar4etlace 3ill
recei0e its )air 0alueH 3&ic& 3ill re)lect t&e mar4etIs e0aluation o) t&e issuerIs cre!it
stan!ing" T&e( 3oul!H t&ere)oreH &a0e to restate t&is )air 0alue to remo0e t&e cre!it ris4
!iscount e))ect on initial recognition" Presuma6l(H t&is a!-ustment 3oul! &a0e to 6e
treate! as a c&arge to income or eFuit("
==
In )actH )e3 argue )or ma4ing t&is a!-ustment
on initial recognition in resect o) lia6ilities t&at are e;c&ange! )or cas&H an! e;isting
stan!ar!s an! ractice 3oul! not ermit it" T&e argument )or e;clu!ing issuer cre!it ris4
)rom t&e measurement o) lia6ilities on initial recognition &as most commonl( 6een
ma!e in resect o) lia6ilities t&at are e;c&ange! )or ser0ices Asuc& as insuranceH
3arrant(H an! !e)ine! 6ene)it ension o6ligationsBH an! suc& lia6ilities &a0e o)ten 6een
measure! 3it&out recogni@ing t&is ris4" T&ere 3oul! seem to 6e no con0incing
concetual arguments suorting inclusion o) issuer cre!it ris4 on initial recognition in
t&e measurement o) lia6ilities e;c&ange! )or cas& 6ut not )or lia6ilities e;c&ange! )or
ser0ices"
#=1" T&e rimar( concern &as 6een 3it& resect to t&e e))ects o) c&anges in issuer cre!it
stan!ing in reCmeasuring lia6ilities su6seFuent to initial recognition" Some Fuestion t&e
rele0ance o) inclu!ing in income or eFuit( t&e e))ects o) c&anges in an issuerIs cre!it
==
Some 3oul! recogni@e t&is amount as a searate asset on initial recognition" T&e( reason t&at t&is
asset reresents t&e 0alue on initial recognition o) an imlicit 8!e)ault otion9 on t&e art o) t&e
!e6tor to ut its assets to t&e cre!itors instea! o) rea(ing t&e lia6ilit( in accor!ance 3it& its
contractual terms" In essenceH t&is is a !i))erence in t&e units o) accountH 3&ic& 3oul! result in a
6alance s&eet reclassi)ication o) t&e cre!it ris4 comonent o) a lia6ilit( to 6e searatel( accounte! )or
as an asset" T&is reclassi)ication 3oul! &a0e no e))ect on income or eFuit( on initial recognition"
stan!ing in an( reCmeasurements o) its lia6ilities" ReCmeasurement issues are 6e(on!
t&e scoe o) t&is aer"
#=$" In summar(H t&is aer rooses t&at a romise to a( &as t&e same )air 0alue on initial
recognition 3&et&er it is an asset or a lia6ilit(" T&e cre!it stan!ing o) t&e issuer o) a
romise to a( is ta4en into account in t&e mar4etIs !etermination o) t&e )air 0alue o)
t&at romise to a( as an asset or a lia6ilit("
(e 1nit of Account
#=5" A 0ital reCcon!ition )or !etermining t&e 0alue a))ecting roerties o) assets or
lia6ilities is to !e)ine t&eir units o) account" %&et&er an asset or lia6ilit( is !e)ine! as
its lo3est i!enti)ia6le unit or on t&e 6asis o) some grouing or aggregation 3it& ot&er
assets or lia6ilities ma( alter 0alue a))ecting roerties an!H conseFuentl(H a))ect t&e
measure o) )air 0alue or entit( seci)ic 0alue" T3o t(es o) unit o) account issues relate
to AiB ort)olio creation an! AiiB aggregation"
Portfolio Creation
#=*" For t&e uroses o) t&is aerH a ort)olio is consi!ere! to 6e a grou o) similar assets or
lia6ilities in 3&ic& t&e in!i0i!ual assets or lia6ilities retain t&eir i!entities" An e;amle
is a ort)olio o) loans" T&e Fuestion is 3&et&er a loan ort)olio &as a )air 0alue t&at
!i))ers )rom t&e sum o) t&e )air 0alues o) t&e in!i0i!ual loans ma4ing u t&at ort)olio"
#/," T&ere is no !ou6t t&at t&e creation o) a ort)olio can re!uce ris4 t&roug& !i0ersi)ication"
SuoseH )or e;amleH t&at an entit( can c&oose 6et3een in0esting a sum o) mone( in a
single loan 3it& a ,",/ ro6a6ilit( o) !e)ault t&at 3oul! re!uce its )air 0alue to @eroH or
in a !i0ersi)ie! ort)olio o) loans eac& 3it& a ,",/ ro6a6ilit( o) !e)ault" In0estment in
t&e single loan e;oses t&e entit( to a ,",/ ro6a6ilit( o) losing its entire in0estmentH
3&ile t&ere is resuma6l( muc& less ris4 o) losing signi)icantl( more Aor lessB t&an )i0e
ercent o) t&e 0alue o) a !i0ersi)ie! ort)olio o) similar loans" Intuiti0el(H it mig&t 6e
e;ecte! t&at 4no3le!gea6le mar4et articiants 3oul! 6e reare! to a( a smaller
amount )or t&e single loan t&an )or t&e !i0ersi)ie! ort)olio" ?o3e0erH accete! )inance
t&eor( &ol!s t&at an e))icient mar4et rice )or an in!i0i!ual asset or lia6ilit( 3ill not
re)lect an( e))ect )or ris4s t&at can 6e !i0ersi)ie! a3a(" It is reasone! t&at mar4et rices
!o not recogni@e ris4s t&at mar4et articiants coul! re!uce t&emsel0es t&roug&
ort)olio !i0ersi)ication" T&is mig&t seem to suggest t&at t&e )air 0alue o) a ort)olio o)
loans s&oul! 6e e;ecte! to eFual t&e sum o) t&e )air 0alues o) t&e in!i0i!ual loans in
t&at ort)olio" But t&is ma( 6e an o0ersimli)ication" For e;amleH a remium mig&t
6e ai! in t&e mar4etlace )or t&e 0alue o) t&e e))ort an! e;ertise in assem6ling a
!i0ersi)ie! ort)olio"
#/#" T&is aer rocee!s on t&e 6asis t&at a ort)olio coul! &a0e a !i))erent )air 0alue t&an
t&e sum o) t&e )air 0alues o) t&e in!i0i!ual items ma4ing it u" T&e Fuestion o) 3&ic&
unit o) account is aroriate on initial recognition must t&en 6e a!!resse!"
#/+" Pending furt%er anal(sis and testing !e(ond t%e scope of t%is preliminar( investigation)
t%is paper proposes t%at t%e appropriate individual item or portfolio unit of account on
initial recognition is generall( t%e unit of account in &%ic% an entit( ac*uires an asset
or incurs a lia!ilit(6 T%at unit of account can generall( !e e4pected to reflect t%e value
affecting properties of t%at asset or lia!ilit( on its initial recognition6
#/." To ta4e an e;amleH i) an entit( ma4es in!i0i!ual loansH t&e in!i0i!ual loan ma( 6e
consi!ere! to 6e t&e aroriate unit o) account" T&e re)lection o) an( en&ancementH or
!iminutionH o) )air 0alue resulting )rom t&e entit(Is acti0ities to assem6le loans into a
!i0ersi)ie! ort)olio 3oul! 6e consi!ere! a matter )or su6seFuent asset reCmeasurement
an! re0enue:income recognition" In ot&er 3or!sH an( ort)olio e))ect 3oul! not 6e
consi!ere! to 6e a 0alue a))ecting roert( o) t&e entit(Is in!i0i!ual loans at t&e time o)
t&eir initial recognition"
#/=" On t&e ot&er &an!H i) an entit( acFuires ort)olios o) loansH t&e ort)olio 3oul!
resuma6l( 6e t&e aroriate unit o) account on t&e 6asis t&at it re)lects t&e 0alue
a))ecting roerties o) t&e acFuire! loans on initial recognition" In some casesH
&o3e0erH t&e acFuisition o) a ort)olio ma( also inclu!e ot&er assets or lia6ilities" For
e;amleH t&e acFuisition o) a cre!it car! ort)olio is li4el( to inclu!e an intangi6le asset
reresenting e;ecte! )uture cas& )lo3 6ene)its to result )rom )uture 6usiness 3it& car!
&ol!ers as 3ell as t&e current recei0a6le 6alances" T&is intangi6le asset &as !i))erent
0alue a))ecting roerties t&at ma( 3arrant 6eing searate! )rom t&e recei0a6les
ort)olio )or su6seFuent accounting uroses" I) t&e intangi6le an! recei0a6le 6alances
are treate! as a single unit o) accountH it 3ill 6e imortant to !escri6e an! su6seFuentl(
account )or it as a comosite o) t&e recei0a6le ort)olio an! intangi6le Acustomer
relationsB elements"
Level of Aggregation
#//" For t&e uroses o) t&is aerH aggregation is consi!ere! to 6e t&e com6ining o)
in!i0i!ual assets or lia6ilities to create a !i))erent asset or lia6ilit(" T&is com6ining
rocess results in t&e in!i0i!ual asset or lia6ilit( inuts losing t&eir searate i!entities in
t&eir trans)ormation into a !i))erent asset or lia6ilit(" T&e nature o) aggregation issues
aears to !i))er as 6et3een contractual an! nonCcontractual assets an! lia6ilities"
CONTRACTUAL ASSETS AND LIABILITIES"
#/1" T&e 6asis )or assessing t&e aroriate aggregation or !isaggregation o) contractual
assets an! lia6ilities must 6e !etermine! 6( re)erence to t&e a!-u!ge! su6stance o) t&eir
terms an! con!itions" Di))icult Fuestions &a0e arisen 3it& resect to recogni@ing an!
!e)ining assets an! lia6ilities t&at result )rom comle; trans)ers o) contractual rig&ts an!
o6ligations A)or e;amleH securiti@ations o) recei0a6les ort)oliosB" As 3ellH t&ere are
Fuestions 3it& resect to 3&et&er certain )inancial contracts s&oul! 6e !isaggregate!
into t3o or more units o) account A)or e;amleH certain 8&(6ri!9 securities t&at contain
em6e!!e! !eri0ati0esB" T&ese Fuestions 3oul! seem to relate to t&e ercei0e!
imlications o) inter!een!encies 6et3een contractual rig&ts an! o6ligations" For
e;amleH suose an entit( trans)ers a ort)olio o) recei0a6les to a t&ir! art( in return
)or cas& an! t&e trans)erorIs guarantee o) t&e trans)eree against !e)ault ris4" S&oul! it
6e treate! in t&e trans)erorIs accounts as AiB a sale o) t&e recei0a6les 3it& t&e guarantee
recor!e! as a lia6ilit( Aa !isaggregate! treatmentBH or AiiB as a loan to t&e trans)eror
collaterali@e! 6( t&e recei0a6les Aan aggregate! treatmentB' T&ese seem to 6e largel(
Fuestions o) recognition an! !erecognitionH 3it& t&e units o) account )or measurement
!etermine! 6( t&e stan!ar!s go0erning 3&at assets or lia6ilities are to 6e recogni@e!"
NONCCONTRACTUAL ASSETS"
#/$" A !i))erent )orm o) le0elCo)Caggregation issues arises in resect o) nonCcontractual
assets t&at are inuts to cas& generating rocesses" One e;amle is t&e construction o) a
6uil!ing )rom 6ric4sH steelH cementH la6ourH an! ot&er inuts" In t&is caseH t&e unit o)
account is not t&e in!i0i!ual inutsH 6ut 3&at &as 6een constructe! 3it& t&em" T&e
in!i0i!ual inuts &a0e lost t&eir searate i!entities in t&eir trans)ormation into t&e
6uil!ing" It ma( 6e reasone! t&at t&e unit o) account is t&e 6uil!ingH alt&oug& certain
comonents A)or e;amleH t&e ele0atorsB ma( 6e treate! as searate asset units )or
accounting uroses 3&en t&e( can 6e -usti)ie! as &a0ing searate i!entities A)or
e;amleH )or !ereciation urosesB"
#/5" A more ro6lematic e;amle is t&e acFuisition o) eFuiment t&at is mo0e! to a
articular )actor( locationH con)igure! )or a seciali@e! useH an! installe! 3it&in an
assem6l( line Aer&as cementing it in laceB so t&at it coul! &a0e no alternati0e use"
T&e assetIs 0alue a))ecting roerties are li4el( to &a0e 6een )un!amentall( c&ange! 6(
its seciali@ation an! installation" T&e entr( mar4et in 3&ic& t&e eFuiment 3as
urc&ase! no longer esta6lis&es its )air 0alue 6ecause o) its trans)ormation" T&e asset to
6e measure! is no longer t&e eFuiment originall( urc&ase!" Is t&e aroriate unit o)
account on initial recognition t&e recon)igure! eFuiment in its location an! con!ition'
Or is it t&e assem6l( line into 3&ic& t&e eFuiment &as 6een incororate!' In ot&er
3or!sH s&oul! t&e acFuisitionH seciali@ationH an! installation o) t&e eFuiment 6e
consi!ere! to 6e an a!!ition to t&e assem6l( line'
#/*" T&e )air 0alue o) t&e aggregate! asset ma( !i))er signi)icantl( )rom t&e sum o) t&e )air
0alues o) t&e in!i0i!ual inutsH !een!ing on t&e mar4etIs 0aluation o) ossi6le
s(nergistic e))ects resulting )rom t&eir com6ination"
=/
Furt&erH assets to 6e use! in a
=/
Some entit( seci)ic 0alues 3ill also !i))er !een!ing on t&e le0el o) aggregation" For e;amleH
entit( seci)ic measures o) a )actor(Is 0alue in use ma( e;cee! t&e sum o) cost or ot&er entit(
seci)ic measures o) t&e carr(ing 0alues o) t&e in!i0i!ual assets 3it&in t&e )actor("
cas& generating rocess ma( 6e aggregate! at rogressi0el( &ig&er le0els" For e;amleH
t&e assem6l( line mig&t 6e aggregate! 3it& ot&er assets to t&e le0el o) t&e )actor(H or
)urt&er com6ine! 3it& ot&er assets an! lia6ilities to t&e le0el o) t&e re0enue or cas&
generating unit as a 3&ole"
=1
#1," T&e Fuestion is 3&et&er t&ere is an( 6asis )or !etermining t&e aroriate le0el o)
aggregation )or nonCcontractual assets on initial recognition" 8Initial recognition9 &as
6een !e)ine! )or t&e uroses o) t&is aer Asee aragra& 1$B to inclu!e !e0eloment
to t&e oint o) rea!iness )or use in t&e generation o) )uture cas& )lo3s" On t&e 6asis o)
t&is !e)initionH an( s(nergistic e))ects o) t&e aggregation o) inuts into an asset to ma4e
it rea!( )or use 3oul! 6e re)lecte! in its measurement on initial recognition"
=$
T&is
!e)inition o) initial recognition rooses aggregation to t&e lo3est le0el at 3&ic& an
i!enti)ia6le nonCcontractual asset is rea!( )or use" Be(on! t&is ointH an( en&ancement
or !iminution o) asset 0alue 3oul! seem to 6e a matter )or su6seFuent recognition an!
reCmeasurement"
#1#" Pending furt%er stud( !e(ond t%e scope of t%is preliminar( investigation) t%is paper
proposes t%at t%e appropriate unit of account for non,contractual assets on initial
recognition is t%e lo&est level of aggregation at &%ic% an identifia!le asset is read( for
use in a cas% generating process6
;eterminin. t!e A""ro"riate Mar0etB$C
#1+" ?a0ing !e)ine! t&e asset or lia6ilit( unit o) account an! essential )air 0alue a))ecting
roertiesH t3o sets o) Fuestions nee! to 6e a!!resse!G
=1
For t&e urose o) imlementing a stan!ar! on asset imairmentH t&e IASB !e)ines 8cas& generating
unit9 as 8t&e smallest i!enti)ia6le grou o) assets t&at generates cas& in)lo3s t&at are largel(
in!een!ent o) t&e cas& in)lo3s )rom ot&er assets or grous o) assets9 AIAS .1H aragra& 1B" Se0eral
national stan!ar! setters &a0e similar !e)initions"
=$
Alt&oug& s(nergistic e))ects ma( 6e recogni@e! in some circumstances A)or e;amleH as an element
o) goo!3ill in a 6usiness com6inationBH t&e( 3oul! commonl( not 6e recogni@e! as a searate asset
in t&e circumstances !iscusse! &ere"
AaB %&at mar4et or mar4etCeFui0alent sources o) )air 0alue rices e;ist in resect o)
t&e asset or lia6ilit( to 6e measure! on initial recognition'
A6B %&en t&ere is more t&an one mar4et or eFui0alent sourceH eac& o) 3&ic& (iel!s a
!i))erent mar4et riceH 3&at are t&e causes o) t&e !i))erences' Can t&e( 6e
attri6ute! to !i))erences in t&e assets or lia6ilities 6eing tra!e! in t&e !i))erent
mar4ets or eFui0alent sourcesH or to entit( seci)ic e))ects' I) notH 3&ic& mar4et
esta6lis&es )air 0alue'
#1." T&e )ollo3ing is a reliminar( !iscussion o) se0eral issues an! circumstances t&at &a0e
commonl( 6een raise! in !e6ating multile mar4et or 83&ic& mar4et9 Fuestions" T&ese
issues an! circumstances are consi!ere! 3it&in t&e conte;t o) t&e concetual anal(sis to
t&is oint in t&e aer"
Entry and E2it Markets and &elated %ssues
#1=" Similar assets an! lia6ilities are tra!e! at !i))erent rices in !i))erent entr( an! e;it
mar4ets un!er 0arious circumstances commonl( )oun! in ractice" O) courseH 3&at is
an entr( mar4et to one entit( At&e 6u(er in t&at mar4etB 3ill 6e an e;it mar4et to anot&er
entit( At&e seller in t&at mar4etB" T&e )ollo3ing are some t(ical situations"
Loan Assets
#1/" An entit( t&at ma4es loans to in!i0i!ual 6orro3ers is acti0el( oerating in one mar4et
At&e mar4et in 3&ic& it ma4es loansH 3&ic& is t&e entr( mar4et )or t&at entit(B an! it
ma( also 6e a6le to sell its loans in an e;it mar4et At&e mar4et )or selling or securiti@ing
ort)olios o) its loansB" It &as 6een o6ser0e! a6o0e Ain aragra&s #=*C#/=B t&at a
ort)olio mig&t &a0e a )air 0alue t&at !i))ers )rom t&e sum o) t&e )air 0alues o) t&e
in!i0i!ual loans t&at ma4e u t&e ort)olio" T&is aer &as tentati0el( conclu!e! Ain
aragra& #/+B t&at t&e aroriate unit o) account on initial recognition in t&is case is
t&e in!i0i!ual loanH an! t&at an( increase or !ecrease in )air 0alue resulting )rom
assem6ling loans into ort)olios is a matter )or su6seFuent recognition an! reC
measurement consi!eration"
#11" Generali@ing )rom t&is situation lea!s to t&e )ollo3ing roositionG
'n measuring an asset or lia!ilit( on initial recognition) an entit( s%ould generall( look
to t%e market in &%ic% it ac*uired t%e asset or incurred t%e lia!ilit(6
#1$" T&e 0ali!it( an! use)ulness o) t&is roosition ma( 6e 6est assesse! 6( testing it against
0arious concei0a6le entr(Ce;it mar4et situations" A reliminar( anal(sis o) e;amles o)
se0eral suc& situations )ollo3s"
>%olesale and +etail Markets in >%ic% an Entit( 0u(s >%olesale and Sells +etail
#15" Suose t&at an entit( is a &ar!3are retailer an! t&at it acFuires nails )or #",, er oun!
in 6ul4 in t&e 3&olesale mar4et an! t&en sells t&em in smaller Fuantities )or +",, er
oun! in t&e retail mar4et" %&at is t&e )air 0alue o) t&ose nails on initial recognition'
#1*" Alt&oug& t&e &(sical roerties o) in!i0i!ual nails un!ergo no c&ange )rom t&e
3&olesale to t&e retail mar4etH t&e retailing )unction su6seFuent to t&eir acFuisition ma(
6e consi!ere! to a!! a )air 0alue en&ancing roert( to t&ese nails )or retail customers"
I) t&is is accete!H t&en t&e a6o0e roose! rincile 3oul! seem to &ol! in t&is case"
In ot&er 3or!sH it ma( 6e reasone! t&at t&e aroriate mar4et )or t&e retailer in
measuring t&e )air 0alue o) nails on initial recognition is its entr( A3&olesaleB mar4etH
an! t&at an( e;cess o) t&e retail rice o0er t&e 3&olesale rice is a result o) retailing
acti0ities su6seFuent to initial recognition" T&e recognition o) an( 0alue a!!e! 6( t&e
retailing )unction is a matter )or reCmeasurement 3&en it is !etermine! t&at recognition
con!itions )or reCmeasurement &a0e 6een met"
Large 0locks and Volume Effects
#$," An assetIs 0alue a))ecting roerties 3ill o)ten inclu!e t&e si@e or 0olume o) t&e asset
t&at is acFuire!" For e;amleH t&ere ma( 6e a )leet !iscount on truc4s or automo6ilesH
or !i))erent )air 0alues )or large an! small 6loc4s o) securities" As 3it& 3&olesale an!
retail mar4etsH it ma( 6e reasone! t&at measurement on initial recognition s&oul! 6e
6ase! on t&e mar4et in 3&ic& t&e asset to 6e measure! 3as acFuire!" One ca0eatG an
entit( s&oul! generall( 6e e;ecte! to acFuire assets in t&e most a!0antageous mar4et
oen to it on initial recognition" For e;amleH it 3oul! generall( 6e e;ecte! t&at an
entit( Fuali)(ing )or )leet !iscounts 3oul! !etermine t&e )air 0alue o) its truc4s on
initial recognition on t&e 6asis o) rices in t&e )leet mar4etH e0en i) it !i! not ta4e
a!0antage o) t&at mar4et"
#$#" T&ere &as 6een muc& !e6ateH an! consi!era6le inconsistenc( in racticeH 3it& resect to
3&et&er or 3&en estimates o) t&e )air 0alue o) large 6loc4s o) securities s&oul! a!-ust
t&e o6ser0a6le mar4et rices )or smaller 6loc4s"
=5
T&is 3oul! not normall( 6e an issue
on initial recognitionH 6ecauseH reasoning )rom t&e roosition in aragra& #11H t&e
mar4et on initial recognition 3ill generall( 6e t&at in 3&ic& t&e 6loc4 or 6loc4s 3ere
acFuire!" T&e e))ect o) creating a large 6loc4 as a result o) a num6er o) urc&ases o)
smaller 6loc4s 3oul! 6e a matter )or su6seFuent reCmeasurement consi!eration"
1emand 1eposit Lia!ilities
#$+" A !eositor( institution recei0es !eosits )rom customers in return )or ro0i!ing
contractual romises to rea( t&e amounts on !eosit Alus an( interest an! less an(
c&argesH an! su6-ect to an( con!itions seci)ie! in t&e contractBH on t&e !eman! o) t&e
!eositors" T&is is t&e entr( mar4et to t&e !eositor( institution" T&e terms o) t&ese
contracts are resuma6l( !etermine! in an acti0e mar4et in0ol0ing 4no3le!gea6leH
3illing arties at armIs lengt&" Deositor( institutions on occasion trans)er ort)olios o)
!eosit lia6ilities to ot&er !eositor( institutionsH t&us creating an e;it mar4et" T&e )air
0alue o) a ort)olio o) !eman! !eosits 3ill t(icall( !i))er )rom t&e sum o) t&e
rincial amounts o) t&e in!i0i!ual !eosits t&at ma4e u t&e ort)olio" At least art o)
t&is !i))erence is li4el( to 6e 0alues t&at are not attri6uta6le to t&e !eosits t&emsel0es"
In articularH t&e o6ser0a6le mar4et rices at 3&ic& ort)olios o) !eman! !eosits are
e;c&ange! generall( inclu!e not onl( t&e )air 0alue o) t&e !eosits er seH 6ut also t&e
)air 0alue o) 6ene)its e;ecte! to 6e o6taine! )rom t&e customer relations&isH t&at isH
)rom )uture transactions 3it& t&ese !eositors" T&is aer ta4es t&e osition t&at suc&
=5
See FASBH E;osure Dra)tH Fair Value Measurements) aragra&s C+*CC.5 an! C$5" In signi)icant
artH t&e !e6ate relates to relia6ilit( issues"
5=
6ene)its are intangi6les t&at s&oul! not 6e consi!ere! a re!uction o) t&e )air 0alue o)
!eosit lia6ilities on t&eir initial recognition 6( !eositor( institutions" Rat&erH t&e
e;ecte! 6ene)its o) t&e customer relations&is s&oul! 6e e0aluate! searatel( as an
intangi6le 6ene)it an! consi!ere! )or recognition an! measurement as suc&"
=*
#$." It ma( 6e claime! t&atH e0en a)ter remo0ing t&e e))ects o) t&ese an! ot&er ossi6le 0alue
a))ecting !i))erences 6et3een t&e !eosits tra!e! in t&e entr( an! e;it mar4etsH t&ere
3ill still 6e a !i))erence on initial recognition" More seci)icall(H it ma( 6e claime! t&at
an( reasona6le !etermination o) t&e e;it )air 0alue o) !eman! !eositsH calculate! as t&e
resent 0alue o) )uture cas& a(outs to !eositors estimate! on t&e 6asis o) mar4et
con!itions an! e;ectationsH 3ill 6e less t&an t&e entr( )air 0alue"
/,
Accetance o) t&is
!i))erence means t&at !eositor( institutions 3oul! reort a gain at t&e time t&at a
!eosit is ma!eH an! t&e roosition t&at t&ere can 6e onl( one )air 0alue )or an( gi0en
item on an( gi0en !ate 3oul! not stan! u" ?o3e0erH er&as t&is aarent !i))erence is
!ue to some ort)olio creation e))ectH or to unrecogni@e! )uture costs t&at 3ill &a0e to 6e
incurre! to ser0ice t&e !eositsH or to some ot&er ineFui0alenc( 6et3een t&e 0alue
a))ecting roerties o) t&e !eosits in t&e t3o mar4ets" I) soH t&e items 6eing measure!
in t&e entr( mar4et are not t&e same as t&e items 6eing measure! in t&e e;it mar4et"
T&is 3oul! seem to reFuire )urt&er stu!("
>arrant( Lia!ilities and Similar Performance .!ligations
#$=" Suose t&at an entit( is a tele0ision retailer t&at also sells 3arrant( contracts e;ten!ing
6e(on! t&e manu)acturerIs 3arrant(" T&e retailerIs entr( mar4et is t&at in 3&ic& it
incurs t&e 3arrant( lia6ilitiesH t&at isH t&e mar4et 3it& its customers" Its e;it mar4et is
t&e mar4et in 3&ic& it coul! a( a t&ir! art( insurer to assume t&e 3arrant( ser0ice
=*
For a !iscussion o) t&is issueH see Eoint %or4ing Grou o) Stan!ar! SettersH 1raft Standard and 0asis
for Conclusions Financial 'nstruments and Similar 'temsH aragra&s ..1C..* an! ="+*C=".+"
/,
T&is circumstance arises in art 6ecause t&is e;it )air 0alue ta4es into account t&e e;ectations o)
6u(ers an! sellers t&at a signi)icant ercentage o) !eman! !eosits 3ill 6e le)t on !eosit )or an
e;ten!e! erio!H !uring 3&ic& t&e( 3ill 6ear a lo3er rate o) interest t&an 3oul! 6e 6orne 6( term
!eosits o0er t&e same term"
5/
o6ligations" Again t&e Fuestion is 3&et&er t&ere coul! 6e !i))erences in )air 0alue rices
6et3een t&ese t3o mar4ets an!H i) soH 3&et&er t&e( can 6e )ull( e;laine! 6(
!i))erences in t&e )air 0alue a))ecting roerties o) t&e lia6ilities tra!e! in t&e t3o
mar4ets"
#$/" Arguments &a0e 6een ma!e t&at t&e )air 0alue on initial recognition o) suc& a 3arrant(
lia6ilit( s&oul! 6e !etermine! on t&e 6asis o) t&e e;it mar4et 3it& t&ir! art( insurersH
rat&er t&an t&e entr( mar4et 3it& customers"
/#
Primar( among t&ese arguments is t&at
t&e rice in t&e retailerIs mar4et 3it& customers is increase! 6( mar4eting an! relate!
costs t&at must 6e incurre! 6( retailers to in)orm otential customers an! sell
3arranties" In ot&er 3or!sH t&e mar4et rice reFuire! 6( retailers to enter t&e mar4et
3it& customers is increase! 6( t&ese costs an!H resuma6l(H a commensurate return )or
t&is e))ort" T&ir! art( insurers can 6e e;ecte! to accet a lo3er rice to assume t&e
o6ligation un!er t&is 3arrant( contract 6ecause t&e mar4eting e))ort &as ta4en laceH so
t&at insurers 3ill not &a0e to 6ear t&ese costs" T&usH t&ere 3oul! seem to 6e a
otentiall( signi)icant !i))erence 6et3een t&e mar4et rices in t&e entr( an! e;it
mar4ets in t&is case t&at !oes not relate to t&e 0alue a))ecting roerties o) t&e 3arrant(
contracts er se"
#$1" ?o3e0erH t&ere are ot&er )actors t&an can cause !i))erences in t&e 0alue a))ecting
roerties o) 3arrant( contracts as 6et3een t&ese t3o mar4ets" In articularH !i))erences
in t&e cre!it an! er)ormance ris4s o) t&e retailer an! a articular insurer coul! a))ect
t&e )air 0alue o) t&e 3arranties" In ot&er 3or!sH a 4no3le!gea6le customer coul! 6e
e;ecte! to a( less )or a 3arrant( t&at is ro0i!e! 6( an insurer 3it& a oor
er)ormance recor! an! lo3 cre!it Fualit( t&an )or a 3arrant( ro0i!e! 6( an insurer
3it& a strong er)ormance recor! an! a &ig& cre!it rating Ain e))ectH t&e t3o 3arranties
3oul! 6e consi!ere! !i))erent assets 6( t&e customerB" A 4no3le!gea6le customer ma(
6e unli4el( to allo3 t&e retailer to ass its lia6ilit( to an insurer t&at ma( not 6e as goo!
a ris4H 3it&out at least t&e retailer remaining contingentl( lia6le or a(ing t&e customer
/#
T&e FASB &as roose! t&is in its ro-ect on Measuring Financial Per)ormance O6ligations at Fair
>alueH 3&ic& 3as !iscusse! 3it& t&e IASB in Ma( +,,="
51
)or t&e !i))erence in t&e ris4s 6orne" On t&e ot&er &an!H 3&ile t&e customer ma( 6e
content to allo3 t&e retailer to ass its lia6ilit( to an insurer t&at is a 6etter ris4H t&at
insurer is li4el( to c&arge t&e retailer more )or assuming t&e ris4 t&an t&e retailer
recei0e! )rom its customer" T&usH t&e retailerIs e;it mar4et 0alue on initial recognition
3oul! 6e e;ecte! to re)lect t&e &ig&er o) its o3n cre!it an! er)ormance Fualit( an!
t&at o) t&e insurer" As 3ellH )or man( lia6ilities o) t&is natureH an( t&ir! art( insurer
mar4et ma( 6e urel( &(ot&etical i) t&e o6ligations can onl( 6e )ul)ille! 6(
er)ormance 6( t&e retailer" E;amles ma( inclu!e 3arranties in resect o) seciali@e!H
ma!eCtoCor!er ro!uctsH an! er)ormance o6ligations un!er maga@ine su6scritions" In
a!!itionH t&ere ma( 6e ort)olio creation e))ects"
#$$" On 6alanceH it aears t&at some signi)icant !i))erences in mar4et 0alues as 6et3een
entr( an! e;it mar4ets )or 3arranties an! similar er)ormance o6ligations ma( not 6e
e;laine! 6( !i))erences in t&e 0alue a))ecting roerties o) t&e lia6ilities on initial
recognition" ?o3e0erH on t&e 6asis o) t&e a6o0e anal(sisH t&is aer suggests t&at
recognition o) an( !i))erences 6et3een t&e mar4et 0alue o) suc& o6ligations in t&e
mar4et 3it& customers an! t&at in t&e actual or &(ot&etical mar4et 3it& t&ir! art(
insurers s&oul! 6e consi!ere! a reCmeasurement issue" T&e measurement er)ormance
o6ligations on initial recognition 3arrant )urt&er in !et& stu!("
Finis%ed and Partl( Finis%ed =oods
#$5" Finis&e! an! artl( )inis&e! goo!s are not consi!ere! to 6e assets arising on initial
recognition 3&en t&e( are ro!uce! 6( t&e reorting entit(" Suc& assets are oututs
)rom t&e entit(Is ro!uction rocess rat&er t&an inuts 6eing rea!ie! )or use in a cas&
generating rocess" T&eir carr(ing amounts re)lect t&e accumulation o) re0ious
measures o) t&e inuts use! to ma4e t&emH until suc& time as recognition criteria are met
)or t&eir reCmeasurement" T&usH t&e Fuestion o) t&e measurement o) )inis&e! an! artl(
)inis&e! goo!s manu)acture! 6( an entit( is usuall( one o) reCmeasurement 3&en
re0enue recognition criteria are met"
5$
0usiness Ac*uisitions
#$*" A 6usiness acFuisition gi0es rise to t&e nee! to measure t&e assets an! lia6ilities o) t&e
acFuire! entit( as o) t&e acFuisition !ate A3&ic& is t&e !ate o) initial recognition 6( t&e
acFuirerB" 7uestions arise as to 3&at ma( 6e t&e aroriate mar4et )or t&ese assets an!
lia6ilitiesJ t&e mar4et in 3&ic& t&e( 3ere initiall( acFuire! or issue! ma( &a0e no
rele0ance" Finis&e! an! artiall( )inis&e! goo!s in0entories &el! 6( t&e acFuire! entit(
at t&e acFuisition !ate are a case in oint" As in all casesH t&e )irst ste in measuring
t&ese assets is to !etermine t&e aroriate units o) account an! 0alue a))ecting
roertiesH inclu!ing location an! con!itionH on t&e measurement !ate" It ma( 6e most
aroriate to !eri0e t&e estimate! )air 0alue )or t&ese goo!s )rom t&e e;it mar4etH in
3&ic& t&e( 3ill 6e sol!H A3it& a!-ustment )or !i))erences o) locationH con!ition an!
!egree o) comletionB"
Summar(
#5," T&e a riori e;ectation reasone! )rom t&e mar4et 0alue measurement o6-ecti0e is t&at
t&ere can 6e onl( one )air 0alue )or a articular asset or lia6ilit( on a measurement !ate
Aaragra& #./B" 7uestions arise as to 3&at is t&is )air 0alue 3&en t&ere is more t&an
one mar4et 3it& !i))erent rices )or similar assets or lia6ilities" T&is aer rooses t&at
suc& !i))erences ma( 6e !ue to 0alue a))ecting !i))erences 6et3een t&e assets or
lia6ilities tra!e! in t&ese !i))erent mar4ets or to entit( seci)ic transaction or ot&er costs
or 6ene)its t&at s&oul! 6e e;clu!e! )rom t&e !etermination o) )air 0alue" T&is aer
)urt&er suggests t&atH in man( casesH it 3ill 6e )oun! t&at t&e 6est source )or )air 0alue
measurement on initial recognition 3ill 6e t&e mar4et in 3&ic& t&e asset or lia6ilit( to
6e measure! 3as acFuire! or incurre!H 6ecause t&e assets or lia6ilities tra!e! in t&ese
mar4ets are generall( li4el( to &a0e t&e same 0alue a))ecting roerties as t&e asset or
lia6ilit( to 6e measure! at t&at !ate" ?o3e0erH t&e a6o0e e;amles !emonstrate t&at
t&ere are some situations in 3&ic& t&ere 3ill 6e no suc& entr( mar4et A)or e;amleH
)inis&e! goo!s in0entor( o) an acFuire! 6usinessBH or entr( mar4et rices ma( not 6e
)ull( aroriate Aossi6l(H )or e;amleH in resect o) !eosit lia6ilities an! certain
er)ormance lia6ilitiesB" In certain o) t&ese cases t&e most aroriate ricing source
55
ma( 6e an e;it mar4et" In an( caseH it is necessar( to i!enti)( an! a!-ust )or an(
!i))erences in t&e )air 0alue a))ecting roerties o) mar4et tra!e! assets or lia6ilities an!
t&e asset or lia6ilit( to 6e measure! on t&e measurement !ate"
#5#" It seems anomalous t&at !i))erent mar4ets coul! e;ist 3it& !i))erent rices )or i!entical
assets or lia6ilities on a measurement !ate" ?o3e0erH it mig&t 6e t&at multile mar4ets
)or i!entical assets or lia6ilities coul! result )rom legal reFuirements or licensing
arrangements t&at restrict access to certain mar4ets to articular entities" Some ossi6le
situationsG
AaB Access to 3&olesale mar4ets )or )res& )ruitsH 0egeta6lesH meat or certain ot&er
)oo! ro!ucts ma( 6e limite! in some laces to accre!ite! entitiesH to t&e
e;clusion o) ot&ers"
A6B In some countriesH enterrises ma( 6e reFuire! to ma4e crossC6or!er )oreign
currenc( transactions a6o0e a seci)ie! amount t&roug& t&e countr(Is central
6an4" In suc& circumstancesH t&e )oreign currenc( must 6e 6oug&t )rom or sol!
to t&e central 6an4 at t&e 6an4Is esta6lis&e! ratesH 3&ic& ma( !i))er )rom t&e
unregulate! e;c&ange rates )or smaller transactions" Suc& situations ma( reFuire
secial consi!erationH an! it ma( 6e Fuestione! 3&et&er t&e transactions 3it& t&e
central 6an4 in t&is case can Fuali)( as a mar4et Asee aragra&s #,$C##,B"
AcB It &as 6een claime! t&at use! cars tra!e! in certain auction mar4ets accessi6le
onl( to license! tra!ers ma( &a0e lo3er rices )or i!entical automo6iles to t&ose
sol! in use! car retail mar4ets"
#5+" T&is aer rooses t&at t&e Fuestion o) 3&et&er !i))erent mar4ets 3it& !i))erent rices
ma( e;ist )or i!entical assets or lia6ilities reFuires in !et& stu!( o) aarent multile
mar4ets an! t&e nature an! causes o) t&e rice !i))erences 6et3een t&em" I) suc&
circumstances e;istH t&en t&ere 3oul! &a0e to 6e some !e)ensi6le rule )or c&oosing
5*
6et3een t&e rices in t&ese mar4ets" One roosal is t&at t&e most a!0antageous mar4et
rice a0aila6le to t&e entit( s&oul! 6e selecte!"
/+
Oter Market3&elated 'onsiderations
'nformation As(mmetr(
#5." In)ormation as(mmetr( e;ists 3&en some mar4et articiants &a0eH or are t&oug&t to
&a0eH in)ormation a6out certain 0alue a))ecting roerties o) an asset or lia6ilit( t&at is
not a0aila6le to ot&er mar4et articiants" It 3as conclu!e! earlier in t&is aer
Aaragra& #,*B t&at t&e concet o) 84no3le!gea6le9 in t&e !e)inition o) )air 0alue
s&oul! 6e resume! to mean t&at mar4et articiants &a0e reasona6le access to u6licl(
a0aila6le in)ormation" T&is !oes not reclu!e t&e ossi6ilit( t&at some articiants ma(
&a0e a!!itional ri0ate in)ormation 3&ic&H &a! it 6een 4no3n to ot&er articiantsH
coul! &a0e a))ecte! t&e rice t&at t&e( 3oul! &a0e 6een 3illing to a( or recei0e"
/.
To
illustrateH t&e seller o) a 3arrant( ma( &a0e ri0ate in)ormation a6out certain ris4s
relate! to its a6ilit( to meet t&e terms o) t&e 3arrant( t&at is not a0aila6le to otential
6u(ers o) t&e 3arrant(" For e;amleH t&e seller ma( 4no3 t&at its )inancial situation is
suc& t&at it is at &ig& ris4 o) !e)aulting on its 3arrant( o6ligationH or &a0e ri0ate
in)ormation a6out t&e Fualit( o) its ro!uct t&atH i) 4no3n to 6u(ersH 3oul! a))ect t&e
mar4et 0alue o) t&e 3arrant("
/+
T&is is roose! in FASB E;osure Dra)tH Fair Value MeasurementsH aragra& #1" See also Eoint
%or4ing Grou o) Stan!ar! SettersH 1raft Standard and 0asis for Conclusions Financial
'nstruments and Similar 'tems) aragra&s */C**H .=,C.=#H an! =".." T&ese aragra&s suggest t&at
suc& a rule 3oul! reFuire signi)icant suorting gui!ance" For e;amleH t&e mar4et t&at ro0i!es t&e
most a!0antageous rice is not necessaril( !etermine! 6( t&e lo3est mar4et rice a0aila6le to t&e
6u(er or t&e &ig&est mar4et rice a0aila6le to t&e seller" To illustrateH i) a articular 6u(er coul! a( a
rice o) #,, in mar4et A lus transaction costs o) =H or a rice o) #,# in mar4et B lus transaction
costs o) +H t&e total cost to t&e 6u(er in mar4et B o) #,. is more a!0antageous t&an t&e total cost to
t&e 6u(er in mar4et A o) #,="
/.
For an anal(sis o) t&e e))ects o) in)ormation as(mmetr( in t&e mar4et )or use! carsH see 8T&e mar4et
)or OlemonsIG Fualit( uncertaint( an! t&e mar4et mec&anism9H in George A" A4erlo)H An Economic
T%eorist:s 0ook of TalesH c&ater +"
*,
#5=" Some ma( 6elie0e t&at )air 0alue s&oul! 6e !etermine! on t&e resumtion t&at t&ere is
no in)ormation as(mmetr(H t&at isH t&at all articiants &a0e access to all u6lic an!
ri0ate 0alue a))ecting in)ormation" Ot&ers ma( ac4no3le!ge t&e e;istence o)
in)ormation as(mmetr( 6ut ta4e t&e 0ie3 t&at it s&oul! generall( 6e ignore! 6ecause
t&ere is no ractical 3a( o) assessing its e))ect on )air 0alues"
#5/" In)ormation as(mmetr( is an in)ormation uncertaint( ris4" To illustrateH a rational 6u(er
o) t&e 3arrant( !escri6e! in aragra& #5. ma( 6e e;ecte! to re!uce t&e amount t&at
&e or s&e 3oul! 6e reare! to a( to allo3 )or t&e ris4 t&at t&e seller ma( 6e
3it&&ol!ing a!0erse ri0ate in)ormation on its caa6ilit( to er)orm un!er t&e terms o)
t&e 3arrant(" T&e sellerH recogni@ing t&isH coul! 6e e;ecte! to tr( to re!uce t&at
in)ormation uncertaint( i) it 6elie0es t&is coul! result in a &ig&er rice" T&e seller
mig&tH )or e;amleH ma4e a0aila6le its au!ite! )inancial statements or an in!een!ent
certi)ication o) its cre!it rating" T&e ro0ision o) suc& in)ormation ma( re!uce 6ut not
eliminate t&e in)ormation as(mmetr( concerns o) otential 6u(ers in t&e mar4etlace"
T&ese acti0ities can &a0e signi)icant e))ects on mar4et 0alue"
#51" T&e 0alues t&at !i))erent mar4et articiants ma( lace on in)ormation as(mmetr( seem
to 6e in!istinguis&a6le )rom entit( seci)ic e;ectations generall(" In articularH an
entit(Is e;ectations ma( 6e 6ase! on ri0ate in)ormationH )or e;amleH t&e 6elie)
A3&ic& ma( or ma( not 6e 3ell )oun!e!B t&at it &as suerior 4no3le!ge to t&at o) ot&er
mar4et articiants" To illustrateH t&e urc&aser in a 6usiness com6ination ma( ercei0e
certain s(nergies in com6ining its e;isting 6usiness 3it& t&at o) t&e acFuireeH 6ase! in
art on its ri0ate 4no3le!ge o) its o3n 6usiness" As a resultH in)ormation as(mmetr(
ma( interact 3it& ot&er entit( seci)ic )actors in !etermining t&e ma;imum rice a
urc&aser 3oul! 6e 3illing to a(" In)ormation as(mmetr( mig&tH )or e;amleH cause a
otential 6u(er to re!uce t&e amount it 3oul! ot&er3ise 6e reare! to a( )or a gi0en
assetH 6ut its 0aluation o) t&e asset ma( 6e a))ecte! as 3ell 6( man( ot&er entit( seci)ic
)actorsH inclu!ing its e;ectations )or t&e use o) t&e assetH its income ta; ositionH an!
er&as ercetions as to t&e assetIs liFui!it(" Paragra&s #,#C##, !iscuss t&e rocess
*#
6( 3&ic& !i0erse entit( seci)ic e;ectations an! assumtions are resol0e! to t&e
mar4et rice )or a articular asset or lia6ilit( on an( gi0en !ate"
#5$" Finall(H it is ro6a6l( not ossi6le to 4no3 3&at in)ormation t&e mar4et &asH t&at isH to
!etermine 3&at in)ormation ma( 6e in t&e u6lic !omain an! imoun!e! in a mar4et
riceH or &o3 in)ormation as(mmetr( ma( &a0e a))ecte! a mar4et rice" T&is seems to
create ro6lems in tr(ing to remo0e an( e))ects o) in)ormation as(mmetr( )rom a
mar4et rice or in tr(ing to incororate it into a )air 0alue estimate 3&ere t&ere is no
o6ser0a6le mar4et rice" T&is issue 3ill 6e consi!ere! in assessing t&e relia6ilit( o) )air
0alue estimates in c&ater $"
0id,Asked Spreads
#55" T&e 6i! rice in resect o) an asset is t&e rice at 3&ic& a rosecti0e 6u(er )ormall(
o))ers to 6u( itH an! t&e as4e! rice is t&e rice at 3&ic& a rosecti0e seller )ormall(
o))ers to sell it"
/=
In a !ealer mar4et )or acti0el( tra!e! assetsH Fuote! 6i! an! as4e!
rices on a gi0en !ate are li4el( to reresent t&e rices t&at !ealers 3ere a(ing an!
recei0ing on t&at !ateH in 3&ic& case t&e srea! ma( 6e consi!ere! to reresent
transaction costs to t&e 6u(ers an! sellers Asee t&e )ollo3ing section on transaction
costsB" Fair 0alue 3oul! t&en 6e measure! 6( 6i! rices )or long ositions AassetsB an!
as4e! rices )or s&ort ositions Alia6ilitiesB" ?o3e0erH in ot&er cases a 6i!Cas4e! srea!H
3&ic& ma( 6e 3i!eH is li4el( to reresent in large art some signi)icant uncertaintiesH
an! ma( in!icate onl( t&e range in 3&ic& )air 0alue ma( lie" Actual transactions coul!
ta4e lace an(3&ere 3it&in t&at range on t&e measurement !ate" T&usH 3&en t&ere is a
3i!e 6i!Cas4e! srea! one ma( nee! to loo4 to ot&er sources to !etermine t&e
aroriate )air 0alue 3it&in t&at range" T&ere is no concetual -usti)ication )or
assuming t&at t&e mi! oint 0alue in a 6i!Cas4e! rice srea! is a 6etter estimate t&an
an( ot&er oint in t&e range"
/=
See 9o%ler:s 1ictionar( for Accountants) 1
t&
e!ition"
*+
Market Accessi!ilit( and +elated 'ssues
#5*" A commonl( e;resse! 0ie3 is t&at it is inaroriate to measure t&e )air 0alue o) an
asset or lia6ilit( on t&e 6asis o) a mar4et t&at is not accessi6le to t&e entit( o3ning t&e
asset or o3ing t&e lia6ilit(" It 3as o6ser0e! in aragra& #5# t&at mar4et accessi6ilit(
restrictions ma( e;lain some situations in 3&ic& t&ere aears to 6e more t&an one
mar4et 3it& !i))erent rices )or t&e same asset or lia6ilit(" It is imortant to !e)ine
care)ull( 3&at is meant 6( 8mar4et inaccessi6ilit(9 an! 3&et&er it ma( ta4e !i))erent
)orms 3it& !i))erent imlications )or )air 0alue measurement" For e;amleH a mar4et )or
a articular asset ma( not 6e accessi6le 6( an entit( in its o3n rig&tH 6ut t&e entit( ma(
6e a6le to contract 3it& someone 3&o can tra!e in it to acFuire an asset in t&at mar4et
an! t&en sell it to t&e entit(" In ot&er situationsH a mar4et ma( 6e inaccessi6le to an
entit( as a result o) legal or ot&er restrictions as to 3&o can o3n or oerate articular
assets" T&is aer rooses t&at researc& s&oul! 6e un!erta4en to !etermine t&e nature
an! 6ases )or restricte! access mar4ets an! t&eir )air 0alue measurement imlications
)or similar items t&at ma(H or ma( notH 6e tra!e! in ot&er mar4ets"
T?E DISTINCTION BET%EEN MAR2ET >ALUES AND AMOUNTS T?AT COULD BE IMMEDIATELP REALILED
OR SETTLED"
#*," Some &a0e eFuate! mar4et A)airB 0alues 3it& imme!iate reali@ation or settlement
amounts" For e;amleH some &a0e eFuate! t&e )air 0alue o) longCterm !e6t 3it& t&e
amount at 3&ic& it coul! 6e settle! 3it& t&e cre!itor on t&e measurement !ate" T&e
concern is t&en raise! t&at t&is amount ma( not 6e an accessi6le ossi6ilit( to t&e !e6tor
an!H e0en 3&en it is ossi6leH it ma( in0ol0e ro&i6iti0e costs an! enalties t&at ren!er
it an irrational an! irrele0ant 0alue )or accounting uroses" T&is settlement amount is
not )air 0alueH 6ut is t&e amount t&at 3oul! 6e ai! un!er t&e terms o) t&e !e6t contract
i) an imme!iate settlement otion is e;ercise!" It isH t&ere)oreH eFui0alent to t&e e;ercise
rice un!er an otion agreement" As suc&H it is t&e amount o) a &(ot&etical !e6t
rea(ment transaction 3it& t&e cre!itorH rat&er t&an t&e amount t&at 3oul! 6e negotiate!
)or an e;c&ange o) t&e !e6t 6et3een armIs lengt& arties on t&e measurement !ate"
//
//
A measurement Fuestion arises i) a contractual asset or lia6ilit( contains an otion t&at gi0es an
entit( t&e rig&t to settle it at a rice t&at is more a!0antageous t&an its mar4et rice" See !iscussion o)
*.
#*#" In a more general senseH t&is aer reasons t&at t&e )air 0alue o) an asset or lia6ilit( is
not its liFui!ation 0alue on imme!iate sale or settlement on a measurement !ate 3&en
t&is amount !oes not re)lect t&e mar4etIs e;ectations )or its &ig&est an! 6est use" Most
assets an! lia6ilities are !esigne! or e;ecte! to generate or rea( cas& )lo3s o0er
erio!s o) time" T&e( ma( 6e &el! or sol! or settle!H !een!ing on 3&at is ercei0e! to
6e t&e most a!0antageous course o) action" T&e mar4et measurement o6-ecti0e !oes not
em6o!( an( e;ectations )or reali@ingH settlingH &ol!ing or using an( asset or lia6ilit(H
6e(on! t&e general mar4et e;ectation o) &ig&est an! 6est use" T&e time erio! )or
reali@ation or settlement !oes not matter to t&is o6-ecti0e 6ecause time an! atten!ant
ris4s are a!-uste! )or in t&e mar4etlace in terms o) resent 0alue eFui0alents
A!iscounte! at mar4et rates o) return )or t&e time an! ris4s o) 3aitingB" Certainl(H t&e
mar4eta6ilit( an! liFui!it( o) an asset or lia6ilit( are ris4 )actors t&at ma( a))ect its )air
0alue" For e;amleH an asset t&at is &ig&l( liFui! or mar4eta6le ma( tra!e at a remium
to one t&at is not" Suc& a remium reresents t&e rice t&at t&e mar4et uts on re!uce!
liFui!it( ris4 as art o) its rocess o) !etermining resent 0alues o) ris4( )uture cas&
)lo3s"
#*+" In summar(H t&is aer reasons t&at t&e amount at 3&ic& an asset or lia6ilit( 3oul! 6e
reali@e! or settle! on a measurement !ate ma( 6e accete! to 6e its )air 0alue on t&at
!ate onl( i)G
AaB It is a mar4et riceH or eFui0alentH meeting t&e con!itions o) a mar4et roose!
in aragra&s #,$C##," T&is 3oul! not 6e t&e caseH )or e;amleH in t&e situation
!iscusse! in aragra& #*,"
A6B It can 6e eFuate! to an o6ser0e! mar4et riceH or eFui0alentH )or an asset or
lia6ilit( t&at is i!entical or similar to t&e asset or lia6ilit( to 6e measure! on t&e
measurement !ate" In some casesH t&e mar4et tra!e! asset or lia6ilit( ma( 6e
su))icientl( similar to ena6le aroriate a!-ustment )or 0alue a))ecting
!i))erences" In ot&er casesH it ma( 6e !etermine! t&at t&e !i))erences are too
t&is issue in Eoint %or4ing Grou o) Stan!ar!CSettersH 1raft Standard and 0asis for Conclusions
,Financial 'nstruments and Similar 'tems) aragra&s #,,C#,#H .=+C.=.H an! ="+5" Suc& a situation
seems most li4el( to arise su6seFuent to initial recognition"
*=
great to ena6le t&e mar4et tra!e! rice to 6e aroriatel( a!-uste!H in 3&ic&
case ot&er alternati0es 3ill nee! to 6e consi!ere!" T&ese situations gi0e rise to
Fuestions o) relia6l( estimating t&e mar4et eFui0alent 0alue o) an asset or
lia6ilit( on initial recognition" General concetual issues relating to relia6ilit(
are a!!resse! in c&ater 1H an! issues relating to t&e relia6ilit( o) )air 0alue
estimates in c&ater $"
Tran$a'tion Co$t$
#*." T&e IASB !e)ines transaction costs in t&e conte;t o) )inancial instruments asG
8Incremental costs t&at are !irectl( attri6uta6le to t&e acFuisitionH issue or
!isosal o) a )inancial asset or )inancial lia6ilit(" An incremental cost is one t&at
3oul! not &a0e 6een incurre! i) t&e entit( &a! not acFuire!H issue! or !isose!
o) t&e )inancial instrument"9
/1

Transaction costs comrise t&e !irect costs o) t&e transaction itsel) Asuc& as )ees or
commissions ai! to agentsH 6ro4ersH an! !ealersBH an! an( le0iesH )or e;amleH 6(
regulators or securities e;c&angesH an! trans)er ta;esH !utiesH an! sales ta;es t&at are
a(a6le as a result o) an e;c&ange transaction"
#*=" It is roose! t&at an essential !e)ining c&aracteristic o) transaction costs )or t&e
uroses o) measuring )air 0alue is t&at suc& costs are not reco0era6le in t&e
mar4etlace )or t&e un!erl(ing asset or lia6ilit( on t&e measurement !ate" T&usH costs
incurre! 6( an entit( to acFuire an assetH or issue a lia6ilit(H t&at can 6e reco0ere! in t&e
mar4et s&oul! not 6e consi!ere! to 6e transaction costsH 6ut rat&er s&oul! 6e inclu!e! in
!etermining its )air 0alue on initial recognition" As an e;amleH suose t&at a articular
commo!it( must 6e imorte! an! attracts an imort !ut( t&at is ai! 6( t&e imorter"
T&e !ut( is not a transaction cost as !e)ine! a6o0e i) t&e imorter coul! reco0er it in
reselling t&e commo!it( in t&e !omestic mar4et 6ecause 6u(ers in t&e !omestic mar4et
3oul! &a0e &a! to a( t&e !ut( t&emsel0es i) t&e( &a! imorte! t&e commo!it(" It is not
/1
IAS .*H aragra& *"
*/
necessar( t&at t&e imorter inten! to resell t&e commo!it(H 6ecause t&e mar4et 0alue o)
an asset or lia6ilit( on initial recognition is una))ecte! 6( an entit(Is mar4eting
intentions"
/$
#*/" T&e IASB !e)inition on transaction costs is e;ten!e! )or t&e uroses o) t&is aer as
)ollo3sG
Transaction costs are incremental costs t&at are !irectl( attri6uta6le to t&e
acFuisitionH issue or !isosal o) an asset or lia6ilit( an!H )or t&e uroses o)
measuring t&e )air 0alue o) t&e asset or lia6ilit(H are not reco0era6le in t&e
mar4et lace on t&e measurement !ate"
#*1" 'n summar() t%is paper concludes t%at transaction costs) as defined a!ove) incurred on
t%e ac*uisition of an asset or on t%e incurrence of a lia!ilit( are not part of t%e fair
value of t%e asset or lia!ilit( on initial recognition6
#*$" Transaction costs ma( 6e inclu!e! in t&e Fuote! rice )or an asset or lia6ilit(" For
e;amleH t&e rice Fuote! )or a real estate roert( ma( 6e #H#,,H,,,H inclusi0e o)
commissions an! real estateH trans)erH an! sales ta;es o) #,,H,,, to 6e ai! 6( t&e
0en!or" T&e )air 0alue o) t&is roert( is t&e amount net o) t&ese transaction costs"
#*5" Transaction costs incurre! in acFuiring an asset or lia6ilit( areH t&ere)oreH e;ense! on
initial recognition 3&en t&e asset or lia6ilit( is measure! at )air 0alue" As a resultH
transaction costs !o not gi0e rise to an( !i))erence 6et3een entr( an! e;it 0alue un!er
t&e mar4et measurement o6-ecti0e" ?o3e0erH un!er an entit( seci)ic measurement
o6-ecti0eH suc& costs mig&t 6e a!!e! to t&e measure o) an assetH or !e!ucte! )rom t&e
measure o) a lia6ilit(H on initial recognition 3&en t&e entit( e;ects t&at t&e costs 3ill
6e reco0ere! )rom )uture acti0ities in0ol0ing t&e asset or lia6ilit("
#**" 7uestions also arise as to t&e treatment o) transaction an! ot&er costs t&at an entit( ma(
&a0e to a( in or!er to reali@e t&e )air 0alue o) an asset or to settle t&e )air 0alue o) a
/$
It is ossi6le t&at a cost ma( 6e reco0era6le onl( in art in t&e mar4etlaceH in 3&ic& case onl( t&e
ortion t&at is not reco0era6le 3oul! 6e consi!ere! to 6e a transaction cost"
*1
lia6ilit(" As a general rincileH suc& costs t&at cannot 6e a0oi!e!H 6ut must necessaril(
6e ai! in )uture to ac&ie0e t&e )air 0alue o) an asset on t&e 6asis o) its &ig&est an! 6est
useH or to rea( t&e )air 0alue o) a lia6ilit( on t&e 6asis o) its most e))icient rea(ment
met&o!H 3ill resuma6l( meet t&e !e)inition o) a lia6ilit(" Suc& costs s&oul! 6e
searatel( recogni@e! as lia6ilities 3&en t&e relate! asset or lia6ilit( is recogni@e! an!
measure! at )air 0alue"
/5
I) suc& costs are not reco0era6le in t&e mar4etlaceH t&e(
3oul! 6e treate! as e;enses on recognitionH rat&er t&an inclu!e! in t&e )air 0alue o) t&e
asset or lia6ilit(" An entit( s&oul! not recogni@e an( lia6ilit( )or )uture costs t&at it is
not un!er a current o6ligation to a("
+,," Costs t&at ma( 6e consi!ere! necessar( to comlete an asset s&oul! 6e !istinguis&e!
)rom transaction costs" T&e )air 0alue o6-ecti0e is to measure t&e )air 0alue o) an
incomlete asset in its lace an! con!ition at t&e measurement !ate" An aroriate
estimate o) t&e )air 0alue o) an incomlete asset mig&t 6e ma!e 6( !e!ucting t&e
!iscount t&at t&e mar4et 3oul! reFuire )or t&e assetIs lac4 o) comleteness )rom t&e
o6ser0a6le )air 0alue o) an ot&er3ise eFui0alent comlete asset" In rincileH t&is
!iscount is not t&e entit(Is estimate o) t&e costs to comlete Aalt&oug& it mig&t 6e
consi!ere! a near enoug& aro;imation in some circumstancesB"
/5
An e;amle is !e)erre! income ta;es t&at arise 3&en t&e )air 0alue o) an asset on initial recognition
e;cee!s t&e ta; 6ase Ao)ten t&e amount ai! )or t&e assetB an! t&e !i))erence 3ill ultimatel( result in a
gain )or income ta; uroses t&at 3ill attract ta;"
*$
C!a"ter 3 # +enera) Con'e"tua) Ana)y$i$ / Re)ia-i)ity
;e%inin. Re)ia-i)ity
+,#" T&e anal(sis o) c&aters .C/ &as )ocuse! on )un!amental concetual consi!erations
relating to assessing t&e rele0ance o) alternati0e measurement 6ases on initial
recognition" %e no3 turn to relia6ilit(H an! to !e)ining an! consi!ering )actors a))ecting
&o3 3ell measurement 6ases are a6le to ac&ie0e t&eir o6-ecti0esH t&at isH &o3 3ell t&e(
are a6le to reresent 3&at t&e( urort to reresent" As CON +H aragra& 1+H statesG
8Accounting in)ormation is relia6le to t&e e;tent t&at users can !een! on it to reresent
t&e economic con!itions or e0ents t&at it urorts to reresent"9
/*
+,+" %&ile most o) t&e concetual )rame3or4s in!icate t&at a tra!eCo)) must 6e ma!e
6et3een rele0ance an! relia6ilit(H t&e U"2" ASB Statement of Principles for Financial
+eporting Aaragra& .".=B states t&atH 3&en t&e most rele0ant in)ormation is not t&e
most relia6leH 8K it 3ill usuall( 6e aroriate to use t&e in)ormation t&at is t&e most
rele0ant o) 3&ic&e0er in)ormation is relia6le"9 T&is aer rooses to accet t&is U"2"
aroac& in e0aluating alternati0e measurement 6ases" In ot&er 3or!sH it is roose!
t&atH 3&en more t&an one alternati0e measurement 6asis ac&ie0es an acceta6le le0el o)
relia6ilit(H t&e most rele0ant o) t&ese 6ases s&oul! 6e selecte!" T&usH i) t&ere can 6e
agreement on t&e most rele0ant measurement 6asis on initial recognitionH t&e Fuestion
t&en 6ecomes 3&et&er it can ass a reasona6le relia6ilit( testJ it !oes not also &a0e to 6e
t&e most relia6le measurement 6asis"
+,." Relia6ilit( is consi!ere! to &a0e t&ree attri6utesG reresentational )ait&)ulnessH
neutralit(H an! 0eri)ia6ilit( Asee aragra&s =,C==B" O) t&eseH t&e 6asic un!erinning is
ro0i!e! 6( reresentational )ait&)ulness" CON +H aragra& /*H em&asi@es t&isG 8T&e
relia6ilit( o) a measure rests on t&e )ait&)ulness 3it& 3&ic& it reresents 3&at it urorts
to reresentH coule! 3it& an assurance )or t&e userH 3&ic& comes t&roug& 0eri)icationH
/*
T&e IASB Frame3or4 a!ots a similar ositionG 8In)ormation &as t&e Fualit( o) relia6ilit( 3&en it is
)ree )rom material error an! 6ias an! can 6e !een!e! uon 6( users to reresent )ait&)ull( t&at
3&ic& it eit&er urorts to reresent or coul! reasona6l( 6e e;ecte! to reresent9 Aaragra& .#B"
*5
t&at it &as t&at reresentational Fualit("9 T&us t&e aroriate starting oint )or an
anal(sis o) t&e relia6ilit( o) a measurement 6asis is to e;amine 3&at it urorts to
reresentH t&at isH its measurement o6-ecti0e" T&e attri6ute o) neutralit( t&en relates to
)ree!om )rom 6ias in reresenting 3&at is urorte! to 6e measure!H an! 0eri)ia6ilit(
relates to t&e !egree o) consensus amongst 4no3le!gea6le measurers in al(ing a
measurement 6asis"
+,=" Limitations on t&e relia6ilit( o) a measurement 6asis result )rom some )orm o)
measurement uncertaint(H 3&ic& e;ists 3&en its measure o) an asset or lia6ilit( on a
measurement !ate coul! 6e a 0ariet( or range o) !i))erent reasona6l( ossi6le or
-usti)ia6le amounts" T3o sources o) measurement uncertaint( ma( 6e i!enti)ie!G
AaB Estimation uncertaint("
A6B Economic in!eterminac("
E$timation Un'ertainty
+,/" An estimate in0ol0es a -u!gment a6out an uncertain e;isting con!ition or )uture
outcome" E;amles in accounting inclu!e measurements 6ase! on an estimate o) t&e
Fuantit( o) gol! in a gol! mine Aan uncertain e;isting con!itionB an! an estimate o) t&e
)uture timing an! amounts o) cas& )lo3s to 6e recei0e! )rom a loan recei0a6le Aan
uncertain )uture outcomeB" In t&ese casesH t&e actual amount o) gol! in t&e mine an! t&e
actual timing an! amounts o) cas& receits )rom t&e loan 3ill ultimatel( 6e caa6le o)
o6ser0ationH ossi6l( ro0i!ing e0i!ence as to t&e 0ali!it( o) earlier estimates an! t&e
measurements 6ase! on t&em" In ot&er casesH suc& as t&e )air 0alue o) an emlo(ee
stoc4 otionH t&ere ma( 6e no o6ser0a6le transactionH e0entH or ot&er &enomenon to
ro0i!e e0i!ence a6out t&e 0ali!it( o) an estimate"
!istinguising Estimation 1ncertainty from &isk3&elated Volatility
+,1" Actual outcomes ma( not 6e a )air in!ication o) t&e relia6ilit( o) rior estimates" T&is is
6ecause an outcome ma( 6e a))ecte! 6( in)ormation on e0ents or circumstances t&at !i!
not e;ist at t&e measurement !ate" T&usH t&e relia6ilit( o) a measurement estimation
**
s&oul! 6e -u!ge! on t&e 6asis o) t&e )acts an! t&e 0ali!it( o) assumtions at t&e
measurement !ateH an! not necessaril( 6( t&e su6seFuent outcome"
1,
+,$" In ot&er 3or!sH one must !istinguis& 6et3een estimation uncertaint( an! 0olatilit(
resulting )rom ta4ing ris4s" For e;amleH t&e e;c&ange rate alica6le to a loan a(a6le
in a )oreign currenc( ma( 6e caa6le o) recise !etermination )rom Fuote! e;c&ange
rates on a measurement !ateH so t&at t&ere is no estimation uncertaint( 3it& resect to it"
?o3e0erH t&e ris4 o) )uture c&anges in t&at rateH an! t&ere)ore o) )uture c&anges in an(
measure o) t&e loan t&at re)lects current e;c&ange ratesH ma( 6e consi!era6le"
+,5" Some con)use t&e 0olatilit( o) a measurement t&at urorts to re)lect t&e e))ects o)
otentiall( 0olatile c&anges in economic con!itions 3it& its relia6ilit(" For e;amleH i)
a )air 0alue measurement accuratel( !eicts t&e amount )or 3&ic& an asset or lia6ilit(
coul! 6e e;c&ange! 6et3een 4no3le!gea6leH 3illing arties in an armIs lengt& mar4et
transactionH t&en it is relia6l( measuring 3&at it urorts to reresent" T&e 0olatilit( o)
t&is 0alue o0er time is siml( re)lecting t&e e))ects o) c&anges in un!erl(ing mar4et
con!itions" T&ose 3&o ma( o6-ect to t&is 0olatilit( 6eing measure! an! resente! in
)inancial statements are resuma6l( ta4ing issue 3it& its !ecision use)ulness or
rele0ance" ?o3e0erH concern a6out &o3 3ell an estimate o) t&e )air 0alue o) an asset or
lia6ilit( reresents 3&at )air 0alue urorts to measure is a relia6ilit( concern" T&usH it
is imortant to !istinguis& relia6ilit( )rom 0olatilit( arising )rom c&anges in con!itions
t&at are cature! 6( a measurement 6asis"
(olerance for Estimation 1ncertainty
+,*" T&ere are man( e;amles o) signi)icant estimation uncertaint( in )inancial accountingH
inclu!ingG
1,
Ne0ert&elessH t&e e;amination o) actual outcomes can 6e &el)ul in assessing an! imro0ing
estimation tec&niFues 3&en t&e )actors a))ecting su6seFuent e0ents are ta4en into account"
Reconciling rior estimates 3it& actual outcomes can 6e an imortant art o) a s(stem o) roce!ures
an! controls to &el ensure t&e relia6ilit( o) measurements t&at !een! on estimates o) )uture
outcomes"
#,,
a current 0alue measurement o) a lia6ilit( un!er a contentious la3suitH
t&e estimation o) )uture salar( increases in a current 0alue measurement o) a salar(C
6ase! !e)ine! 6ene)it ension lanH an!
t&e estimation o) liFui!it( an! 0olatilit( arameters entering into t&e )air 0alue
measure o) an otion to 6u( or sell an asset t&at is not tra!e! in an acti0e mar4et"
+#," It is 3ell recogni@e! an! accete! t&at accounting cannot a0oi! some !egree o)
estimation uncertaint(" T&e IASB Frame3or4 inclu!es t&e )ollo3ing statementG
8In man( casesH cost or 0alue must 6e estimate!J t&e use o) reasona6le estimates
is an essential art o) t&e rearation o) )inancial statements an! !oes not
un!ermine t&eir relia6ilit(" %&enH &o3e0erH a reasona6le estimate cannot 6e
ma!e t&e item is not recognise! in t&e 6alance s&eet or income statement"9
Aaragra& 51B
+##" T&e concetual )rame3or4s o) t&e IASBIs liaison national stan!ar! setting artners
contain similar statements" Un)ortunatel(H t&ere is no Fuantitati0e 6asis )or !etermining
3&at constitutes 8a reasona6le estimate9 )or accounting recognition uroses" Rat&erH
t&is &as 6een le)t to in!i0i!ual stan!ar!s an! su6-ecti0e -u!gments"
1#
Alt&oug& t&is
aer !oes not a!!ress 3&en assets or lia6ilities s&oul! 6e recogni@e! Asee aragra&s
#.C#/BH t&e e0aluation o) alternati0e measurement 6ases on initial recognition
necessaril( reFuires consi!eration o) t&eir caa6ilities )or relia6le estimation" T&e
anal(sis o) alternati0e measurement 6ases in c&ater $ 3ill consi!er t&e 0ulnera6ilit( o)
articular measurement 6ases to unacceta6le !egrees o) estimation uncertaint( an!
3&et&er t&ere ma( 6e 3a(s o) coing 3it& t&at uncertaint("
1#
For e;amleH accounting stan!ar!s &a0e conclu!e! t&at t&e )uture 6ene)its o) an enterriseIs internal
researc& e))orts are generall( incaa6le o) su))icientl( relia6le estimation to 3arrant t&eir recognition
as assets in )inancial statements"
#,#
E'onomi' In(etermina'y
+#+" A measurement 6asis ma( 6e su6-ect to limitations in its a6ilit( to reresent )ait&)ull( a
articular economic &enomenon as a result o) in!eterminac(" In!eterminac( arises
3&en it is not ossi6le to !e)ine a &enomenon in su))icientl( concrete terms to ena6le
it to 6e 0ali!l( Fuanti)ie!H at least 3it&out ma4ing signi)icant limiting assumtions"
T&at isH some 0alue a))ecting Fualit( or roert( o) an asset or lia6ilit( ma( 6e un4no3n
an! un4no3a6le" CON +H aragra& 15H illustrates t&is 6( re)erence to t&e ro6lems o)
!e)ining 8intelligence9 an! -u!ging 3&et&er intelligence tests measure it 0ali!l("
Attemts to measure intelligence must )all 6ac4 on t&e measurement o) some
o6ser0a6le 6e&a0ioursH or on tests o) 0er6alH arit&metic or ot&er s4ills t&at are 6elie0e!
to 6e &ig&l( correlate! 3it& intelligence" T&e relia6ilit( o) suc& measurements must 6e
interrete! care)ull(H recogni@ing t&eir in&erent limitations"
1+
+#." Similarl(H 3&at )inancial statements can urort to reresent a6out t&e economic 0alue
o) an enterrise is su6-ect to signi)icant in!eterminac( limitations" Accounting &as 6een
!escri6e! as t&e art o) t&e ossi6le" Concetual )rame3or4s stress t&at )inancial
statements !o not urort to s&o3 t&e 0alue o) an enterriseH 6ut rat&er 8K s&oul!
ro0i!e in)ormation t&at is use)ul to t&ose 3&o !esire to ma4e t&eir o3n estimates o)
t&e enterriseIs 0alue"9
1.
Financial accounting measurement is limite! to assets an!
lia6ilities o) enterrises t&at meet certain criteria )or i!enti)icationH recognition an!
measura6ilit(" It 3ill 6e seen in c&ater $ t&at alternati0e measurement 6ases &a0e
!i))erent 0ulnera6ilities to !i))erent t(es an! !egrees o) in!eterminac( in !i))erent
circumstances"
+#=" A 6asic economic in!eterminac( in accounting in0ol0es ar6itrar( allocations or
attri6utions" T&e ro6lem arises 3&en a measurement 6asis reFuires t&at t&e cost or
1+
An economic in!eterminac( ma( a))ect not onl( t&e relia6ilit( o) measurements o) a articular
economic &enomenonH 6ut also its a!-u!ge! rele0ance" Users o) )inancial in)ormation ma(
conclu!e t&at a &enomenon is so in!e)ina6le t&at attemts to measure it are not &el)ul in
)ormulating an economic !ecision"
1.
See CON /H aragra& +$"
#,+
0alue o) an item 6e allocate! among t3o or more assets or lia6ilities < t&e 8oneCtoC
man(9 attri6ution ro6lem" It &as 6een 3ell !emonstrate! t&at t&ere can 6e no uniFue
nonCar6itrar( solution to a oneCtoCman( or a man(CtoCman( allocation"
1=
T&ere are
numerous oneCtoCman( an! man(CtoCman( allocations in resent !a( )inancial
accounting" For e;amleH cost measurement 6ases normall( reFuire oneCtoCman(
allocations on initial recognition o) assets acFuire! in 6as4et urc&ase transactions an!
sel) constructe! assets t&at in0ol0e t&e use o) ot&er enterrise assets or o0er&ea!s"
Accounting stan!ar!s ma( seci)( allocation met&o!s to 6e )ollo3e! in certain o) t&ese
situations" Suc& accounting rescritions ma( imro0e t&e 0eri)ia6ilit( o)
measurementsH 6ut cannot imro0e t&eir reresentational )ait&)ulness" Furt&erH suc&
rescritions are su6-ect to measurement 6ias in t&e sense t&at t&e ar6itrar( a!otion o)
a articular allocation met&o! necessaril( reclu!es eFuall( -usti)ia6le alternati0es t&at
(iel! !i))erent results" It 3ill 6e seen in c&ater $ t&at t&e ro6lem o) ar6itrar(
allocations !i))ers as 6et3een measurement 6ases an! situations"
+#/" Economic in!eterminac( is a more )un!amental ro6lem t&an estimation uncertaint("
Estimation uncertaint( in0ol0es a 4no3nH Fuanti)ia6le &enomenon t&at is su6-ect to
uncertain estimationH 3&ile in!eterminac( results 3&en a &enomenon cannot 6e
su))icientl( !e)ine! to 6e caa6le o) estimation" ?o3e0erH an estimate o) a Fuanti)ia6le
&enomenon A)or e;amleH a resent 0alue measurement o) t&e cas& )lo3s to result )rom
a researc& un!erta4ing 3it& &ig&l( uncertain outcomesB coul! 6e so uncertain t&at it
ma( 6e consi!ere! in!eterminate 3it&in a 3i!e range" Suc& estimation uncertaint( is
!i))icult to !istinguis& )rom economic in!eterminac(" Ne0ert&elessH eac& reresents a
!i))erent source o) measurement uncertaint(H an! it is roose! t&at it is imortant to
un!erstan! t&e nature an! source o) a measurement uncertaint( in assessing &o3 it
mig&t 6e coe! 3it& an! in -u!ging t&e e))ects o) suc& coing aroac&es on t&e
0eri)ia6ilit(H 6iasH an! reresentational )ait&)ulness o) t&e resulting measure"
1=
T3o comre&ensi0e 3or4s on t&is su6-ect areG Art&ur L T&omasH T&e Allocation Pro!lem in
Financial Accounting T%eor( AStu!ies in Accounting Researc& No" .BJ an! Art&ur L" T&omasH T%e
Allocation Pro!lem; Part T&o AStu!ies in Accounting Researc& No" *B"
#,.
+#1" Mar4et an! entit( seci)ic measurement o6-ecti0es are susceti6le to !i))erent relia6ilit(
limitations" For e;amleH t&e relia6ilit( Ameasurement uncertaint(B o) an entit( seci)ic
measurement ma( 6e su6-ect to limitations in managementIs 4no3le!ge 6aseH an! to
ossi6le 6iases Ainclu!ing t&e otimismH essimismH an! ris4 tolerancesB o) t&e measurer
At&e entit(BH
1/
as 3ell as measurement uncertainties t&at are in&erent in t&e articular
entit( seci)ic 6asis use!" An o6ser0a6le mar4et rice )or an asset or lia6ilit( on a
measurement !ate is not su6-ect to measurement uncertainties" ?o3e0erH in t&e a6sence
o) suc& a mar4et riceH an estimate! )air 0alue ma( 6e oen to signi)icant measurement
uncertaint("
;i$')o$ure
+#$" It is )un!amental to statistical reresentation an! t&e mat&ematics o) ro6a6ilit( t&at a
0ali! !eiction o) t&e measurement o) an uncertain &enomenon or state reFuires more
t&an reorting a single amount selecte! )rom 3it&in t&e range o) ossi6ilities" T&e
statistical roerties o) a num6er urorting to reresent an un!erl(ing &enomenon or
state inclu!e in)ormation a6out t&e natureH si@e an! s&ae o) t&e range o) uncertaint("
T&usH t3o 6asic roerties o) a single oint measurement un!er con!itions o)
uncertaint( nee! to 6e con0e(e! to )ull( ortra( t&at measurementG AaB t&e 6asis )or
!etermining t&e single oint measurementH an! A6B t&e natureH si@e an! s&ae o) t&e
range o) ossi6le 0alues aroun! t&at oint" %it& resect to AaBH in t&e case o) estimation
uncertaint(H a single oint measurement mig&t 6e t&e most li4el( 0alue in t&e range o)
ossi6ilities un!er t&e articular measurement 6asisH or its ro6a6ilit(C3eig&te! mean
Aits 8e;ecte! 0alue9B" %&en t&ere is an area o) in!eterminac(H some )ormula or rule
ma( 6e use! A)or e;amleH t&e cost o) an in0entor( asset ma( 6e calculate! using a
FIFOH LIFOH or 3eig&te! a0erage use assumtion ruleH an! a marginalH )ull or 0aria6le
1/
Some concetual )rame3or4s intro!uce a !istinction 6et3een measurement 6ias an! measurer 6ias
AseeH )or e;amleH CON +H aragra&s $$C$5H an! Australian Statement o) Accounting Concets
SACC.H -ualitative C%aracteristics of Financial 'nformationH aragra&s +#C++B" Measurement 6ias
is 6ias t&at is in&erent in a measurement 6asis" Measurer 6ias Asometimes terme! 8error9B is a
misalication o) a articular measurement 6asis in a articular circumstance to ac&ie0e a !esire!
result"
#,=
cost attri6ution met&o!B" %it& resect to A6BH un)ortunatel( recise statistical
Fuanti)ication o) ranges o) uncertaint( is rarel( ossi6le in )inancial accounting"
?o3e0erH t&is !oes not reclu!e t&e ro0ision o) use)ul Fualitati0eH an! in some casesH
Fuantitati0e in)ormation a6out t&e nature an! e;tent o) an uncertaint(" It seems to 6e
3ell accete!H at least in rincileH t&at suc& !isclosures are rele0ant to )ull an! )air
)inancial reorting" For e;amleH CON +H aragra& $+H notesG 8Reorting accounting
num6ers as certain an! recise i) t&e( are not is a negation o) relia6le reorting"9
+#5" T&e nature an! e;tent o) measurement uncertaint( ma( !een! to a signi)icant !egree
on 3&at a measurement 6asis urorts to reresent" For e;amleH a measurement 6asis
t&at urorts to )ull( reresent t&e e))ects o) all economic con!itions on t&e
measurement !ate ma( generall( 6e e;ecte! to 6e more susceti6le to measurement
uncertaint( t&an a 6asis t&at &as less am6itious o6-ecti0es" Since t&e alternati0e
measurement 6ases i!enti)ie! an! !e)ine! at aragra&s 15C*1 !i))er in 3&at t&e(
urort to measureH t&e( ma( 6e e;ecte! to &a0e !i))erent susceti6ilities to
measurement uncertainties"
+#*" T&usH t&is aer conclu!es t&at in)ormation a6out measurement uncertaint( s&oul! 6e
consi!ere! an essential element o) measurement reorting in )inancial accounting"
From t&is it is reasone! t&at t&e e0aluation o) t&e relia6ilit( o) a measurement 6asis
s&oul! encomass in)ormation t&at can 6e ro0i!e! a6out t&at measurement 6asis an!
t&e natureH si@e an! s&ae o) t&e range o) an( measurement uncertaint(" Seci)icall(H
)inancial statement users are resume! to 6e intereste! in &o3 an uncertain
measurement &as 6een !eri0e! )rom t&e range o) reasona6l( ossi6le amountsH an! t&e
nature an! e;tent o) t&e measurement uncertaint("
++," T&is aer rooses t&at t&e a6ilit( to ro0i!e use)ul !isclosures a6out t&e in)ormation
uncertaint( o) a measurement 6asis is consi!ere! an imortant )actor in assessing its
relia6ilit(" T&is !oes not con!one unrelia6le measurementsH 6ut rat&er 6roa!ens t&e
6asis )or assessing t&e relia6ilit( o) alternati0e measurement 6ases" More seci)icall(H it
is roose! t&at a measurement 6asis s&oul! not 6e consi!ere! unrelia6le solel( 6ecause
#,/
it &as a 3i!e range o) measurement uncertaint(H i) 0ali! an! use)ul in)ormation can 6e
ro0i!e! t&at ena6les users to un!erstan! an! e0aluate t&e uncertaint("
++#" T&is roosal seems consistent 3it& recent emirical researc& e0i!enceH 3&ic& in!icates
t&at t&e mar4et incororates o6ser0a6le !i))erences in t&e relia6ilit( o) accounting
measures in t&e ricing o) eFuit( securities" A recent aer 6( an American Accounting
Association committee sur0e(e! t&is researc&" It inclu!es t&e )ollo3ing summar(
conclusion an! recommen!ationG
8Researc& !emonstrates t&at t&e in0estors incororate relia6ilit( into eFuit(
rices an! 0ie3 relia6ilit( in)ormation as imortant to t&eir in0estment
-u!gments an! !ecisions" Accor!ingl(H t&e Committee encourages t&e FASB not
to let constituentsI concerns a6out in)ormation relia6ilit( to re0ent recognition
o) rele0ant in)ormation" Rat&erH 3e suort e;an!e! !isclosure o) in)ormation
on relia6ilit( o) estimates" T&e more users 4no3 a6out t&e mo!els or met&o!s
use! to calculate estimates an! t&e assumtions use! in t&ose met&o!sH t&e 6etter
t&e( can assess t&e relia6ilit( o) accounting measures an! incororate t&is
in)ormation into t&eir -u!gments an! !ecisions"9
11
+++" 'n summar() t%is paper proposes t%at) in comparing and evaluating t%e relia!ilit( of
alternative measurement !ases) consideration s%ould !e given to !ot%;
t%e nature and e4tent of measurement uncertaint( under alternative measurement
!ases) and
t%e relevance and relia!ilit( of supporting information on t%e nature and e4tent of
measurement uncertaint( t%at can !e provided in respect of alternative
measurement !ases6
++." As note! a6o0e Aaragra&s +,1C+,5BH t&e ris4Crelate! 0olatilit( o) a 0alue is a searate
!imension )rom measurement uncertaint(" Di))erent measurement 6ases re)lect t&e
e))ects o) 0arious ris4s to !i))erent e;tents at !i))erent times" T&e resonsi0eness o)
11
American Accounting AssociationIs Financial Accounting Stan!ar!s CommitteeH Comments to t%e
FAS0 on Measurement +elia!ilit(H Unu6lis&e! aerH Eune .H +,,.H age $"
#,1
alternati0e measurement 6ases to 0arious ris4s an! t&eir relati0e a6ilities to )acilitate
ris4 anal(sis are clearl( imortant in comaring an! e0aluating t&emH 6ut t&ese )actors
a))ect t&e rele0ance o) t&e measurement ro0i!e! un!er eac& 6asis rat&er t&an its
relia6ilit("
#,$
C!a"ter # Ana)y$i$ o% A)ternative Mea$urement Ba$e$
++=" C&aters .C1 &a0e resente! a general anal(sis an! e0aluation o) imortant concetual
consi!erations relating to t&e measurement o) assets an! lia6ilities on initial recognition"
C&ater $ 3ill no3 ta4e a more seci)ic )ocus an! e;amine eac& o) t&e alternati0e
measurement 6ases A3&ic& 3ere i!enti)ie! an! gi0en 3or4ing !e)initions at aragra&s
15C*1B in t&e conte;t o) t&e general concetual anal(sis"
++/" Eac& i!enti)ie! measurement 6asis 3ill 6e e;amine! to !e)ine t&e un!erl(ing
o6-ecti0eAsBH measurement roertiesH an! assumtions t&at c&aracteri@e it in relation to
ot&er 6ases" A rimar( )ocus 3ill 6e to i!enti)( an! e;amine t&e areas o) similarit( an!
!i))erence 6et3een alternati0e 6asesH so as to un!erstan! &o3H 3&enH an! 3&( t&e( (iel!
!i))erent measurements" T&e ultimate urose o) t&is anal(sis is to assess 3&et&er one
6asisH or some reasone! com6ination o) 6asesH is most aroriate on t&e initial
recognition o) assets an! lia6ilities"
=air 2a)ue
++1" T&e tentati0e conclusion !e0eloe! in c&ater = Asee aragra& #+5B is t&atH su6-ect to
anal(sis o) seci)ic measurement 6ases an! assuming relia6le measura6ilit(H 8K t&e
mar4et measurement o6-ecti0e &as imortant Fualities t&at ma4e it suerior to entit(
seci)ic measurement o6-ecti0esH at least on initial recognition"9 T&e mar4et
measurement o6-ecti0e t&us seems to 6e a logical oint o) !earture )or a comarati0e
anal(sis o) alternati0e measurement 6ases"
++$" T&e 3or4ing !e)inition o) 8)air 0alue9 isG
T&e amount )or 3&ic& an asset or lia6ilit( coul! 6e e;c&ange! 6et3een
4no3le!gea6leH 3illing arties in an armIs lengt& transaction Asee aragra&s
55C*.B"
++5" T&e )un!amental o6-ecti0e o) )air 0alue is to re)lect t&e mar4et rice o) an asset or
lia6ilit( on t&e measurement !ate" %&en t&ere is no o6ser0a6le mar4et rice )or assets
#,5
or lia6ilities 3it& t&e same 0alue a))ecting roerties as t&e asset or lia6ilit( to 6e
measure!H t&e o6-ecti0e is to estimate 3&at t&e mar4et rice 3oul! 6e i) a mar4et
e;iste!"
++*" T&e tentati0e concetual conclusion in c&ater =H 3it& resect to t&e suerior !ecision
use)ulness an! rele0ance o) t&e mar4et 0alue o6-ecti0e o0er entit( seci)ic alternati0es
on initial recognition o) assets an! lia6ilitiesH 3as ma!e su6-ect toG
AaB t&e seci)ic e;amination o) alternati0e measurement 6asesH an!
A6B t&e con!ition t&at t&e )air 0alue o) an asset or lia6ilit( can 6e measure! 3it&
su))icient relia6ilit( to -usti)( its recognition in )inancial statements"
+.," T&e 6asic roerties o) )air 0alue relating to its !ecision use)ulness an! rele0ance on
initial recognition &a0e 6een set out in c&aters = an! /H an! so nee! not 6e reeate!
&ereH 6ut 3ill 6e a!!resse! in more seci)ic terms relati0e to t&e comarati0e anal(ses
o) t&e alternati0e measurement 6ases"
+.#" %&at &as not 6een a!!resse! to t&is ointH an! 3ill 6e t&e )ocus o) t&e imme!iatel(
)ollo3ing sectionH is t&e 0ulnera6ilit( o) t&e )air 0alue measurement o6-ecti0e to
ro6lems o) relia6ilit(" Signi)icant concerns &a0e 6een raise! in accounting literature
an! ractice 3it& resect to t&e relia6ilit( o) )air 0alue estimates in a num6er o)
common situations arising on t&e initial recognition o) assets an! lia6ilities"
&eliability -imitations
+.+" T&e estimation o) )air 0alue is su6-ect to relia6ilit( limitations 3&en t&ere is no !irectl(
o6ser0a6le mar4et rice )or an asset or lia6ilit( on a measurement !ate" T&e Fuestion is
3&et&er t&ere are circumstances in 3&ic& a su))icientl( relia6le estimate o) )air 0alue is
not ossi6le 3it& reasona6le cost an! e))ort an!H i) a relia6le estimate is not consi!ere!
ossi6leH 3&at can 6e !one' Per&as certain con!itions un!erl(ing a ure )air 0alue
o6-ecti0e coul! 6e rela;e!H or an alternati0e measurement 6asis t&at is caa6le o)
#,*
relia6le estimation coul! 6e su6stitute! )or )air 0alueH or as a last resortH no recognition
coul! 6e gi0en to t&e asset or lia6ilit("
+.." T&e IASB an! FASB &a0e a!ote! a )air 0alue measurement &ierarc&( in connection
3it& t&eir -oint ro-ect on 6usiness com6inationsH 3&ic& 3oul! use )air 0alue as t&e
measurement o6-ecti0e )or assets an! lia6ilities o) 6usinesses acFuire!"
1$
Recentl(H t&e
FASB &as roose! some c&anges to t&e )air 0alue estimation &ierarc&("
15
T&e &ierarc&(
sets out general gui!ance on 3&at s&oul! 6e consi!ere! to 6e 6est e0i!ence o) )air 0alue
at t&ree 6asic le0els o) relia6ilit(" It is instructi0e to e;amine t&is &ierarc&( in
consi!ering AiB t&e nature an! signi)icance o) )air 0alue measurement uncertaintiesH an!
AiiB t&e aroac&es an! assumtions t&at are use! to resol0e t&ese measurement
uncertainties to single amount )air 0alue estimates" T&e anal(sis o) t&is &ierarc&(
ena6les some insig&ts into t&e relia6ilit( limitations o) t&e resulting amountsH 3&ic& in
turn &els to ro0i!e a use)ul 6asis )or comarison 3it& alternati0e measurement 6ases
on t&e initial recognition o) assets an! lia6ilities"
+.=" T&e )air 0alue estimation &ierarc&( as !e0eloe! to !ate consists o) t&ree 6roa! le0els"
It gi0es &ig&est riorit( to o6ser0a6le mar4et rices in acti0e mar4ets )or assets an!
lia6ilities t&at are i!entical to t&ose to 6e measure!H an! lo3est riorit( to inuts
!e0eloe! on t&e 6asis o) an entit(Is o3n internal estimates an! assumtions"
Level 1
+./" Le0el # ma( 6e generall( !e)ine! as )ollo3sG
Fair 0alue s&all 6e estimate! using o6ser0a6le mar4et rices )or i!entical assets
or lia6ilities in acti0e mar4ets 3&ene0er t&at in)ormation is a0aila6le"
T&is is t&e i!ealH an! )air 0alue !etermine! at Le0el # is a )ull( relia6le measure o) 3&at
)air 0alue urorts to reresent"
1$
T&e source use! in t&is aer is t&e IASB Pro-ect U!ateH 0usiness Com!inations @P%ase ''A
Application of t%e Purc%ase Met%odH as re0ise! Eune =H +,,.H age *" T&e IASB an! FASB are
continuing to consi!er ossi6le imro0ements to t&is &ierarc&("
15
FASB E;osure Dra)tH Fair Value Measurements) aragra&s #=C+= an! C=.CC1#"
##,
+.1" T&e e))ecti0e imlementation o) Le0el # reFuires a clear an! consistent un!erstan!ing
o) 3&at is meant 6( an acti0e mar4et" T&is aer &as attemte! to i!enti)( an! !escri6e
t&e essential attri6utes o) t&e mar4et 0alue measurement o6-ecti0e Asee aragra&s #,$C
##,B an! &as roose! t&e )ollo3ing !e)inition o) 8mar4et9 to em6o!( t&ese attri6utesG
A 6o!( o) 4no3le!gea6leH 3illingH armIs lengt& arties carr(ing on su))icientl(
e;tensi0e e;c&ange transactions in an asset or lia6ilit( to ac&ie0e its eFuili6rium
riceH re)lecting t&e mar4et e;ectation o) earning or a(ing t&e mar4et rate o)
return )or commensurate ris4 on t&e measurement !ate Aaragra& #,$B"
+.$" To !ate accounting stan!ar!s &a0e not !e)ine! 3&at s&oul! 6e consi!ere! to constitute a
mar4et )or t&e uroses o) imlementing t&e )air 0alue &ierarc&(" ?o3e0erH t&e recent
FASB E;osure Dra)t on Fair Value Measurements !oes roose a start at t&isG
8In an acti0e mar4etH suc& as t&e Ne3 Por4 Stoc4 E;c&angeH Fuote! rices t&at
reresent actual Ao6ser0a6leB transactions are rea!il( an! regularl( a0aila6leJ
readil( availa!le means t&at ricing in)ormation is currentl( accessi6le an!
regularl( availa!le means t&at transactions occur 3it& su))icient )reFuenc( to
ro0i!e ricing in)ormation on an ongoing 6asis" In !etermining 3&et&er a
mar4et is acti0eH t&e em&asis is on t&e le0el o) acti0it( )or a articular asset or
lia6ilit("9
1*
Certain asects o) t&is FASB !escrition o) an acti0e mar4et seem consistent 3it& t&e
!e)inition o) 8mar4et9 roose! in t&is aer D nota6l( t&atH )or a mar4et to e;istH t&ere
must 6e su))icientl( )reFuent or e;tensi0e transactions"
+.5" T&e a6o0e roose! !e)inition o) 8mar4et9 3oul! reFuire some signi)icant suorting
gui!ance to ena6le reasona6le an! consistent -u!gments 3it& resect to 3&et&er 0arious
ossi6le tra!ing situations coul! 6e consi!ere! to ac&ie0e t&e mar4et measurement
o6-ecti0e" Suc& gui!ance is 6e(on! t&e scoe o) t&is aer" ?o3e0erH certain issues t&at
3oul! seem to nee! to 6e a!!resse! to !e0elo suc& gui!ance are raise! an! !iscusse!
in t&e )ollo3ing aragra&s"
1*
FASB E;osure Dra)tH Fair Value Measurements) aragra& #,"
###
T?E 2NO%LEDGE CONDITION
+.*" One issue relates to t&e le0el o) 4no3le!ge reFuire! 6( mar4et articiants" It 3as
roose! earlier t&at t&e 84no3le!gea6le arties9 con!ition 3it&in t&e concet o) )air
0alue s&oul! 6e !e)ine! in terms o) access to u6licl( a0aila6le in)ormation Aaragra&
#,*B" It is )urt&er roose! t&at t&ere must 6e a minimum le0el o) u6lic in)ormation to
ena6le a mar4et" %&at t&e minimum le0el ma( 6e is an oen Fuestion" ?o3e0erH
resuma6l( it s&oul! inclu!e current in)ormation a6out transactions an! rices in
resect o) t&e articular assets or lia6ilities" T&e a6o0e aragra& Fuote! )rom t&e FASB
E;osure Dra)t notes t&atH in an acti0e mar4etH 8ricing in)ormation is currentl(
accessi6le9" T&is in)ormation mig&t 6e e;ecte! to inclu!e t&e Fuantities an! Fualit( o)
items tra!e! as 3ell as general mar4et con!itions an! rates o) return a0aila6le in t&e
mar4etlace )or commensurate le0els o) ris4" T&is !oes notH &o3e0erH reclu!e t&e
ossi6ilit( o) in)ormation as(mmetr( Asee aragra&s #,* an! #5.C#5$B"
+=," Some &a0e &el! t&at an asset or lia6ilit( must &a0e some signi)icant erio! o) e;osure
to t&e oen mar4etH or t&at t&ere 3oul! nee! to 6e signi)icant in)ormation
!isseminationH e!ucationH an! mar4eting to in)orm otential articiants a6out t&e asset
or lia6ilit(H )or a mar4et in it to e;ist"
$,
Ot&er3iseH t&e( reasonH t&e 4no3le!ge con!ition
)or t&at asset or lia6ilit( 3oul! not 6e met" Oen an! acti0e tra!ing 3it& e;tensi0e
transactions in commonl( tra!e! securities an! goo!s an! ser0ices ma( 6e resume! to
meet t&is con!ition" ?o3e0erH it ma( not 6e met )or items t&at are t&inl( tra!e!H are ne3
to t&e mar4etlaceH or are uniFue in some signi)icant resect" T&is aer roosesH gi0en
t&e limite! scoe o) its in0estigationH t&at t&ere is a nee! )or researc& to ena6le t&e
4no3le!ge con!ition un!erl(ing t&e concet o) a mar4et to 6e )ull( !e)ine!" I) a mar4etH
as !e)ine!H cannot 6e consi!ere! to e;ist )or an asset or lia6ilit( on initial recognitionH
t&en re)erence 3ill nee! to 6e ma!e to ot&er ossi6le sources )or estimating its )air
0alue or to an aroriate su6stitute measurement"
$,
For e;amleH see T&e Ro(al Institution o) C&artere! Sur0e(orsH Valuation of .&ner,occupied
Propert( for Financial Statements) aragra& +"#J an! Appraisal 'nstitute +esponse; FAS0 Fair
Value Measurements) age *"
##+
%IDE BIDCAS2ED PRICE SPREADS
+=#" Mar4et ine))icienciesH inclu!ing in)ormation as(mmetries an! 0arious uncertaintiesH
ma( lea! to mar4et rices t&at are not rea!il( o6ser0a6le as single 0alues 6ut as
otentiall( 3i!e 6i!Cas4e! rice srea!sH t&at isH rice srea!s t&at are !ue to more t&an
-ust !ealer transaction )acilitation )ees Asee aragra& #55B" Suc& rice srea!s ma(
reresent ranges o) in!eterminac( 3&en t&ere is no con0incing e0i!ence as to 3&ere in
t&e 6i!Cas4e! rice range transaction rices can 6e e;ecte! to )all" T&is in!eterminac(
&as o)ten 6een 8resol0e!9 in ractice 6( selecting t&e mi! oint in t&e rangeH 6ut t&is
con0ention 3oul! seem to &a0e no concetual -usti)ication 3&en actual transactions
coul! )all an(3&ere 3it&in t&e range"
TRANSACTION PRICES
+=+" T&e concet o) a mar4et as en0isage! in t&is aer reFuires 8su))icientl( e;tensi0e
e;c&ange transactions in an asset or lia6ilit( to ac&ie0e its eFuili6rium rice"9 Paragra&
#, o) t&e FASB E;osure Dra)t on )air 0alue measurements cite! a6o0e also states t&at
in an acti0e mar4et 8transactions occur 3it& su))icient )reFuenc( to ro0i!e ricing
in)ormation on an ongoing 6asis"9 T&usH it ma( 6e conclu!e! t&at t&e e;istence o) an
o6ser0a6le transaction or a )e3 in)reFuent transactions is not su))icient o) itsel) to
constitute a mar4et )or t&e uroses o) Le0el # o) t&e )air 0alue &ierarc&("
$#
A &ig&l(
contro0ersial issue 3it& articular signi)icance to measurement on initial recognition
relates to 3&et&er or 3&en t&e rice e;c&ange! )or an asset or lia6ilit( in a single
transaction 6et3een a 6u(er an! a seller coul! 6e accete! to 6e its mar4et rice A)air
0alueB on t&e !ate o) t&e transaction"
+=." It seems to 6e commonl( 6elie0e! t&at t&e transaction rice o) an asset or lia6ilit(
arri0e! at 6et3een a 6u(er an! a seller !ealing at armIs lengt& s&oul! 6e resume! to 6e
$#
T&e Eoint %or4ing Grou o) Stan!ar! Setters in Dra)t Stan!ar!s an! Basis )or Conclusions C
Financial 'nstrument) and Similar 'tems arri0e! at a some3&at similar conclusion in i!enti)(ing
certain situations in 3&ic& 8rices are not !etermine! 6( normal mar4et interactions9H or 3&en t&ere
are in)reFuent transactions" In t&ese situationsH it conclu!e! t&at t&e o6ser0e! rices s&oul! not 6e
use! 8as t&e rimar( 6asis )or !etermining )air 0alue9" See its aragra&s 55C** an! .+5C..," It !i!
notH &o3e0erH a!!ress or !e)ine t&e concet o) a mar4et"
##.
its mar4et rice at t&e !ate o) t&e transactionH At&at is to ac&ie0e Le0el # o) t&e )air 0alue
&ierarc&(B unless t&ere is con0incing e0i!ence to t&e contrar("
$+
Suorters o) t&is 0ie3
argue t&at a transaction rice meets t&e !e)inition o) )air 0alue < t&at isH it is t&e
amount )or 3&ic& t&e asset or lia6ilit( coul! 6e e;c&ange! 6et3een 4no3le!gea6leH
3illing arties in an armIs lengt& transaction < unless t&ere is clear e0i!ence t&at one
or more o) t&ese con!itions is not met" E;cetions coul! ariseH )or e;amleH i) it is
aarent t&at t&e transaction occurre! un!er !uress rat&er t&an 6et3een 3illing artiesH
3as 6et3een relate! artiesH or 3as art o) a set o) transactions t&at 3oul! &a0e
occurre! at a !i))erent rice i) not )or t&ose ot&er transactions"
$.
It is also concei0a6le
t&at t&ere coul! 6e situations in 3&ic& it is e0i!ent t&at one o) t&e arties !i! not meet
t&e con!ition o) 6eing 4no3le!gea6leH er&asH )or e;amleH i) a !i))erent mar4et rice
coul! 6e o6ser0e!" But 6arring clear e0i!ence o) suc& e;cetionsH t&e argument is t&at
in an oenH )ree enterrise econom(H t&e rices o) all goo!s an! ser0ices are set on t&e
6asis o) sul( an! !eman! con!itions 6( cometing articiants 3&o can 6e e;ecte!
to 6e 4no3le!gea6le a6out t&e ro!ucts an! ser0ices in 3&ic& t&e( are transacting"
Bu(er an! seller interests &a0e access to in)ormation a6out t&e rates o) return )or ris4
a0aila6le in t&e mar4etlaceH an! t&usH it is argue!H s&oul! 6e e;ecte! to negotiate
rices t&at are consistent 3it& t&ese mar4et e;ectations"
+==" CON $H aragra& +$ a!0ances t&is ositionG
8A transaction in t&e mar4etlace < an e;c&ange )or cas& at or near to t&e !ate
o) t&e transaction < is t&e most common trigger )or accounting recognitionH an!
accountants t(icall( accet actual e;c&ange rices as )air 0alue in measuring
t&ose transactionsH a6sent ersuasi0e e0i!ence to t&e contrar(" In!ee!H t&e usual
con!ition )or using a measurement ot&er t&at t&e e;c&ange rice is a conclusion
t&at t&e state! rice is not reresentati0e o) )air 0alue"9 M)ootnote omitte!N
$+
B( 8transaction rice9 it is meant t&e rice e;clu!ing an( transaction costs A!e)ine! at aragra&s
#*.C+,,B"
$.
T&ese are e;amles cite! in t&e FASB E;osure Dra)tH Fair Value Measurements) aragra& +.!"
##=
+=/" T&is osition is oen to Fuestion" E0er( !a( eole get 6argains or a( more t&an )air
0alue )or goo!s an! ser0ices" In!i0i!ual transaction rices ma( e;cee! or 6e less t&an
)air 0alue 6ecause o) ignoranceH ina!eFuate researc&H con0enienceH or !isa!0antageous
6argaining ositionsH among ot&er reasons" Is it reasona6le to assume t&at t&ere 3ill
al3a(s 6e rea!il( o6ser0a6le e0i!ence o) t&ese situations' It ma( 6e argue! t&at t&e
resumtion t&at transaction rice is eFual to )air 0alueH a6sent ersuasi0e e0i!ence to
t&e contrar(H s&oul! 6e re0erse! D t&at it s&oul! 6e resume! t&at a transaction rice is
not eFual to )air 0alue on initial recognition unless t&ere is ersuasi0e e0i!ence t&at it is"
T&e 6asis )or t&is argument is t&atH as o6ser0e! a6o0eH a single transaction !oes not
constitute a mar4et" It ma( 6e reasone! t&at t&e transaction rice o) an asset or lia6ilit(
can urort to 6e no more t&an its &istorical cost At&e )air 0alue o) consi!eration gi0en
or recei0e!BH unless t&ere is in!een!ent e0i!ence t&at its )air 0alue is eFual to its
&istorical cost on t&e transaction !ate" It 3ill 6e !emonstrate! in t&e )ollo3ing section
on t&e &istorical cost 6asis t&at &istorical cost &as !i))erentH more limite!H measurement
roerties t&an )air 0alue on t&e initial recognition o) assets an! lia6ilities"
+=1" In man( situations t&ere 3ill 6e ersuasi0e e0i!ence t&at t&e transaction rice
e;c&ange! )or an asset or lia6ilit( reasona6l( re)lects its mar4et 0alue on t&e transaction
!ate" For e;amleH amounts ai! )or commonH u6licl( tra!e! goo!s an! ser0ices 3oul!
normall( 6e rea!il( seen to 6e consistent 3it& o6ser0a6le rices in t&e mar4etlace" T&e
concern is 3it& resect to assets an! lia6ilities )or 3&ic& t&ere is no mar4et an! no
o6ser0a6le 6asis )or !etermining 3&et&er or not a transaction rice is eFual to )air
0alue"
+=$" T&is concern ma( 6e illustrate! 6( an e;amle" Suose t&at entit( A is 6argaining to
acFuire a uniFue assetH sa( an oerating su6si!iar( o) entit( B" AIs estimate o) t&e
ma;imum amount t&at it 3oul! 6e reare! to a( 3ill resuma6l( 6e 6ase! on its
ri0ateH entit( seci)ic in)ormation an! e;ectations" It mig&t e;ect certain s(nergies
3it& its resent oerations or 6elie0e t&at it &as suerior e;ertise to ot&ers in t&at
6usiness" Suose t&at t&e ma;imum amount t&at A is reare! to a( is #"/ million"
BH on t&e ot&er &an!H ma( &a0e a muc& lo3er estimate o) t&e 0alue o) t&e su6si!iar(
##/
6ase! on its 4no3le!ge an! e;ectations" It mig&t not 6e as otimistic as AH an! it
mig&t &a0e lo3er e;ectations as to t&e s(nergies t&at it can e;tract )rom t&e asset"
Suose B estimates a 0alue o) "/ million an! 3oul! 6e reare! to sell )or an( rice in
e;cess o) t&at amount" A an! B 3ill not 6e ri0( to eac& ot&erIs e;ectationsH
in)ormation 6ases an! e;ertiseH alt&oug& t&e( ma( tr( to learn as muc& as ossi6le
a6out t&em to imro0e t&eir resecti0e 6argaining ositions" Suose t&at t&ere are no
ot&er 4no3n otential 6u(ers 6ecause o) t&e uniFueness o) t&e asset" %&at is t&e )air
0alue o) t&is asset' Suose A acFuires t&e su6si!iar( )or #"./ million in cas&" S&oul!
t&is 6e consi!ere! to 6e t&e )air 0alue o) t&e oerating su6si!iar( on initial recognition
6( A'
+=5" %&at c&aracteri@es t&e uniFue asset illustrate! 6( t&e 6usiness acFuisition e;amle
a6o0e is t&at t&ere is no real ossi6ilit( o) o6taining ersuasi0e e0i!ence 3it& resect to
3&et&er t&e e;c&ange rice isH or is notH reresentati0e o) )air 0alue" T&e e;c&ange rice
o) #"./ million is t&e assetIs &istorical cost to AH an! t&is ma( 6e all t&at can 6e relia6l(
o6ser0e! on initial recognition in t&is case" S&oul! t&e e;c&ange rice 6e accete! to 6e
t&e assetIs mar4et A)airB 0alue on t&e transaction !ate 3&en t&ere is no o6-ecti0e 3a( to
!etermine a 6etter reresentation o) )air 0alue 3it&in a otentiall( largeH an! ro6a6l(
un4no3a6leH 6i!Cas4e! srea!' T&is single transaction !oes not constitute a mar4et as
!e)ine! a6o0eH an! t&us t&e transaction rice 3oul! not meet t&e 6asic o6-ecti0e o) )air
0alue < to re)lect t&e assetIs mar4et rice on t&e transaction !ate" Entit( A ma( &a0e
ma!e a 6argain urc&ase" Alternati0el(H its entit( seci)ic e;ectations )or s(nergies
ma( &a0e &a! no 6asis in realit( 6ut ma( &a0e 6een unrealisticall( otimistic"
+=*" T&e essential Fuestion is 3&et&er t&e transaction rice in situations li4e t&is can 6e
consi!ere! to 6e t&e urc&ase! assetIs mar4et 0alue At&at isH Fuali)( un!er Le0el # o) t&e
&ierarc&(B on t&e measurement !ateH or 3&et&er all t&at can 6e asserte! is t&at it is t&e
rice ai! A&istorical costB"
+/," Some argue t&atH i) t&e measurement o6-ecti0e is )air 0alueH t&e closest ro;( or
su6stitute s&oul! 6e !escri6e! as 8)air 0alue9H no matter &o3 )ar s&ort o) t&e o6-ecti0e
##1
t&e actual measurement ma( 6e" Ot&ers re-ect t&is 0ie3J t&e( mig&t suggest t&at it is
analogous to !escri6ing margarine as 6utter i) t&e o6-ecti0e is to o6tain 6utter 6ut it is
una0aila6le an! margarine is consi!ere! to 6e t&e closest su6stitute" T&e( 6elie0e t&at a
measurement s&oul! 6e !escri6e! in terms o) 3&at 3as actuall( ac&ie0e!H an! not
urort to 6e an(t&ing more t&an t&at"
+/#" T&e a6o0e e;amle illustrates t&at accounting measurement on initial recognition &as
sometimes )allen 6ac4 on an assumtion t&at )air 0alue is relia6l( reresente! 6(
anot&er accounting 6asis Ain articularH &istorical costB in or!er to resol0e an
in!eterminac(" T&e ro6lem 3it& !escri6ing t&e e;c&ange rice AcostB as )air 0alue on
initial recognition in situations o) t&e nature illustrate! in t&e 6usiness acFuisition
e;amle is t&at it creates an e;ectation t&at t&e amount &as 6een !etermine! 6( mar4et
)orces encomassing a signi)icant num6er o) 4no3le!gea6leH cometing mar4et
articiants 3&en t&is is not t&e case"
Level
+/+" Le0el + ma( 6e !e)ine! in t&e )ollo3ing termsG
I) o6ser0a6le mar4et rices )or i!entical assets or lia6ilities are not a0aila6le on
t&e measurement !ateH )air 0alue s&all 6e estimate! using o6ser0a6le mar4et
rices )or similar assets or lia6ilities a!-uste! as aroriate )or !i))erencesH
3&ene0er t&at in)ormation is a0aila6le"
+/." T&ere must 6e rele0ant an! relia6le 6ases )or a!-usting an o6ser0a6le mar4et rice )or
!i))erences in 0alue a))ecting roerties o) t&e mar4et tra!e! assets or lia6ilities an! t&e
asset or lia6ilit( to 6e measure!" T&is reFuires t&at rice a!-ustments relia6l( re)lect t&e
a!-ustments t&at mar4et articiants coul! 6e e;ecte! to ma4e" I) relia6le a!-ustments
are not ossi6leH t&en re)erence must 6e ma!e to Le0el ."
+/=" A contro0ersial unit o) account issue in0ol0es 3&et&er or not a!-ustments s&oul! 6e
ma!e )or 6loc4 !iscounts or remiums t&at can arise 3&en t&e o6ser0a6le mar4et rice
)or an item A)or e;amle a coman(Is s&ares tra!e! on a u6lic e;c&angeB re)lects
##$
normal tra!ing 6loc4s t&at are smaller t&an t&e 6loc4 o) s&ares &el! 6( a articular
entit( Asee aragra&s #$,C#$#B" A large 6loc4 mig&t tra!e at a signi)icant !iscount )rom
t&e o6ser0a6le mar4et rice )or smaller 6loc4sH ossi6l( re)lecting a lo3er le0el o)
liFui!it(H orH er&asH at a remium i) t&e 6loc4 coul! a))ect control o) t&e coman("
T&ere are t&eoretical an! ractical concerns relate!H )or t&e most artH to t&e relia6ilit(
o) suc& a!-ustments"
$=
>arious more or less ar6itrar( rules e;ist in ractice"
+//" Some ot&er issues relating to t&e alication o) Le0el + ma( 6e illustrate! 6( an
e;amle" Suose t&at an entit( acFuires anot&er entit( 3&ic& &as 3or4 in rocess
in0entories reFuire! to 6e measure! at )air 0alue on t&e acFuisition !ate" Suose t&at
t&e )inis&e! goo! &as an o6ser0a6le mar4et rice" Un!er Le0el + o) t&e &ierarc&(H t&e
)air 0alue o) t&e )inis&e! goo! 3oul! 6e use! as t&e 6asis )or estimating t&e )air 0alue o)
t&e 3or4 in rocessH 3it& a!-ustment )or t&e !i))erencesH assuming t&at t&e )inis&e!
goo! can 6e consi!ere! to 6e a similar asset to t&e 3or4 in rocess" A num6er o)
aroac&es mig&t 6e ta4en to estimating t&e mar4et e))ect o) !i))erences" A common
aroac& is to assume t&at t&e entit(Is estimate o) t&e costs to comlete an! sell t&e
3or4 in rocess Ao)ten 3it& t&e a!!ition o) an estimate! ro)it marginB reasona6l(
reresent t&e a!-ustment t&e mar4et coul! 6e e;ecte! to ma4e" T&is results in a!oting
a net reali@a6le 0alue measurement 6asisH 3it& its !een!ence on entit( seci)ic
assumtions an! e;ectations" T&is is not necessaril( t&e a!-ustment t&at t&e mar4et
3oul! ma4e" Mar4et articiants mig&t 6uil! in estimates o) t&e li4eli&oo! o)
success)ul comletion an! !i))erent e;ectations o) costs an! ro)it margin !eman!e!
in t&e mar4et lace )or eFui0alent ris4" ?o3e0erH t&e mar4et a!-ustment ma( 6e
un4no3a6le" Once againH anot&er accounting measurement 6asis ma( 6e su6stitute! )or
)air 0alue in or!er to o0ercome a )air 0alue in!eterminac( an! meet t&e accounting nee!
)or a single 0alue )or 3or4 in rocess in0entor( on t&e !ate o) its initial acFuisition"
$=
See !iscussion o) t&is issue in Eoint %or4ing Grou o) Stan!ar! SettersH 1raft Standard and 0asis
for Conclusions Financial 'nstruments and Similar 'temsH aragra&s #,+C#,. an! =".=C="./J an!
FASB E;osure Dra)tH Fair Value Measurements) aragra&s C+*CC.5 an! C$5"
##5
Level "
+/1" Le0el . ma( 6e !e)ine! in t&e )ollo3ing termsG
I) o6ser0a6le mar4et rices )or i!entical or similar assets or lia6ilities are not
a0aila6le on t&e measurement !ateH or i) !i))erences 6et3een similar assets or
lia6ilities are not relia6l( !etermina6leH )air 0alue s&all 6e estimate! using ot&er
0aluation tec&niFues" >aluation tec&niFues s&all 6e consistent 3it& t&e o6-ecti0e
o) estimating )air 0alue an! incororate assumtions t&at mar4etlace
articiants 3oul! use 3&ene0er mar4etC6ase! in)ormation is a0aila6le 3it&out
un!ue cost an! e))ort" I) mar4etC6ase! in)ormation is not a0aila6le 3it&out
un!ue cost an! e))ortH an entit( ma( use as inuts its o3n assumtions as a
ractical e;e!ient"
+/$" Fair 0alue estimates ma( 6e ma!e using measurement tec&niFues or mo!els t&at are
accete! to reasona6l( relicate t&e rocess t&at mar4et articiants coul! 6e e;ecte!
to use to rice assets an! lia6ilities" Suc& mo!els are 6ase! on accete! mar4et ricing
rincilesH inclu!ing resent 0alue met&o!ologies an! concets o) ro6a6ilit( an! ris4"
T&ere are 3ell esta6lis&e! mo!els )or measuring t&e )air 0alue o) man( t(es o) otions
an! ot&er !eri0ati0esH as 3ell as certain rimar( )inancial instruments suc& as loans
recei0a6le an! a(a6le"
$/
As an e;amleH a relia6le estimate o) t&e )air 0alue o) notes
recei0a6le on initial recognition normall( ma( 6e ma!e 6( !iscounting t&e contractual
a(ments using t&e o6ser0a6le mar4et rate o) return )or commensurate term an! cre!it
ris4" T&is resent 0alue aroac& is 3ell accete! an! &as 6een in lace in accounting
stan!ar!s an! ractice in a num6er o) -uris!ictions )or man( (ears"
$1
In man( cases )air
0alue ricing mo!els &a0e 6een !e0eloe! 6( e;erts in )inance an! 6( )inancial
$/
SeeH )or e;amleH !iscussion o) mo!els )or estimating t&e )air 0alue o) loan assets in Eoint %or4ing
Grou o) Stan!ar! SettersH 1raft Standard and 0asis for Conclusion B Financial 'nstruments and
Similar 'tems) aragra&s ./*C.1. an! =".1C=".5"
$1
Stan!ar!s in t&e Unite! States &a0eH since #*$#H reFuire! t&at t&e contracte! cas& )lo3s o) notes
recei0a6le an! a(a6le t&at !o not 6ear interest at realistic mar4et interest rates on initial recognition
6e !iscounte! at reasona6le current mar4et rates Asee Accounting Princiles Boar! Oinion No" +#H
'nterest on +eceiva!les and Pa(a!lesH aragra&s #+C#=B" See also IAS .*H aragra& AG 1="
##*
institutions in creating instruments to manage ris4s" Suc& instruments must 6e caa6le
o) relia6le )air 0alue measurement to ena6le t&em to ser0e t&is urose" In recent (ears
most accounting stan!ar! setters &a0e conclu!e! t&at t&e large ma-orit( o) !eri0ati0es
are caa6le o) relia6le )air 0alue estimation using mo!els 3&en o6ser0a6le mar4et
rices )or t&em are not a0aila6le"
$$
+/5" Fair 0alue measurement mo!els &a0e 6een !e0eloe! )or certain signi)icant contractual
assets an! lia6ilities an!H in articularH )or 0arious t(es o) )inancial instruments" T&ere
seem to 6e )e3er rosects )or !e0eloing relia6le )air 0alue measurement mo!els )or
nonCcontractual assets t&at are inuts to re0enue generating rocesses"
+/*" NonCcontractual assets t&at !o not generate cas& )lo3s in an! o) t&emsel0esH 6ut
contri6ute along 3it& ot&er inuts to a cas& generating rocessH can resent signi)icant
)air 0alue measurement ro6lems 3&en t&ere are no o6ser0a6le mar4et rices )or
i!entical or similar assets" An e;amle is an item o) eFuiment t&at is con)igure! )or a
seciali@e! use in a cas& generating rocess" I) one loo4s to its reali@a6le 0alue in t&e
mar4etlaceH it mig&t 6e conclu!e! t&at t&e mar4et sees no 0alue in t&e seciali@e!
eFuiment 6e(on! its 0alue as scraH or as t&e mar4et 0alue o) unseciali@e! eFuiment
less estimate! costs to restore t&e seciali@e! asset to its original unseciali@e!
con!ition" T&is 0ie3 resumes t&at t&e mar4et !oes not see t&e seciali@e! eFuiment as
&a0ing an( 0alue in use in t&e entit(Is re0enue generating rocess" T&is 3oul! not seem
to 6e a reasona6le resumtionH unless t&ere is con0incing u6licl( a0aila6le
in)ormation suorting it A3&ic& mig&t 6e t&e case i) it is e0i!ent t&at t&e eFuiment
coul! not 6e ro!ucti0el( use! in t&e re0enue generating rocessH or i) a relia6le )air
0alue estimate o) t&e rocess as a 3&ole is so lo3 t&at t&e 0alue in use o) contri6uting
inut assets is minimalB" Lac4ing suc& e0i!enceH it ma( 6e conclu!e! t&at t&e
84no3le!gea6le arties9 con!ition necessar( to t&e e;istence o) a mar4et Asee
aragra&s +.*C+=,B is not met )or t&is seciali@e! asset on t&e measurement !ate"
$$
In articularH see IAS .* an! FASB Statements #.. an! #.5"
#+,
+1," In ot&er 3or!sH it ma( 6e reasone! t&at t&e eFuimentIs )air 0alue a))ecting roerties
&a0e 6een )un!amentall( c&ange! 6( its seciali@ationH so t&at t&e 6asis )or its )air 0alue
lies in its 0alue in use in t&e cas& generating rocessH rat&er t&an in mar4et rices )or
unseciali@e! eFuiment or scra" Since t&ere is no o6ser0a6le mar4et rice )or t&is
seciali@e! eFuimentH one 3oul! e;ect to loo4 )or a mo!el un!er Le0el . o) t&e
&ierarc&( as set out a6o0e" T&is 3oul! resuma6l( 6e a resent 0alue mo!elH 6ase! on
!iscounting estimate! cas& )lo3s to 6e generate! 6( t&e contri6ution o) t&e seciali@e!
eFuiment to t&e cas& generating rocess" But t&is mo!el reFuires attri6uting t&e
estimate! net cas& )lo3s to 6e generate! 6( t&e rocess as a 3&ole to seci)ic inuts"
Suc& attri6ution is su6-ect to a )un!amental in!eterminac(H 6ecause it reFuires a oneCtoC
man( allocation Asee aragra& +#=B"
+1#" One mig&t t&en Fuestion 3&et&er t&e unit o) account s&oul! 6e at a &ig&er le0el o)
aggregation" T&is 3as !iscusse! at aragra&s #/5C#1#H 3&ere it 3as roose! t&atH
en!ing )urt&er stu!( 6e(on! t&e scoe o) t&is aerH 8K t&e aroriate unit o)
account )or nonCcontractual assets on initial recognition is t&e lo3est le0el o)
aggregation at 3&ic& an i!enti)ia6le asset is rea!( )or use in a cas& generating rocess9"
I) t&is is accete!H t&en it 3oul! seem necessar( to conclu!e t&at t&e )air 0alue o) a nonC
contractual asset t&at is one o) man( inuts to a cas& generating rocess cannot 6e
relia6l( estimate! using a resent 0alue mo!el"
+1+" T&e relia6ilit( o) )air 0alue estimates using mo!els is !een!ent not onl( on &o3 3ell a
mo!el relicates accete! mar4et ricing rocessesH 6ut also on t&e relia6ilit( o) its !ata
inuts" A )air 0alue mo!el s&oul! 6e e;ecte! to 6e 6ase! on inuts an! assumtions
t&at mar4etlace articiants 3oul! use" As an e;amleH !ata inuts reFuire! 6(
accete! stoc4 otion ricing mo!els inclu!e t&e current rice o) t&e un!erl(ing stoc4H
t&e 0olatilit( o) t&at riceH t&e e))ects o) 0esting ro0isionsH an! t&e ris4C)ree interest
rate )or t&e e;ecte! li)e o) t&e otion" T&e mar4et rices o) certain o) t&ese inuts can
6e rea!il( o6ser0e!" For e;amleH t&e ris4C)ree interest rate can 6e !eri0e! )rom t&e
o6ser0a6le rices o) go0ernment 6on!sH an! t&e current rice o) t&e un!erl(ing stoc4
can 6e o6ser0e! i) it is tra!e! in a mar4et" T&e mar4etIs measure o) some ot&er inuts
#+#
ma( not 6e so rea!il( !etermina6leH )or e;amleH t&e e))ects o) 0esting ro0isions an!
t&e aroriate measure o) 0olatilit("
+1." In some situationsH sources or measures o) !ata inuts ma( 6e esta6lis&e! t&atH 3&ile not
!irectl( !eri0e! )rom o6ser0a6le mar4et ricesH are generall( accete! not to
comromise un!ul( a mo!elIs estimate o) )air 0alue" T&ese ma( 6e su6-ect to some
range o) misestimation" For e;amleH t&e measure o) 0olatilit( on ricing an otion is
commonl( 6ase! on ast 0olatilit(H 3&ic& ma( not 6e )ull( in!icati0e o) current mar4et
e;ectations o) )uture 0olatilit(" T&e consistenc( o) suc& !ata 3it& mar4et e;ectations
reFuires care)ul e0aluation in t&e conte;t o) t&e articular circumstancesH an! !isclosure
o) t&e 6asis o) suc& !ata an! un!erl(ing assumtions is imortant 3&en t&ere is
signi)icant uncertaint("
+1=" Fun!amental Fuestions ma( arise in al(ing t&e 84no3le!gea6le arties9 con!ition
un!erl(ing t&e concet o) )air 0alue Asee aragra&s #,*H #5.C#5$ an! +.*C+=,B" In
articularH it is li4el( to 6e !i))icult or imossi6le to assess 3&at in)ormation s&oul! 6e
consi!ere! to 6e a0aila6le to articiants" Furt&erH t&ere 3oul! seem to 6e no ractical
6asis )or ricing in)ormation as(mmetr(" T&usH lac4ing o6ser0a6le mar4et ricesH
accete! mo!els seem t(icall( to assume t&at t&ere is no in)ormation as(mmetr(H t&at
isH to assume t&at all arties &a0e access to t&e same in)ormation an! t&at )air 0alue is
not a))ecte! 6( concerns t&at some arties ma( &a0e ri0ate riceCrele0ant in)ormation
a!0antages" T&e 0ali!it( o) t&is assumtionH an! 3&et&er t&ere ma( 6e an( 0ia6le
alternati0esH 3oul! seem to 3arrant in !et& stu!(H in articularH to esta6lis& 3&et&er
t&is is a signi)icant limitation o) )air 0alue mo!elsH or 3&et&er it ma( 6e a reasona6le
assumtion 3it&in certain mo!eling conte;ts"
+1/" An entit( ma( use a ro)essional 0aluator to estimate t&e )air 0alue o) an asset" A
ro)essional 0aluator ma( &a0e e;tensi0e 4no3le!ge an! e;ertise 3it& resect to
estimating t&e li4el( mar4et rices o) articular t(es o) assets" Suc& a 0aluation ma( 6e
consistent 3it& t&e )air 0alue measurement o6-ecti0eH 6ut it 3oul! not seem su))icient to
accet t&at t&is is so 3it&out assurance t&at t&e measurement tec&niFuesH assumtionsH
#++
an! !ata use! are consistent 3it& t&at o6-ecti0e" Accountants ma( &a0e a lot to learn
)rom suc& 0aluatorsH an! it is recommen!e! t&at t&e literature an! ractices o)
signi)icant ro)essional 0aluation 6o!ies 6e rigorousl( stu!ie!"
+11" In some situationsH 3&en t&ere is no a0aila6le in)ormation as to mar4et e;ectations
3it& resect to a material inutH t&e onl( recourse ma( 6e to use entit( estimations
re)lecting t&e entit(Is e;ectations" T&e a6o0e !escrition o) Le0el . in!icates t&atH
3&en in)ormation a6out assumtions t&at mar4etlace articiants 3oul! ma4e is not
a0aila6le 3it&out un!ue cost an! e))ortH an entit( ma( use its o3n assumtions" T&e
general ro0iso in using suc& entit( seci)ic assumtionsH as set out in CON $H
aragra& .5H is t&at t&ere 6e 8K no contrar( !ata in!icating t&at mar4etlace
articiants 3oul! use !i))erent assumtions"9 It seems unli4el( t&at t&ere coul! o)ten
6e an( &ar! e0i!ence o) suc& contrar( !ataH gi0en t&at t&e reason )or using entit(
seci)ic !ata an! assumtions is t&at t&ere is no relia6le in)ormation as to mar4et
e;ectations" In ot&er 3or!sH t&ere ma( o)ten 6e no e))ecti0e 6asis )or 0ali!ating or
re)uting 3&et&er entit( seci)ic e;ectations are a reasona6le ro;( )or mar4et
e;ectations" T&usH t&is 8no contrar( mar4et !ata9 ro0iso 3oul! seem li4el( to 6e an
emt( con!ition in t&ese situations"
+1$" Since entit( seci)ic estimates an! assumtions t&at !o not coinci!e 3it& mar4et
e;ectations are inconsistent 3it& t&e )air 0alue measurement o6-ecti0eH it is roose!
t&atG
A measurement model cannot !e considered to ac%ieve a relia!le estimation of
t%e fair value of an asset or lia!ilit( if it is materiall( dependent on entit(
specific e4pectations t%at cannot !e demonstrated to !e consistent &it% market
e4pectations6
+15" T&is is not to suggest t&at entit( seci)ic !ata an! assumtions ma( not 6e aroriate
su6stitutes )or mar4et !ata 3&en mar4et !ata are una0aila6le" Some signi)icant assets
an! lia6ilities ma( 6e caa6le o) measurement on initial recognition onl( on t&e 6asis o)
mo!els using signi)icant entit( seci)ic !ata" T&ese ma( inclu!eH )or e;amleH lia6ilit(
#+.
ro0isions )or asset retirement o6ligationsH claims arising )rom la3suitsH an! lia6ilities
arising un!er !e)ine! 6ene)it ensions lans" T&e 6asic oint is t&atH i) a measurement is
use! t&at is a more limite! reresentation t&an )air 0alueH it s&oul! 6e !escri6e! in terms
o) 3&at it isH not reresente! to 6e 8)air 0alue9"
+1*" T&e FASB E;osure Dra)tH Fair Value Measurements) rooses a !i))erent aroac& to
Le0el . estimates o) )air 0alue" It rooses t&at Le0el . estimates 6e 6ase! on t&e results
o) multile 0aluation tec&niFues consistent 3it& 8t&e mar4et aroac&H income
aroac&H an! cost aroac&9 3&ene0er t&e in)ormation nee!e! to al( t&ese
tec&niFues is a0aila6le 3it&out un!ue cost an! e))ort"
$5
T&e 8mar4et aroac&9 in0ol0es
re)erence to mar4et rices o) 8comara6le9 assets an! lia6ilities to t&ose to 6e
measure!H an! seems to en0isage greater latitu!e in t&e use o) mar4et rices t&an it
ro0i!es )or in Le0els # an! + Aalt&oug& t&is is not selle! outB" T&e 8income aroac&9
re)ers to mo!els t&at use resent 0alue met&o!ologiesH inclu!ing otion ricing mo!els"
T&e 8cost aroac&9 )or an asset consi!ers t&e amount t&at 3oul! 6e reFuire! to relace
its current ser0ice caacit(H t&at isH current relacement cost" T&e E;osure Dra)t
o6ser0es t&at t&e use o) multile 0aluation tec&niFues is consistent 3it& generall(
accete! 0aluation racticesH 3&ic& reFuire 0aluation e;erts to consi!er multile
tec&niFues 6ase! on t&ese t&ree aroac&es"
$*
T&e FASBIs Basis )or Conclusions
inclu!es t&e )ollo3ing e;lanationG
8T&e Boar! conclu!e! t&at 6ecause !i))erent 0aluation tec&niFues ten! to
ro0i!e in!een!ent in!ications o) )air 0alueH an estimate 6ase! on t&e results o)
multile 0aluation tec&niFues is li4el( to 6e more relia6le t&an an estimate 6ase!
on t&e results o) a single 0aluation tec&niFue" Accor!ingl(H t&e results o) t&ose
0aluation tec&niFues At&e resecti0e in!ications o) )air 0alueB s&oul! 6e
e0aluate!H an! signi)icant !i))erences e;laine!H as a 6asis )or t&e resulting
estimate"9 Aaragra& C/$B
$5
See FASB E;osure Dra)tH Fair Value Measurements) aragra&s +#C+.H e;amles at aragra&s
B#,CB#1H an! aragra&s C=+ an! C/1CC1#"
$*
T&e E;osure Dra)t Aaragra& C=+B cites t&e Araisal Foun!ationIs Uni)orm Stan!ar!s o)
Pro)essional Araisal Practice"
#+=
+$," T&e anal(sis an! roosals in t&is aer gi0e cause to Fuestion 3&et&er t&ese t&ree
aroac&es Aarticularl( t&e cost aroac&B can 6e relie! uon to result in measurements
t&at are consistent 3it& t&e )air 0alue o6-ecti0e as it is !e)ine! in t&is aer" T&e results
o) t&ese aroac&es alie! to articular assets an! lia6ilities are li4el( to 6e more
limite! measurement reresentations t&an )air 0alue as a result o) reliance on entit(
seci)ic e;ectations in t&e resolution o) in!eterminacies an! estimation uncertainties"
T&e assumtions an! 6ases )or al(ing eac& o) t&ese t&ree tec&niFues an! in selecting
6et3een t&em nee! to 6e rigorousl( i!enti)ie! an! un!erstoo! to 6e a6le to assess to
3&at e;tent t&e( ma(H or ma( notH 6e consistent 3it& t&e )air 0alue measurement
o6-ecti0e At&at isH relia6l( reresent )air 0alueB" T&e e;amlesH in aragra&s B#,CB#1
o) t&e FASB E;osure Dra)tH in!icate accetance o) signi)icant su6-ecti0it( an! reliance
on t&e -u!gment o) t&e 0aluator"
Summar(
+$#" 'n summar() fair value estimates are su!/ect to potentiall( large ranges of
indeterminac( in some relativel( common situations arising on t%e initial recognition of
assets and lia!ilities6
+$+" T&ese ro6lems &a0e 6een resol0e!H in t&e sense o) resolution to a single amountH in a
0ariet( o) 3a(sH all o) 3&ic& comromise t&e )air 0alue measurement o6-ecti0e in some
!egree < t&at isH t&e( re!uce t&e reresentational )ait&)ulness o) measurements
urorting to reresent )air 0alue" Certain o) t&ese ro6lems mig&t 6e o0ercome in time
6( researc& t&at ena6les a 6etter un!erstan!ing o) mar4et ricing rocesses an!
assumtions" For e;amleH t&e )air 0alue o) certain )orms o) nonCtra!e! otions mig&t
6e su6-ect to more relia6le Fuanti)ication t&roug& researc& on mar4et ricing rocesses
an! relate! )inancial literature" ?o3e0erH some ma-or areas o) in!eterminac( seem to 6e
intracta6leH )or e;amleH in resect o) seciali@e! nonCcontractual assets"
+$." None o) t&is is to suggest t&at t&e )air 0alue o6-ecti0e lac4s rele0ance )or t&e
measurement o) assets an! lia6ilities on initial recognitionH or t&at ot&er measurement
#+/
6ases are necessaril( 6etter as t&e general o6-ecti0e" Suc& a ossi6ilit( cannot 6e
a!!resse! 3it&out comarati0e in !et& consi!eration o) t&e ot&er measurement 6ases"
+$=" T&is aer conclu!esH 6ase! on t&e anal(sis in t&is sectionH t&at )air 0alue is not relia6l(
estima6le in certain relati0el( common situations" It is roose! t&atH i) )air 0alue is
!etermine! to 6e t&e most aroriate o6-ecti0e )or measurement o) assets an!
lia6ilities on initial recognitionH t&enH 3&en it is not caa6le o) relia6le estimationH t&e
aroac& s&oul! 6e to use con0entions or ot&er measurement 6ases t&at are most
consistent 3it& t&e )air 0alue measurement o6-ecti0e" Furt&erH it is suggeste! t&atH i)
ot&er measurement 6ases are use! as su6stitutes )or )air 0alue an! t&ere is some !egree
o) )le;i6ilit( in &o3 t&e( ma( 6e interrete! or alie!H e))orts s&oul! 6e ma!e to a!ot
met&o!ologies t&at are as consistent as ossi6le 3it& t&e )air 0alue o6-ecti0e"
Consi!eration o) t&ese ossi6ilities reFuires a t&oroug& un!erstan!ing o) t&e
measurement attri6utes o) ot&er measurement 6ases"
+$/" Finall(H t&is aer rooses t&atH 3&en )air 0alue is t&e o6-ecti0e 6ut is not relia6l(
estima6leH measurement su6stitutes s&oul! 6e clearl( !escri6e! in terms o) 3&at t&e(
areH not as 8)air 0alue9"
7i$tori'a) Co$t
+$1" T&e 3or4ing !e)inition o) &istorical cost Asee aragra&s $1C$*B isG
Assets are recor!e! at t&e )air 0alue o) t&e consi!eration gi0en to acFuire t&em
at t&e time o) t&eir acFuisition" Lia6ilities are recor!e! at t&e )air 0alue o) t&e
consi!eration recei0e! in e;c&ange )or t&e o6ligations at t&e time t&e( 3ere
incurre!"
+$$" In man( situations t&ere 3ill 6e ersuasi0e e0i!ence t&at t&e )air 0alue o) t&e
consi!eration gi0en or recei0e! )or an asset or lia6ilit( also reresents its )air 0alue at
t&e !ate o) initial recognition Asee aragra& +=1B" In t&ese situations t&e measurement
6asis on initial recognition s&oul! 6e consi!ere! to 6e )air 0alue" T&is section consi!ers
t&e measurement 6asis to 6e &istorical cost onl( 3&en it cannot 6e -usti)ie! to eFual )air
#+1
0alue on initial recognition < t&at isH 3&en t&e measurement must 6e -u!ge! 6( its
&istorical cost measurement roerties"
&elevance
Assets
+$5" T&e )air 0alue o) consi!eration gi0en to acFuire an asset Aits &istorical cost as !e)ine!
a6o0eB !oes not urort to measure t&e 0alue recei0e!" In ot&er 3or!sH &istorical costH
as !e)ine! a6o0eH gi0es no consi!eration to reco0era6ilit(" It is onl( a measure o) t&e
amount e;en!e!" It &as 6een o6ser0e! t&at a 6asic roert( o) an asset is t&at it
reresents )uture economic 6ene)its e;ecte! to )lo3 to t&e entit(H an! t&at t&e cas&C
eFui0alent e;ectations attri6ute o) an asset is a rimar( )ocus o) accounting
measurement Asee aragra& =5B" T&e &istorical cost o) an asset !oes not &a0e t&is
attri6uteH an! t&ere)ore it must 6e sulemente! 6( some a!!itional measure o)
reco0era6le 0alue to meet t&e 8asset9 test"
+$*" Some argue t&at a resumtion o) reco0era6ilit( is imlicit in t&e &istorical cost
measure o) an assetH 6ecause it can 6e generall( resume! t&at an entit( 3ill not a(
more )or an asset t&an it 6elie0es to 6e its 0alue to t&e entit(" T&e( reason t&at an entit(
must 6elie0e t&at an assetIs 0alue to t&e entit( on initial acFuisition 3ill eFual or e;cee!
t&e amount ai! )or itH or t&e entit( 3oul! not &a0e acFuire! it" T&is aer !oes not
!isute t&at t&is 6elie) is li4el( to un!erlie asset acFuisitionsH 6ut t&is 6elie) !oes not
ro0i!e a su))icient 6asis )or resuming t&at &istorical cost is a measure o) 0alue
recei0e!" T&e 6elie) o) asset cost reco0era6ilit( on t&e art o) t&e acFuiring entit( ma(
re)lect entit( seci)ic e;ectations t&at ma( or ma( not 6e reasona6leH an! ma( or ma(
not 6e suorte! 6( o6ser0a6le e0i!ence" A resumtion o) 0alue recei0e! reFuires
in!een!ent su6stantiation 6( re)erence to some acceta6le measure o) its reco0era6le
0alue"
+5," As a ractical matterH it ma( 6e reasona6le to accet t&at t&e )air 0alue o) consi!eration
gi0en to acFuire an asset is reco0era6le at t&e !ate o) initial recognition a6sent e0i!ence
#+$
to t&e contrar(" But t&is 3oul! 6e a ractical e;e!ient to a0oi! un!ue cost an! e))ort to
su6stantiate reco0era6ilit( in situations in 3&ic& t&ere is no reason to !ou6t it"
5,
Suc& an
e;e!ient resumtion !oes not c&ange t&e )act t&at &istorical cost must 6e
sulemente! 6( a reco0era6ilit( con!itionH an! t&ere nee!s to 6e agreement as to 3&at
reco0era6ilit( measure s&oul! 6e use! in assessing t&is"
+5#" T&usH &istorical costH as !e)ine! a6o0eH !oes not stan! on its o3n as an asset
measurement 6asis" T&is is e0i!ence! 6( accounting concetual )rame3or4s 3&ic&
reFuire t&at t3o con!itions relate! to asset reco0era6ilit( 6e met to -usti)( recognition
an! measurement in )inancial statementsG
AaB 8An item t&at meets t&e !e)inition o) an element s&oul! 6e recognise! i)G AaB it is
ro6a6le t&at an( )uture economic 6ene)it associate! 3it& t&e item 3ill )lo3 to
or )rom t&e entit( K"9
5#
T&e )act t&at a cost &as 6een incurre! is not su))icient
-usti)ication )or t&e recognition o) an asset 6ecause not all costs result in
ro6a6le )uture 6ene)its"
A6B Furt&erH it is an accete! rincile o) accounting t&at a recogni@e! asset s&oul!
not 6e carrie! at an amount in e;cess o) its reco0era6le 0alue to t&e entit(" In
ot&er 3or!sH t&e &istorical cost o) an asset can onl( 6e recor!e! to t&e e;tent t&at
it can 6e consi!ere! to 6e reco0era6leH 3&ic& reFuires re)erence to some
measure o) reco0era6le 0alue" AT&e concets o) imairment an! reco0era6le
amountH an! alternati0e 6ases )or t&e estimation o) reco0era6le amountH are to 6e
e;amine! in a su6seFuent stage o) t&is ro-ect < see aragra&s #1C#$"B
+5+" Some ma( 3is& to re!e)ine &istorical cost 3it&in a 6roa!er 8&istorical costC6ase!9
mo!el in 3&ic& an asset t&at meets t&e )irst recognition con!ition a6o0e is measure! on
5,
A resumtion t&at &istorical cost is reco0era6le a6sent e0i!ence to t&e contrar( ma( 6e -usti)ie! on
t&e e;ectation t&at t&ere 3ill 6e o6ser0a6le e0i!ence in suc& cases" T&is ma( 6e contraste! 3it& t&e
aerIs roosal to re-ect a resumtion t&at an e;c&ange amount eFuals )air 0alue on t&e transaction
!ate a6sent ersuasi0e e0i!ence to t&e contrar(H 6ecause Aas e;laine! in aragra&s +=+C+/#B t&ere
are signi)icant situations in 3&ic& t&ere is no o6ser0a6le 6asis )or !etermining 3&et&er or not t&e
contrar( con!ition e;ists"
5#
IASB Frame3or4H aragra& 5."
#+5
initial recognition at t&e lo3er o) cost an! an acceta6le measure o) its reco0era6le
0alue" T&e o6-ecti0e on initial recognition o) an asset 3oul! t&en 6e to re)lect its
reco0era6le cost" T&is is &o3 &istorical costC6ase! accounting &as e0ol0e! an! is
generall( alie! in current ractice" T&is is not &istorical costH &o3e0erH 6ut a
com6ination o) asset measurement 6ases < t&e lo3er o) &istorical cost an! some
measure o) reco0era6le amount" %&ile a lo3er o) cost an! reco0era6le amount
measurement uts a )loor 0alue on an assetH it cannot urort to reresent 0alue
recei0e!H 6ut onl( t&at t&e asset is not 3ort& less t&an t&e recor!e! amount"
+5." In contrastH )air 0alue !oes urort to measure t&e 0alue o) an asset < its 0alue in t&e
mar4etlace" Fair 0alue stan!s on its o3n as t&e 0alue t&at coul! 6e e;c&ange! 6et3een
4no3le!gea6leH 3illingH armIs lengt& arties" As a resultH t&e searate con!itions set out
in aragra& +5# 3it& resect to t&e recognition an! reco0era6le 0alue o) assets are not
alica6leH 6ecause t&e( are incororate! 3it&in )air 0alue" More seci)icall(G
AaB T&e a6o0eCnote! con!ition )or t&e recognition o) an asset < t&at it 6e ro6a6le
t&at a )uture economic 6ene)it 3ill 6e recei0e! < &as no rele0ance to a )air
0alue measurement" T&is is 6ecause t&e ro6a6ilit( o) )uture 6ene)it is re)lecte!
in t&e measurement o) )air 0alue" For e;amleH a articular )inancial otion ma(
&a0e little li4eli&oo! o) 6ecoming 8in t&e mone(9H 6ut it &as a )air 0alue at
3&ic& it is tra!e! in t&e mar4etlace" An( item t&at &as a ositi0e )air 0alue to
t&e acFuirer on initial recognition At&at isH &as an e;c&ange 0alue in t&e
mar4etlaceB &as a recogni@a6le Ao6ser0a6leB asset 0alue"
A6B Furt&erH t&e )air 0alue o) an asset on initial recognition nee!s no a!!itional
reco0era6le 0alue assessmentH 6ecause t&e )air 0alue o) an asset is t&e mar4etIs
measure o) its reco0era6le 0alue"
+5=" In summar(H )air 0alue &as a 0ital roert( as a measure o) asset 0alue recei0e! on
initial recognition t&at is missing in &istorical cost"
#+*
Lia!ilities
+5/" A arallel comarison ma( 6e ma!e 6et3een t&e &istorical cost an! )air 0alue o) a
lia6ilit( on initial recognition" On t&e &istorical cost 6asisH a lia6ilit( is measure! on
initial recognition at t&e )air 0alue o) t&e consi!eration recei0e! in e;c&ange )or
incurring t&e o6ligation" T&is amount ma( not 6e a reasona6le measure o) t&e amount
o3ingH 6ecause t&ere is not necessaril( an eFui0alent relations&i 6et3een t&e amount
o) consi!eration recei0e! )or incurring a lia6ilit( an! t&e amount o) t&e ro6a6le
sacri)ice o) )uture 6ene)its t&at t&e lia6ilit( entails" Entities ma( incur lia6ilities 3it&out
recei0ing an( consi!eration < )or e;amleH a lia6ilit( incurre! as a result o) a la3suitH
or arising as a result o) an acci!ent causing en0ironmental !amage" In ot&er 3or!sH t&e
&istorical cost o6-ecti0e alie! to lia6ilities !oes not urort to measure t&e 0alue o)
t&e o6ligation incurre!H onl( t&e )air 0alue o) t&e consi!eration recei0e!" It is no3 3ell
recogni@e! in ractice t&at it is not aroriate to measure lia6ilities on t&e 6asis o) t&e
)air 0alue o) t&e consi!eration recei0e! 3&en t&is !oes not re)lect a reasona6le measure
o) t&e amount o3ing"
+51" Fair 0alueH on t&e ot&er &an!H !oes urort to measure t&e 0alue o) lia6ilities in t&e
mar4etlace on t&e measurement !ate"
+5$" In summar(H &istorical cost !oes not urort to reresent an imortant !imension A0alue
recei0e! or o3e!B t&at is urorte! to 6e reresente! in )air 0alue" ?istorical cost ma(
6e e;ecte!H t&enH to &a0e more limite! in)ormation 0alue an! !ecision use)ulness <
t&at isH to 6e a less rele0ant measurement 6asis < on initial recognition o) assets an!
lia6ilities t&an )air 0alue in all situations in 3&ic& )air 0alue can 6e relia6l( !etermine!"
Some Additional +elevance Considerations
ENTITP SPECIFIC IMPLICATIONS
+55" An imortant tentati0e conclusion o) c&ater = is t&at t&e mar4et A)air 0alueB
measurement o6-ecti0e is more rele0ant t&an entit( seci)ic measurement o6-ecti0es on
initial recognition o) assets an! lia6ilities" %&at imlications !oes t&is tentati0e
#.,
conclusion &a0e )or &istorical cost' ?istorical cost is a reresentation o) t&e )air 0alue
o) consi!eration e;c&ange! in an armIs lengt& transaction" T&e &istorical cost o) an
asset or lia6ilit( is t&ere)ore !e)ine! in terms o) its transaction e;c&ange amount rat&er
t&an in terms o) t&e reorting entit(Is e;ectations an! assumtions" It isH ne0ert&elessH
an entit( seci)ic measurement in t&e sense t&atH i) t&e &istorical cost Aor lo3er o) cost
an! reco0era6le amountB o) an asset !i))ers )rom its )air 0alueH t&ere must 6e some
e;licit or imlicit entit( seci)ic e;ectations as to its reco0era6le 0alue t&at !i))er
)rom t&e e;ectations o) t&e mar4etlace" For e;amleH i) t&e recor!e! &istorical cost o)
an asset is /,,H 3&ile its )air 0alue is onl( =,,H t&e entit( must &a0e a &ig&er
e;ectation o) its reco0era6le 0alue t&an !oes t&e mar4et" T&e &istorical cost o) an asset
Aor a lia6ilit(B isH t&ere)oreH an entit( seci)ic measurement 3&en it !i))ers )rom )air
0alue"
T?E COSTCRE>ENUE MATC?ING OBEECTI>E
+5*" T&e rele0ance o) &istorical costC6ase! accounting &as tra!itionall( 6een remise! on a
costCre0enue matc&ing o6-ecti0e" It is imortant to consi!er t&is o6-ecti0e an! its
imlications )or t&e rele0ance o) &istorical costH in comarison 3it& )air 0alueH )or
measurement on initial recognition o) assets an! lia6ilities" T&e costCre0enue matc&ing
o6-ecti0e &as its roots in t&e economic remise t&at sacri)ices must generall( 6e ma!e
At&at isH costs must generall( 6e incurre!B to ac&ie0e 6ene)its At&at isH re0enuesB" An
essential o6-ecti0e o) 6usiness enterrises can 6e en0isage! in t&is 3a(" Business
entities are set u 3it& t&e o6-ecti0e o) trans)orming 0arious inuts o) goo!s an!
ser0ices into oututs t&at can 6e sol! )or re0enues t&at e;cee! t&e costs o) t&e inuts
use! to ac&ie0e t&em" T&e &istorical cost o) an inut to a )uture re0enueCgenerating
acti0it( reresents t&e in0estment or sacri)ice ma!e to ac&ie0e re0enue 6ene)its" T&e
tra!itional accounting o6-ecti0e &as 6een to e;ense t&e cost o) an asset 3&en t&e
re0enues to 3&ic& t&e asset is consi!ere! to contri6ute are recogni@e!" Income is t&en
measure! on t&e 6asis o) matc&ing costs 3it& relate! re0enues"
5+
De)ining an!
5+
T&is matc&ing o6-ecti0e is e;licitl( recogni@e! in most concetual )rame3or4s" SeeH )or e;amleH
IASB Frame3or4H aragra&s */C*1"
#.#
measuring t&e &istorical cost o) assets on initial recognition &as 6een consi!ere! to 6e
t&e )irst essential ste in t&is matc&ing rocess"
+*," T&is tra!itional matc&ing o6-ecti0e &as un!ergone signi)icant c&anges o0er t&e (ears"
In articularH as note! earlierH it is no3 3ell accete! in rincile t&at an inut must
meet t&e !e)inition o) an asset to 3arrant caitali@ation o) its costH an! t&at its cost
s&oul! 6e carrie! )or3ar! onl( to t&e e;tent t&at it can 6e consi!ere! to 6e reco0era6le
)rom )uture re0enueCgenerating acti0ities" Furt&erH t&e mar4etlace is t&e )inal ar6iter in
!etermining t&e reco0era6le 0alue o) an assetH t&roug& t&e sale o) t&e asset in t&e
mar4etlace or t&roug& sales in t&e mar4etlace o) goo!s or ser0ices to 3&ic& t&e
assetIs use contri6utes"
+*#" T&e measurement o) an asset on its initial acFuisition at its mar4et A)airB 0alue ro0i!es
an initial matc&ing oint 6et3een t&e mar4etlaceIs 0alue o) t&e asset an! its &istorical
cost" An( ro)it or loss on acFuisition is t&e result o) matc&ing t&e 6ene)it At&e mar4et
0alue o) t&e asset on acFuisitionB against t&e sacri)ice ma!e At&e cost e;en!e!B to
acFuire or create t&at asset" Suc& ro)it or loss re)lects t&e mar4et measure o) t&e
e))ecti0eness o) t&e asset acFuisition or creation acti0it(H an! no e;ecte! entit( seci)ic
a!0antages or !isa!0antages are carrie! )or3ar! to )uture erio!s" To carr( )or3ar! t&e
&istorical cost o) an asset t&at !i))ers )rom its )air 0alue on initial recognition ma( 6e
consi!ere! to result in a less in)ormati0e matc&ing in later erio!s 3&en t&e asset is
ultimatel( reali@e! At&roug& sale or useB" T&is is 6ecause t&e reorte! ro)it or loss at
t&at )uture time 3ill not !istinguis& t&e income e))ects o) acti0ities relating to t&e
acFuisition or creation o) t&e asset )rom t&e income e))ects o) su6seFuent acti0ities"
+*+" In summar(H it is reasone! t&at t&e costCre0enue matc&ing o6-ecti0e is not lostH 6ut is
en&ance!H 6( t&e measurement o) assets at )air 0alue rat&er t&an &istorical cost on initial
recognition"
#.+
DECISION USEFULNESS
+*." T&e IASB Frame3or4 an! t&e concetual )rame3or4s o) its liaison national stan!ar!
setting artners i!enti)( !ecision use)ulness as t&e rimar( o6-ecti0e o) )inancial
statements" Furt&erH t&e( gi0e rominence to use)ulness )or re!icti0e uroses an! to
)ee!6ac4 0alue in relation to re!icti0e uroses Asee aragra&s .,C.# an! .$C.*B"
+*=" Since t&e &istorical cost o) an asset !oes not urort to measure 0alue recei0e!H it &as no
!e)ine! e;ectations )or t&e a6ilit( o) an asset to generate )uture cas& or cas&
eFui0alents" It is not a )or3ar! loo4ing measurement 6asis" T&us it ma( 6e e;ecte! to
&a0e limite! re!icti0e 0alue in an! o) itsel)" Use)ulness )or re!icti0e uroses 3oul!
seem to !een! on 3&ate0er recognition an! reco0era6le 0alue con!itions are alie!H
an! on entit( seci)ic e;ectations )or t&e use or sale o) t&e asset" A correson!ing
anal(sis ma( 6e ma!e o) a lia6ilit("
+*/" T&e recor!e! cost o) an asset to 6e use! in a 6usiness ena6les a !etermination o) t&e
total amount to 6e c&arge! to income in )uture erio!sH 3&ic& )acilitates t&e re!iction
o) )uture reorte! income" ?o3e0erH t&is !oes not in itsel) &a0e an( necessar(
imlications )or t&e a6ilit( o) t&e entit( to generate )uture cas& an! cas& eFui0alents"
Furt&erH t&is is not a uniFue attri6ute o) &istorical costH since an( measurement o) an
asset on initial recognition !e)ines t&e amount t&at 3ill ultimatel( 6e c&arge! to e;ense
on t&e use or sale o) t&e asset"
+*1" In comarisonH t&e )air 0alue o) an asset on initial recognition em6o!ies mar4et
e;ectations )or t&e )uture reco0er( o) t&e )air 0alue lus t&e rate o) return a0aila6le in
t&e mar4et lace )or assets o) eFui0alent ris4" A arallel statement ma( 6e ma!e in
resect o) t&e )air 0alue o) a lia6ilit(" Furt&erH t&e otential 0olatilit( o) o6ser0a6le
mar4et rices is caa6le o) statistical anal(sis A)or e;amleH 0alueCatCris4 an! sensiti0it(
anal(sesB to &el users e0aluate t&e ris4 an! 0olatilit( !imensions o) reorte! )air 0alue
amountsH gi0en in)ormation a6out t&e nature o) t&e assets or lia6ilities an! t&eir in&erent
ris4s"
#..
Summar( B Conclusion on +elevance
+*$" T%is paper proposes) !ased on t%e foregoing anal(sis) t%at fair value %as a significant
value dimension missing from %istorical cost @and also from t%e lo&er of %istorical cost
and recovera!le value measurementsA6 As a conse*uence) t%is paper concludes t%at
%istorical cost @and t%e lo&er of %istorical cost and recovera!le valueA is less relevant
t%an fair value on t%e initial recognition of assets and lia!ilities6
+*5" T&e a6o0e anal(sis o) &istorical cost in comarison 3it& )air 0alue is not e;&austi0e A)or
e;amleH it !oes not a!!ress eac& o) t&e criteria set out at aragra&s +5C/=B" It 3oul!
6e a 0er( ma-or un!erta4ing to e;amine t&oroug&l( t&e e;tensi0e literature on t&e
&istorical costCre0enue matc&ing mo!elH an! all t&e arguments t&at mig&t 6e raise!"
Suc& an e;amination is 6e(on! t&e scoe o) t&is reliminar( in0estigation" Rat&erH t&is
aer &as attemte! to i!enti)( an! )ocus on certain rimar( consi!erationsH 3&ic&H it is
roose!H strongl( suort t&e a6o0e conclusion" It is e;ecte! t&at a!!itional anal(sis
3oul! ser0e to ro0i!e )urt&er suort )or it"
/istorical 'ost as a Substitute for )air Value on %nitial &ecognition
+**" T&is aer roosesH in aragra& +,+H t&at t&e most rele0ant measurement 6asis s&oul!
6e selecte! 3&en t&at 6asis can 6e measure! 3it& acceta6le relia6ilit(" Accor!ingl(H
6ase! on t&e conclusion roose! a6o0eH )air 0alue s&oul! 6e selecte! o0er &istorical
cost )or measurement o) assets an! lia6ilities on initial recognition 3&en )air 0alue can
6e estimate! 3it& acceta6le relia6ilit(" T&usH as 6et3een &istorical cost an! )air 0alueH
t&e measurement o6-ecti0e s&oul! 6e )air 0alue on initial recognitionH 3it&
consi!eration o) &istorical cost onl( 3&en )air 0alue is not measura6le 3it& acceta6le
relia6ilit("
.,," Alt&oug& &istorical cost lac4s imortant attri6utes o) )air 0alueH it !oes &a0e certain
signi)icant attri6utes t&at &a0e le! it to 6e accete! as a rele0ant measurement 6asis on
initial recognition" T&e essence o) t&e &istorical cost measurement o6-ecti0eH an!
t&ere)ore o) its rele0anceH lies in its reresenting t&e )air 0alue o) consi!eration
e;c&ange! )or an asset or lia6ilit(" T&is is t&e transaction rice resulting )rom a
#.=
6argaine! e;c&ange 6et3een armIs lengt& arties" As suc&H it is a 0ali! measure o) t&e
economic sacri)ice ma!e to o6tain an assetH or economic 6ene)it recei0e! )or incurring a
lia6ilit(" It is roose! t&at an &istorical cost measurement o) an asset or lia6ilit( can 6e
accete! to &a0e su))icient rele0ance to 6e a ossi6le su6stitute )or )air 0alue on initial
recognition 3&en )air 0alue cannot 6e estimate! 3it& a!eFuate relia6ilit( < ro0i!e!
t&at it is a relia6le reresentation o) t&e )air 0alue o) consi!eration gi0en or recei0e!H
an! it is su6-ect to reasona6le sulementar( con!itions relating to reco0era6ilit( A)or
assetsB or reresentation o) amounts o3ing A)or lia6ilitiesB" Its merits as a ossi6le
su6stitute )or )air 0alue on initial recognition relati0e to ot&er measurement 6ases
!een!s on t&e outcome o) t&e anal(sis o) t&ese ot&er 6ases"
.,#" T&is conclusion lea0es t&e )ollo3ing ossi6ilities to 6e a!!resse!G
AaB %&et&er ot&er measurement alternati0esH or com6inations o) alternati0esH are
more rele0ant t&an )air 0alue in some or all initial recognition situations" T&is
assessment a3aits t&e anal(sis o) t&e ot&er i!enti)ie! measurement 6ases in
imme!iatel( )ollo3ing sections"
A6B %&et&erH or un!er 3&at circumstancesH &istorical cost is t&e most aroriate
su6stitute measurement 6asis on initial recognition 3&en )air 0alueH or anot&er
more rele0ant measurement 6asisH is not relia6l( !etermina6le" T&is assessment
!een!s on t&e anal(sis o) t&e relia6ilit( o) &istorical cost measurementsH an!
t&e comarati0e anal(sis o) ot&er measurement 6ases"
+elia!ilit( Limitations
.,+" As 3it& t&e consi!eration o) )air 0alue relia6ilit( a6o0eH t&e o6-ecti0e is not to a!!ress
relia6ilit( recognition criteria A3&ic& are outsi!e t&e scoe o) t&is aerBH 6ut to
un!erstan! an! assess t&e limitations o) &istorical cost measurement to reresent 3&at it
urorts to reresent" More seci)icall(H t&e o6-ecti0e is to assessG
to 3&at e;tent an! in 3&at circumstances is &istorical cost su6-ect to estimation
uncertainties or economic in!eterminacies on initial recognition o) assets an!
lia6ilitiesH an!
#./
3&at ma( 6e t&e imlications o) suc& limitations )or t&e use)ulness o) &istorical cost
measurements in comarison 3it& ot&er measurement alternati0es'
.,." T&e &istorical cost measurement o6-ecti0e isH in its urest )ormH to re)lect t&e 6argaine!
e;c&ange amount ai! or recei0e! )or an asset or lia6ilit( on initial recognition" T&is
amount is most !irectl( an! relia6l( measure! 3&en an asset is acFuire! or a lia6ilit(
incurre! in e;c&ange )or cas& or cas& eFui0alent consi!eration in a single transaction
6et3een an armIs lengt& 6u(er an! seller"
.,=" But &istorical cost measurement o) an asset or lia6ilit( o)ten reFuires t&e attri6ution o)
costs to an asset or lia6ilit(" %&en !irect attri6ution is ossi6leH )or e;amleH 3&en a
cost is incurre! in an e;c&ange transaction to install an asset an! &as no ot&er ossi6le
attri6utionH t&en it is resuma6l( a relia6le measure o) art o) t&e &istorical cost o) t&at
asset" ?o3e0erH in man( cases t&e !etermination o) t&e &istorical cost o) an asset or
lia6ilit( reFuires an allocation o) a cost or costs amongst assetsH lia6ilitiesH an!
e;enses" Suc& attri6utions are li4el( to 6e su6-ect to oneCtoCman( or man(CtoCman(
allocation in!eterminac(" Man( e;amles coul! 6e cite!" Among t&ese are t&e
unresol0e!H an! irresol0a6leH !e6ates on o0er&ea! allocations to in0entoriesH mining an!
oil e;loration roertiesH an! sel)Cconstructe! assets" From a lia6ilit( ersecti0eH
allocation issues ma( arise in attri6uting costs t&at are consi!ere! to 6e associate! 3it&
t&e issuance o) !e6t or 3&en a lia6ilit( arises as art o) a 86as4et9 urc&ase transaction"
.,/" T&e reresentational )ait&)ulness o) an &istorical cost measurement is su6stantiall(
re!uce! in common situations 3&en its !etermination reFuires signi)icant allocations"
T&e range o) in!eterminac( can 6e 0er( large in suc& situationsH an! it ma( 6e
Fuestione! 3&et&er t&e &istorical cost measurement o6-ecti0e is attaina6le 3it&
reasona6le relia6ilit( in t&ese situations" A !ecision not to allocate costs o) inuts t&at
can 6e consi!ere! to &a0e contri6ute! to t&e creation o) an asset or lia6ilit( !oes not
resol0e t&e ro6lem" Lero is itsel) an ar6itrar( allocation t&at is no moreH an! er&as
#.1
lessH -usti)ia6le t&an man( ot&er ossi6le allocations"
5.
Seci)ie! allocation rules
!ictate! 6( stan!ar! setters 3ill result in some stan!ar!i@ation o) &istorical cost
measurementsH t&us imro0ing t&e 0eri)ia6ilit( asect o) relia6ilit( an! ossi6l( also t&e
comara6ilit( asect" ?o3e0erH suc& rules cannot imro0e t&e reresentational
)ait&)ulness o) &istorical cost measurements" It is nota6le t&at t&e situations in 3&ic&
&istorical cost in!eterminac( ma( 6e greatest < t&at isH in resect o) sel) constructe! or
seciali@e! nonCcontractual assets < are t&e same situations in 3&ic& )air 0alue ma(
not 6e relia6l( estima6le" T&usH it ma( 6e conten!e! t&at &istorical cost &as limite!
use)ulness as a relia6le su6stitute )or )air 0alue in t&ese situations"
.,1" A )urt&er Fuestion 3it& resect to t&e reresentational )ait&)ulness o) &istorical cost
measurement arises 3&en t&e cost o) an asset consists o) t&e accumulation o) attri6ute!
costs t&at 3ere incurre! some time in t&e ast A)or e;amleH an allocation o) )i;e! asset
o0er&ea!s or interest costs o) !e6t to a sel)Cconstructe! assetB" In suc& a case t&e
&istorical cost o6-ecti0e o) reresenting t&e )air 0alue o) t&e consi!eration gi0en at t&e
time o) t&e sel)Cconstructe! assetIs initial recognition
5=
seems not to 6e met" It 3as
o6ser0e! in aragra& $5 t&at some stan!ar! setters &a0e !e)ine! t&e 8&istorical cost9 o)
an asset in terms o) t&e accumulation o) costs t&at can 6e attri6ute! to it 3it&out
seci)(ing t&at t&e cost reresents t&e )air 0alue o) consi!eration gi0en at t&e acFuisition
!ate" Ot&ers ma( argue t&at t&e 3or4ing !e)inition o) &istorical cost a!ote! in t&is
aer nee! not 6e altere! to accommo!ate suc& allocationsH 6ut t&at it ma( 6e
interrete! to mean t&e )air 0alue o) consi!eration gi0en Aor recei0e!B in resect o) t&e
5.
T&e e;tent o) t&e ar6itrar( allocation ro6lem )or t&e !etermination o) t&e &istorical cost o) assets in
common circumstances &as 6een seci)icall( ac4no3le!ge! in some concetual )rame3or4s" In
articularH t&e FASBIs CON +H aragra& 1/H notes t&atG 8I) assets are con0erte! into ot&er assets
3it&in an enterriseH as 3&en ra3 materials are con0erte! into )inis&e! ro!uctsH or 6uil!ings or
eFuiment are constructe! 6( an enterrise )or its o3n useH t&e multilicit( o) costing con0entions
t&at can 6e use!H all 3it&in t&e 6oun!aries o) resent generall( accete! accounting rincilesH ma4e
it imossi6le to attac& a uniFue cost to t&e )inis&e! asset" T&usH it ma( not 6e certain t&at t&e cost )or
t&e asset in t&e enterriseIs recor!s !oes )ait&)ull( reresent its cost"9
5=
Note t&atH as !iscusse! in aragra&s 11C1$H )or t&e uroses o) t&is aerH 8initial recognition9 is
consi!ere! to inclu!e an( time erio! necessar( to ma4e an asset rea!( )or use in a cas& generating
rocess"
#.$
originating asset Aor lia6ilit(B 3&ose costs are 6eing allocate! to t&e ne3 asset" T&is
aer rooses not to c&ange t&e 3or4ing !e)initionH 6ut to accet t&e ossi6ilit( o) t&is
latter interretation an! t&e a!!itional !egree o) imrecision t&at it imlies )or &istorical
cost"
.,$" An a!!itional ro6lem o) &istorical cost allocation arises in resect o) reCrecognition
costs" T&is ro6lem is e0i!entH )or e;amleH in t&e &istorical cost recor!e! )or assets
arising )rom researc& an! !e0eloment an! t&e e;loration an! !e0eloment o) mineral
an! oil an! gas roertiesH an! in resect o) reCconstruction an! reCcontract costs"
5/
Suc& costs cannot 6e caitali@e! 6e)ore an asset is recogni@e!H an! most stan!ar!s
ro&i6it t&eir retroacti0e caitali@ation 3&en an asset is su6seFuentl( recogni@e!" As a
resultH t&e amount recor!e! as t&e 8cost9 o) suc& an asset is not a )ait&)ul reresentation
o) t&e )air 0alue o) t&e consi!eration gi0en to create it" T&e rule t&at reCrecognition
costs not 6e retroacti0el( caitali@e! seems to 6e 6ase! rimaril( on concerns relating
to ractical e))ects rat&er t&an on an( con0incing concetual 6asis"
.,5" Finall(H t&ere is t&e asset cost reco0era6ilit( con!itionH an! t&e analogous lia6ilit(
amount o3ing con!itionH !iscusse! at aragra&s +$5C+5+ an! +5/H an! t&e otential
!i))iculties in arri0ing at relia6le estimates to suort 3&et&er or not t&ese con!itions
are met"
.,*" T%us) t%e determination of %istorical cost on t%e initial recognition of assets and
lia!ilities is su!/ect to potentiall( large areas of measurement uncertaint( in common
situations in &%ic% %istorical cost is not une*uivocall( defined !( t%e e4c%ange of cas%
or cas% e*uivalents on t%e initial recognition date6
.#," Some ma( argue t&at &istorical cost !eterminations s&oul! 6e consi!ere! to 6e o)
acceta6le relia6ilit( i) t&e( meet current stan!ar!s )or recognition e0en 3&en t&ere is a
signi)icant le0el o) measurement uncertaint(" T&eir arguments ma( 6e as )ollo3sG
5/
SeeH )or e;amleH IAS ##H Construction ContractsH aragra& +#H an! A6stract .= o) t&e U"2" ASBIs
Urgent Issues Tas4 ForceH Pre,contract CostsH aragra& #/A6BH 3&ic& reclu!e reinstatement o)
e;ense! reCcontract costs"
#.5
AaB ?istorical cost !eterminations are at least ultimatel( groun!e! in actual
transaction e;c&ange amountsH t&at isH are comrise! o) allocations o) costs or
)air 0alues t&at &a0e 6een recogni@e! to 6e relia6l( measura6le" In contrastH
some )air 0alue estimates using mo!els ma( not &a0e an( o6ser0a6le
transactions 6ase" T&is argument 3oul! seem to ro0i!e little com)ortH &o3e0erH
3&en &istorical cost is su6-ect to a large range o) allocation ar6itrariness"
A6B T&e &istorical costC6ase! mo!el &as e;iste! )or man( (earsH an! &as remaine! in
lace 3it& some a!atations to c&anging circumstancesH !esite its critics" It is
suorte! 6( e;tensi0e e;erience in ractice an! )amiliarit(H an! man(
allocations are circumscri6e! to some e;tent 6( accounting stan!ar!s" T&is is a
ragmatic rat&er t&an a t&eoretical argument" In assessing t&is argument it is
imortant to 6e clear on t&e seriousness o) t&e ro6lem" Accountants an! users
o) )inancial statements ma( &a0e come to accet current accounting allocation
stan!ar!s an! racticesH er&as 3it&out )ull( recogni@ing t&e e;tent to 3&ic&
reresentational )ait&)ulness ma( 6e comromise! 6( ar6itrar( allocations" T&e
cost allocation ro6lem can 6e !eceti0eH in t&at some allocation can al3a(s 6e
ma!e an! ma( 6e gi0en some seemingl( lausi6le suorting rationale" But t&e
)act is t&at no oneCtoCman( allocation can 6e t&eoreticall( -usti)ie! 6ecause 8K
inuts interactH an! t&eir interaction re0ents t&eoretical -usti)ication )rom 6eing
gi0en to t&e inut allocations emlo(e! in )inancial accounting"9
51
.##" Desite t&e seeming t&eoretical intracta6ilit( o) oneCtoCman( allocationsH it mig&t 6e
reasone! on urel( ragmatic groun!s t&at &istorical cost !eterminations o) assets an!
lia6ilities t&at accor! 3it& e;isting stan!ar!s an! ractices s&oul! continue to 6e
accete! to 6e relia6le 3&en t&ere is no con0incing e0i!ence t&at anot&er more rele0ant
measurement 6asis can 6e relia6l( alie!"
51
Art&ur L" T&omasH T%e Allocation Pro!lem in Financial Accounting T%eor() age ;iii"
#.*
Summar( Proposal
.#+" T%is paper proposes t%at t%e %istorical cost !asis applied in accordance &it% generall(
accepted accounting principles can !e accepted as a relevant and relia!le su!stitute for
fair value on initial recognition &%en fair value is not relia!l( estima!le) a!sent
persuasive evidence t%at t%e %istorical cost amount is not recovera!le @if an assetA or
does not reasona!l( represent t%e amount o&ing @if a lia!ilit(A6
.#." T&e a6o0e roosal is su6-ect to assessing 3&et&er ot&er measurement 6ases still to 6e
e;amine! are !etermine! to 6e caa6le o) relia6le estimation an! to 6e more rele0ant
t&an &istorical cost )or measuring assets an! lia6ilities on initial recognition"
Application of <istorical Cost >it%in t%e Conte4t of t%e Fair Value .!/ective
.#=" T&e rele0ance o) &istorical cost as a su6stitute )or )air 0alue on initial recognition stan!s
to 6e imro0e! i) it is alie! on 6ases t&at are as consistent as ossi6le 3it& t&e )air
0alue o6-ecti0e" Interreting &istorical cost allocation ossi6ilities in measuring an
asset or lia6ilit( on initial recognition 3it&in t&e conte;t o) t&e o0erarc&ing )air 0alue
measurement o6-ecti0e coul! ro0i!e a )res& ersecti0e )or reCassessing some
tra!itional cost allocation stan!ar!s" It is 6e(on! t&e scoe o) t&is reliminar(
in0estigation to un!erta4e an e;amination o) t&e 0ast 6o!( o) literature an! stan!ar!s
relating to cost allocations" ?o3e0erH to illustrate somet&ing o) t&e ossi6le
imlicationsH t3o e;amles o) areas in 3&ic& cost allocations mig&t 6e 0ie3e!
!i))erentl( 3it&in t&e o0erall )air 0alue measurement o6-ecti0e ma( 6e cite!G
Transaction costs Aas !e)ine! in aragra&s #*.C+,,B are e;clu!e! in measuring t&e
)air 0alue o) assets an! lia6ilities on initial recognition" Follo3ing )rom t&isH i)
&istorical cost is use! as a su6stitute )or )air 0alue on initial recognitionH it ma( 6e
reasone! t&at t&e measure o) t&e cost o) an asset or lia6ilit( on initial recognition
s&oul! also e;clu!e transaction costs"
A )un!amental Fuestion arising 3it&in t&e &istorical cost mo!el relates to 3&et&er
an!H i) soH &o3 interest s&oul! 6e caitali@e! on assets t&at ta4e some time to ma4e
#=,
rea!( )or use or sale" Rational mar4et e;ectations as to t&e e))ects o) time an!
atten!ant ris4s on t&e )air 0alue o) an assetH as e0i!ent in resent 0alue tec&niFues
)or estimating )air 0alueH ma( 6e reasone! to &a0e imlications )or interest
caitali@ation"
5$
.#/" Aen!i; . to t&is aer e;lores on a reliminar( 6asis some ossi6le imlications o)
t&e )air 0alue measurement o6-ecti0e )or assessing certain cost attri6ution stan!ar!s an!
ractices"
Current Co$t / Re"ro(u'tion Co$t an( Re")a'ement Co$t
&elevance
Assets
.#1" T&e term 8current cost9 is commonl( use! to encomass rero!uction cost an!
relacement cost" T&e 3or4ing !e)initions o) t&ese t3o concets o) current cost Asee
aragra&s 5,C5.B areG
Rero!uction cost D T&e most economic current acFuisition cost o) relacing an
e;isting asset 3it& an i!entical one"
Relacement cost D T&e most economic current acFuisition cost o) relacing an
e;isting asset 3it& an asset o) eFui0alent ro!ucti0e caacit( or ser0ice
otential"
REPRODUCTION COST
.#$" T&e rero!uction cost o) an asset 3oul! !i))er )rom its &istorical cost on initial
recognition i) t&e most economic cost to rero!uce it !i))ers )rom t&e )air 0alue o) t&e
consi!eration gi0en to acFuire it" For e;amleH i) an entit( urc&ase! or constructe! an
asset )or /,, t&at coul! reasona6l( 6e rero!uce! 6( t&e entit( on t&e acFuisition !ate
5$
It coul! 6e conclu!e! t&at t&e resulting accounting )or transaction costs an! interest is neit&er
&istorical cost nor )air 0alueH 6ut a &(6ri! 6asis 6et3een t&e t3oH in 3&ic& case it s&oul! 6e !escri6e!
as suc&"
#=#
)or =,,H its rero!uction cost 6asis amount 3oul! 6e =,, an! a #,, loss 3oul! 6e
recor!e!" Alternati0el(H in t&e rare case t&at an entit( o6taine! an asset )or .,, un!er
uniFue con!itions t&at coul! not 6e reeate!H an! it 3oul! cost =,, to rero!uceH its
rero!uction cost 6asis amount 3oul! 6e =,, an! a #,, gain 3oul! 6e recor!e!" AlsoH
t&e rero!uction cost o) an asset Asuc& as one arising )rom researc& an! !e0eloment
acti0itiesB 3oul! inclu!e an( reCrecognition costs t&at 3oul! 6e necessar( to rero!uce
t&e asset on initial recognition" PreCrecognition costs are not recogni@e! on an &istorical
cost 6asis as it is normall( alie! Asee aragra& .,$B"
.#5" Rero!uction cost urorts onl( to 6e a measure o) t&e amount t&at 3oul! 6e e;en!e!
on a measurement !ate" T&usH in common 3it& &istorical costH it !oes not urort to
measure 0alue recei0e!H an! t&ere)ore must 6e sulemente! 6( an a!!itional
reco0era6ilit( con!ition"
REPLACEMENT COST
.#*" Relacement cost &as an a!!itionalH more am6itiousH o6-ecti0e t&an rero!uction cost"
T&e relacement cost o6-ecti0e is to measure t&e most economic cost to relace t&e
ro!ucti0e caacit( or ser0ice otential o) an assetH rat&er t&an -ust t&e most economic
cost to rero!uce it as is"
.+," T&e relacement cost 3or4ing !e)inition re)lects a concet t&at !ates 6ac4 to a erio!
t&at e;ten!e! )rom aro;imatel( t&e mi! #*1,s to t&e earl( #*5,sH !uring 3&ic&
alternati0es to t&e &istorical cost mo!el 3ere e;tensi0el( stu!ie! an! !e6ate!" T&ere
3as 3i!esrea! !issatis)action 3it& t&e &istorical costCre0enue matc&ing mo!el at t&at
timeH in large art as a result o) &ig& le0els o) in)lation !uring muc& o) t&is erio!H an!
concerns t&at &istorical cost measurement results in mislea!ing income reorting un!er
con!itions o) in)lation or rai!l( c&anging rices"
.+#" T&e relacement cost alternati0e 3as a!0ocate! )rom t&e ersecti0e o) maintaining an
entit(Is ro!ucti0e caacit( in meeting t&e costCre0enue matc&ing o6-ecti0e" Suorters
6elie0e t&at income s&oul! 6e reorte! onl( a)ter ro0i!ing )or t&e most economic
#=+
current cost to relace t&e ro!ucti0e caacit( use! in generating re0enues" T&isH t&e(
reasonH results in an aroriate measure o) er)ormanceH 6ecause it s&o3s 3&et&er t&e
entit( is a6le to reco0er its current costs )rom re0enues 3&en rices c&ange" Furt&erH it
ma( 6e consi!ere! to ro0i!e a goo! 6asis )or re!iction o) )uture ro)ita6ilit( o) an
entit(H 6( e;clu!ing unreeata6le &ol!ing gains an! losses"
.++" Stan!ar! setters in man( -uris!ictions ut in lace stan!ar!s )or t&e ro0ision o)
sulementar( relacement cost Aan! in some casesH general rice le0el a!-uste!B
6alance s&eet an! income !ata"
55
T&ese stan!ar!s 3ere not 3ell recei0e! 6( rearers
an! users o) )inancial statements in most o) t&ese -uris!ictions" Man( entities )oun! t&e
relacement cost o) t&eir assets !i))icult to measure an! interret" Users generall(
)oun! t&e !ata o) limite! use)ulnessH an! !ou6te! t&eir relia6ilit(" In)lation a6ate!
s&ortl( a)ter t&ese stan!ar!s 3ere issue!H an! most o) t&ese stan!ar!s 3ere 3it&!ra3n"
5*
Some 6elie0e t&at t&ese stan!ar!s !i! not reresent a )air test o) relacement costH
6ecause t&e( 3ere in lace )or an insu))icient time an! generall( 3ere not rigorousl(
alie!" T&e concetual 6asis )or relacement cost concet &as not 6een rigorousl(
a!!resse! 6( stan!ar! setters since t&e mi! #*5,s" In articularH t&ere &as 6een little
consi!eration o) relacement cost in relation to later !e0eloments in )air 0alue
measurement t&eor( an! ractice"
.+." T&e ma-or criticisms o) relacement cost 0oice! in t&e #*5,s can 6e !irectl( relate! to
its o6-ecti0eH to !e)ine an assetIs ser0ice otential or ro!ucti0e caacit( an! !etermine
t&e most economic cost to relace it" T&is o6-ecti0e seems most aroriate to a
tra!itional manu)acturing enterrise 3&ose assets consist largel( o) roert(H lant an!
eFuiment t&at are not su6-ect to rai! tec&nological c&ange an! 3&ere signi)icant
c&anges in ro!uct lines are not e;ecte!" %&ile t&ese con!itions ma( &a0e 6een t&e
norm some (ears agoH t&e( &a! !iminis&e! alica6ilit( in t&e #*5,sH an! ma( rarel( 6e
met in to!a(Is economic en0ironment" Relacement cost measurement &as 6een accuse!
55
SeeH )or e;amleH FASB Statement No" ..H Financial +eporting and C%anging PricesH #*$*J an!
U"2" Statement o) Stan!ar! Accounting Practice #1H Current Cost AccountingH #*5,"
5*
FASB Statement No" .. 3as 3it&!ra3n in #*51H an! U"2" Statement o) Stan!ar! Accounting
Practice #1 3as susen!e! in #*5/"
#=.
o) 6eing 83&at i)9 accounting 3&en an entit( 3ill notH or cannotH relace its e;isting
resources 3it& i!entical assetsH an! t&us must estimate t&e most economic cost o) assets
t&at it !oes not o3n" T&e rele0ance o) relacement cost an! t&e oerating caital
maintenance o6-ecti0e &as 6een Fuestione!H in articularH in resect o) non rene3a6le or
irrero!uci6le assets suc& as oil an! gas reser0es or motion icture )ilmsH an! in resect
o) monetar( 3or4ing caitalH commo!ities &el! )or tra!ing urosesH ort)olio
in0estmentsH intangi6lesH an! )or lant or eFuiment t&at is su6-ect to signi)icant
tec&nological o6solescence"
*,
In summar(H man( &a0e 6een o) t&e oinion t&at t&e
relacement cost o6-ecti0e lac4s rele0anceH or is rele0ant onl( un!er limite! con!itions
to certain tangi6le assets"
.+=" T&ese criticisms &a0e arisen )or t&e most art 3it& resect to measuring assets in
erio!s su6seFuent to initial recognitionH an! it ma( 6e e;ecte! t&at relacement cost
3ill normall( eFual &istorical cost on initial recognition" T&usH it mig&t 6e conten!e!
t&at t&e measurement o) relacement cost is not an issue o) signi)icance on initial
recognition" ?o3e0erH measures o) t&e relacement cost o) an asset can !i))er )rom its
&istorical costH )air 0alueH an! ot&er alternati0e 6ases on initial recognition" T&e
relacement cost o) an asset coul! 6e !etermine! to !i))er )rom its &istorical cost on
initial recognitionH )or e;amleH i) its caacit( e;cee!s 3&at t&e entit( can e;ect to useH
or i) t&e asset is art o) an o6solete lant or coul! &a0e 6een acFuire! or constructe! at a
more economic cost"
Comarison 3it& Fair >alue
.+/" Un!er t&e )air 0alue measurement o6-ecti0e all assets are rice! in cometiti0e
relations&i 3it& one anot&er" Mar4et )orces can 6e e;ecte! to !ri0e t&e )air 0alues o)
all assets to t&e same eFuili6rium e;ectation o) earning t&e a0aila6le mar4et rate o)
return )or eFui0alent ris4 on t&e measurement !ate Asee aragra&s #,#C#,5B" T&e result
*,
T&e Bac4groun! In)ormation an! Basis )or Conclusion aen!i; in FASBH No" 5*H Financial
+eporting and C%anging Prices) #*51H contains a 6rie) !iscussion o) t&ese ro6lems" For a more
e;tensi0e !iscussion see Ross M" S4inner an! E" Ale; Mil6urnH Accounting Standards in Evolution)
ages /=*C//5H an! re)erences cite! t&erein"
#==
is t&atH i) an asset is ercei0e! 6( mar4et articiants to 6e a less economic ro0i!er o)
its ser0ice otential t&an some ot&er assetH its rice 3ill 6e !iscounte! in relation to t&at
o) t&e more economic su6stitute" For e;amleH suose an entit( acFuires a comuter
t&at is tec&nologicall( in)erior to anot&er mo!el" Mar4et articiants can 6e e;ecte! to
4no3 t&isH assuming t&e in)ormation is u6licl( a0aila6le" T&usH t&e )air 0alue o) t&e
entit(Is comuter can 6e e;ecte! to 6e less t&an t&at o) t&e suerior alternati0e 6( t&e
rice e))ect o) t&e tec&nological !i))erenceH as !etermine! 6( t&e mar4et" T&usH t&ere is
no nee! to searc& out an! e0aluate ossi6le more economic su6stitutesH 6ecause t&e
mar4et 3ill alrea!( &a0e !one t&is an! rice! t&e e;isting asset accor!ingl(" From t&e
ersecti0e o) t&e mar4etlaceH t&e reco0era6le relacement cost o) an asset is its )air
0alue"
.+1" In summar(H )air 0alue incororates t&e essential roerties o) relacement cost )rom t&e
mar4etIs ersecti0e" T&e mar4et rice o) an asset re)lects t&e mar4etIs ercetion o)
t&e &ig&est an! 6est use o) t&e assetIs ro!ucti0e caacit( or ser0ice otential" T&is is
t&e 8most economic9 rice o) t&at caacit( or ser0ice otential in t&e mar4etlaceH
ta4ing into account u6licl( a0aila6le in)ormation 3it& resect to ossi6le su6stitutes
)or !eli0ering t&at otential or caacit("
.+$" It is imortant to un!erstan! t&e analogous concet to ser0ice otential an! ro!ucti0e
caacit( t&at is t&e 6asis o) )air 0alue" Fair 0alue em6o!ies a 6roa!er concet" T&e
ser0ice otential or ro!ucti0e caacit( o) an asset is e;an!e! to comrise t&e mar4etIs
e;ectation o) t&e assetIs cas& )lo3 generating a6ilit( in its &ig&est an! 6est useH
!iscounte! using t&e mar4et ris4Ca!-uste! rate o) return" All assetsH contractual an! nonC
contractualH can 6e concei0e! in terms o) t&e resent 0alue o) t&eir e;ecte! cas& )lo3
generating a6ilit("
.+5" T&is aer roosesH 6ase! on t&e a6o0e anal(sisH t&at 3&en t&e )air 0alue o) an asset is
relia6l( measura6leH t&ere is no nee! to go )urt&er in attemting to estimate its
relacement cost" Some ma( !isagree" T&e( ma( 6elie0e t&at t&e relacement cost o) an
asset !etermine! in accor!ance 3it& t&e !e)inition at aragra& .#1 coul!H at least in
#=/
some situationsH result in a !i))erentH more rele0antH amount t&an its )air 0alue" In or!er
to assess t&is ossi6ilit(H it is necessar( to i!enti)( an! assess t&e ossi6le sources o)
!i))erences 6et3een relacement costH as tra!itionall( !e)ine!H an! )air 0alue"
.+*" Relacement cost as tra!itionall( !e)ine! coul! 6e e;ecte! to !i))er )rom )air 0alue in
t3o )un!amental resectsG
It ma( re)lect entit( seci)ic e;ectations as to an assetIs ser0ice otential or
ro!uction caacit( an! its 8most economic cost9 t&at !i))er )rom mar4et
e;ectations"
In common 3it& &istorical cost an! rero!uction costH it is not a measure o) 0alue
recei0e!" Rat&erH it is onl( a measure o) t&e amount t&at 3oul! 6e e;en!e! to
acFuire an asset on t&e measurement !ate"
..," Entit( Seci)ic Consi!erations" Relacement costH as tra!itionall( !e)ine!H 0ie3s an
assetIs ro!ucti0e caacit( or ser0ice otential in t&e conte;t o) t&e o3ning entit(Is
6usiness circumstancesH intentionsH an! e;ectations" T&is reFuires a searc& )or ossi6le
su6stitutes )or t&e e;isting asset t&at coul! !eli0er its ro!ucti0e caacit( or ser0ice
otential at a more economic cost to t&e entit(" T&e assessment o) ossi6le su6stitutes
must resuma6l( 6e ma!e on t&e 6asis o) entit( managementIs e;ectations re)lecting
t&e articular use to 3&ic& t&e entit( 3oul! ut t&e asset" Some mig&t c&allenge t&is
resumtionH noting t&at an estimation o) relacement cost coul! 6e 6ase! on a
0aluation 6( an in!een!ent ro)essional 0aluator" T&e rinciles an! tec&niFues use!
6( ro)essional 0aluators 3arrant stu!(H 3&ic& is 6e(on! t&e scoe o) t&is aer" It
3oul! seem articularl( imortant to e0aluate t&e source o) e;ectations an!
assumtions use! 6( ro)essional 0aluators" Base! on t&e anal(sis o) t&is aerH it
seems li4el( t&at a ro)essional 0aluatorIs e;ectations an! assumtions coul! 6e
classi)ie! as eit&er mar4et or entit( seci)ic" I) a 0aluatorIs estimation o) an assetIs
relacement cost is )oun!e! in mar4et rices or in!een!entl( su6stantiate! estimates
o) mar4et e;ectationsH t&en t&e result is an estimate o) t&e assetIs )air 0alue"
Alternati0el(H i) a 0aluatorIs estimation o) relacement cost cannot 6e su6stantiate! to
#=1
6e consistent 3it& mar4et e;ectationsH it must 6e signi)icantl( !een!ent on t&e
entit(Is e;ectations or on t&e 0aluatorIs e;ectations t&at are accete! 6( t&e entit( )or
)inancial reorting uroses" In eit&er caseH t&e result is an entit( seci)ic estimate o)
relacement cost"
..#" Again 3e re)er 6ac4 to t&e tentati0e conclusion in c&ater =H t&at t&e mar4et
measurement o6-ecti0e A)air 0alueB &as imortant Fualities t&at ma4e it concetuall(
suerior to entit( seci)ic measurement o6-ecti0esH at least on initial recognition"
T&ere)oreH t&e Fuestion is 3&et&er an entit( seci)ic !etermination o) t&e relacement
cost o) an asset on initial recognition t&at !i))ers )rom its )air 0alue coul! &a0e attri6utes
not recogni@e! in t&e anal(sis o) c&ater = t&at 3oul! c&ange t&at tentati0e conclusion"
..+" Certain 6asic issues relating to entit( seci)ic relacement cost measurements ma( 6e
illustrate! 6( an e;amle" Suose t&at an entit( acFuires a lu;ur( automo6ile solel( )or
t&e urose o) !eli0ering i@@as" T&e )air 0alue o) t&e lu;ur( car can 6e e;ecte! to 6e
relia6l( measura6leH assuming t&ere is an acti0e mar4et )or suc& cars" T&is )air 0alue
re)lects 4no3le!gea6le mar4et articiantsI e;ectations o) t&e &ig&est an! 6est use o)
t&e assetIs ser0ice otential" %&at is t&e aroriate entit( seci)ic 6asis )or !etermining
t&e i@@a !eli0er( ser0ice otential )or t&e urose o) measuring t&e carIs relacement
cost' T&e re)erents )or !etermining t&e most economic cost o) t&e same !eli0er( ser0ice
otential in t&e articular circumstances must !een! on management intentions an!
e;ectations" At one e;tremeH t&e entit( mig&t -usti)( t&e )ull mar4et rice o) t&e car in
t&e 6elie) t&atH )or t&e inten!e! clienteleH t&e lu;ur( car a!!s a 0ital re0enueCen&ancing
restige )actor" At t&e ot&er e;tremeH it mig&t 6e argue! t&at all t&at is nee!e! is a
moe! or a 6ic(cleH in 3&ic& case t&e relacement cost o) t&e lu;ur( car 3oul! 6e t&at
o) a moe! or 6ic(cle"
..." T&is e;amle illustrates t&at an entit( seci)ic !etermination o) t&e ser0ice otential or
ro!ucti0e caacit( o) an asset to 6e use! in a re0enue generating acti0it( ma( 6e
!i))erent )rom t&at o) t&e mar4etH an! t&at ossi6le !i))erences ma( &a0e 0er(
signi)icant measurement e))ects" It also illustrates t&e otential am6iguit( o) an entit(
#=$
seci)ic relacement cost measurement o6-ecti0e 3&en t&e ser0ice otential or
ro!ucti0e caacit( o) an asset in its &ig&est an! 6est use in t&e mar4etlace ma(
e;cee! t&e nee!s o) an entit(" As o6ser0e! in aragra& .+.H some ot&er ossi6le
sources o) am6iguit( in entit( seci)ic !eterminations o) ser0ice otential or ro!ucti0e
caacit( in0ol0e situations in 3&ic& assetsI ro!ucti0e caacities are su6-ect to
signi)icant tec&nical o6solescence or to !i))erences in management strategies an!
e;ectations un!er c&anging 6usiness con!itions" T&e concern is t&at 3&at constitutes
t&e most economic ser0ice otentials or ro!ucti0e caacities o) suc& assets ma( not 6e
su))icientl( !e)ina6le in t&e conte;t o) a articular entit(Is circumstances to 6e
unam6iguousl( i!enti)ie! an! measure!" T&is concern goes 6e(on! relia6ilit( in t&e
sense t&at it relates to t&e a6ilit( to !e)ine t&e relacement cost measurement o6-ecti0e
in t&e conte;t o) a articular entit( )or man( assets in common circumstances"
..=" In a!!itionH some costs ma( 6e inclu!e! in an entit( seci)ic measure o) t&e
relacement cost o) an asset t&at are e;clu!e! in measuring its )air 0alue" Primar(
among t&ese are transaction costs Aas !e)ine! in aragra&s #*.C+,,B"
../" Relacement Cost D Not a Measure o) >alue Recei0e!" As !e)ine! at aragra& .#1H
relacement cost urorts onl( to 6e a measure o) t&e most economic cost t&at 3oul! 6e
e;en!e! to o6tain t&e ser0ice otential or ro!ucti0e caacit( o) an assetJ it is not a
measure o) 0alue recei0e!" T&usH as 3it& &istorical cost an! rero!uction costH it cannot
stan! on its o3n as a measurement 6asisH 6ut must 6e su6-ect to a!!itional asset
recognition an! reco0era6le 0alue measurement con!itions" In sumH relacement cost is
missing an imortant attri6ute t&at is reresente! in )air 0alue"
..1" Most accountants seem no3 to accet t&at t&e relacement cost o) an asset s&oul! 6e
su6-ect to a reco0era6le 0alue ceiling" Man( current cost a!0ocates 6elie0e t&at t&e
rele0ance o) relacement cost s&oul! 6e e0aluate! 3it&in t&e conte;t o) !eri0al 0alueH
3&ic& is anal(@e! in a su6seFuent section o) t&is c&ater" It s&oul! 6e recogni@e!H
&o3e0erH t&at a lo3er o) relacement cost an! reco0era6le 0alue measurement o6-ecti0e
&as signi)icant conseFuences )or assessments o) ro!ucti0e caacit( caital
#=5
maintenance" T&e reco0era6le 0alue o) an asset t&at is lo3er t&an its relacement cost
cannot ser0e as a measure t&at s&o3s 3&et&er ro!ucti0e caacit( is maintaine!"
..$" In summar(H a measure o) t&e relacement cost o) an asset on initial recognition t&at
!i))ers )rom its )air 0alue is su6-ect to t&e limitations o) entit( seci)ic !eterminations o)
t&e most economic cost o) relacing t&e assetIs ser0ice otential or ro!ucti0e caacit(H
an! to t&e )act t&at relacement cost is not a measure o) 0alue recei0e!"
..5" A common ans3er to t&ese criticisms o) relacement cost as a measurement 6asis
!i))ering )rom )air 0alue is t&at t&e entit( seci)ic concet o) relacement cost s&oul! 6e
e;an!e! to 6e 6ase! on an e;ectation o) rational management 6e&a0iour" T&e most
economic cost to relace an assetIs ro!ucti0e caacit( 3oul! t&en 6e !etermine! on
t&e 6asis o) 3&at a rational manager s&oul! 6e e;ecte! to !eci!e in t&e articular
circumstances o) t&e reorting entit(" A 3ellC!e)ine! rational management 6e&a0ioural
)rame3or4 3oul!H it is argue!H eliminate un-usti)ia6le entit( seci)ic e;ectations"
Attention t&en turns to !e)ining an! e0aluating 3&at s&oul! 6e consi!ere! to constitute
rational management 6e&a0iour an! &o3 it ma( !i))er )rom )air 0alue" T&e rincial
rational management 6e&a0ioural )rame3or4 is !eri0al 0alue" ?o3e0er t&e !eri0al
0alue )rame3or4 !oes not a!!ress t&e measurement o) relacement cost or t&e ro6lems
in estimating t&e ser0ice otential or ro!ucti0e caacit( o) an asset in an entit( seci)ic
conte;t"
Lia!ilities
..*" Paragra& 5. rooses t&at t&e current cost eFui0alent )or a lia6ilit( 6e !e)ine! as t&e
)air 0alue o) consi!eration t&at t&e o3ing entit( 3oul! &a0e recei0e! i) t&e lia6ilit( &a!
6een incurre! on t&e measurement !ate"
.=," T&is roose! !e)inition !oes not ma4e an( re)erence to t&e relacement o) ro!ucti0e
caacit( or ser0ice otentialH 6ecause t&is 3oul! seem to 6e a roert( o) assets rat&er
t&an lia6ilities" T&e literature on relacement cost measurement t&at )ocuses on t&e
o6-ecti0e o) ro!ucti0e caacit( caital maintenance &as not a!!resse! t&e 0aluation o)
#=*
lia6ilities" Rat&erH t&e rimar( concern 3it& lia6ilities in t&is literature &as 6een 3&et&erH
an! i) so &o3H &ol!ing gains an! losses arising )rom measuring assets at t&eir
relacement cost s&oul! 6e allocate! 6et3een lia6ilities an! eFuit(" In summar(H t&ere
3oul! seem to 6e no literature on relacement cost er se t&at is &el)ul in a!!ressing
t&e measurement o) lia6ilities"
.=#" T&e !e)inition roose! a6o0e aears to 6e generall( consistent 3it& current cost
o6-ecti0esH 3it& t&e ca0eat t&at it s&oul! 6e interrete! in terms o) 3&at coul! 6e
consi!ere! to 6e rational or 8most economic9 3it&in t&e entit(Is circumstances" T&is
current cost measure o) a lia6ilit( ma( rarel( !i))er on initial recognition )rom its
measurement on an &istorical cost 6asis"
.=+" Current cost lia6ilit( measurement su))ers )rom t&e same limitations as &istorical cost
lia6ilit( measurement on initial recognition" T&ese measurement 6ases urort onl( to
measure t&e )air 0alue o) t&e consi!eration t&at 3as recei0e! A&istorical cost 6asisB or
3oul! 6e recei0e! Acurrent cost 6asisBH 3&ic& &a0e no necessar( relations&i to t&e
ro6a6le )uture sacri)ice" For e;amleH no amount 3oul! 6e ro0i!e! )or a lia6ilit( t&at
arises as a result o) a lossH suc& as ma( arise )rom a la3suitH an! t&ere is li4el( to 6e no
relia6le 6asis )or !etermining t&e )air 0alue o) consi!eration recei0e! )or incurring asset
retirement or ostCemlo(ment 6ene)it o6ligations" Furt&erH a current cost lia6ilit(
ro0isionH suc& as a ro0ision )or 3arranties or asset retirement o6ligationsH 3oul! 6e
6ase! on entit( seci)ic e;ectationsH 3it& conseFuent ossi6le !i))erences )rom )air
0alue" For e;amleH an entit( coul! !eci!e to c&arge less t&an t&e mar4et rice )or a
3arrant(H an! t&ere)ore recei0e less consi!erationH resuma6l( in t&e 6elie) t&at it coul!
ser0ice t&e lia6ilit( at less cost t&an is imlicit in t&e mar4et rice"
.=." In summar(H t&e lia6ilit( eFui0alent to relacement cost is not 3ell !e)ine! in t&e
literatureH 6ut can 6e reasone! to 6eG
missing t&e 0ital !imension o) e;ecte! )uture sacri)ice 0alueH an!
su6-ect to t&e limitations o) an entit( seci)ic measurement 6asis"
#/,
Summar( B Conclusion on +elevance
.==" T%is paper proposes) !ased on t%e foregoing anal(sis) t%at reproduction cost and
replacement cost are eac% su!/ect to significant limitations in &%at t%e( can purport to
measure t%at render t%em less relevant measurement !ases t%an fair value on t%e initial
recognition of assets and lia!ilities6
.=/" In summar(H it is roose! t&at t&e a6o0e anal(sis ro0i!es a strong case )or conclu!ing
t&at current cost 6ases Arero!uction an! relacement costB are o) more limite!
rele0ance < t&at isH t&e( ma( 6e e;ecte! to &a0e more limite! in)ormation 0alue an!
!ecision use)ulness < t&an )air 0alue )or measuring assets an! lia6ilities on initial
recognition in all situations 3&en )air 0alue can 6e relia6l( estimate!" T&e a6o0e
anal(sis is not e;&austi0eH &o3e0erH an! a more e;tensi0e e;amination o) rero!uction
cost an! relacement cost against t&e criteria set out in aragra&s +5C1/ mig&t re0eal
a!!itional insig&ts"
.=1" Some roose t&at an estimate o) )air 0alue ma( 6e 6ase! on relacement cost" T&is
aer roosesH in aragra&s .+/C.+5H t&at t&e )air 0alue o) an asset em6o!ies t&e
essential roerties o) relacement costH 6ut t&at t&e re0erse is not necessaril( t&e case"
T&usH t&is aer reasons t&at an assetIs relacement cost s&oul! not 6e reresente! to 6e
its )air 0alue unless t&e essential con!itions o) )air 0alue can 6e !emonstrate! to 6e met
on t&e measurement !ate"
'urrent 'ost as a Substitute for )air Value on %nitial &ecognition
+elevance
.=$" It )ollo3s )rom t&e a6o0e conclusion t&at )air 0alue s&oul! 6e use! in re)erence to
rero!uction an! relacement cost )or t&e measurement o) assets an! lia6ilities on
initial recognition 3&en )air 0alue can 6e relia6l( measure!" T&e Fuestion is t&en
3&et&er one or 6ot& o) t&e current cost 6ases coul! 6e a more aroriate su6stitute )or
)air 0alue t&an &istorical cost 3&en )air 0alue is not relia6l( measura6le on initial
recognition" T&e current cost measurement o6-ecti0e ma( 6e reasone! to 6e more
#/#
rele0ant t&an t&at o) &istorical cost" T&is is 6ecause &istorical cost urorts to measure
3&at 3as ai! )or an assetH or recei0e! )or a lia6ilit(H 3&ile t&e current cost 6ases
urort to measure t&e most economic amount t&at rationall( coul! &a0e 6een ai! or
recei0e! on initial recognition" T&usH i) a current cost 6asis is relia6l( measura6le an!
can 6e e;ecte! to 6e reco0era6leH it coul! 6e e;ecte! to &a0e more in)ormation 0alue
t&an &istorical cost on initial recognition"
.=5" In comaring t&e t3o current cost o6-ecti0esH t&e relacement cost o) an asset urorts
to reresent more t&an its rero!uction costH an! t&us is concetuall( a more rele0ant
o6-ecti0e" It is imortantH &o3e0erH to consi!er t&e relations&i 6et3een relacement
cost an! rero!uction cost" Some &a0e roose! t&at t&e current cost o) an asset s&oul!
6e !e)ine! as t&e lo3er o) relacement cost an! rero!uction cost"
*#
It seems !i))icult to
concei0e o) a situation in 3&ic& t&e rero!uction cost o) an asset coul! 6e less t&an its
relacement cost" In t&e e0ent t&at rero!uction cost is lo3er t&an t&e cost o) an( more
economic relacement ossi6ilitiesH t&en it 3oul! seem t&at it must 6e t&e assetIs
relacement cost < t&at isH t&at t&e most economic cost to relace t&e assetIs ser0ice
otential or ro!ucti0e caacit( is t&e most economic cost to rero!uce it on t&e
measurement !ate"
.=*" T&usH a rele0ance &ierarc&( o) cost su6stitutes )or )air 0alue in measuring assets on
initial recognition ma( 6e set out" First re)erence is relacement costH secon!
re)erence is rero!uction costH an! t&ir! re)erence is &istorical cost" It is stresse! t&at
t&is &ierarc&( resumes t&at t&ese cost measures are relia6l( measura6le an! t&at
reasona6le con!itions relating to reco0era6ilit( are met" An analogous rele0ance
&ierarc&( ma( 6e set out )or lia6ilitiesH e;cet t&at t&ere is no lia6ilit( eFui0alent to t&e
relacement cost o) an asset Asee aragra&s ..*C.=.B"
*#
SeeH )or e;amleH Australian Accounting Stan!ar!s Boar!H Staff Paper; Fair Value) 1eprival Value
and 1epreciated +eplacement Cost) aragra& #5"
#/+
+elia!ilit(
./," %&ile t&e relacement cost o6-ecti0e can 6e reasone! to 6e more rele0ant t&an
rero!uction cost or &istorical cost on initial recognitionH t&ere are serious ro6lems
3it& resect to its caa6ilit( )or relia6le estimation 3&en )air 0alue cannot 6e relia6l(
estimate!" As !iscusse! in aragra&s .+. an! ..+C...H t&ese ro6lems stem )rom t&e
relacement cost o6-ecti0e itsel)H seci)icall( )rom t&e lac4 o) o6-ecti0e re)erents )or
!e)ining t&e most economic cost ser0ice otential or ro!ucti0e caacit( o) assets in
entit( seci)ic conte;ts" T&ese ro6lems 6ecome acute 3&en t&e e;isting ser0ice
otential or ro!ucti0e caacit( o) an asset ma( 6e most economicall( ac&ie0e! 6(
using !i))erent assets )rom t&ose o3ne! 6( t&e entit( < t&at isH 3&en an assetIs
relacement cost !i))ers )rom its rero!uction cost"
./#" T%is paper proposes) !ased on t%e a!ove anal(sis) t%at replacement cost is not capa!le
of sufficientl( relia!le estimation to !e used as a su!stitute for fair value in measuring
assets on initial recognition &%en fair value is not relia!l( estima!le"
./+" T&is roose! conclusion is su6-ect to )urt&er stu!( 6e(on! t&e scoe o) t&is aer" In
articularH it is recommen!e! t&at researc& 6e un!erta4en into relacement cost
0aluation tec&niFues emlo(e! 6( ro)essional 0aluators to !etermine 3&et&er t&ere
ma( 6e situations in 3&ic& relia6le entit( seci)ic estimates o) relacement cost o)
assets on initial recognition are ossi6le"
./." On t&e ot&er &an!H t&e rero!uction cost o) an asset on initial recognition Aan! its
lia6ilit( eFui0alentB seems li4el( to 6e caa6le o) relia6le estimation in some situations"
For e;amleH t&e rero!uction cost o) some sel)Cconstructe! assets ma( 6e caa6le o)
relia6le estimation on initial recognitionH an! ma( !i))er )rom &istorical cost" It isH
&o3e0erH 0ulnera6le to t&e same allocation ro6lems as &istorical cost"
./=" 0ased on t%e a!ove anal(sis) t%is paper proposes t%at t%e reproduction cost of an asset
@and its e*uivalent for a lia!ilit(A !e used on initial recognition in preference to
%istorical cost as a su!stitute for fair value &%en;
#/.
it is significantl( different from %istorical cost)
it is capa!le of relia!le estimation) and
and it is reasona!le to assume t%at it is recovera!le @if an assetA or reasona!l(
reflects t%e amount o&ing @if a lia!ilit(A6
.//" T&is roose! conclusion is su6-ect to )urt&er stu!( arallel to t&at roose! )or
relacement cost in aragra& ./+"
./1" %&ile rero!uction cost 3ill commonl( 6e eFual to &istorical cost on initial recognitionH
it coul! !i))er signi)icantl( in certain situations" T&ese situations coul! occurH )or
e;amleH 3&en t&e &istorical cost o) a constructe! asset reFuires t&e allocation o) costs
incurre! in ast erio!s Asee aragra& .,1B an! in resect o) assets )or 3&ic& t&ere are
signi)icant reCrecognition costs t&at are not recogni@e! on t&e &istorical cost 6asis Asee
aragra& .,$B"
./$" Parallel to t&e roosal in aragra& .#= 3it& resect to &istorical costH it is roose!
t&at rero!uction cost s&oul! 6e !etermine! on a 6asis t&at is as consistent as ossi6le
3it& t&e )air 0alue o6-ecti0e" T&is 3oul! meanH )or e;amleH e;clu!ing transaction costs
Aas !e)ine! in aragra&s #*.C+,,B" T&is mig&t 6e reasone! to result in a measurement
6asis t&at is neit&er ure current cost nor )air 0alueH 6ut a &(6ri! 6asis 6et3een t&e t3o"
Net Rea)iDa-)e 2a)ue
&elevance
Assets
./5" T&e 3or4ing !e)inition o) net reali@a6le 0alue Asee aragra& 5=B isG
T&e estimate! selling rice in t&e or!inar( course o) 6usiness less t&e estimate!
costs o) comletion an! t&e estimate! costs necessar( to ma4e t&e sale"
#/=
./*" In contrast 3it& costC6ase! measurement 6ases A&istorical cost an! current costBH net
reali@a6le 0alue is a measure o) t&e 6ene)it 0alue o) an asset" T&e Fuestion is 3&et&er it
is a rele0ant measure o) t&e 6ene)it 0alue o) an asset on initial recognition"
.1," Current reali@a6le 0alue mo!els &a0e 6een strongl( a!0ocate! o0er &istorical cost an!
current cost mo!els 6( a )e3 rominent aca!emics"
*+
T&e( !isagree! among
t&emsel0es on some )un!amental issuesH &o3e0erH inclu!ing 3&at s&oul! 6e t&e unit o)
account At&at isH 3&at s&oul! 6e t&e le0el o) aggregation o) assetsB an! 3&et&er t&e
o6-ecti0e s&oul! 6e to assume sales in t&e or!inar( course o) 6usiness or on t&e 6asis o)
liFui!ation rices" Net reali@a6le 0alueH as !e)ine! a6o0eH &as generall( 6een use! in
)inancial accounting in a rat&er limite! roleH 6eing largel( restricte! to lo3er o) cost an!
reco0era6le 0alue !eterminations"
.1#" One ma-or reason t&at reali@a6le 0alue &as 6een re-ecte! as a general measurement 6asis
is t&at it results in seemingl( unrealisticall( lo3 0alues )or most ro!ucti0e assets suc&
as lant an! eFuimentH an! 3oul! o)ten reFuire large 3riteCo))s on t&e acFuisition o)
suc& assets"
COMPARISON %IT? FAIR >ALUE
.1+" T&ere aear to 6e t3o ossi6le areas o) !i))erence 6et3een net reali@a6le 0alue an! )air
0alueG
AaB Focus o) net reali@a6le 0alue on reali@ation t&roug& sale"
A6B T&e !een!enc( o) net reali@a6le 0alue on entit( seci)ic e;ectations"
Focus on Sale
.1." Net reali@a6le 0alue stiulates reali@ation t&roug& saleH rat&er t&an t&roug& &ol!ing or
using an asset" %&ile t&e &rase in t&e !e)inition 8selling rice in t&e or!inar( course o)
6usiness9 is resuma6l( inten!e! to a0oi! a )orce! liFui!ation sales riceH t&e term 8net
*+
SeeH )or e;amleH R "E" C&am6ersH Accounting) Evaluation and Economic 0e%aviour) an! Accounting
for 'nflation; Met%ods and Pro!lems) an! R" R" SterlingH T%eor( of t%e Measurement of Enterprise
'ncome6
#//
reali@a6le 0alue9 is generall( interrete! to reclu!e a 0alue in use connotation" In
contrastH )air 0alue re)lects t&e rice o) an asset in 3&at t&e mar4et ercei0es to 6e its
&ig&est an! 6est use" T&e )air 0alue o) an asset is not its imme!iate reali@a6le 0alue on a
measurement !ateH i) t&is is not its &ig&est an! 6est use in t&e mar4etlace" For e;amleH
t&ere ma( 6e no mar4et Aas !e)ine! at aragra& #,$B )or a articular seciali@e! nonC
contractual asset" T&is asset ma(H t&ere)oreH 6e !isosa6le onl( to otential 6u(ers 3&o
&a0e no a6ilit( to use it in its &ig&est an! 6est use A6ut ma(H )or e;amleH 6u( it onl( )or
its 0alue as scraB" Fair 0alue resumes t&at t&e o3ner o) an asset &as t&e a6ilit( to
reali@e t&e asset in its &ig&est an! 6est use in t&e mar4etlace"
.1=" Net reali@a6le 0alue is re!uce! 6( costs t&at are estimate! to 6e necessar( i) t&e asset is
sol!H 6ut t&at 3oul! not ot&er3ise 6e incurre!" It &as 6een e;laine! Asee aragra&
#**B t&at )air 0alue e;clu!es transaction costs or enalties t&at 3oul! 6e incurre! to sell
an asset" I) suc& costs are a0oi!a6leH t&at isH t&e( 3oul! not 6e incurre! in t&e &ig&est
an! 6est use o) an asset in t&e mar4etlaceH t&e( 3oul! 6e recogni@e! onl( i) t&e asset is
sol! an! 3oul! 6e an e;ense o) t&e sales transaction" On t&e ot&er &an!H i) certain e;it
costs are una0oi!a6leH t&at isH t&e entit( is o6ligate! to incur t&em to reali@e t&e )air
0alue o) an assetH t&en suc& costs 3oul! resuma6l( Fuali)( as lia6ilities an! s&oul! 6e
searatel( recogni@e! as suc&" Netting suc& lia6ilities against t&e )air 0alue o) t&e asset
3oul! contra0ene t&e concetual !istinction 6et3een assets an! lia6ilities"
Entit( Seci)ic E;ectations
.1/" T&e net reali@a6le 0alue o) an asset ma( generall( 6e e;ecte! to !i))er )rom )air 0alue
6( t&e amount o) transaction costs !e!ucte! in !etermining net reali@a6le 0alueH an! 6(
t&e e;tent to 3&ic& estimates o) t&e costs o) comletion Ai) an(B !i))er )rom t&e
a!-ustment t&at t&at t&e mar4et coul! 6e e;ecte! to ma4e" In a!!itionH t&e &rase 8t&e
estimate! selling rice in t&e or!inar( course o) 6usiness9 coul! 6e interrete! in an
entit( seci)ic conte;t t&at is not consistent 3it& t&e )air 0alue measurement o6-ecti0e"
T&ese ossi6le !i))erences re)lect t&e e))ects o) !i))erences 6et3een entit( seci)ic an!
mar4et e;ectations"
#/1
.11" T&e 6asic Fuestion t&us again arises as to t&e comarati0e rele0ance o) entit( seci)ic
an! mar4et 0alue measurement o6-ecti0es" In t&is caseH coul! entit( seci)ic
a!-ustments entering into t&e !etermination o) net reali@a6le 0alue 6e reasone! to &a0e
rele0ance not consi!ere! in arri0ing at t&e conclusion in c&ater = At&at t&e mar4et 0alue
measurement o6-ecti0e A)air 0alueB is more rele0ant t&an entit( seci)ic o6-ecti0es on
t&e initial recognition o) an assetB' T&e a6o0e anal(sis an! re0ie3 o) accounting
stan!ar!s an! suorting literature on net reali@a6le 0alue !i! not re0eal an( e0i!ence
or arguments t&at 3oul! gi0e cause to c&ange t&is conclusion" T&is aer t&ere)ore
rooses t&at )air 0alue is more rele0ant t&an net reali@a6le 0alue )or measuring assets
on initial recognition"
Lia!ilities
.1$" As note! in aragra& 5/H t&e lia6ilit( eFui0alent o) net reali@a6le 0alue seems not to
&a0e 6een !e)ine! an! anal(@e! in accounting literatureH 6ut t&e )ollo3ing 3or4ing
!e)inition is roose!G
T&e estimate! rice in t&e or!inar( course o) 6usiness to o6tain release
*.
)rom a
lia6ilit( lus t&e estimate! costs necessar( to carr( out t&e release transaction"
.15" T&e )ocus on current releaseH an! t&e inclusion o) entit( seci)ic transaction costsH
mirrors t&e t3o areas o) !i))erence 6et3een net reali@a6le 0alue an! )air 0alue o) assets
a!!resse! a6o0e" T&usH t&e lia6ilit( eFui0alent to net reali@a6le 0alue is su6-ect to t&e
same t(es o) !i))erences an! rele0ance limitations as is t&e net reali@a6le 0alue o)
assets"
*.
T&e term 8release9 is consi!ere! to inclu!e !irect settlement 3it& cre!itorH e))ecti0e settlement
resulting )rom an entit( acFuiring its tra!e! !e6t instruments in t&e mar4etlaceH an! an arrangement
un!er 3&ic& a t&ir! art( assumes an entit(Is o6ligation"
#/$
Summar( B Conclusion on +elevance
.1*" T%is paper proposes) !ased on t%e a!ove anal(sis) t%at net realiCa!le value) and its
lia!ilit( e*uivalent) is a less relevant measurement !asis t%an fair value on t%e initial
recognition of assets and lia!ilities6
#et &eali0able Value as a Substitute for )air Value on %nitial &ecognition
.$," T&e Fuestion t&en is 3&et&er net reali@a6le 0alue coul! 6e an aroriate su6stitute )or
)air 0alue on t&e initial recognition o) assets an! lia6ilities 3&en )air 0alue is not
relia6l( estima6le" T&is aer rooses t&atH as a su6stitute )or )air 0alueH net reali@a6le
0alue s&oul! 6e alie! on a 6asis t&at it as consistent as ossi6le 3it& t&e )air 0alue
measurement o6-ecti0e" T&is 3oul! mean AiB interreting 8t&e estimate! selling rice in
t&e or!inar( course o) 6usiness9 as a mar4et 0alue measurement o6-ecti0eH AiiB
e;clu!ing transaction costs At&at isH a!!ing t&em 6ac4 to net reali@a6le 0alueBH an! AiiiB
interreting 8costs o) comletion9 3it&in a )air 0alue conte;t" T&e result 3oul! no
longer 6e net reali@a6le 0alue" It 3oul! 6e an estimate o) )air 0alueH eit&er at Le0el # or
Le0el + o) t&e )air 0alue &ierarc&( t&at &as 6een a!ote! 6( t&e IASB an! FASB Asee
aragra&s +./ an! +/+BH i) it is su6stantiall( 6ase! on in)ormation t&at is consistent
3it& mar4et e;ectations" Alternati0el(H an estimate o) reali@a6le 0alue t&at is
signi)icantl( !een!ent on entit( seci)ic inuts coul! 6e consi!ere! to 6e t&e 6est
su6stitute )or )air 0alue in some situations" For e;amleH it mig&t 6e !etermine! t&at t&e
closest su6stitute )or t&e )air 0alue o) a 3or4CinCrocess in0entor( acFuire! as art o) a
6usiness acFuisition is to a!-ust t&e o6ser0a6le mar4et rice o) t&e )inis&e! goo! 6( an
entit( seci)ic estimate o) t&e costs o) comletion"
*=
T&e Fuestion 3oul! t&en 6e
3&et&er t&is measurement coul! 6e accete! to 6e a relia6le estimate o) t&e )air 0alue o)
t&e 3or4 in rocessH or 3&et&er its !een!enc( on entit( seci)ic e;ectations is so
signi)icant t&at it s&oul! 6e treate! an! !escri6e! as a &(6ri! measurement 6asis"
*=
T&ese a!-ustments 3oul! resuma6l( inclu!eH i) materialH an estimate o) t&e e))ects o) t&e time 0alue
o) mone( an! a ro)it marginH eac& !etermine! on a 6asis as consistent as ossi6le 3it& t&e )air 0alue
measurement o6-ecti0e"
#/5
.$#" T&usH )ollo3ing )rom t&e a6o0e anal(sisH t&ere is no role )or net reali@a6le 0alueH as
tra!itionall( !e)ine!H in t&e measurement o) assets an! lia6ilities on initial recognition"
In ot&er 3or!sH t&e concet reFuires su6stantial reinterretation as a ossi6le estimate
o)H or su6stitute )orH )air 0alue on initial recognition"
2a)ue in U$e
&elevance
Assets
.$+" T&e 3or4ing !e)inition o) 0alue in use Asee aragra&s 51C5$B isG
T&e resent 0alue o) estimate! )uture cas& )lo3s e;ecte! to arise )rom t&e
continuing use o) an asset an! )rom its !isosal at t&e en! o) its use)ul li)e"
COMPARISON %IT? FAIR >ALUE
.$." T&e a6o0e !e)inition siml( e;resses t&e resent 0alue concet o) an asset 3it&in t&e
conte;t o) a nonCcontractual asset t&at is use! in a cas& )lo3 generating rocess" T&e
0alue in use measurement o6-ecti0e is not clear )rom t&is !e)inition 6ecause resent
0alue is a met&o!olog( t&at can 6e alie! to estimate amounts un!er se0eral !i))erent
measurement o6-ecti0es" T&e essential Fuestion is 3&ose e;ectations s&oul! 6e t&e
6asis o) 0alue in use measurements'
Mar4et E;ectations
.$=" I) t&e o6-ecti0e is to al( t&e resent 0alue met&o!olog( to estimate t&e )air 0alue o)
an asset At&at isH to re)lect mar4et e;ectationsBH t&en 0alue in use is in!istinguis&a6le
)rom t&e )air 0alue measurement o6-ecti0e" Present 0alueC6ase! mo!els )or estimating
)air 0alue are consi!ere! to 6e at Le0el . o) t&e )air 0alue measurement &ierarc&(
a!ote! 6( t&e IASB an! FASB Asee aragra&s +/1C+$#B" T&e term 80alue in use9 &as
not generall( 6een use! to !escri6e resent 0alueC6ase! estimates o) )air 0alue"
#/*
Entit( Seci)ic E;ectations
.$/" T&e term 80alue in use9 &as generall( 6een consi!ere! to 6e an entit( seci)ic
measurement o6-ecti0e" From t&is ersecti0eH t&e 0alue in use o6-ecti0e is to measure
t&e resent 0alue o) t&e estimate! net cas& in)lo3s t&at t&e reorting entit( e;ects an
asset to generate" T&is measure coul! !i))er signi)icantl( )rom t&e assetIs )air 0alue on
initial recognition" In t&is conte;tH 0alue in use is a searate measurement 6asis !istinct
)rom )air 0alue an! t&e ot&er i!enti)ie! measurement 6ases"
.$1" >alue in use is essentiall( a )orecast t&at anticiates an! caitali@es managementIs
e;ectations" T&usH i) t&e 0alue in use measurement 6asis 3ere to 6e a!ote!H assets
3oul! 6e restate! on initial recognition )rom t&eir transaction amounts to managementIs
e;ectations o) t&e resent 0alues o) t&eir )uture net cas& in)lo3s" T&is resent 0alue o)
an asset 3oul! resuma6l( generall( re)lect t&e &ig&est rice t&at t&e entit( 3oul! 6e
reare! to 6i! )or t&e asset in t&e mar4etlace on its acFuisition !ate" Accor!ingl(H t&e
)air 0alue o) t&is assetH an! t&e amount t&e entit( actuall( ai! )or itH coul! 6ot& 6e
muc& lo3er t&an managementIs estimation o) its 0alue in use on t&at !ate" T&ere 3oul!
seem to 6e no e;ternal re)erents )or entit( seci)ic 0alue in use measurementsH alt&oug&
current accounting stan!ar!s )or 0alue in use measurements A3&ic& &a0e 6een restricte!
to imaire! assetsB &a0e attemte! to lace some 6oun!aries on 3&at it ma( 6e
reasona6le )or an entit( to e;ect"
*/
.$$" In summar(H t&e rimar( !i))erence 6et3een t&e 0alue in use an! )air 0alue
measurement o6-ecti0es is t&at 0alue in use is an entit( seci)ic measurement o6-ecti0eH
3&ic& amounts to a )orecast 6( entit( management" Base! on t&e a6o0e anal(sisH t&ere
3oul! seem to 6e not&ing in t&e concet o) 0alue in use t&at 3oul! gi0e cause to
o0erturn t&e general concetual conclusionH !e0eloe! in c&ater =H t&at t&e mar4et
0alue measurement o6-ecti0e is o) greater rele0ance t&an an entit( seci)ic o6-ecti0e on
initial recognition o) assets an! lia6ilities" In articularH a ma-or concern 3it& 0alue in
use is t&at it 3oul! result in caitali@ing management e;ectations on initial
recognitionH 3it& t&e li4el( conseFuence o) reorte! income gains )or man( assets" Suc&
*/
See )or e;amleH IAS .1H aragra&s .,C/$"
#1,
measurements 3oul! seem to &a0e no clear e;ternal re)erents 3it&out t&e !isciline o)
rices !etermine! 6( mar4et )orces"
.$5" T&e rele0ance o) 0alue in use ma( 6e consi!ere! to 6e )urt&er limite! 6ecause it onl(
gi0es consi!eration to an assetIs inCuse 0alueH an! t&us gi0es no consi!eration to its
0alue i) sol!H ot&er t&an at t&e en! o) its use)ul li)e" In a!!itionH t&e !e)inition o) 0alue
in use i!enti)ies onl( nonCcontractual assets t&at are )or use in a 6usiness" ?o3e0erH t&e
concet coul! 6e e;ten!e! to contractual an! ot&er nonCcontractual assets" For e;amleH
a loan coul! 6e 0alue! on t&e 6asis o) entit( seci)ic estimates o) t&e resent 0alue o)
t&e )uture cas& )lo3s t&e entit( e;ects to collect"
.$*" >alue in use !oes not &a0e suort in accounting stan!ar!sH or in aut&oritati0e literature
or racticeH as a general measurement 6asis )or assets on initial recognition" Its use &as
6een limite! to a measure o) t&e reco0era6le 0alue o) imaire! assetsH an! it &as 6een
a!0ocate! as a measure o) reco0era6le 0alue 3it&in t&e !eri0al 0alue )rame3or4" Its
role 3it&in t&at )rame3or4 is e;amine! in t&e )ollo3ing section o) t&is aer"
Lia!ilities
.5," >alue in useH as tra!itionall( !e)ine!H &as alication onl( to assets" ?o3e0erH its
lia6ilit( eFui0alent ma( 6e concei0e! as t&e resent 0alue o) t&e estimate! cas&
out)lo3s e;ecte! to 6e incurre! in satis)(ing t&e contractual ro0isions o) an
o6ligation" T&is &as 6een !escri6e! as t&e 8cost o) er)ormance9 6asis"
*1
Certain
lia6ilitiesH suc& as !e)ine! 6ene)it ension o6ligationsH ma( 6e measure! on t&is 6asis"
As 3it& an assetH t&e resent 0alue measurement o) a lia6ilit( 3ill !i))er )rom )air 0alue
i) it re)lects entit( seci)ic e;ectations t&at !i))er )rom mar4et e;ectations" Suc&
entit( seci)ic e;ectations can 6e e;ecte! to 6e su6-ect to t&e same rele0ance
limitations in relation to mar4et e;ectations !iscusse! in resect o) assets"
*1
See An!re3 Lennar!H Lia!ilities and %o& to account for t%em; an e4plorator( essa(H aragra&s +$
an! .+"
#1#
Summar( B Conclusion on +elevance
.5#" T%is paper proposes) !ased on t%e a!ove anal(sis) t%at value in use) and its lia!ilit(
e*uivalent) is a less relevant measurement !asis t%an fair value on t%e initial
recognition of assets and lia!ilities6
Value in 1se as a Substitute for )air Value on %nitial &ecognition
.5+" T&is aer rooses t&at t&e 0alue in use measurement 6asis ma( 6e a!ate! to 6e an
acceta6le su6stitute )or )air 0alue )or certain assets an! lia6ilities on initial recognition
in some circumstances 3&en )air 0alue is not caa6le o) relia6le estimation" Suc&
a!atation in0ol0es al(ing t&e resent 0alue met&o!olog( on a 6asis t&at is as
consistent as ossi6le 3it& t&e )air 0alue measurement o6-ecti0e" T&is 3oul! reFuire
using mar4et !ata an! assumtions t&at are consistent 3it& mar4et e;ectations 3&en
suc& !ata an! assumtions are a0aila6le" Certain resumtions ma( 6e ma!e as to 3&at
s&oul! 6e consi!ere! to constitute rational mar4et e;ectations in al(ing t&e resent
0alue met&o!olog(" For e;amleG
t&e !iscount rate s&oul! 6e consistent 3it& t&e mar4et rate o) return )or eFui0alent
ris4 on t&e measurement !ateJ
estimates o) e;ecte! )uture cas& )lo3s s&oul! re)lect e;ecte! )uture le0els o)
in)lation or !e)lation t&at are consistent 3it& t&ose imlicit in t&e !iscount rateJ
estimates o) uncertain cas& )lo3s s&oul! re)lect ro6a6ilit(C3eig&te! e;ecte!
0alues to t&e e;tent ractica6leJ an!
estimates o) e;ecte! )uture cas& )lo3s s&oul! 6e consistent 3it& reasona6le
e;traolations o) ast general economic an! rele0ant in!ustr( e;erience in t&e
geogra&ic areas in 3&ic& t&e assets or lia6ilities are locate!H unless t&ere is
con0incing e;ternal e0i!ence to suort !i))erent e;ectations"
*$
*$
IAS .1H 'mpairment of Assets) reFuires t&at 80alue in use9 cas& )lo3 estimates 6e 6ase! on e;ternal
e0i!ence 3&en a0aila6leH sets out certain re6utta6le resumtions 3it& resect to longCterm
ro-ectionsH an! reFuires t&e use o) mar4et rates o) interest to !iscount )uture cas& )lo3s" See IAS .1H
aragra&s .,C/$"
#1+
.5." T&ese resumtions are generall( consistent 3it& t&e gui!ance ro0i!e! in FASB CON
$6 T&e FASB E;osure Dra)tH Fair Value MeasurementsH summari@es t&e )ollo3ing
ossi6le sources o) mar4et inutsG
8Mar4et inuts s&all 6e !etermine! 6ase! on in)ormation t&at is timel(H
originate! )rom sources in!een!ent o) t&e entit(H an! use! 6( mar4etlace
articiants in ma4ing ricing !ecisions" E;amles o) mar4et inuts t&at ma( 6e
use!H !irectl( or in!irectl( as a 6asis )or !eri0ing ot&er rele0ant inutsH inclu!e
t&e )ollo3ingG
AaB 7uote! rices A3&et&er Fuote! in terms o) comlete! transaction ricesH 6i! an!
as4e! ricesH or ratesBH a!-uste! as aroriate K"
A6B In)ormation a6out interest ratesH (iel! cur0eH 0olatilit(H rea(ment see!sH
!e)ault ratesH loss se0erit(H cre!it ris4H liFui!it(H an! )oreign e;c&ange rates"
AcB Seci)ic an! 6roa! cre!it !ata an! ot&er rele0ant statistics Ain!ustr( an! ot&erBH
inclu!ing a current u6lis&e! in!e;"9 Aaragra& #+B
.5=" T&e a!atation o) 0alue in use to 6e as consistent as ossi6le 3it& t&e )air 0alue
o6-ecti0e e))ecti0el( c&anges its o6-ecti0e so t&at it ma( no longer 6e consi!ere! to 6e
consistent 3it& t&e tra!itional interretation o) 0alue in use" As a conseFuenceH t&is
aer rooses t&at t&e term 80alue in use9 s&oul! not 6e use! to !escri6e resent 0alue
estimates t&at &a0e a )air 0alue measurement o6-ecti0eH in or!er to a0oi! otential
con)usion 3it& t&e tra!itional entit( seci)ic un!erstan!ing o) t&e term"
.5/" At t&e same timeH t&ese resent 0alue estimates 3ill not meet con!itions o) t&e )air
0alue measurement o6-ecti0e 3&en signi)icant mar4et inuts are not a0aila6le so t&at
estimates are signi)icantl( !een!ent on entit( seci)ic !ata an! e;ectations t&at
cannot 6e -usti)ie! as necessaril( re)lecting mar4et e;ectations"
*5
A resent 0alue
measure o) t&e estimate! cas& )lo3s to 6e recei0e! or ai! in resect o) an asset or
lia6ilit( is a &(6ri! measurement 6asis t&at contains elements o) 0alue in use an! )air
0alue 3&en it is 6ase! on a0aila6le mar4et inuts sulemente! 6( signi)icant entit(
*5
See aragra&s +11C+1$ )or !iscussion o) t&e 6asis )or t&is conclusion"
#1.
seci)ic inuts" It is roose! t&at it s&oul! 6e !escri6e! as suc& an! 6e suorte! 6(
aroriate !isclosures o) signi)icant assumtions an! !ata sources"
.51" Suc& resent 0alue estimates 3ill o)ten 6e su6-ect to 0er( signi)icant estimation
uncertaint(H 3&ic& ma( raise Fuestions as to t&eir relia6ilit(" ?o3e0erH t&e( ma( 6e t&e
onl( ossi6ilit( )or certain t(es o) assets an! lia6ilities )or 3&ic& neit&er )air 0alue nor
costC6ase! su6stitutes are a0aila6le" E;amles inclu!e o6ligations in resect o) !e)ine!
6ene)it ension lansH some ro!uct 3arrantiesH an! asset retirementsH 3&ere t&ere are
t(icall( no comara6le mar4et rices an! no o6ser0a6le transactions )or cas& or
eFui0alent consi!eration" It is roose! t&at resent 0alue estimates o) suc& assets an!
lia6ilities ma( 6e consi!ere! to 6e o) acceta6le relia6ilit(H !esite t&eir estimation
uncertaint(H i) suorte! 6( aroriate !isclosures"
**
T&e c&allenge )or stan!ar! setters
is to !e0elo seci)ic stan!ar!s )or resent 0alue estimates )or t&ese t(es o) assets an!
lia6ilities t&at are as consistent as is ossi6le 3it& t&e )air 0alue measurement o6-ecti0eH
an! meet reasona6le con!itions in resect o) an! internal consistenc(H )ree!om )rom
6iasH an! 0eri)ia6ilit("
.5$" In a!!ition to estimation uncertaint(H resent 0alue estimation 6ases are su6-ect to
serious in!eterminacies in certain common situations" In articularH man( nonC
contractual assets !o not generate cas& )lo3s in an! o) t&emsel0es" Rat&erH t&e(
contri6ute along 3it& ot&er inuts to re0enue generating rocesses" An( attri6ution o)
t&e cas& )lo3s o) a re0enue generating rocess to in!i0i!ual inuts must 6e 6ase! on
ar6itrar( oneCtoCman( allocations" T&ere)oreH i) t&e aroriate unit o) account on
initial recognition is consi!ere! to 6e t&e lo3est le0el o) aggregation at 3&ic& an
i!enti)ia6le asset is rea!( )or use in a cas& generating rocessH
#,,
t&en it ma( 6e
conclu!e! t&at t&e resent 0alue o) t&e cas& )lo3s to 6e generate! 6( an asset t&at is
use! 3it& ot&er assets in a re0enue generating rocess is not relia6l( measura6le"
**
T&e onl( alternati0e ma( 6e nonCrecognition o) t&e asset or lia6ilit(H an! it ma( 6e conclu!e! t&at
e0en an estimate su6-ect to signi)icant estimation uncertaint( is suerior to nonCrecognition A3&ic&
results in a @ero 0alueB i) aroriate suorting !isclosures can 6e ro0i!e!" See !iscussion o) t&is
issue at aragra&s +#$C+++"
#,,
T&is 3as roose! at aragra& #1#"
#1=
.55" 'n summar() t%is paper proposes t%at;
Value in use) defined as an entit( specific o!/ective) is not an appropriate su!stitute
for fair value on initial recognition &%en fair value is not relia!l( measura!le6
<o&ever) a present value,!ased estimate of future net cas% flo&s to !e received or
paid in respect of an asset or lia!ilit( ma( !e an accepta!le su!stitute for fair value
on initial recognition) if t%e future cas% flo&s can !e independentl( estimated and
t%e estimate is determined on a !asis as consistent as possi!le &it% t%e fair value
measurement o!/ective6 >%en suc% an estimate is significantl( dependent on entit(
specific e4pectations t%at cannot !e /ustified to !e t%e same as market e4pectations)
it s%ould !e considered to !e a %(!rid measurement !asis &it% disclosure of its
essential assumptions and inputs6
T%e present value of future cas% flo&s cannot !e independentl( estimated) and
t%erefore cannot !e relia!l( determined) for individual non,contractual assets t%at
are used toget%er &it% ot%er inputs in a cas% generating process6
;e"riva) 2a)ue
&elevance
Assets
.5*" Some 6elie0e t&at it is not su))icient to e0aluate eac& o) t&e i!enti)ie! measurement
alternati0es as searate an! in!een!ent 6ases" T&e( argue t&at t&ese 6ases s&oul! 6e
consi!ere! in t&e conte;t o) an o0erarc&ing t&eor( o) t&e 0alue o) an asset to a 6usiness
3it&in a rational management !ecision )rame3or4" T&e 0alue o) an asset to an entit( is
reasone! to !een! on t&e oortunities t&at are a0aila6le to t&at entit( )or t&e use or
sale o) t&at asset" T&e aroriate measurement )or an asset is t&en !etermine! 6( t&e
oortunit( t&at a rational manager s&oul! 6e e;ecte! to ursue in t&e entit(Is
circumstances" Measurement 6ases t&at assume oortunities una0aila6le to t&e entit(
or t&at !o not ma4e economic sense in t&e circumstances are consi!ere! to 6e irrele0ant"
#1/
T&e rational management measurement )rame3or4 t&at is commonl( a!0ocate! is
8!eri0al 0alue9H also 4no3n as 80alue to t&e 6usiness9"
.*," T&e 3or4ing !e)inition o) !eri0al 0alue Asee aragra&s *=C*/B isG
T&e loss t&at an entit( 3oul! su))er i) it 3ere !eri0e! o) an asset" It is t&e
lo3er o) relacement cost an! reco0era6le amount on t&e measurement !ateH
3it& reco0era6le amount 6eing t&e &ig&er o) 0alue in use an! net reali@a6le
0alue"
.*#" T&e !eri0al 0alue )rame3or4 &ol!s t&at t&e 0alue o) an asset to a 6usiness entit( is t&e
economic loss t&at t&e entit( 3oul! su))er i) !eri0e! o) t&e asset" It is reasone! t&at
t&e loss to t&e entit( coul! not e;cee! t&e most economic current cost to relace t&e
ro!ucti0e caacit( or ser0ice otential o) an asset" T&e uer 6oun!ar( o) an assetIs
!eri0al 0alue is its relacement cost 6ecauseH 3&en Aas 3ill usuall( 6e t&e caseB an
entit( e;ects a return )rom t&e asset in e;cess o) its relacement costH t&e entit( 3ill
not lose t&at return since it can relace t&e asset )or a lo3er amount"
#,#
It is )urt&er
reasone! t&at a rational entit( 3ill not relace an asset 3&en its reco0era6le 0alue to t&e
entit( is less t&an its relacement costH 6ecause it !oes not ma4e economic sense to
relace an asset t&at cannot 6e e;ecte! to reco0er its cost" In t&is caseH i) !eri0e! o)
t&e e;isting assetH t&e entit( stan!s to lose its reco0era6le 0alue" Reco0era6le 0alue
re)lects t3o ossi6ilities AoortunitiesB < t&e entit( coul! sell t&e asset )or its net
reali@a6le 0alueH or it coul! use t&e asset an! ac&ie0e its 0alue in use" A rational entit(
#,#
Some 6elie0e t&at t&ere is an anomal( in t&e !eri0al 0alue rationale i) t&e relacement cost o) an
asset is !etermine! to 6e less t&an its net reali@a6le 0alue" T&e( argue t&at t&e !eri0al 0alue o) an
asset in t&is case s&oul! 6e its net reali@a6le 0alueH so as to inclu!e t&e 0alue o) t&e 8re!e0eloment
otion9" T&e( reason t&at rational management 3oul! sell t&e asset to reali@e its net reali@a6le 0alue
an! t&en relace it at its lo3er relacement cost" See Geo))re( %&ittingtonH 8Deri0al >alue an! Fair
>alueG An Amen!ment an! a Reconciliation9H Unu6lis&e! Dra)t PaerH Fe6ruar( +,,." Some ot&ers
see t&is as a ro6lem in !e)ining an assetIs relacement costH arguing t&at t&e relacement cost o) an
asset coul! ne0er 6e rationall( !etermine! to 6e less t&an its net reali@a6le 0alue" T&is issue
!emonstrates an am6iguit( in t&e entit( seci)ic concet o) relacement cost t&at is illustrate! in art
6( t&e i@@a !eli0er( e;amle in aragra& ..+"
#11
can 6e e;ecte! to c&oose t&e alternati0e t&at (iel!s t&e &ig&er reco0era6le 0alue" T&usH
t&e reco0era6le 0alue to an entit( is consi!ere! to 6e t&e &ig&er o) its net reali@a6le
0alue an! 0alue in use" T&is c&ain o) logic lea!s to t&e !ecision rule set out in t&e
!e)inition an! illustrate! in t&e )ollo3ing !iagram"
.*+" T&e !eri0al 0alue !ecision )rame3or4 is not inten!e! to mean t&at articular entities
3ill necessaril( ma4e rational !ecisions in accor!ance 3it& it" Rat&erH it &ol!s t&at
entities s&oul! 6e accounta6le )or measuring assets on t&e 6asis o) t&is rational !ecision
)rame3or4"
COMPARISON %IT? FAIR >ALUE
.*." It is instructi0e to comare !eri0al 0alue 3it& )air 0alueH so as to un!erstan! 3&en an!
3&( !eri0al 0alue can !i))er )rom )air 0alue on t&e initial recognition o) an asset" T&e
!eri0al 0alue !ecision rule resumes t&at an asset ma( &a0e a !i))erent relacement
costH net reali@a6le 0alueH an! 0alue in use at an( gi0en measurement !ate" T&e mar4et
A)airB 0alue measurement o6-ecti0e !oes not en0isage t&at t&ere coul! 6e !i))erent entr(
an! e;it )air 0alues )or t&e same asset at t&e same measurement !ate Asee aragra&s
#.=C#.5B" T&e relations&i 6et3een !eri0al 0alue an! )air 0alue ma( 6e illustrate! 6(
an e;amle" Suose t&atG
t&e )air 0alue o) an asset on initial recognition is relia6l( measura6leH an! is #,,J
>alue to t&e 6usiness
Q lo3er o)
Relacement cost Reco0era6le amount
Q &ig&er o)
>alue in
use
Net reali@a6le
0alue
#1$
transaction costs to acFuire t&e asset are /H in 3&ic& case relacement cost ma( 6e
reasone! to 6e #,, lus / Ai"e"H #,/BJ an!
transaction costs to sell t&e asset are .H in 3&ic& case net reali@a6le 0alue ma( 6e
reasone! to 6e )air 0alue o) #,, less . Ai"e"H *$B"
From t&e mar4et ersecti0eH 0alue in use is t&e resent 0alue o) e;ecte! )uture cas&
)lo3s re)lecting mar4et e;ectationsH 3&ic& is #,," T&e !eri0al 0alue o) an asset
3&ose )air 0alue is relia6l( measura6le ma( t&en 6e !etermine! to 6e t&e lo3er o) its
relacement cost Ain t&is case #,/B an! reco0era6le amount Ain t&is case #,,H 6eing t&e
&ig&er o) net reali@a6le 0alue o) *$ an! t&e mar4et eFui0alent o) 0alue in use o) #,,B"
Transaction costs to acFuire t&e asset !o not enter into t&is measurement o) !eri0al
0alue 6ecause t&e( are not reco0era6le" Transaction costs to sell t&e asset are not
!e!ucte! 6ecause t&e( 3ill not 6e incurre! un!er t&e &ig&est an! 6est use o) t&e asset"
.*=" T&usH an assetIs !eri0al 0alue is its )air 0alueH i) !eri0al 0alue is measure! on t&e
6asis o) mar4et e;ectations" In ot&er 3or!sH measure! on t&e 6asis o) mar4et
e;ectationsH t&e economic loss t&at an entit( 3oul! su))er i) !eri0e! o) an asset is its
)air 0alue" It ma( 6e conclu!e! t&en t&at !eri0al 0alue coul! !i))er )rom )air 0alue
onl( 3&en an entit(Is management &as !i))erent e;ectations )rom t&ose t&at are
imlicit in t&e mar4et rice" In t&e e;amle a6o0eH i) t&e entit(Is management 6elie0es
t&at t&e 0alue in use o) t&e asset is more t&an #,,H sa( #/,H t&en its !eri0al 0alue 3ill
6e eFual to its relacement cost o) #,/ A6ecause relacement cost 3ill t&en 6e less t&an
reco0era6le amountB" In t&is caseH a relacement cost t&at e;cee!s t&e )air 0alue o) t&e
asset is -usti)ie! un!er !eri0al 0alue on t&e 6asis o) managementIs e;ectation t&at t&e
assetIs 0alue in use is greater t&an its )air 0alue in t&e mar4etlace"
.*/" T&e 6asic Fuestion arises again < 3&et&er entit( seci)ic measurementsH in t&is case
ma!e in t&e conte;t o) t&e !eri0al 0alue )rame3or4H can 6e consi!ere! to 6e more
rele0ant t&an )air 0alue )or an asset on initial recognition" Deri0al 0alue is su6-ect to
t&e entit( seci)ic limitations o) eac& o) its t&ree measurement comonents
Arelacement costH net reali@a6le 0alueH an! 0alue in useB t&at &a0e 6een !emonstrate! in
#15
rece!ing sections" T&ere 3oul! seem to 6e not&ing in t&e t&eor( o) !eri0al 0alue t&at
mitigates t&ese limitations"
Lia!ilities
.*1" T&e lia6ilit( eFui0alent o) !eri0al 0alue &as 6een re)erre! to as 8relie) 0alue9"
#,+
It &as
6een roose! t&at t&e relie) 0alue o) a lia6ilit( is t&e &ig&er o) t&e consi!eration
amount At&at isH t&e )air 0alue o) t&e consi!eration t&at 3oul! 6e recei0e! i) t&e lia6ilit(
3ere issue! on t&e measurement !ateB an! settlement amountH 3it& settlement amount
6eing !e)ine! as t&e lo3er o) t&e current cost o) er)ormance an! t&e current cost o)
release )rom t&e lia6ilit( Asee t&e !iagram 6elo3B"
#,.

.*$" T&e relie) 0alue o) a lia6ilit( ma( 6e comare! 3it& its )air 0alue 3it& arallel results to
t&e comarison o) t&e !eri0al 0alue an! )air 0alue o) an asset" It isH t&ere)oreH reasone!
t&at relie) 0alue is su6-ect to t&e same limitations in rele0ance in comarison 3it& )air
0alue as &as 6een !emonstrate! )or !eri0al 0alue"
#,+
SeeH )or e;amleH Accounting Stan!ar!s Boar! AU2BH Statement of Principles for Financial
+eporting) aragra& 1"*"
#,.
See An!re3 Lennar!H Lia!ilities and %o& to account for t%em; an e4plorator( essa(H eseciall(
aragra&s .+C.."
Relie) 0alue to t&e 6usiness
Q &ig&er o)
Consi!eration Settlement amount
Q lo3er o)
Cost o)
release
Cost o)
er)ormance
#1*
Summar( B Conclusion on +elevance
.*5" T%is paper proposes) !ased on t%e foregoing anal(sis) t%at deprival value @relief valueA
reflecting entit( specific assumptions and e4pectations is a less relevant measurement
!asis t%an fair value on t%e initial recognition of assets @lia!ilitiesA6
.**" T&e a6o0e anal(sis an! roose! conclusion are not inten!e! to suggest t&at t&e
!eri0al 0alue Arelie) 0alueB o) an asset Alia6ilit(B !oes not &a0e rele0ance i) it !i))ers
)rom )air 0alue on initial recognition" Rat&erH it is roose! t&at its rele0ance lies in its
use )or internal management urosesH an! ossi6l( as t&e 6asis )or sulementar(
in)ormation a6out managementIs e;ectations" Deri0al 0alue ro-ects entit(
managementIs e;ectations 6e(on! t&e e;isting 0alue o) an asset in t&e mar4etlace" It
ro0i!es a rational !ecision )rame3or4 )or managementIs e0aluation o) t&e 0alue o) an
asset to t&e entit(H 6ase! on its e;ectations as to t&e )uture outcomes o) oortunities
t&at are oen to it" ManagementIs e0aluation o) t&e 0alue o) an asset is 6ase! on
comaring managementIs )orecast o) t&e resent 0alue o) t&e )uture cas& )lo3s to 6e
ac&ie0e! t&roug& t&e assetIs useH managementIs e;ectations o) t&e most economic cost
to relace t&e assetIs usa6le ser0ice otentialH an! t&e net rocee!s t&at management
3oul! e;ect to reali@e i) t&e asset 3ere sol!" Suc& estimations ma( reFuire 83&at i)9
ro-ectionsH an! !i))erent estimates o) !eri0al 0alue mig&t 3ell 6e ma!e on t&e 6asis o)
!i))erent ossi6le scenarios" Suc& estimates ma( 6e in0alua6le to management in
e0aluating 6u(H relaceH sellH &ol! an! use oortunitiesJ )or e;amleH in assessing t&e
ma;imum amount t&at it s&oul! 6e reare! to a( )or an asset" Certainl(H entit(
seci)ic 0aluations are essential to an e))icient mar4et rocessH since mar4et rices
re)lect t&e cometiti0e interaction o) t&e !i0erse e;ectations o) 6u(er an! seller
interests"
=,," E;ternal )inancial reorting uroses are )un!amentall( !i))erent )rom t&e a6o0e
internal management uroses" T&is aer rooses t&at t&e agree! uroses o)
)inancial reorting Aset out an! anal(@e! at aragra&s +5C1/B are 6est accomlis&e!
A)or t&e reasons !e0eloe! in t&e general concetual anal(sis o) c&ater =B 3&en assets
an! lia6ilities are measure! on initial recognition at t&eir 0alue in t&e mar4etlaceH
#$,
rat&er t&an on t&e 6asis o) t&e e;ectations o) t&e reorting entit(Is management" T&e
0alue o) assets an! lia6ilities to an entit( 3ill ultimatel( 6e !etermine! 6( t&e outcome
o) mar4et )orcesH so t&at it is roose! t&at t&e most rele0ant measure o) an asset or
lia6ilit( on initial recognition is its 0alue in t&e mar4etlace at t&at time"
=,#" In summar(H it &as 6een !emonstrate! t&at !eri0al 0alue Arelie) 0alueB is a searate
measurement )rame3or4 t&at is !istinct )rom )air 0alue onl( 3&en it is 6ase! on entit(
seci)ic e;ectations t&at !i))er )rom mar4et e;ectations" It is conclu!e!H )or t&e
reasons re)erre! to a6o0eH t&at !eri0al 0alue Arelie) 0alueB is t&ere)ore less rele0ant )or
e;ternal )inancial reorting uroses t&an )air 0alue in measuring assets an! lia6ilities
on initial recognition"
!eprival Value as a Substitute for )air Value on %nitial &ecognition
=,+" %&en )air 0alue is not relia6l( measura6le on initial recognitionH !eri0al 0alue ma( 6e
consi!ere! to &a0e merit as a rational !ecision )rame3or4 )or selecting 6et3een
relacement cost Aor its ossi6le rero!uction cost an! &istorical cost su6stitutesBH
reali@a6le 0alueH an! 0alue in useH )or t&e )ollo3ing reasonsG
T&e rational management 6e&a0ioural imlications o) !eri0al 0alue o0ercome a
6asic limitation o) relacement cost stan!ing on its o3n" Since t&e !eri0al 0alue o)
an asset is its reco0era6le amount 3&en relacement cost e;cee!s reco0era6le
amountH !eri0al 0alue can urort to 6e a measure o) t&e assetIs 6ene)it 0alue to t&e
entit("
Furt&erH a )un!amental ro6lem 3it& net reali@a6le 0alue as a stan! alone
measurement o) an assetIs 6ene)it 0alue < t&at isH its )ocus onl( on reali@ation
t&roug& sale < is also resol0e! 3it&in t&e !eri0al 0alue )rame3or4" T&is is
6ecauseH 3it&in !eri0al 0alueH net reali@a6le 0alue is onl( consi!ere! to 6e a
rational measure o) reco0era6le amount 3&en it is &ig&er t&an 0alue in useH t&at isH
3&en it is rational to sell t&e asset"
#$#
Similarl(H 0alue in use is consi!ere! to 6e t&e rele0ant measure o) an assetIs
reco0era6le amount onl( 3&en it is rational to continue to use t&e asset"
T&usH !eri0al 0alue can 6e reasone! to 6e o) greater rele0ance t&an an( o) t&e t&ree
comonent measurement 6ases ta4en 6( t&emsel0es"
=,." ?o3e0erH t&e tra!itional concet o) !eri0al 0alue an! its alication reFuires
signi)icant reinterretation in lig&t o) t&e rece!ing anal(sis o) t&e t&ree comonent
measurement 6ases" T&e Fuestion is &o3 !eri0al 0alue ma( 6e aroriatel(
interrete! an! alie! 3it&in t&e o0erarc&ing )air 0alue measurement o6-ecti0e on
initial measurementH an! gi0en t&at eac& o) t&e t&ree measurement 6ases is su6-ect to
serious relia6ilit( ro6lems in certain common situations" In articularH t&e )ollo3ing
issues an! roosals in resect o) eac& o) t&e t&ree measurement 6ases nee! to 6e ta4en
into account"
AaB Current cost" It &as 6een roose! t&at t&e relacement cost o) an asset cannot
6e accete! to 6e relia6l( measura6le on initial recognition 3&en )air 0alue is
not relia6l( measura6le" T&is aer rooses t&at rero!uction cost Aan! its
lia6ilit( eFui0alentB 6e use! as a su6stitute )or )air 0alue on initial recognition
3&en rero!uction cost Aor its lia6ilit( eFui0alentB is relia6l( estima6le an! it is
reasona6le to assume t&at it is reco0era6le A)or an assetB or reasona6l( reresents
t&e amount o3ing A)or a lia6ilit(B" In most situationsH &o3e0erH t&e &istorical
cost 6asis can 6e reasona6l( assume! to reresent t&e rero!uction cost o) an
asset Aor t&e lia6ilit( eFui0alentB on initial recognition" T&e aer )urt&er
rooses t&at t&e rero!uction an! &istorical cost 6ases 6e alie! as
consistentl( as ossi6le 3it& t&e )air 0alue measurement o6-ecti0e" Suc&
alication 3oul! result in e;clu!ing transaction costs Aas !e)ine!BH an! coul!
reFuire ot&er a!-ustments"
A6B Net reali@a6le 0alue" T&is aer rooses t&at al(ing net reali@a6le 0alue Aan!
its lia6ilit( eFui0alentB on a 6asis t&at is as consistent as ossi6le 3it& t&e )air
0alue measurement o6-ecti0e 3oul! result in remo0ing transaction an! ot&er e;it
costs t&at 3oul! not 6e inclu!e! in )air 0alueH an! coul! result in some ot&er
#$+
a!-ustments" T&e a!-uste! amount 3ill no longer 6e net reali@a6le 0alue" Rat&erH
it 3ill 6e eit&er an estimate o) )air 0alue orH 3&en signi)icant entit( seci)ic
inuts are reFuire!H it 3ill 6e a &(6ri! measure o) an assetIs sales rice Aor
lia6ilit( settlement riceB"
AcB >alue in use" T&is aer rooses t&at al(ing 0alue in use on a 6asis t&at is as
consistent as ossi6le 3it& t&e )air 0alue measurement o6-ecti0e 3ill result in a
resent 0alue estimate t&at is no longer aroriatel( !escri6e! as 80alue in
use9" Rat&erH it 3ill 6e a &(6ri! resent 0alue estimate 3&en it is signi)icantl(
!een!ent on entit( seci)ic e;ectations t&at cannot 6e -usti)ie! to 6e t&e same
as mar4et e;ectations" Furt&erH t&e resent 0alue o) )uture cas& )lo3s cannot 6e
relia6l( !etermine! )or in!i0i!ual nonCcontractual assets t&at are use! toget&er
3it& ot&er inuts in a cas& generating rocess" As a resultH !eri0al 0alue is
su6-ect to t&e unit o) account limitations o) resent 0alue measurements" In
ot&er 3or!sH )or current costH net reali@a6le 0alueH an! resent 0alue 6ases to 6e
comara6le )or t&e same assetH t&e unit o) account must 6e at t&e lo3est le0el o)
aggregation at 3&ic& t&e resent 0alue o) )uture cas& )lo3s can 6e estimate!H
3&ic& is t&e smallest grou o) assets t&at generates cas& )lo3s t&at are
in!een!ent o) cas& )lo3s generate! 6( ot&er assets" T&is 3ill commonl( 6e a
signi)icantl( larger unit o) account t&an &as generall( 6een consi!ere!
aroriate )or t&e measurement o) assets on initial recognition"
Summar( Proposal
=,=" 0ased on t%e a!ove anal(sis) t%is paper proposes t%at) &%en t%e fair value of an asset
cannot !e relia!l( estimated on initial recognition) t%e 7deprival value8 decision rule
&ould) assuming relia!le measura!ilit() !e restated to !e;
t%e lo&er of reproduction cost @or %istorical cost in situations &%en %istorical
cost can !e reasona!l( assumed to e*ual reproduction cost on initial
recognitionA and recovera!le value) &it% recovera!le value !eing t%e %ig%er of
realiCa!le value and t%e present value of t%e future net cas% inflo&s to !e
generated !( t%e asset6
#$.
Eac% of t%ese t%ree measurement !ases is appropriate su!/ect to !eing relia!l(
measura!le) and &ould !e applied as consistentl( as possi!le &it% t%e fair value
measurement o!/ective6
=,/" A arallel restate! 8relie) 0alue9 !ecision rule coul! 6e set out )or lia6ilities on initial
recognition"
#$=
C!a"ter 5 # A Synt!e$i$
=,1" T&e )un!amental conclusion emerging )rom t&e rece!ing anal(ses is t&at assets an!
lia6ilities s&oul! 6e measure! at t&eir )air 0alue on initial recognition 3&en )air 0alue
can 6e estimate! 3it& an acceta6le le0el o) relia6ilit(6 T&is conclusion !oes not resol0e
t&e matterH &o3e0erH 6ecause )air 0alue o)ten cannot 6e estimate! 3it& acceta6le
relia6ilit(" Accor!ingl(H it is necessar( to 6e a6le to !etermineG
AaB 3&en )air 0alue can an! cannot 6e estimate! 3it& an acceta6le le0el o)
relia6ilit(J an!
A6B 3&en it cannotH 3&at ot&er measurement 6ases are o) su))icient rele0ance an!
relia6ilit( to ser0e instea!"
=,$" T&is aer rooses t&atH in selecting a su6stitute measurement 6asis )or )air 0alue on
t&e initial recognition o) an asset or lia6ilit(H one s&oul! select t&e relia6le 6asis t&at is
most consistent 3it& t&e )air 0alue measurement o6-ecti0eH an! al( it as consistentl(
as ossi6le 3it& t&is o6-ecti0e6 I) no aroriate measurement 6asis is su))icientl(
rele0ant an! relia6leH t&en a 6asic con!ition )or t&e recognition o) an asset or lia6ilit(
At&at 8t&e item &as a cost or 0alue t&at can 6e measure! 3it& relia6ilit(9B
#,=
is not met"
Ju(.in. Re)ia-i)ity / Some +enera) Con$i(eration$
=,5" T&ere cannot 6e a )ull( o6-ecti0e 6asis )or !etermining 3&en )air 0alue isH or is notH
caa6le o) relia6le estimation" Rat&erH t&e !etermination isH necessaril(H a -u!gment to
6e ma!e in t&e conte;t o) t&e circumstances o) a articular asset or lia6ilit(" T&is aer
rooses t&at -u!gment o) relia6ilit( o) a measurement s&oul! 6e logicall(
circumscri6e! 6( certain 6asic consi!erations 3it&in certain !e)ina6le resumtions" In
man( situations in0ol0ing t&e measurement o) assets an! lia6ilities on initial
recognition a rational -u!gment rocess ma( 6e e;ecte! to 6e reasona6l( conclusi0e"
T&e )ollo3ing consi!erations are o) articular imortance in assessing t&e relia6ilit( o)
estimates o) )air 0alue an! ossi6le su6stitutes )or )air 0alue on initial recognition"
#,=
IASB Frame3or4H aragra& 5.A6B"
#$/
!isclosure of Measurement 1ncertainty
=,*" T&is aer rooses t&at a measurement ma( 6e consi!ere! relia6leH e0en 3&en it is
su6-ect to a 3i!e range o) measurement uncertaint(H i) t&e nature an! e;tent o)
measurement uncertaint( an! t&e 6asis )or selecting a single oint measurement can 6e
aroriatel( !e)ine! an! !isclose!"
Procedures and 'ontrols
=#," An entit( can en&ance t&e relia6ilit( o) uncertain measurements 6( utting in laceH an!
!ocumentingH a rigorous s(stem o) measurement oliciesH roce!uresH an! controls" An
aroriate s(stem can imro0e reresentational )ait&)ulness o) uncertain measurements
6( &eling to ensure t&at all rele0ant )actors are a!!resse! an! inclu!e!H an! can
en&ance t&e internal consistenc( o) suc& measurements" It is roose! t&at measurement
relia6ilit( s&oul! 6e assesse! on t&e assumtion t&at entities !e0elo an! !ocument
aroriate measurement oliciesH roce!uresH an! controls"
&elevance3&eliability (rade3off
=##" In some situationsH an uncertain 6ut &ig&l( rele0ant measurement ma( 6e consi!ere! to
6e o) acceta6le relia6ilit( i) t&e alternati0e is a muc& less rele0ant accounting" For
e;amleH suose a lia6ilit( e;ists t&at is li4el( to result in some outla( 6ut t&e amount
can onl( 6e estimate! 3it&in a 3i!e range" In t&is caseH a measurement 6asis t&at results
in an amount t&at is 3it&in t&e range o) reasona6l( ossi6le outcomes an! is
accomanie! 6( in)ormati0e !isclosures ma( 6e consi!ere! to 6e o) acceta6le
relia6ilit( D t&at isH ma( 6e consi!ere! to 6e suerior to nonCrecognition"
A Pro"o$e( Mea$urement 7ierar'!y on Initia) Re'o.nition
=#+" T&e )ollo3ing !iscussion resumes t&at t&e asset or lia6ilit( to 6e measure! on initial
recognition &as 6een )ull( !e)ine!H inclu!ing its unit o) account an! ot&er 0alueC
a))ecting roerties Asee aragra&s #.*C#1#B"
#$1
Estimates of )air Value 4 -evels 5 and 6
=#." 't is proposed t%at t%e fair value of an asset or lia!ilit( can !e estimated &it% an
accepta!le level of relia!ilit( on initial recognition &%en eit%er of t%e follo&ing
conditions is met;
@aA Level 1 B T%ere is an o!serva!le market price for assets or lia!ilities t%at are
identical or similar to t%e asset or lia!ilit( to !e measured on or near t%e time of
initial recognition) and appropriate ad/ustment consistent &it% market
e4pectations can !e made for @iA an( differences !et&een t%e market traded
assets or lia!ilities and t%e asset or lia!ilit( to !e measured and @iiA an( time
difference6
@!A Level B Failing an o!serva!le market price meeting t%e conditions of Level 1)
t%ere is an accepted model for estimating t%e market price of t%e asset or
lia!ilit( to !e measured on initial recognition) and all material inputs to t%e
model reflect o!serva!le market prices or relia!l( measura!le p%enomena t%at
can !e e4pected to !e t%e !asis of market participants: determinations &it%in t%e
model6
=#=" For t&ere to 6e an o6ser0a6le mar4et rice )or an asset or lia6ilit(H t&ere must 6e a
mar4et" T&usH it is necessar( to !e)ine 3&at constitutes a 8mar4et9H an! 3&en a mar4et
rice )or an asset or lia6ilit( can 6e resume! to e;ist" T&is aer &as !escri6e! t&e 4e(
attri6utes o) a mar4et rice Asee aragra&s **C##,B" T&ese attri6utes ro0i!e t&e 6asis
)or t&e suerior rele0ance o) )air 0alue )or accounting measurement uroses" At t&e
root o) t&ese attri6utes is t&is accete! remiseG Cometiti0e )orces in an oen mar4et
3ill !ri0e t&e mar4et rice o) an asset to t&e rice t&at 6rings t&e !i0erse e;ectations o)
4no3le!gea6le an! 3illing armIs lengt& articiants into eFuili6rium" T&is eFuili6rium
rice re)lects t&e mar4etIs e;ectation o) earning t&e currentl( a0aila6le mar4et rate o)
return )or eFui0alent ris4"
#,/
In an oen mar4etH 3&en t&e rice o) an asset is not in
eFuili6rium 3it& current mar4et e;ectationsH At&at isH 3&en t&ere is a mar4et
#,/
For simlicit( uroses t&is e;lanation assumes t&at t&e mar4et transaction is in resect o) an asset"
A arallel e;lanation can 6e set out )or a lia6ilit("
#$$
e;ectation t&at t&is rice 3ill (iel! an a6normal returnBH cometiti0e mar4et )orces 3ill
result in ar6itrage transactions t&at 3ill Fuic4l( 6ring t&e rice into eFuili6rium"
=#/" Accounting literature &as not !e)ine! 8mar4et9 )or t&e uroses o) imlementing t&e
)air 0alue measurement o6-ecti0e" T&e )ollo3ing !e)inition is roose!G
For t%e purposes of t%e application of Levels 1 and ) a 7market8 is a !od( of
kno&ledgea!le) &illing) arm:s lengt% parties carr(ing on sufficientl( e4tensive
e4c%ange transactions in an asset or lia!ilit( to ac%ieve its e*uili!rium price)
reflecting t%e market e4pectation of earning or pa(ing t%e market rate of return
for commensurate risk on t%e measurement date"
T&is roose! !e)inition reFuires suorting gui!ance to ena6le reasona6le an!
consistent -u!gments as to 3&et&er 0arious ossi6le tra!ing situations ma( 6e resume!
to result in mar4et eFuili6rium rices"
=#1" An o6ser0a6le mar4et rice ma( onl( 6e a0aila6le )or an asset or lia6ilit( t&at !i))ers in
some 0alueCa))ecting resects )rom t&e asset or lia6ilit( to 6e measure! on t&e
measurement !ate" T&ere must 6e a rele0ant an! relia6le 6asis )or a!-usting t&e
o6ser0a6le mar4et rice )or suc& !i))erences" T&is reFuires t&at a rice a!-ustment
relia6l( re)lect t&e a!-ustment t&at mar4et articiants coul! 6e e;ecte! to ma4e )or
t&e e))ect o) t&e !i))erence"
=#$" Some 6elie0e t&at o6ser0a6le mar4et rices )or i!entical or similar assets or lia6ilities to
t&e asset or lia6ilit( 6eing measure! must 6e in mar4ets t&at are accessi6le 6( t&e entit("
Le0el # as roose! a6o0e !oes not in!icate t&is to 6e a con!ition" T&is aer suggests
t&at t&ere 3ill onl( 6e one )air 0alue )or an asset or lia6ilit( on a gi0en !ateH an! t&at a
mar4et t&at is not accessi6le to an entit( is generall( li4el( to 6e )or an asset or lia6ilit(
t&at !i))ers in some 0alueCa))ecting resects )rom t&e entit(Is asset or lia6ilit( on initial
recognition" T&is issue nee!s )urt&er researc&"
=#5" It is 3ell accete! t&at t&e o6-ecti0e o) )air 0alue is to reresent t&e mar4et rice o) t&e
asset or lia6ilit( to 6e measure! on t&e measurement !ate" I) t&ere is no o6ser0a6le
#$5
mar4et rice )or t&e asset or lia6ilit( on t&e measurement !ateH t&e )air 0alue o6-ecti0e is
to estimate 3&at t&e mar4et rice 3oul! 6e i) t&ere 3ere a mar4et" T&e o6-ecti0e o) a
)air 0alue mo!el is to relia6l( relicate t&e rocess t&at mar4ets coul! 6e e;ecte! to
use to estimate t&e mar4et rice o) a articular asset or lia6ilit(" E))ecti0e mo!els are
6ase! on accete! mar4et ricing rincilesH inclu!ing resent 0alue met&o!ologies an!
concets o) ro6a6ilit( an! ris4" T&ere are 3ellCesta6lis&e! mo!els )or measuring t&e
)air 0alue o) man( t(es o) otions an! ot&er !eri0ati0esH as 3ell as certain rimar(
)inancial instruments suc& as loans recei0a6le an! a(a6le" In man( cases t&ese ricing
mo!els &a0e 6een !e0eloe! 6( e;erts in )inance an! 6( )inancial institutions )or t&e
urose o) creating instruments )or managing ris4s" T&ere 3oul! seem to 6e less
rosect )or !e0eloing relia6le )air 0alue ricing mo!els )or nonCcontractual assets t&at
are inuts to re0enueCgenerating rocesses"
=#*" T&e relia6ilit( o) )air 0alue estimates using mo!els !een!s not onl( on &o3 3ell a
articular mo!el relicates t&e mar4et ricing rocessH 6ut also on t&e relia6ilit( o) its
!ata inuts" T&e material inuts to a )air 0alue mo!el must relia6l( re)lect t&e estimates
an! assumtions t&at mar4etlace articiants 3oul! use" In some situationsH ro;ies or
assumtions ma( 6e esta6lis&e! t&at are generall( accete! to not un!ul( comromise a
mo!elIs estimation o) )air 0alue" In some ot&er situationsH t&e onl( recourse 3ill 6e to
use entit( seci)ic estimations an! assumtions 3&en t&ere is no a0aila6le in)ormation
as to mar4et e;ectations" T&ere is li4el( to 6e no e))ecti0e 6asis )or 0ali!ating or
re)uting 3&et&er entit( seci)ic e;ectations are a reasona6le ro;( )or mar4et
e;ectations" Since entit( seci)ic estimates an! assumtions t&at !o not coinci!e 3it&
mar4et e;ectations are inconsistent 3it& t&e )air 0alue measurement o6-ecti0eH t&is
aer rooses t&atG
A measurement model cannot ac%ieve a relia!le estimation of t%e fair value of
an asset or lia!ilit( &%en it is materiall( dependent on entit( specific
e4pectations t%at cannot !e demonstrated to !e consistent &it% market
e4pectations6
#$*
T&usH it is roose! t&at measurement estimates t&at are materiall( !een!ant on entit(
seci)ic inuts s&oul! not 6e accete! as meeting t&e con!itions o) t&e roose! Le0el +
)or t&e estimation o) )air 0alue" ?o3e0erH t&ere are situations in 3&ic& t&e measurement
o) an asset or lia6ilit( on initial recognition is onl( ossi6le using mo!els or tec&niFues
t&at rel( signi)icantl( on entit( seci)ic estimates or assumtions t&at cannot 6e
!emonstrate! to coinci!e 3it& mar4et e;ectations" T&ese are a!!resse! un!er Le0el =
o) t&e roose! &ierarc&( 6elo3"
=+," T&ere is a !i))erence o) !egree onl( 6et3een a!-usting an o6ser0a6le mar4et rice )or
!i))erences ALe0el #B an! using a measurement mo!el t&at incororates mar4etC6ase!
inuts ALe0el +B" A!-ustments un!er Le0el # must &a0e a suorta6le 6asis < t&at isH a
suorta6le mo!el < )or estimating t&e a!-ustment t&at mar4et articiants coul! 6e
e;ecte! to ma4e to an o6ser0a6le mar4et rice"
Substitutes for )air Value 4 -evels 7 and 8
=+#" Level " B Estimates of current cost; Failing t%e a!ilit( to estimate fair value &it%
accepta!le relia!ilit( @t%at is) to meet t%e conditions of Levels 1 or A;
@aA an asset s%ould !e measured on initial recognition at its current cost) provided
t%at t%is amount can !e relia!l( estimated and can !e reasona!l( e4pected to !e
recovera!leD and
@!A a lia!ilit( s%ould !e measured on initial recognition at its current consideration
amount) provided t%at t%is amount can !e relia!l( estimated and can !e
reasona!l( e4pected to represent t%e amount o&ed6
=++" T&is aer rooses t&at it 6e resume! t&at a relia6le measure o) t&e &istorical cost o)
an asset or lia6ilit( 3ill 6e a reasona6le measure o) its current cost on initial
recognitionH unless t&ere is ersuasi0e e0i!ence t&at a !i))erent current rero!uction
cost is relia6l( estima6le"
#5,
=+." T&is aer rooses t&at relacement cost cannot 6e e;ecte! to 6e !etermine! 3it&
su))icient relia6ilit( to ser0e as a su6stitute )or )air 0alue 3&en )air 0alue is not relia6l(
estima6le on initial recognition" T&is roosal is su6-ect to )urt&er researc& 6e(on! t&e
scoe o) t&is aer"
=+=" T&e current cost 6asis s&oul! 6e alie! as consistentl( as ossi6le 3it& t&e )air 0alue
measurement o6-ecti0e" It is roose! t&at suc& alication s&oul! result in e;clu!ing
transaction costs Aas !e)ine!BH an! )urt&er stu!( coul! lea! to ot&er a!-ustments to
e;isting accete! cost allocation 6ases Asee aragra&s .#=C.#/ an! ./$B" Suc&
a!-ustments coul! lea! to measurements t&at are neit&er cost nor )air 0alueH 6ut &(6ri!
measurements t&at s&oul! 6e !escri6e! as suc&H 3it& aroriate e;lanator(
!isclosures
=+/" I) t&ere is ersuasi0e e0i!ence t&at t&e current cost amount is not reco0era6leH in t&e
case o) an assetH or !oes not reasona6l( reresent t&e amount o3ingH in t&e case o) a
lia6ilit(H t&en re)erence s&oul! 6e ma!e to Le0el ="
=+1" Level # Models or tec%ni*ues t%at depend significantl( on entit( specific e4pectations;
'f t%e conditions of Levels 1) or " cannot !e met) an asset or lia!ilit( s%ould !e
measured on initial recognition on t%e !asis of an accepted model or tec%ni*ue6 To t%e
e4tent t%at relia!le market,!ased data are unavaila!le) t%e measurement model or
tec%ni*ue s%ould use relia!l( estima!le entit( specific data t%at are not inconsistent
&it% o!serva!le market e4pectations6
=+$" Asset an! lia6ilities t&at ma( &a0e to 6e measure! at Le0el = on initial recognition ma(
6e classi)ie! into t3o grousG
AaB Assets an! lia6ilities t&at 3oul! )all into Le0el .H e;cet t&at t&eir cost 6asis
amounts cannot 6e e;ecte! to 6e reco0era6leH in resect o) assetsH or to
reasona6l( reresent amounts o3ingH in resect o) lia6ilities"
A6B Assets an! lia6ilities t&at )ail t&e con!itions )or )air 0alue estimation an! )or
3&ic& cost 6asis amounts are not relia6l( !etermina6le" Some assets an!
#5#
lia6ilities arise )rom ot&er t&an transactions in0ol0ing cas& or cas&CeFui0alent
consi!eration" T&e( ma( inclu!e lia6ilities )or asset retirement o6ligationsH
claims arising )rom la3suitsH assets an! lia6ilities arising )rom insurance
contractsH an! lia6ilities arising un!er !e)ine! 6ene)it ension an! ot&er
emlo(ee 6ene)it lansH an! some stoc4C6ase! comensation lans" T&ese assets
an! lia6ilities ma( 6e measure! on initial recognition on t&e 6asis o) resent
0alue estimates Asee aragra&s .51 an! .55B" Alternati0el(H assets an! lia6ilities
ma( result )rom 6as4et urc&ases" For e;amleH 3or4 in rocess in0entories
ma( 6e acFuire! as art o) a 6usiness acFuisition" In t&is caseH a &(6ri!
reali@a6le 0alue estimate ma( 6e aroriate 3&en t&e assetIs )air 0alue cannot
6e relia6l( estimate! Asee aragra& .$,B"
=+5" T&e c&allenge )or accounting stan!ar! setters is to !e0elo stan!ar!s )or assets an!
lia6ilities 3it& t&ese c&aracteristics t&at ena6le rele0ant an! relia6le measurements t&at
are as consistent as ossi6le 3it& t&e o6-ecti0es o) )air 0alueH an! are suorte! 6(
aroriate !isclosures" Since t&ese measurements !o not meet t&e con!itions )or 6eing
!escri6e! as )air 0alue estimatesH t&e( s&oul! 6e !escri6e! in more limite! terms on t&e
6asis o) t&e mo!els or tec&niFues use! an! sources o) signi)icant !ata inuts"
=+*" Le0els . an! = are consistent 3it& t&e restate! !eri0al 0alue !ecision rule roose! in
aragra& =,=" Un!er t&at restate! !ecision ruleH 3&en an asset cannot 6e relia6l(
measure! un!er Le0els # or + on initial recognitionH it 3oul! 6e measure! un!er Le0el .
at its current cost 3&en current cost is relia6l( measura6leH unless its reco0era6le
amount is lo3er" %&en an assetIs reco0era6le amount is recogni@e! to 6e less t&an its
current cost on initial recognitionH its reco0era6le amount 3oul! &a0e to 6e estimate! 6(
re)erence to Le0el =" I) t&e alication o) measurement tec&niFues un!er Le0el =
resulte! in !i))erent reali@a6le 0alue an! resent 0alue amountsH t&en t&e &ig&er o) t&e
t3o amounts 3oul! 6e use!" A arallel restatement o) t&e relie) 0alue !ecision rule ma(
6e set out )or lia6ilities
#5+
=.," T&e alication o) t&is &ierarc&( to t&e measurement o) assets t&at are consi!ere! to 6e
imaire! reFuires a!!itional anal(sis t&at is 6e(on! t&e scoe o) t&is aer"
Measurement o) imaire! assets is !e)erre! to a later stage o) t&is ro-ect"
#on3&ecognition 9 (e Only Option Wen te 'onditions of -evels 538 'annot be
Met
=.#" %&ile t&is aer !oes not !eal 3it& asset an! lia6ilit( recognition con!itionsH t&e
imlication o) t&e a6o0e roose! measurement &ierarc&( is t&atH i) none o) t&e a6o0e
measurement Le0els can 6e alie!H 6asic con!itions )or recognition o) an asset or
lia6ilit( &a0e not 6een met"
=uture Re$ear'!
=.+" A num6er o) issues &a0e 6een raise! t&at reFuire researc& 6e(on! t&e scoe o) t&is
aer" T&e more signi)icant areas in 3&ic& )urt&er researc& is recommen!e! are
summari@e! as )ollo3sG
AaB T&is aer &as )ocuse! on essential rimar( issuesH 3it& !e)erral o) 3&at are
consi!ere! to 6e secon!ar( issues Aliste! at aragra& #+B )or )uture stu!("
A6B T&e 0ali!it( o) t&e roosition t&at t&ere can 6e onl( one )air 0alue )or an asset
or lia6ilit( on a measurement !ate reFuires )urt&er researc& into t&e nature an!
causes o) !i))erent rices in !i))erent mar4ets )or aarentl( similar assets an!
lia6ilities Aaragra&s #.$ an! #5+B" Particular re)erence &as 6een ma!e to t&e
AiB t&e nature an! 6ases o) restricte! access mar4ets an! t&eir imlications )or
)air 0alue measurement Aaragra& #5*B an! AiiB !i))erences in rices 6et3een
entr( AcustomerB mar4ets an! e;it mar4ets )or !eman! !eosits Aaragra&s #$+C
#$.B an! )or 3arrant( an! certain ot&er er)ormance o6ligations Aaragra&s
#$=C#$$B"
AcB T&is aer rooses )urt&er stu!( o) certain issues relating to !e)ining t&e unit
o) account )or measurement uroses on initial recognition Aaragra&s #=5C
#1#B"
#5.
A!B T&ere is a nee! )or researc& into mar4et ricing rinciles an! tec&niFuesH an!
into t&e con!itions t&at ma( 6e consi!ere! to !e)ine 8mar4et9 )or t&e uroses
o) al(ing t&e mar4et A)airB 0alue measurement o6-ecti0e Aaragra&s #,$C##,H
+.1C+.5 an! +$+B" Particular Fuestions inclu!e AiB t&e minimum le0el o)
in)ormation an! 4no3le!ge necessar( )or t&ere to 6e a mar4et )or an asset or
lia6ilit( Aaragra&s +.*C+=,BH AiiB !e)ining an! estimating rice e))ects o)
in)ormation as(mmetr( Aaragra&s #5.C#5$ an! +1=BH an! AiiiB !e)ining t&e
3illing armIs lengt& arties con!ition o) )air 0alue Aaragra& ##,B"
AeB T&e aer rooses t&at accounting measurement rinciles ma( 6e imro0e!
6( stu!( o) t&e literature an! ractices o) ro)essional 0aluation !iscilines
Aaragra& +1/B" In articularH it is roose! t&at researc& 6e un!erta4en into
relacement cost an! rero!uction cost 0aluation tec&niFues emlo(e! 6(
ro)essional 0aluators Aaragra&s ./+ an! .//B"
A)B T&e aer rooses t&at cost allocation 6ases literature an! ractices 6e reC
e;amine! 3it&in t&e conte;t o) t&e )air 0alue measurement o6-ecti0e on initial
recognition Aaragra&s .#=C.#/ an! Aen!i; .B"
#5=
A""en(iA 1
+)o$$ary o% Si.ni%i'ant Term$ U$e(
T&e )ollo3ing terms an! t&eir !e)initions are rero!uce! )rom t&e 6o!( o) t&e aer"
AssetG An asset is a resource controlle! 6( t&e entit( as a result o) ast e0ents an! )rom
3&ic& )uture economic 6ene)its are e;ecte! to )lo3 to t&e entit("
Current consi!eration amount Ameasure o) a lia6ilit(BG T&e )air 0alue o) t&e
consi!eration t&at t&e o3ing entit( 3oul! &a0e recei0e! i) t&e lia6ilit( &a! 6een
incurre! 6( it on t&e measurement !ate"
Current cost Ameasure o) an assetBG T&e most economic current acFuisition cost o) an
asset or o) its eFui0alent ro!uction caacit( or ser0ice otential"
Current cost o) er)ormance Ameasure o) a lia6ilit(BG T&e resent 0alue o) estimate!
cas& )lo3s e;ecte! to 6e ai! to satis)( a lia6ilit("
Deri0al 0alue Ao) an assetBG T&e loss t&at an entit( 3oul! su))er i) it 3ere !eri0e! o)
an asset" It is t&e lo3er o) relacement cost an! reco0era6le amount on t&e
measurement !ateH 3it& reco0era6le amount 6eing t&e &ig&er o) 0alue in use an! net
reali@a6le 0alue"
E))icient mar4et riceG T&e rice t&at )ull( an! 3it&out 6ias imoun!s all u6licl(
a0aila6le in)ormation on t&e measurement !ate"
Entr( 0alueG A measure o) t&e amount )or 3&ic& an asset coul! 6e 6oug&t or a lia6ilit(
coul! 6e incurre!"
E;it 0alueG A measure o) t&e amount )or 3&ic& an asset coul! 6e reali@e! or a lia6ilit(
coul! 6e settle!"
#5/
Fair 0alueG T&e amount )or 3&ic& an asset or lia6ilit( coul! 6e e;c&ange! 6et3een
4no3le!gea6leH 3illing arties in an armIs lengt& transaction"
?istorical costG Assets are recor!e! at t&e )air 0alue o) t&e consi!eration gi0en to
acFuire t&em at t&e time o) t&eir acFuisition" Lia6ilities are recor!e! at t&e )air 0alue o)
t&e consi!eration recei0e! in e;c&ange )or t&e o6ligations at t&e time t&e( 3ere
incurrre!"
Initial recognitionG Initial recognition Asee 8recognition9B o) an asset or lia6ilit(
commonl( occurs at t&e instant 3&en an e;c&ange transaction ta4es lace t&at results in
an entit( acFuiring t&e asset or incurring t&e lia6ilit(" For assets !e0eloe! o0er a
erio! o) time At&at isH reFuiring some time an! e))ort to lanH !e0eloH acFuire
comonentsH constructH installH testH an! generall( ut in a osition to contri6ute to a
cas& generating rocessBH initial recognition is consi!ere! to inclu!e an( time erio!
necessar( to ma4e an asset rea!( )or useH t&at isH to ut it in a osition to contri6ute to
t&e generation o) )uture cas& )lo3s"
Lia6ilit(G A lia6ilit( is a resent o6ligation o) t&e entit( arising )rom ast e0entsH t&e
settlement o) 3&ic& is e;ecte! to result in an out)lo3 )rom t&e entit( o) resources
em6o!(ing economic 6ene)its"
Mar4etG A 6o!( o) 4no3le!gea6leH 3illingH armIs lengt& arties carr(ing on su))icientl(
e;tensi0e e;c&ange transactions in an asset or lia6ilit( to ac&ie0e its eFuili6rium riceH
re)lecting t&e mar4et e;ectation o) earning or a(ing t&e mar4et rate o) return )or
commensurate ris4 on t&e measurement !ate"
Net reali@a6le 0alue Ao) an assetBG T&e estimate! selling rice in t&e or!inar( course o)
6usiness less t&e estimate! costs o) comletion an! t&e estimate! costs necessar( to
ma4e t&e sale"
RecognitionG T&e rocess o) incororating in t&e 6alance s&eet or income statement an
item t&at meets t&e !e)inition o) an element an! satis)ies t&e criteria )or recognition"
#51
Release amount Ameasure o) a lia6ilit(BG T&e estimate! rice in t&e or!inar( course o)
6usiness to o6tain release )rom a lia6ilit( lus t&e estimate! costs necessar( to carr( out
t&e release transaction"
Relie) 0alue Ao) a lia6ilit(BG T&e &ig&er o) current consi!eration amount an! settlement
amountH 3it& settlement amount 6eing !e)ine! as t&e lo3er o) t&e current cost o)
er)ormance an! t&e current cost o) release )rom t&e lia6ilit("
ReCmeasurement Ao) e;isting assets or lia6ilitiesBG Measurements in erio!s )ollo3ing
initial recognition t&at esta6lis& a ne3 carr(ing amount unrelate! to re0ious amounts
an! accounting con0entions Asometimes re)erre! to as a 8)res&Cstart measurement9B"
Relacement cost Ao) an assetBG T&e most economic current acFuisition cost o)
relacing an e;isting asset 3it& an asset o) eFui0alent ro!ucti0e caacit( or ser0ice
otential"
Rero!uction cost Ao) an assetBG T&e most economic current acFuisition cost o)
relacing an e;isting asset 3it& an i!entical one"
Transaction costsG Incremental costs t&at are !irectl( attri6uta6le to t&e acFuisitionH
issue or !isosal o) an asset or lia6ilit( an!H )or t&e urose o) measuring t&e )air 0alue
o) t&e asset or lia6ilit(H are not reco0era6le in t&e mar4etlace on t&e measurement !ate"
>alue in useG T&e resent 0alue o) estimate! )uture cas& )lo3s e;ecte! to arise )rom
t&e continuing use o) an asset an! )rom its !isosal at t&e en! o) its use)ul li)e"
#5$
A""en(iA 2
Note on Con'e"tua) =rame@or0$
Paragra&s .,C/= o) t&e aer summari@e certain 4e( asects o) t&e concetual
)rame3or4s o) t&e IASB an! its national stan!ar! setting artners in !e0eloing
e0aluation criteria )or measurement 6ases" T&e )rame3or4s are use! )or t&is urose as
t&e( areJ no attemt is ma!e to e0aluate t&e )rame3or4s"
In generalH t&e u6lis&e! )rame3or4s
#
correson! Fuite closel( to eac& ot&er on t&ose
issues t&at t&e( a!!ress in common Asome )rame3or4s co0er more issues t&an ot&ersB"
?o3e0erH t&e )rame3or4s are not i!entical an! some o) t&e !i))erences ma( 6e
consi!ere! signi)icant )or some uroses" T&is note &ig&lig&ts certain !i))erences in
t&ose ortions o) t&e )rame3or4s t&at &a0e 6een use! in t&e aer as e0aluation criteria
)or alternati0e measurement 6ases"
+
T&e )ollo3ing !iscussion !oes not a!!ress all
asects o) t&e )rame3or4s"
#" Decision Use)ulness
All o) t&e )rame3or4s a!ot as t&e o6-ecti0e o) )inancial statements t&e ro0ision o)
!ecision use)ul in)ormation" T&e( all ac4no3le!ge t&at t&ere is a 0ariet( o) !i))erent
t(es o) )inancial statement users 3it& otentiall( !i))ering in)ormation nee!s"
?o3e0erH t&ere is some !i0ergence on t&e Fuestion o) 3&ose nee!s s&oul! !etermine
#
T&e aro0e!H u6lis&e! )rame3or4s !iscusse! in t&is aen!i; are t&ose o) t&e IASB AFrame3or4
)or t&e Prearation an! Presentation o) Financial StatementsH or 8Frame3or49BH Australia AStatements
o) Accounting ConcetsH or 8SACs9BH Cana!a ASection #,,, o) t&e CICA ?an!6oo4H !enote! as
8CICA9BH Ne3 Lealan! AStatement o) Concets )or General Purose Financial ReortingH or
8SCGPFR9BH t&e Unite! 2ing!om AStatement o) Princiles )or Financial ReortingH or 8SPFR9B an!
t&e Unite! States AStatements o) Financial Accounting ConcetsH or 8CONs9B"
+
T&is note is 6ase! in art on a commentar(H 8An International Comarison an! E0aluation o)
Financial Accounting Concets Statements9 6( Pro)essor %illiam R" Scott o) t&e Uni0ersit( o)
%aterlooH u6lis&e! in Canadian Accounting Perspectives A0ol" #H no" +J +,,+B an! an unu6lis&e!
aer !iscusse! 6( t&e G=R# grou o) stan!ar! settersH 8Concetual Frame3or4 Comarison9
AAgen!a Paer $ an! attac&ments )or t&e Eanuar( +,,# meetingB"
t&e content o) )inancial statements o) 6usiness enterrises Asome )rame3or4s also
encomass nonC6usiness entitiesB"
T&e IASB )rame3or4 lists a 3i!e 0ariet( o) otential users o) )inancial statementsH
notes t&at t&ere are in)ormation nee!s common to all usersH an! conclu!es t&at t&e
ro0ision o) )inancial statements t&at meet t&e nee!s o) in0estors 3ill also meet
most o) t&e nee!s o) ot&ers t&at )inancial statements can satis)("
.
T&e Australian )rame3or4 in!icates t&at t&e o6-ecti0e o) )inancial statements is to
ro0i!e in)ormation t&at is use)ul )or ma4ing an! e0aluating !ecisions a6out t&e
allocation o) scarce resourcesH 3&ic& ma( suggest an in0estor:cre!itor orientation"
?o3e0erH it also !iscusses a 3i!e 0ariet( o) t(es o) )inancial statement users an!
states t&at )inancial statements s&oul! satis)( t&e common nee!s o) a num6er o)
t(es o) user"
=
T&e Cana!ian )rame3or4 mentions a 3i!e 0ariet( o) )inancial statement users 6ut
gi0es rimac( to t&e nee!s o) in0estors an! cre!itors"
/
T&e Ne3 Lealan! )rame3or4 !oes not !iscuss !i))erent t(es o) )inancial statement
users an!H accor!ingl(H !oes not a!!ress t&e Fuestion o) 3&ose nee!s s&oul! 6e t&e
)ocus o) )inancial reorting"
1
T&e U"2" )rame3or4 states t&at t&e o6-ecti0e o) )inancial statements is to ro0i!e
in)ormation t&at is use)ul to a 3i!e range o) usersH 6ut goes on to sa( t&at t&e
o6-ecti0e can usuall( 6e met 6( )ocusing e;clusi0el( on t&e in)ormation nee!s o)
resent an! otential in0estors" T&is re6utta6le resumtion is 6ase! on t&e 0ie3
t&at !i))erent t(es o) )inancial statement users 3it& !i))ering uroses &a0e
o0erlaing in)ormation nee!s"
$
.
IASB Frame3or4H aragra&s *C#,"
=
SAC +H aragra&s #1H +1
/
CICA aragra&s #,,,"##H "#/"
1
SCGPFRH section ."
$
SPFRH c&ater #H rinciles an! aragra&s #"=C#"1H #"#,C#"##"
#5*
T&e U"S" )rame3or4 lists a 3i!e 0ariet( o) otential users o) )inancial statements 6ut
seci)ies t&at t&e o6-ecti0e o) )inancial reorting s&oul! 6e to satis)( in0estorsI an!
cre!itorsI in)ormation nee!s"
5
T&e nee!s o) ot&er users 3ill generall( 6e satis)ie! 6( t&e
in)ormation ro0i!e! )or in0estors an! cre!itors"
Alt&oug& t&ere are !i))erencesH a clear ma-orit( o) t&e )rame3or4s gi0e at least greater
3eig&t to t&e in)ormation nee!s o) in0estors an! cre!itors" Eit&er e;licitl( or
imlicitl(H t&e )rame3or4s rel( on t&e e;ectation t&at satis)(ing t&e nee!s o) in0estors
an! cre!itors 3ill generall( satis)( t&e nee!s o) ot&er )inancial statement users as 3ell"
+" Pre!icti0e >alueH Fee!6ac4 >alue an! Ste3ar!s&i
Alt&oug& t&e language !i))ers )rom one )rame3or4 to anot&erH t&ere are relati0el( clear
statements in eac& one t&at i!enti)( 6ot& re!icti0e 0alue an! )ee!6ac4 0alue as 4e(
asects o) t&e !ecision use)ulness o) )inancial statement in)ormation" T&e( are
!escri6e! as rincial asects o) t&e rele0ance o) )inancial in)ormation" To t&e e;tent
t&at some o) t&e )rame3or4s ela6orate on t&ese t3o asectsH t&e( !o not aear to
intro!uce !i0ergent 0ie3s as to t&eir meaning" T&e )rame3or4s generall( !istinguis&
ot&er asects o) !ecision use)ulnessH nota6l( ste3ar!s&i in)ormation" Some
)rame3or4s )ocus more on 3&at t(e o) in)ormation s&oul! 6e ro0i!e! A)inancial
ositionH er)ormanceH )inancing an! in0esting acti0it(H etc"B an! less on 3&at t&e
in)ormation 3oul! 6e use! )or"
." 7ualitati0e C&aracteristics o) Financial In)ormation
All o) t&e )rame3or4s i!enti)( t&e )ollo3ing )our Fualitati0e c&aracteristics o) )inancial
in)ormationG un!erstan!a6ilit(H rele0anceH relia6ilit( an! comara6ilit(" All o) t&e
)rame3or4s also intro!uce ot&er )actors an! assumtionsH suc& as materialit(H
timelinessH cost:6ene)it consi!erations an! going concernH t&at interact 3it& t&e )our
rincial c&aracteristics orH in some casesH )orm elements o) one o) t&e )our
c&aracteristics"
5
CON #H aragra&s .,H .+"
#*,
T&e IASBH Cana!ianH Ne3 Lealan! an! U"2" )rame3or4s resent t&e )our rincial
c&aracteristics as essentiall( arallel consi!erationsH e0en t&oug& not necessaril( o)
eFual imortance" T&e Australian an! U"S" )rame3or4s lace t&e )our rincial
c&aracteristics in a more structure! relations&i to eac& ot&erH an! ot&er )actorsH as
)ollo3sG
In t&e Australian )rame3or4H rele0ance an! relia6ilit( are !esignate! as t&e rimar(
c&aracteristicsH !ealing 3it& t&e rearation o) )inancial in)ormation" Comara6ilit(
an! un!erstan!a6ilit( are !escri6e! as !ealing 3it& t&e resentation o) )inancial
in)ormation"
*
T&e U"S" )rame3or4 c&aracteri@es rele0ance an! relia6ilit( as 6eing t&e rimar(
c&aracteristicsH 6ut it also o6ser0es t&at it !oes not mean to assign riorities to t&e
0arious c&aracteristics" Un!erstan!a6ilit( is !escri6e! as a userCseci)ic Fualit( t&at
stan!s 6et3een !ecision ma4ers an! t&e !ecision use)ulness o) in)ormation"
Comara6ilit( is !escri6e! as a secon!ar( c&aracteristic t&at interacts 3it&
rele0ance an! relia6ilit("
#,
All o) t&e )rame3or4s comment on t&e nee! to ma4e tra!eCo))s 6et3een c&aracteristics"
T&e IASBH Cana!ian an! Ne3 Lealan! )rame3or4s call )or a 6alance to 6e !etermine!
in seci)ic circumstances t&roug& 8ro)essional -u!gment9"
##
T&e U"S" )rame3or4 gi0es
rece!ence to rele0ance an! relia6ilit( 6ut in!icates t&at tra!eCo))s 6et3een t&ose
c&aracteristics 3ill !een! on circumstances"
#+
T&e Australian )rame3or4 comments
t&at rele0ance an! relia6ilit( ma( nee! to 6e 6alance! against eac& ot&er 6ut neit&er is
ran4e! a6o0e t&e ot&er"
#.
?o3e0erH t&e U"2" )rame3or4 gi0es rimac( to rele0ance in
an( tra!eCo)) 6et3een c&aracteristics
#=
H an! goes on to stateG
*
SAC .H aragra&s $H .#H .1"
#,
CON +H aragra& .. an! )igure #"
##
IASB Frame3or4H aragra& =/J CICA aragra& #,,,"+=J SCGPFRH aragra& 1"#"
#+
CON +H aragra&s .. an! *,"
#.
SAC .H aragra& $"
#=
SPFRH c&ater .H rinciles"
#*#
8K relia6ilit( is a &ur!le to 6e cleare! Aie is t&e in)ormation su))icientl(
relia6le'BH not a cometition t&at &as to 6e 3on Aie is t&is in)ormation t&e most
relia6le'B" T&is means t&at t&e aroac& to 6e a!ote! K 3ill 6e t&e one t&at is
t&e most rele0ant o) t&ose t&at are relia6le"9
=" Relia6ilit( o) Financial In)ormation
T&e )rame3or4s e;&i6it some interesting 0ariations in !escri6ing t&e comonent
elements o) relia6ilit(" Eac& )rame3or4 sets out a set o) suc& elementsH 3&ic& ma( 6e
summari@e! as s&o3n in Figure # Ane;t ageB"
T&e )ollo3ing )eatures o) t&e )rame3or4sI !iscussions o) relia6ilit( are articularl(
note3ort&(G
All o) t&e )rame3or4s uneFui0ocall( state reresentational )ait&)ulness as a searate
elementH an! o)ten as t&e )irst one" IASB an! Australia state su6stance o0er )orm as
a searate elementH 3&ereas t&e ot&ers 0ie3 it as a )eature o) reresentational
)ait&)ulness" Reresentational )ait&)ulness aears to &a0e e))ecti0el( t&e same
meaning in all o) t&e )rame3or4sH e0en t&oug& e;resse! in some3&at !i))erent
3a(s"
Neutralit(H or )ree!om )rom !eli6erate 6iasH is common to all o) t&e )rame3or4s an!
!escri6e! in t&e same 3a("
Pru!ence or conser0atism )eature in all o) t&e )rame3or4s" In t&e Ne3 Lealan! an!
U"S" )rame3or4s t&e( are !iscusse! as su6si!iar( )actors rat&er t&an rincial
elements o) relia6ilit(H 6ut t&is !i))erence o) resentation alone !oes not aear to 6e
articularl( signi)icant" T&e 0arious )rame3or4s all !istinguis& 6et3een t&e
necessit( o) ru!ence in t&e )ace o) uncertaint( an! t&e unacceta6le ractice o)
!eli6eratel( un!erstating assets an! re0enues an! o0erstating lia6ilities an!
e;enses"
#*+
Comleteness is consi!ere! imortant 6( all o) t&e )rame3or4sH 6ut it is inclu!e! in
t&em in a 0ariet( o) 3a(s" It !oes not aear t&at t&e !i))erences 3oul! 6e
signi)icant in t&e alication o) t&e )rame3or4s"
#*.
Figure #
Elements o) Relia6ilit(
IASB
#/
Au$tra)ia
#1
Cana(a
#$
Ne@
Eea)an(
#5
Unite(
?in.(om
#*
Unite(
State$
+,
Reresentational )ait&)ulness S S
6
S S S S
Su6stance o0er )orm S S
) ) ) )
Neutralit(
A)ree!om )rom 6iasB
S S S S S S
Pru!ence : conser0atism S S
c
S
&
S
i
Comleteness S S
! g !H &
S
-
>eri)ia6ilit(
A)ree!om )rom errorB
a
S
e
S S S S
S !enotes t&at an element is resent in a concetual )rame3or4"
a Mentione! 6ut not i!enti)ie! as a searate asect o) relia6ilit("
6 Distinguis&e! )rom 8e))ecti0e reresentation9H an element o) rele0ance"
c Conser0atism !istinguis&e! )rom ru!enceJ onl( ru!ence consi!ere! an asect o) relia6ilit("
! Dealt 3it& t&roug& t&e materialit( test"
e Em&asis on t&e role o) au!its"
) Consi!ere! an element o) reresentational )ait&)ulness"
g Consi!ere! an element o) neutralit("
& Consi!ere! an 8in)luence9 on Fualitati0e c&aracteristics"
i Consi!ere! a )actor in)luencing reresentational )ait&)ulness an! neutralit("
- Consi!ere! an element o) 6ot& reresentational )ait&)ulness an! neutralit(J also a )actor in rele0ance
o) in)ormation"
#/
IASB Frame3or4H aragra&s +=C=1"
#1
SAC .H aragra&s #1C.,"
#$
CICAH aragra& #,,,"+#"
#5
SCGPFRH aragra&s ="*C="#+H 1"1 an! 1"*"
#*
SPFRH c&ater .H rinciles an! aragra&s ."$C."+,"
+,
CON +H aragra&s /5C5*H *#C##,H #1,"
#*=
>eri)ia6ilit( is i!enti)ie! as a searate element o) relia6ilit( 6( all o) t&e )rame3or4s
e;cet t&e IASBIs"
+#
T&e e;tent o) 0eri)ia6ilit( )or a articular item o) )inancial
in)ormation can 6e assesse! accor!ing to t&e !isersion o) a reresentati0e num6er
o) in!een!ent measurements o) t&e un!erl(ing item 6eing measure!" T&e
)rame3or4s generall( !istinguis& 0eri)ia6ilit( )rom neutralit("
/" Elements o) Financial Statements
All o) t&e )rame3or4s i!enti)( an! !e)ine t&e elements o) )inancial statementsH
generall( in similar 3a(s alt&oug& t&ere are some note3ort&( !i))erences" One o) t&e
!i))erences commonl( o6ser0e! is t&e !istinction ma!e in some o) t&e )rame3or4sH an!
not ot&ersH 6et3een re0enues an! gains an! 6et3een e;enses an! losses" T&is an!
some ot&er !i))erences are not signi)icant )or uroses o) e0aluating alternati0e
measurement 6ases"
T&e aer a!ots t&e concets o) assets an! lia6ilitiesH as !e)ine! in t&e )rame3or4sH as
imortant e0aluation criteria )or alternati0e measurement 6ases" T&ose t3o elements o)
)inancial statements are common to all o) t&e )rame3or4sH 6ut t&e( are not !e)ine! in
t&e same manner" T&e 0arious !e)initions are set out in Figure + Ane;t ageB"
T&e )ollo3ing oints a6out t&e !e)initions are articularl( note3ort&(G
As a num6er o) commentators &a0e ointe! outH t&e U"S" )rame3or4 inclu!es
ro6a6ilit( in its !e)initions o) assets an! lia6ilitiesH an! !oes not mention it in t&e
recognition criteria ACON /H aragra& 1.B" All o) t&e ot&er )rame3or4s !e)ine
assets an! lia6ilities 3it&out re)erence to ro6a6ilit(H an! inclu!e it in t&e
recognition criteria" As in!icate! in t&e )ootnotes to t&e U"S" !e)initions an!
e;laine! in commentaries on t&e U"S" )rame3or4H 8ro6a6le9 is meant in t&e 6roa!
sense o) 8e;ecte!9 an! is not inten!e! to con0e( an( sense o) statistical
ro6a6ilit("
+#
T&e IASB Frame3or4 mentions in its summar( !escrition o) relia6ilit( Aaragra& .#B t&at
in)ormation is relia6le 3&en it is 8)ree )rom material error9H 6ut it !oes not use t&e term
80eri)ia6ilit(9 nor !iscuss t&e issue"
#*/
Figure +
De)initions o) Assets an! Lia6ilities
++
A$$et$ *ia-i)itie$
IASB An asset is a resource controlle! 6( t&e
enterrise as a result o) ast e0ents an! )rom
3&ic& )uture economic 6ene)its are e;ecte! to
)lo3 to t&e enterrise"
A lia6ilit( is a resent o6ligation o) t&e enterrise
arising )rom ast e0entsH t&e settlement o) 3&ic& is
e;ecte! to result in an out)lo3 )rom t&e enterrise
o) resources em6o!(ing economic 6ene)its"
Australia 8Assets9 are )uture economic 6ene)its controlle!
6( t&e entit( as a result o) ast transactions or
ot&er ast e0ents K
8Lia6ilities9 are t&e )uture sacri)ices o) economic
6ene)its t&at t&e entit( is resentl( o6lige! to ma4e
to ot&er entities as a result o) ast transactions or
ot&er ast e0ents"
Cana!a Assets are economic resources controlle! 6( an
entit( as a result o) ast transactions or e0ents
an! )rom 3&ic& )uture economic 6ene)its ma( 6e
o6taine!"
Lia6ilities are o6ligations o) an entit( arising )rom
ast transactions or e0entsH t&e settlement o) 3&ic&
ma( result in t&e trans)er or use o) assetsH ro0ision
o) ser0ices or ot&er (iel!ing o) economic 6ene)its in
t&e )uture"
Ne3
Lealan!
Assets are ser0ice otential or )uture economic
6ene)its controlle! 6( t&e entit( as a result o)
ast transactions or ot&er ast e0ents"
Lia6ilities are t&e )uture sacri)ices o) ser0ice
otential or o) )uture economic 6ene)its t&at t&e
entit( is resentl( o6lige! to ma4e to ot&er entities
as a result o) ast transactions or ot&er ast e0ents"
Unite!
2ing!om
Assets are rig&ts or ot&er access to )uture
economic 6ene)its controlle! 6( an entit( as a
result o) ast transactions or e0ents"
Lia6ilities are o6ligations o) an entit( to trans)er
economic 6ene)its as a result o) ast transactions or
e0ents"
Unite!
States
Assets are ro6a6le
#5
)uture economic 6ene)its
o6taine! or controlle! 6( a articular entit( as a
result o) ast transactions or e0ents"
TTTTTTTTTTTTTTTTTTT
#5
Pro6a6le is use! 3it& its usual general meaningH
rat&er t&an in a seci)ic accounting or tec&nical
sense Asuc& as t&at in FASB Statement No" /H
Accounting )or ContingenciesH ar" .BH an! re)ers to
t&at 3&ic& can reasona6l( 6e e;ecte! or 6elie0e!
on t&e 6asis o) a0aila6le e0i!ence or logic 6ut is
neit&er certain nor ro0e! A%e6sterUs Ne3 %orl!
Dictionar( o) t&e American LanguageH +! college
e!" MNe3 Por4 Simon an! Sc&uster #*5+NH "
##.+B" Its inclusion in t&e !e)inition is inten!e! to
ac4no3le!ge t&at 6usiness an! ot&er economic
acti0ities occur in an en0ironment c&aracteri@e! 6(
uncertaint( in 3&ic& )e3 outcomes are certain
Aars" ==C=5B"
Lia6ilities are ro6a6le
+#
)uture sacri)ices o)
economic 6ene)its arising )rom resent o6ligations
++
o) a articular entit( to trans)er assets or ro0i!e
ser0ices to ot&er entities in t&e )uture as a result o)
ast transactions or e0ents"
TTTTTTTTTTTTTTTTTTT
+#
Pro6a6le is use! 3it& its usual general meaningH rat&er
t&an in a seci)ic accounting or tec&nical sense Asuc&
as t&at in Statement /H ar" .BH an! re)ers to t&at 3&ic&
can reasona6l( 6e e;ecte! or 6elie0e! on t&e 6asis o)
a0aila6le e0i!ence or logic 6ut is neit&er certain nor
ro0e! A%e6sterUs Ne3 %orl! Dictionar(H " ##.+B" Its
inclusion in t&e !e)inition is inten!e! to ac4no3le!ge
t&at 6usiness an! ot&er economic acti0ities occur in an
en0ironment c&aracteri@e! 6( uncertaint( in 3&ic& )e3
outcomes are certain Aars" ==C=5B"
++
O6ligations in t&e !e)inition is 6roa!er t&an legal
o6ligations" It is use! 3it& its usual general meaning
to re)er to !uties imose! legall( or sociall(J to t&at
3&ic& one is 6oun! to !o 6( contractH romiseH moral
resonsi6ilit(H an! so )ort& A%e6sterUs Ne3 %orl!
Dictionar(H " *5#B" It inclu!es eFuita6le an!
constructi0e o6ligations as 3ell as legal o6ligations
Aars" .$C=,B"
T&e IASB !e)ines 8an asset9 an! 8a lia6ilit(9H 3&ereas t&e ot&er )rame3or4s !e)ine
8assets9 an! 8lia6ilities9"
++
T&e !e)initions in t&e ta6le are all Fuote! !irectl( )rom t&e )rame3or4s"
#*1
T&e IASB an! Cana!ian )rame3or4s !e)ine assets as resources t&at gi0e rise to
economic 6ene)its" T&e U"2" )rame3or4 !e)ines assets as access to economic
6ene)its" T&e AustralianH Ne3 Lealan! an! U"S" )rame3or4s !e)ine assets as t&e
6ene)its t&emsel0es" It is unclear 3&et&er t&ese !i))erences in t&e !e)initions coul!
lea! to !i))erences in 3&at 3oul! 6e recogni@e! or &o3 an item mig&t 6e !escri6e!
or resente! in )inancial statements"
Similarl(H t&e IASBH Cana!ian an! U"2" )rame3or4s !e)ine lia6ilities as o6ligations
to trans)er economic 6ene)itsH 3&ereas t&e AustralianH Ne3 Lealan! an! U"S"
)rame3or4s !e)ine lia6ilities as t&e )uture sacri)ice o) economic 6ene)its"
It &as 6een suggeste! t&at t&e !i))erent !e)initions mig&t lea! to !i))erent conclusions as
to t&e most aroriate 6asis o) measurement )or assets or lia6ilities"
+.
T&is aer ta4es
t&e osition t&at t&e !e)initions 3ere not inten!e! to reFuire t&e a!otion o) an(
articular alternati0e measurement 6asis Aor ot&er3ise t&e concetual )rame3or4s
3oul! &a0e so in!icate!B" Alt&oug& t&e !i))erences note! a6o0e coul! &a0e
conseFuences )or certain urosesH t&e( !o not necessaril( lea! to inconsistent results in
!e)ining or e0aluating measurement 6ases" T&e most signi)icant issue aears to 6e t&at
note! in aragra& #/AaB" T&e U"S" concetual )rame3or4 !e)ines assets an! lia6ilities
in terms o) t&e ro6a6ilit( o) )uture economic 6ene)its o6taine! or sacri)ice! 3&ereas
mar4et 6ase! 0alues )actor t&e ro6a6ilit( o) o6taining or sacri)icing economic 6ene)its
into t&e measurement o) t&e asset or lia6ilit(" ?o3e0erH t&e FASB uses t&e term
8ro6a6ilit(9 in !e)ining 8assets9 an! 8lia6ilities9 onl( in t&e sense o) 8e;ecte!9H an!
not in t&e sense o) statistical ro6a6ilit(H 3&ic& is t&e sense in 3&ic& it is use! in
re)erence to mar4et 6ase! measurements"
1" Economic Puroses
None o) t&e )rame3or4s a!! muc& to t&e comments Fuote! in t&e aer )rom CON #
concerning t&e resume! economic uroses o) 6usiness enterrises" T&e U"2"
)rame3or4 ma4es similar comments Aaragra& #"#,B in e;laining 3&( t&e
+.
SeeH )or e;amleH An!re3 Lennar!H Lia!ilities and %o& to account for t%em; an e4plorator( essa()
aragra&s $=C5+"
#*$
in)ormation nee!s o) ot&er t(es o) )inancial statement users 3ill generall( coinci!e
3it& t&ose o) in0estors" Not&ing in t&is section o) t&e aer aears to con)lict 3it& an(
o) t&e )rame3or4s"
$" Concets o) Caital Maintenance
T&e IASBH Cana!ian an! Ne3 Lealan! )rame3or4s eac& !iscuss caital maintenance
concets 6rie)l( an! 3it&out seci)(ing an( articular aroac&" T&e U"2" an! U"S"
)rame3or4s seci)( t&e alication o) t&e tra!itional )inancial caital aroac&"
+=
T&e
Australian )rame3or4 !oes not inclu!e a statement !ealing 3it& measurement issuesH
alt&oug& consi!era6le 3or4 &as 6een un!erta4en to3ar!s !e0eloing one"
5" Cost:Bene)it Constraints
All o) t&e )rame3or4s mention t&is constraint in !iscussing t&e Fualitati0e
c&aracteristics o) )inancial in)ormationH an! none o) t&em go 6e(on! a general
!escrition o) t&e tra!eCo)) 6et3een costs an! 6ene)its"
*" Ot&er Matters
T&e )oregoing !iscussion relates seci)icall( to t&e )eatures o) t&e concetual
)rame3or4s t&at correson! to t&e 6asis o) e0aluation set out in aragra&s +5 to /= o)
t&is aer" Some o) t&e )rame3or4s contain little or no seci)ic !iscussion o) t&e
measurement 6ases i!enti)ie! in t&is aer 3&ile ot&ers !o" For e;amleG
T&e IASB an! Cana!ian )rame3or4s !escri6e 3&at measurement isH list some o) t&e
measurement 6asis i!enti)ie! in t&is aerH an! comment t&at &istorical cost is most
commonl( a!ote! AIASB Frame3or4 aragra&s **C#,# an! CICA aragra&s
#,,,"/.C"/=B"
T&e FASBIs CON / !escri6es t&e alication o) e;c&ange rices an! current 0ersus
&istorical 0alues in general terms Aaragra&s 55C*,B" CON $ lin4s resent 0alue to
)air 0alue Asee aragra& +/ in articularB"
+=
SPFRH aragra&s 1".*C1"=+J CON /H aragra&s =/C=5"
#*5
In t&e U"2"Is SPFRH c&ater 1 !iscusses some o) t&e alternati0e measurement 6ases
i!enti)ie! in t&is aer an! conclu!es t&at current 0alues are necessar( in some
Aseci)ie!B circumstances"
T&e Australian concetual )rame3or4 !oes not inclu!e an( ositions on
measurement issuesH alt&oug& t&e Australian Accounting Researc& Foun!ationIs
Accounting T&eor( Monogra& #, roose! a 8relati0e current 0alue9 mo!el t&at
inclu!es a 0ersion o) t&e 80alue to t&e 6usiness9 aroac& A!eri0al 0alueB"
Ne3 Lealan!Is SCGPFR Asection *B contains a !iscussion o) measurement 6ases
similar to t&at in t&e IASB Frame3or4H 6ut goes on to e;ress a re)erence )or a
8mo!i)ie! &istorical cost9 s(stem t&at ro0i!es )or remeasuring certain nonCcurrent
assets to current 0alue Aaragra& *"*B"
#," Conclusion
T&e elements o) t&e si; u6lis&e! concetual )rame3or4s incororate! into t&e
e0aluation criteria )or measurement 6ases e;&i6it a num6er o) !i))erences an!
0ariations" For t&e uroses o) e0aluating alternati0e measurement 6asesH t&ere !o not
aear to 6e an( outrig&t con)licts or ma-or !i))erences in aroac& t&at 3oul!
necessaril( lea! to !i))erent conclusions un!er one )rame3or4 t&an un!er anot&er"
#**
A""en(iA ,
Some Con$i(eration$ on ;eterminin. Co$t
a$ a Su-$titute %or =air 2a)ue on Initia) Re'o.nition
#" Un!er Le0el . o) t&e measurement &ierarc&( roose! in t&is aerH assets an!
lia6ilities 3oul! 6e measure! on initial recognition on an aroriate cost 6asis
Arero!uction or &istorical costB un!er certain con!itions 3&en )air 0alue cannot 6e
estimate! 3it& acceta6le relia6ilit(" In articularH it seems li4el( t&at nonCcontractual
assets t&at are sel) constructe! or a!ate! )or seciali@e! use 3oul! commonl( 6e
measure! on initial recognition on a cost 6asis" T&is aer rooses t&at met&o!s )or
attri6uting costs to assets an! lia6ilities on initial recognition 6e selecte! to 6e as
consistent as ossi6le 3it& t&e )air 0alue measurement o6-ecti0e" It )urt&er suggests t&at
e;isting cost attri6ution stan!ar!s an! ractices 6e reCassesse! in t&e conte;t o) t&is
o6-ecti0e"
+" T&is aen!i; e;lores some ossi6le imlications o) t&e )air 0alue measurement
o6-ecti0e )or reCassessing cost attri6ution stan!ar!s an! ractices" Its urose is not to
resol0e issuesH 6ut to ser0e as a reliminar( in!ication o) ossi6le lines o) inFuir(
3&ic&H i) consi!ere! to 6e otentiall( )ruit)ulH 3oul! reFuire inC!et& stu!("
Intere$t Ca"ita)iDation
(e 'ost Perspective
." One o) t&e )un!amental Fuestions o) cost !etermination is 3&et&er an!H i) so &o3H
interest s&oul! 6e caitali@e! on nonCcontractual assets t&at ta4e some time to ma4e
rea!( )or use or sale" T&ree !i))erent 0ie3s on interest caitali@ation ma( 6e i!enti)ie!
3it&in t&e &istorical cost 6asisG
AaB Some reason t&at interest on !e6t use! to )inance an asset !uring t&e erio! t&at
it is 6eing ma!e rea!( )or use is a necessar( art o) t&e cost to acFuire it"
#
In
#
FASB Statement No" .=H CapitaliCation of 'nterest CostH ta4es t&e osition t&at interest on !e6t
s&oul! 6e caitali@e! as art o) t&e cost o) certain Fuali)(ing assets !uring t&e erio! o) time reFuire!
+,,
t&eir 0ie3H not caitali@ing t&is interest 3oul! 6ias t&e measurement o) t&e asset
6( s(stematicall( un!erstating its cost" Accetance o) t&is 0ie3 gi0es rise to t&e
)ollo3ing measurement alication issuesG
I!enti)(ing t&ose assets on 3&ic& interest s&oul! 6e caitali@e! an! 3&en
caitali@ation s&oul! 6egin an! en!"
Attri6uting lia6ilities to t&ese assets" A num6er o) !i))erent aroac&es to
attri6uting lia6ilities to assets &a0e 6een ut )or3ar!J in most cases t&ese are
su6-ect to 8man(CtoCman(9 allocation ro6lems"
+
Measuring t&e interest on attri6ute! lia6ilities" Current stan!ar!s reFuire
t&at interest 6e !etermine! on t&e &istorical cost 8e))ecti0e interest9 6asis" It
ma( 6e reasone! t&at it 3oul! 6e more consistent 3it& t&e )air 0alue
measurement o6-ecti0e to caitali@e interest on attri6ute! lia6ilities at t&e
mar4et 0alue o) interest )or commensurate ris4 !uring t&e caitali@ation
erio!" Caitali@ing interest on t&is )air 0alue 6asis ma( also 6e reasone! to
6e more consistent 3it& t&e accete! o6-ecti0e o) &istorical cost C to re)lect
8t&e )air 0alue o) t&e consi!eration gi0en9 to acFuire an asset at t&e time o)
its acFuisition Aaragra& $1B"
.

A6B Some ot&ers 6elie0e t&at interest on !e6t is a(a6le )or t&e use o) mone( )or a
erio!H an! s&oul! 6e e;ense! in t&at erio!"
=
T&e( !o not 6elie0e t&at t&e cost
o) an asset s&oul! !i))er !een!ing on &o3 or 3&en it is )inance!" T&isH t&e(
reasonH can seriousl( imair comara6ilit( 6et3een entities an! o0er time 3it&in
an entit(" Some oose caitali@ation o) interest on !e6t 6ecauseH in t&eir 0ie3H
to get t&em rea!( )or t&eir inten!e! use"
+
FASB Statement No" .= conclu!e! t&at it is legitimate to caitali@e an aortionment o) interest on
all !e6t outstan!ing t&at mig&t t&eoreticall( &a0e 6een ai! o)) 3ere it not )or t&e Fuali)(ing assetAsB
un!er construction"
.
See aragra& .,1H 3&ic& Fuestions t&e reresentational )ait&)ulness o) a cost measure o) an asset
t&at is 6ase! on aggregating costs o) inuts t&at 3ere urc&ase! at 0arious times in t&e astH an! are
t&ere)ore not necessaril( reresentati0e o) t&eir )air 0alues at t&e time t&e asset is constructe!"
=
IAS +. a!ots t&is osition as its 6enc&mar4 treatment Aaragra&s $C5B" ?o3e0erH it ermitsH as an
allo3e! alternati0eH caitali@ation o) 86orro3ing costs t&at are !irectl( attri6uta6le to t&e acFuisitionH
construction or ro!uction o) a Fuali)(ing asset K9 Aaragra& ##B"
+,#
it con)uses )inancing an! oerating costsH an! !istorts oerating ro)ita6ilit("
/
Furt&erH t&e( ma( o6-ect to caitali@ation o) interest on !e6t 6ecause it
commonl( reFuires ar6itrar( allocations in attri6uting !e6t to articular assets"
AcB A t&ir! sc&ool o) t&oug&t &ol!s t&at interest s&oul! 6e caitali@e! on t&e 6asis o)
a 6roa! concet o) economic cost" Suorters argue t&at t&e o6-ecti0e s&oul! 6e
to recor! t&e )ull economic sacri)ice incurre! in constructing an asset" In t&eir
0ie3H t&is sacri)ice inclu!es not onl( t&e interest on 6orro3ing t&at is attri6ute!
to t&e assetH 6ut also an( a!!itional return )orgone 6ecause t&e construction 3as
un!erta4en" T&e 6ene)it o) t&is return 3oul!H t&e( reasonH &a0e accrue! to
increase eFuit( in t&e a6sence o) t&e in0estment in t&e construction o) t&e asset"
T&e FASB accete! t&at suc& sacri)ice is art o) t&e economic cost o) t&e asset"
?o3e0erH it conclu!e! in Statement .= t&at t&e caitali@ation o) t&e return
)orgone is outsi!e t&e transactionsC6ase! &istorical cost mo!elH 6ecause t&e cost
3oul! &a0e to 6e imute! rat&er t&an 6eing t&e result o) an e;c&ange
transaction"
1
In suort o) t&is conclusionH it ma( 6e argue! t&at t&e return
)orgone !oes not )it 3it&in t&e !e)inition o) 8&istorical cost9H 6ecause it is not
8consi!eration gi0en9" ?o3e0erH ot&ers ma( argue t&at t&e true measure o) t&e
)air 0alue o) consi!eration gi0en to acFuire an asset inclu!es a reasona6le
measure o) an( return )orgone"
(e )air Value Perspective
=" T&e )air 0alue o) an asset 3&ose 6ene)its consist o) )uture cas& )lo3s can 6e e;ecte! to
increase at t&e a0aila6le mar4et rate o) return as t&e time to t&e reali@ation o) its cas&
)lo3s gro3s nearerH all ot&er t&ings 6eing eFual" T&is is t&e simle conseFuence o) t&e
resent 0alue rincile in t&e mar4etlaceH un!er 3&ic& e;ecte! cas& )lo3s 6ecome
more 0alua6le A&a0e a &ig&er resent 0alueB t&e closer t&e( are to reali@ation" T&is is
e0i!ence! 6( t&e )act t&at in0estors in a cometiti0e mar4et e;ect to 6e comensate! at
/
See Ste&en ?" PenmanH Financial Statement Anal(sis and Securit( Valuation) +,,#H age +5,"
1
Nonet&elessH some regulate! u6lic utilities in Nort& America &a0e caitali@e! a return on eFuit(
caital as 3ell as !e6t interest in resect o) assets un!er constructionH reasoning t&at t&eir re0enue
rate 6ase allo3s a return on eFuit( caital" See FASB Statement No" $#H aragra&s #/ an! 5+C5="
+,+
t&e current ris4Ca!-uste! mar4et rate )or !e)erring receit o) cas& Ain ma4ing a loanH )or
e;amleB" In ot&er 3or!sH t&e current mar4et rate o) return is 8caitali@e!9 At&at isH
accrues to increase t&e )air 0alue o) an asset 3&ose 6ene)its consist o) )uture cas& )lo3sB
o0er t&e time until t&e e;ecte! cas& )lo3s are reali@e!"
/" T&is )air 0alue return e;ectation &as !irect alication to nonCcontractual assets t&at
ta4e time to construct an! ma4e rea!( )or use" Suc& an asset reFuires in0estment o)
)un!s )or a erio! o) time 6e)ore t&e asset 3ill 6e in a osition to generateH or contri6ute
to t&e generation o)H cas& in)lo3s" T&usH t&e assetIs )air 0alue on initial recognition
$
can
6e e;ecte! to inclu!e t&e mar4et return )or )orgoing t&e receit o) cas& in)lo3s )or t&e
erio! necessar( to ma4e t&e asset rea!( )or use"
5
In ot&er 3or!sH t&e mar4et rice )or
suc& an asset can 6e e;ecte! to inclu!e comensation )or t&e time 0alue o) mone( an!
atten!ant ris4s t&roug& t&e construction erio!"
1" T&e caitali@ation o) interest at t&e mar4et rate o) return on an asset t&at is un!er
construction is consistent 3it& t&e 8economic cost9 aroac& !escri6e! in aragra&
.AcBH interrete! 3it&in )air 0alue measurement t&eor(" Furt&erH as note! in t&at
aragra&H it ma( 6e reasone! t&at caitali@ation o) interest at t&e a0aila6le mar4et rate
o) return )or commensurate ris4 )or t&e erio! in 3&ic& an asset is 6eing constructe! is
also consistent 3it& a 6roa! interretation o) &istorical cost" T&e 6asis )or t&is argument
is t&at t&e mar4et rice t&at 3oul! 6e ai! )or t&is asset i) it &a! 6een urc&ase! rat&er
t&an constructe! 3oul! 6e e;ecte! to inclu!e t&is interest return"
$" T&e )air 0alue measure o) interest to 6e caitali@e! 3oul! 6e 6ase! solel( on t&e assetIs
recor!e! 0alue an! ris4 !uring t&e erio! o) construction" As a resultH t&e amount
caitali@e! 3oul! not !een! on &o3 t&e asset &as 6een )inance!"
$
T&is aer &as !e)ine! 8initial recognition9 to inclu!e an( time erio! necessar( to ma4e an asset
rea!( )or use in a cas& generating rocess Asee aragra& 1$B"
5
Ot&er mar4et )actors A)or e;amleH inut rice c&anges an! c&anges in t&e e;ecte! cas& )lo3s to 6e
generate! 6( t&e assetB ma( o0er3&elm t&e interest e))ect in some situationsH 6ut t&e mar4et interest
e))ect still occurs"
+,.
5" It is em&asi@e! t&at t&e caitali@ation o) interest at t&e mar4et rate o) return )or an asset
un!er construction 3oul! not ma4e a costC6ase! measurement un!er Le0el . o) t&e
roose! &ierarc&( eFui0alent to )air 0alue" T&e resulting measurement 3oul! o)ten
!i))er )rom )air 0alue on initial recognitionH 6ecause it 3oul! not re)lect an( e))ects o)
inut rice c&anges !uring t&e construction erio!H nor 3oul! it re)lect s(nergies t&at
ma( result )rom com6ining inuts in constructing t&e asset" Furt&erH t&e mar4et rate o)
interest 3oul! 6e multilie! 6( t&e accumulate! costs o) inuts use! in constructing t&e
assetH an! t&ere)ore 3oul! not 6e a true measure o) t&e mar4et return )actor" T&e
resulting measurement 3oul!H t&ere)oreH still 6e a costCaccumulation 6asis su6stitute )or
)air 0alue t&at &as 6een e;ten!e! to caitali@e interest on a 6asis t&at is as consistent as
ossi6le 3it& &o3 mar4et articiants coul! 6e e;ecte! to rice t&e interest e))ect"
*" T&e anal(sis to t&is oint 3oul! seem to suort a resumtion t&at t&e )air 0alue
caitali@ation o) interest in measuring cost un!er Le0el . o) t&e roose! &ierarc&( is
more consistent 3it& t&e )air 0alue measurement o6-ecti0e t&an t&e alternati0es
!iscusse! in aragra& ." ?o3e0erH man( ma( 6e uncom)orta6le 3it& t&e result D in
articularH 3it& t&e )act t&at caitali@ation o) interest on t&is )air 0alue 6asis 3ill result
in a cre!it to income or eFuit( !uring t&e erio! in 3&ic& an asset is 6eing reare! )or
use" Is t&ere a con0incing 6asis )or recogni@ing t&is cre!it in income'
*

#," In consi!ering t&is FuestionH it s&oul! )irst 6e o6ser0e! t&at i) t&e mar4et 0alue o) a sel)C
constructe! asset is relia6l( measura6le on initial recognitionH t&is mar4et 0alue 3ill
inclu!e t&is gain" T&e recognition o) t&is gain in income or eFuit( necessaril( )ollo3s
)rom a!oting t&e )air 0alue measurement 6asis on initial recognition" T&e gainIs
reco0era6ilit( is e0i!ence! 6( t&e assetIs mar4et 0alue on initial recognition"
##" %&en t&e assetIs )air 0alue is not relia6l( measura6le on initial recognitionH su6stituting
a cost measure t&at caitali@es interest at t&e mar4et rate o) return results in a similar
cre!it to income or eFuit(" In recogni@ing t&is gainH t&e entit( is 6eing gi0en cre!it )or
*
Some ma( argue t&at t&is is a Fuestion )or consi!eration in a ro-ect on income recognitionH 3&ic& is
6e(on! t&e scoe o) t&is aer" ?o3e0erH accetance o) t&e )air 0alue measurement o6-ecti0e on
initial recognition o) assets carries 3it& it imlicit accetance )or recogni@ing income )rom an( gains
t&at arise 3&en t&e )air 0alue o) an asset e;cee!s t&e amount ai! )or it"
+,=
t&e estimate! return t&at t&e mar4et 3oul! e;ect to 6e ai! )or t&e time 0alue o) mone(
an! atten!ant ris4s ertaining to t&e construction erio!" In t&is caseH &o3e0erH t&ere
3ill 6e no relia6le mar4et 0alue to esta6lis& t&e gainIs reco0era6ilit(" T&e use o) cost as
a su6stitute )or )air 0alue un!er Le0el . o) t&e roose! &ierarc&( is con!itione! on it
6eing reasona6le to e;ect t&at t&e amount is reco0era6le" ?o3e0erH since t&ere is no
relia6le )air 0alue )or t&e assetH t&is -u!gment must !een! on entit( seci)ic
e;ectations"
#+" Some ma( 6elie0e t&at an entit( seci)ic e;ectation o) reco0era6ilit( is not a su))icient
6asis )or recogni@ing an increase in income or eFuit( on t&e initial recognition o) an
asset" ?o3e0erH an( caitali@ation o) interestH e0en i) restricte! to interest on !e6t
)inancingH results in a cre!it to income or eFuit(" %&et&er t&e cre!it can 6e o))set
against interest e;ense or is resente! as a searate gain 3oul! not seem to 6e a
comelling reason in itsel) )or re-ecting an interest caitali@ation 6asis" Furt&erH it ma(
6e note! t&at all ot&er attri6utions o) cost to a sel)Cconstructe! asset un!er Le0el . are
su6-ect to t&e same entit( seci)ic reco0era6ilit( con!ition" I) t&e measure o) costH
inclu!ing interest caitali@e! on a concetuall( -usti)ia6le 6asisH is consi!ere! to 6e
reco0era6leH t&e 6asis )or !etermining reco0era6ilit( 3oul! not seem to ro0i!e a
comelling 6asis )or e;clu!ing t&e interest comonent"
#." In summar(H tra!itional &istorical cost interest caitali@ation issues are lace! in a
6roa!er ersecti0e 3&en a!!resse! 3it&in t&e conte;t o) t&e o0erarc&ing )air 0alue
measurement o6-ecti0e" It is roose!H 6ase! on t&e a6o0e anal(sisH t&at t&e case )or
caitali@ation o) interest at t&e mar4et rate o) return &as su))icient concetual merit to
3arrant its consi!eration 6( stan!ar! setters"
#=" A logical e;tension o) t&e rincile o) caitali@ing interest at t&e mar4et rate o) return
on assets un!er construction ma( 6e contemlate! 3it& resect to accounting )or assets
su6seFuent to initial recognition" Similar Fuestions 3it& resect to t&e e))ects o) interest
ariseH )or e;amleH in !ereciating assetsH suc& as lant an! eFuimentH t&at are e;ecte!
to contri6ute to t&e generation o) cas& in)lo3s o0er a erio! o) time" In ot&er 3or!sH
since cas& )lo3s to 6e recei0e! in t&e more !istant )uture are less 0alua6le t&an t&ose to
+,/
6e recei0e! in t&e nearer termH a logical case ma( 6e ma!e t&at !ereciation ro0isions
s&oul! re)lect t&e e))ects o) t&e time 0alue o) mone("
#,
Some &a0e a!0ocate! t&at
accounting )or !erecia6le assets 3oul! 6e su6stantiall( imro0e! i) resent 0alue
6ase! rinciles arallel to interest caitali@ation at mar4et rates o) return 3ere alie!
in !etermining !ereciation"
##
Caitali@ation o) interest at t&e mar4et rate o) return on
assets un!er construction isH in t&eir 0ie3H -ust one o) t&e imortant imlications o)
rational time 0alue o) mone( rinciles )or )inancial accounting" T&e( 6elie0e t&at
t&ese imlications s&oul! 6e consi!ere! toget&er in or!er to &a0e a co&erentH internall(
consistentH accounting mo!el"
Tran$a'tion Co$t$
#/" Transaction costsH as !e)ine! at aragra&s #*.C+,,H are e;clu!e! in measuring t&e )air
0alue o) an asset or lia6ilit( on initial recognition 6ecause mar4et articiants 3ill not
comensate t&e acFuirer or issuer )or t&ose costs" T&e e;ensing o) transaction costs isH
&o3e0erH inconsistent 3it& t&e tra!itional concet o) cost 6ecause transaction costs are
generall( consi!ere! to 6e art o) t&e )air 0alue o) consi!eration gi0en or recei0e! in
e;c&ange )or assets or lia6ilities"
#1" Accetance o) t&e )air 0alue o6-ecti0e on initial recognition seems to ut t&e tra!itional
t&in4ing on transaction costs in a !i))erent lig&t" Un!er Le0el . o) t&e roose!
&ierarc&(H cost is to 6e use! as a su6stitute )or )air 0alue 3&en certain con!itions are
met" One con!ition is t&at t&e measure o) cost s&oul! 6e e;ecte! to 6e reco0era6le Ain
t&e case o) an assetB or to reresent reasona6l( t&e amount o3e! Ain t&e case o) a
lia6ilit(B" It ma( 6e reasone! t&atH since transaction costs are not reco0era6le in t&e
mar4etlaceH cost s&oul! 6e !e)ine! to e;clu!e t&em )or t&e uroses o) al(ing Le0el
. o) t&e roose! &ierarc&(" In ot&er 3or!sH it is roose! t&at 3&en cost is use! as a
su6stitute )or )air 0alue on initial recognitionH its reco0era6ilit( s&oul! 6e -u!ge!H to t&e
e;tent ossi6leH in terms o) )air 0alue Amar4etB e;ectations"
#,
FASB CON $ !iscusses 8interest met&o!s o) allocation9 at aragra&s 5*C*/"
##
See Ross M" S4inner an! E" Ale; Mil6urnH Accounting Standards in EvolutionH +n! e!"H ages #*5C
+,/H an! sources cite! t&ereinH )or a !iscussion o) interestCa!-uste! !ereciation"
+,1
+overnment +rant$ to A'Fuire A$$et$
#$" In some countriesH go0ernments &a0e ro0i!e! 0arious )orms o) grants to su6si!i@e
entit( in0estment in certain assets" For e;amleH in a num6er o) countriesH go0ernment
grants &a0e 6een use! as incenti0es )or entities to construct lant an! eFuiment in
!isa!0antage! areas or )or certain manu)acturing uroses" Accounting stan!ar!s in a
num6er o) -uris!ictions &a0e reFuire! t&at suc& grants 6e accounte! )or on t&e 6asis o)
t&e rorietar( cost t&eor(" On t&is 6asisH suc& grants 3oul! eit&er 6e nette! against t&e
asset to re)lect t&e net cost to t&e o3nerH or treate! as a !e)erre! cre!it to 6e amorti@e!
on t&e same 6asis as t&e asset so as to ac&ie0e t&e same reorte! net income as t&e net
asset treatment"
#+

#5" A!oting t&e )air 0alue measurement o6-ecti0e on initial recognition 3oul! result in
Fuite a !i))erent aroac&" T&e )air 0alue o) an asset on initial recognition 3oul! 6e
a))ecte! 6( a go0ernment grant onl( to t&e e;tent t&at t&e terms o) t&e grant restrict use
o) t&e asset to less t&an its &ig&est an! 6est use in t&e mar4etlaceH in 3&ic& case mar4et
articiants coul! 6e e;ecte! to a( somet&ing less t&an t&e mar4et rice o) an
i!entical asset 3it& no restrictions on its use" AI)H in a!!ition to restricting t&e use o) t&e
assetH t&e entit( assume! a lia6ilit( un!er t&e terms o) t&e grantH t&en suc& lia6ilit(
3oul! 6e searatel( recogni@e! an! measure! on initial recognition"B Reorte! income
on initial recognition o) t&e asset 3oul! t&en inclu!e t&e grant recei0e!H t&e e))ects o)
an( !i))erences 6et3een t&e )air 0alue an! cost o) t&e assetH an! an( lia6ilit( ro0isions"
%&en )air 0alue is not relia6l( estima6le on initial recognitionH t&enH in accor!ance 3it&
t&e &ierarc&( roose! in t&is aerH a su6stitute measure alie! as consistentl( as
ossi6le 3it& t&e )air 0alue o6-ecti0eH 3oul! 6e use!" T&e 6est su6stitute ma( 6e costH or
a lo3er reco0era6le amount i) restrictions in t&e assetIs use re!uce its reco0era6le
amount 6elo3 cost" Deen!ing on t&e circumstancesH suc& measurement on initial
recognition coul! 6e Fuite !i))erent )rom siml( netting t&e grant against t&e asset"
#+
SeeH )or e;amleH IAS +,H Accounting for =overnment =rants and 1isclosure of =overnment
Assistance6
+,$
Non9monetary EA'!an.e$
#*" T&e general rule in )inancial accounting &as 6een t&at nonCmonetar( e;c&anges A6arter
transactionsB t&at are consi!ere! to &a0e su6stance are to 6e measure! at t&e )air 0alue
o) t&e asset acFuire! or t&e )air 0alue o) t&e asset gi0en uH 3&ic&e0er is more relia6l(
measura6le" Reasoning 3it&in t&e )air 0alue measurement o6-ecti0eH t&e )air 0alue o)
t&e asset acFuire! s&oul! 6e use! 3&en it can 6e estimate! 3it& acceta6le relia6ilit("
T&e )air 0alue o) t&e asset gi0en in e;c&ange is at Le0el . o) t&e &ierarc&( roose! in
t&is aerH an! 3oul! onl( 6e use! 3&en t&e )air 0alue o) t&e asset acFuire! is not
estima6le 3it& acceta6le relia6ilit(" O) courseH 3&en t&e t3o )air 0alues are t&e sameH
t&is is not a consi!eration" %&en neit&er t&e )air 0alue o) t&e asset acFuire! nor t&e asset
gi0en u is relia6l( estima6le on t&e !ate o) t&e transactionH an! a relia6le Le0el =
measurement is not ossi6leH t&en resuma6l( t&e asset acFuire! 3oul! 6e measure! at
t&e carr(ing amount o) t&e asset gi0en u" In t&at caseH no recognition 3oul! 6e gi0en to
a ne3 initial measurementH t&at isH t&e ne3 asset 3oul! siml( 6e su6stitute! )or t&e
asset gi0en u"
Summary
+," T&is aen!i; suggests t&at some issues o) tra!itional cost measurement ma( 3arrant
reCt&in4ing in lig&t o) t&e roose! )air 0alue measurement o6-ecti0e on initial
recognition o) assets an! lia6ilitiesH an! t&e roose! use o) cost as a su6stitute )or )air
0alue 3&en t&e )air 0alue o) an asset or lia6ilit( is not relia6l( measura6le on initial
recognition" Four ossi6le areas )or consi!eration &a0e 6een i!enti)ie! an! 6rie)l(
!iscusse! in t&is aen!i;H an! t&ere ma( 6e ot&ers"
+,5
A""en(iA 4
*i$t o% Re%eren'e$

Pu-)i$!e( $our'e$
Accounting Princiles Boar! o) t&e American Institute o) Certi)ie! Pu6lic Accountants"
Oinion No" +#H 'nterest on +eceiva!les and Pa(a!les" Ne3 Por4H #*$#"
Accounting Stan!ar!s Boar! AUnite! 2ing!omB" Financial Reorting Stan!ar! $H Fair
Values in Ac*uisition Accounting6 Lon!onH #**="
Accounting Stan!ar!s Boar! AUnite! 2ing!omB" Financial Reorting Stan!ar! #/H
Tangi!le Fi4ed Assets" Lon!onH #***"
Accounting Stan!ar!s Boar! AUnite! 2ing!omB" Statement of Principles for Financial
+eporting" Lon!onH #***"
Accounting Stan!ar!s Boar! AUnite! 2ing!omB" 1iscounting in Financial +eporting
A%or4ing PaerB" Lon!onH #**$"
Accounting Stan!ar!s Boar! Urgent Issues Tas4 Force AUnite! 2ing!omB" A6stract .=H
Pre,contract Costs6 Lon!onH +,,+"
Accounting Stan!ar!s E;ecuti0e Committee o) t&e American Institute o) Certi)ie!
Pu6lic Accountants" Proose! Statement o) Position AE;osure Dra)tBH Accounting
for Certain Costs and Activities +elated to Propert() Plant and E*uipment" Ne3
Por4H +,,#"
A4erlo)H George A" An Economic T%eorist:s 0ook of TalesH Cam6ri!ge Uni0ersit(
PressH Cam6ri!geH #*5="
Australian Accounting Researc& Foun!ation" Accounting T&eor( Monogra& #,H
Measurement in Financial Accounting" Caul)iel!H #**5"
Australian Accounting Researc& Foun!ation" Statement o) Accounting Concets SAC
+H .!/ective of =eneral Purpose Financial +eporting" Caul)iel!H #**,"
V
T&e list inclu!es all u6lis&e! sources consulte! !irectl(H lus a num6er o) unu6lis&e! aers"
+,*
Australian Accounting Researc& Foun!ation" Statement o) Accounting Concets SAC
.H -ualitative C%aracteristics of Financial 'nformation" Caul)iel!H #**,"
Australian Accounting Researc& Foun!ation" Statement o) Accounting Concets SAC
=H 1efinition and +ecognition of t%e Elements of Financial Statements" Caul)iel!H
#**/"
Bart&H Mar( E" an! %a(ne R" Lan!sman" 8Fun!amental Issues Relate! to Using Fair
>alue Accounting )or Financial Reorting9H Accounting <oriCons A0ol" *H no" =B"
American Accounting AssociationH SarasotaH Decem6er #**/"
Ba;terH %" T" 'nflation Accounting" P&ili Allan Pu6lis&ers Limite!H O;)or!H #*5="
BellH P&ili %" CVA) CCA and CoCoA; <o& Fundamental are t%e 1ifferences?
Australian Accounting Researc& Foun!ationH Mel6ourneH #*5+"
Cana!ian Institute o) C&artere! Accountants" C'CA <and!ook Accounting" Toronto"
Section #,,,H Financial Statement Concepts A#*55B"
C&am6ersH R" E" Accounting) Evaluation and Economic 0e%aviour6 PrenticeC?allH Inc"H
Engle3oo! Cli))sH #*11"
C&am6ersH R" E" Accounting for 'nflation; Met%ods and Pro!lems6 T&e Uni0ersit( o)
S(!ne(H S(!ne(H #*$/"
CooerH %"%" an! Pu-i I-iri Ae!B" 9o%ler:s 1ictionar( for Accountants) 5t% edition"
PrenticeC?allH Inc"H Engle3oo! Cli))sH #*5."
Crooc&H G" Mic&ael an! %a(ne S" Uton" 8Cre!it Stan!ing an! Lia6ilit(
Measurement9H $nderstanding t%e 'ssues A0olume =H series #B" Financial Accounting
Stan!ar!s Boar! AUnite! StatesBH Nor3al4H Eune +,,#"
Deutsc&es Rec&nungslegungs Stan!ar!s Committee e">" AGerman Accounting
Stan!ar!s CommitteeB" Proper Accounting Principles @Frame&orkA ADra)tBH
translate! e;certs D 8Recognition an! !isclosures in )inancial statements9 an!
8Measurement9" BerlinH +,,+"
+#,
E!3ar!sH E" O" an! P&ili %" Bell" T%e T%eor( and Measurement of 0usiness 'ncome6
Uni0ersit( o) Cali)ornia PressH Ber4ele(H #*1#"
Financial Accounting Stan!ar!s Boar! AUnite! StatesB" Present Value,0ased
Measurements in Accounting ADiscussion Memoran!umB" Nor3al4H #**,"
Financial Accounting Stan!ar!s Boar! AUnite! StatesB" Proose! Statement o)
Financial Accounting Stan!ar!sH Fair Value Measurements AE;osure Dra)tB"
Nor3al4H +,,="
Financial Accounting Stan!ar!s Boar! AUnite! StatesB" Statement o) Financial
Accounting Concets No" #H .!/ectives of Financial +eporting !( 0usiness
Enterprises" Stam)or!H #*$5"
Financial Accounting Stan!ar!s Boar! AUnite! StatesB" Statement o) Financial
Accounting Concets No" +H -ualitative C%aracteristics of Accounting 'nformation"
Stam)or!H #*5,"
Financial Accounting Stan!ar!s Boar! AUnite! StatesB" Statement o) Financial
Accounting Concets No" /H +ecognition and Measurement in Financial Statements
of 0usiness Enterprises" Stam)or!H #*5="
Financial Accounting Stan!ar!s Boar! AUnite! StatesB" Statement o) Financial
Accounting Concets No" 1H Elements of Financial Statements @a replacement of
FAS0 Concepts Statement Eo6 " incorporating an amendment of FAS0 Concepts
Statement Eo6 A" Stam)or!H #*5/"
Financial Accounting Stan!ar!s Boar! AUnite! StatesB" Statement o) Financial
Accounting Concets No" $H $sing Cas% Flo& 'nformation and Present Value in
Accounting Measurements" Nor3al4H +,,,"
Financial Accounting Stan!ar!s Boar! AUnite! StatesB" Statement o) Financial
Accounting Stan!ar!s No" .." Financial +eporting and C%anging Prices6 Stam)or!H
#*$*"
Financial Accounting Stan!ar!s Boar! AUnite! StatesB" Statement o) Financial
Accounting Stan!ar!s No" .=" CapitaliCation of 'nterest6 Stam)or!H #*$*"
+##
Financial Accounting Stan!ar!s Boar! AUnite! StatesB" Statement o) Financial
Accounting Stan!ar!s No" $#H Accounting for t%e Effects of Certain T(pes of
+egulation6 Stam)or!H #*5+"
Financial Accounting Stan!ar!s Boar! AUnite! StatesB" Statement o) Financial
Accounting Stan!ar!s No" 5*H Financial +eporting and C%anging Prices6 Stam)or!H
#*51"
FosterH Eo&n M" ANeelB an! %a(ne Uton" 8T&e Case )or Initiall( Measuring Lia6ilities
at Fair >alue9H $nderstanding t%e 'ssues A0olume +H series #B" Financial Accounting
Stan!ar!s Boar! AUnite! StatesBH Nor3al4H Ma( +,,#"
FosterH Eo&n M" ANeelB an! %a(ne S" Uton" 8Measuring Fair >alue9H $nderstanding
t%e 'ssues A0olume .H series #B" Financial Accounting Stan!ar!s Boar! AUnite!
StatesBH Nor3al4H Eune +,,#"
?annaH Eo&n R"H Duane B" 2enne!(H an! Gor!on D" Ric&ar!son" +eporting t%e Effects
of C%anging Prices; A +evie& of t%e E4perience &it% Section #31F AResearc&
ReortB" Cana!ian Institute o) C&artere! AccountantsH TorontoH #**,"
?ortonH Eoanne an! Ric&ar! Mac0e" 8OFair 0alueI )or )inancial instrumentsG &o3
erasing t&eor( is lea!ing to un3or4a6le glo6al accounting stan!ar!s )or er)ormance
reorting9H Australian Accounting +evie& A0ol" ##H no" +B" CPA AustraliaH
Mel6ourneH Eul( +,,,"
Institute o) C&artere! Accountants in Englan! an! %alesH Accounting Stan!ar!s
Committee" Statement o) Stan!ar! Accounting Practice No" #1H Current Cost
Accounting6 Lon!onH #*5,"
International Accounting Stan!ar!s Boar!" Frame&ork for t%e Preparation and
Presentation of Financial Statements" Lon!onH +,,#"
International Accounting Stan!ar!s Boar!" International Financial Reorting Stan!ar!sH
articularl( current an! roose! re0ise! 0ersions o)G
International Accounting Stan!ar! IAS +H 'nventories"
International Accounting Stan!ar! IAS ##H Construction Contracts"
+#+
International Accounting Stan!ar! IAS #1H Propert() Plant and E*uipment"
International Accounting Stan!ar! IAS #$H Leases"
International Accounting Stan!ar! IAS #*H Emplo(ee 0enefits"
International Accounting Stan!ar! IAS +,H Accounting for =overnment
=rants and 1isclosure of =overnment Assistance"
International Accounting Stan!ar! IAS ++H 0usiness Com!inations"
International Accounting Stan!ar! IAS +.H 0orro&ing Costs"
International Accounting Stan!ar! IAS +1H Accounting and +eporting !(
+etirement 0enefit Plans"
International Accounting Stan!ar! IAS +$H Consolidated Financial
Statements and Accounting for 'nvestments in Su!sidiaries"
International Accounting Stan!ar! IAS +5H Accounting for 'nvestments in
Associates"
International Accounting Stan!ar! IAS .#H Financial +eporting of 'nterests
in Goint Ventures"
International Accounting Stan!ar! IAS .1H 'mpairment of Assets"
International Accounting Stan!ar! IAS .$H Provisions) Contingent
Lia!ilities and Contingent Assets"
International Accounting Stan!ar! IAS .5H 'ntangi!le Assets"
International Accounting Stan!ar! IAS .*H Financial 'nstruments;
+ecognition and Measurement"
International Accounting Stan!ar! IAS =,H 'nvestment Propert("
International Accounting Stan!ar! IAS =#H Agriculture"
International Accounting Stan!ar!s Boar!" =lossar( of Terms6 Lon!onH +,,="
International Accounting Stan!ar!s Boar!" Preface to 'nternational Financial
+eporting Standards" Lon!onH +,,+"
International Accounting Stan!ar!s Boar!" Pro-ect U!ateH 0usiness Com!inations
@P%ase ''A Application of t%e Purc%ase Met%od" Lon!onH Eune =H +,,."
+#.
International Accounting Stan!ar!s Committee Steering Committee on Financial
Instruments" Accounting for Financial Assets and Financial Lia!ilities ADiscussion
PaerB" International Accounting Stan!ar!s CommitteeH Lon!onH #**$"
'nternational =lossar( of 0usiness Valuation Terms FF16 Pu6lis&e! -ointl( 6(
American Institute o) Certi)ie! Pu6lic AccountantsH American Societ( o) AraisersH
Cana!ian Institute o) C&artere! Business >aluatorsH National Association o) Certi)ie!
>aluation Anal(stsH an! T&e Institute o) Business Aarisers"
Eoint %or4ing Grou o) Stan!ar! Setters" 1raft Standard and 0asis for Conclusions
Financial 'nstruments and Similar 'tems" International Accounting Stan!ar!s
CommitteeH Lon!onH +,,,"
2a(H Eo&n" T%e Trut% A!out Markets; T%eir =enius) t%eir Limits) t%eir Follies6 Alan
LaneH Lon!onH +,,."
Lennar!H An!re3" Lia!ilities and %o& to account for t%em; an e4plorator( essa("
Accounting Stan!ar!s Boar! AUnite! 2ing!omBH Lon!onH +,,+"
Mil6urnH E" Ale;" 'ncorporating t%e Time Value of Mone( >it%in Financial Statements"
T&e Cana!ian Institute o) C&artere! AccountantsH TorontoH #*55"
Ne3 Lealan! Societ( o) Accountants" Statement of Concepts for =eneral Purpose
Financial +eporting" %ellingtonH #**."
No6esH C&risto&er" Asset Measurement 0ases in $9 and 'ASC Standards" Certi)ie!
Accountants E!ucational TrustH Lon!onH +,,#"
PenmanH Ste&en ?" Financial Statement Anal(sis and Securit( Valuation" McGra3C
?ill:Ir3inH Ne3 Por4H +,,#"
RICS Proert( >aluation Forum" Valuation of .&ner,occupied Propert( for Financial
Statements A>aluation In)ormation Paer No" #B" T&e Ro(al Institution o) C&artere!
Sur0e(orsH Co0entr(H +,,."
ScottH %illiam R" 8An International Comarison an! E0aluation o) Financial
Accounting Concets Statements9H Canadian Accounting Perspectives A0ol" #H no" +B"
Cana!ian Aca!emic Accounting AssociationH TorontoH +,,+"
+#=
S4innerH Ross M" an! E" Ale; Mil6urn" Accounting Standards in Evolution)
nd
edition6
Pearson E!ucation Cana!aH Inc"H TorontoH +,,#"
Steering Committee on Insurance Contracts o) t&e International Accounting Stan!ar!s
Committee" 1raft Statement of Principles on 'nsurance Contracts" International
Accounting Stan!ar!s Boar!H Lon!onH +,,#"
Sterling R" R" T%eor( of t%e Measurement of Enterprise 'ncome6 Uni0ersit( Press o)
2ansasH La3renceH 2an"H #*$,"
Store(H Ree! 2" an! S(l0ia Store(" T%e Frame&ork of Financial Accounting Concepts
and Standards ASecial ReortB" Financial Accounting Stan!ar!s Boar!H Nor3al4H
#**5"
T%e .4ford 1ictionar( of Current Englis%) +evised Edition6 O;)or! Uni0ersit( PressH
O;)or!H #**1"
T&omasH A" L" T%e Allocation Pro!lem in Financial Accounting T%eor( AStu!ies in
Accounting Researc& No" .B" American Accounting AssociationH E0anstonH #*1*"
T&omasH A" L" T%e Allocation Pro!lem; Part T&o AStu!ies in Accounting Researc& No"
*B" American Accounting AssociationH SarasotaH #*$="
TrottH E!3ar! %" an! %a(ne S" Uton" 8E;ecte! Cas& Flo3s9H $nderstanding t%e
'ssues A0olume #H series #B" Financial Accounting Stan!ar!s Boar! AUnite! StatesBH
Nor3al4H Ma( +,,#"
UtonH %a(ne S" 0usiness and Financial +eporting) C%allenges from t%e Ee&
Econom( ASecial ReortB" Financial Accounting Stan!ar!s Boar!H Nor3al4H +,,#"
UtonH %a(ne S" T%e FAS0 Pro/ect on Present Value 0ased Measurements) an Anal(sis
of 1eli!erations and Tec%ni*ues ASecial ReortB" Financial Accounting Stan!ar!s
Boar!H Nor3al4H #**1"
>e!ster:s Enc(clopedic $na!ridged 1ictionar( of t%e Englis% Language6 #*5*"
+#/
Un"u-)i$!e( $our'e$
American Accounting AssociationH Financial Accounting Stan!ar!s Committee"
Comments to t%e FAS0 on Measurement +elia!ilit(" Eune .H +,,."
Araisal Institute" Appraisal 'nstitute +esponse; Fair Value Measurements E4posure
1raft6 Setem6er $H +,,="
Australian Accounting Stan!ar!s Boar!" Fair Value) 1eprival Value and 1epreciated
+eplacement Cost ASta)) PaerB" Fe6ruar( +,,#"
C&ismanH Neil" T%e 0asis of Measurement in Accounting ADra)t reort )or t&e Institute
o) C&artere! Accountants in Englan! an! %alesB" Ma( +,,="
G=R# Grou o) Stan!ar! Setters" Agen!a Paer $ an! attac&mentsH Conceptual
Frame&ork Comparison AAASB sta)) aerB" Eanuar( +,,#"
IASB Re0aluation Grou" +evaluation =roup:s Proposals for Amendments to 'AS 15)
Propert() Plant and E*uipment ADra)t aer )or t&e IASBB" Eanuar( +,,."
Institute o) Actuaries o) Australia" Economic Valuation Concepts ADiscussion aerB"
S(!ne(H +,,+"
International Accounting Stan!ar!s Boar!" Agen!a Paer .H Measurement A +evie&
of Alternatives" Eune +,,#"
International Accounting Stan!ar!s Boar!" Agen!a Paer .AH Measurement T%e
1eprival Value and Fair Value of Propert() Plant and E*uipment" Eune +,,#"
International Accounting Stan!ar!s Boar!" Agen!a Paer 1H Measurement" Eul( +,,#"
International Accounting Stan!ar!s Boar!" Agen!a Paer 1AH Measurement" Eul(
+,,#"
International Accounting Stan!ar!s Boar!" Agen!a Paer +B AMeeting 3it& National
Stan!ar! SettersBH Concepts of 'ncome and Valuation of Assets; T%eoretical =round
for Mark,to,market Accounting and +ealiCation 0asis" Octo6er +,,#"
+#1
International Accounting Stan!ar!s Boar!" Agen!a Paer $A AMeeting 3it& National
Stan!ar! SettersBH +eport to t%e 'AS0 from t%e 'AS0 +evaluation =roup
Convergence; +evaluation of Propert() Plant and E*uipment" Octo6er +,,+"
International Accounting Stan!ar!s Boar!" Agen!a Paer $B AMeeting 3it& National
Stan!ar! SettersBH +eport to t%e 'AS0 from t%e +evaluation =roup Vie&s of t%e
$9 participants" Octo6er +,,+"
Summaries o) measurement o6-ecti0es ro0i!e! 6( t&e stan!ar! setting 6o!ies o)
AustraliaH Cana!aH German(H t&e Unite! 2ing!om an! t&e Unite! StatesH as 3ell as
t&e International Accounting Stan!ar!s Boar!" MalsoH all o) t&e u6lis&e! stan!ar!s
an! !ra)ts re)erre! to in t&e summariesH e;cet in t&e case o) German(N
%&ittingtonH Geo))re(" 1eprival Value and Fair Value; An Amendment and a
+econciliation ADra)t aerB" Fe6ruar( +,,."
+#$