CHAPTER 5

Measurement Theory
Accounting Theory

Nabila Yasmina M

120110180068
Inka Faradilla Putri

1201101800XX
 # IMPORTANCE OF MEASUREMENT

Campbell:
The assignment of numerals to represent properties
of material systems other than numbers.

Assignment of numerals to objects

or events according to rules.
(Stevens)
< > IMPORTANCE OF MEASUREMENT

• Involves linking the formal number system to some property of

objects or events by means of semantic rules
e.g. semantic rules in accounting are represented by transactions

• In accounting we measure profit by:

first assigning a value to capital
then calculating profit as the change in capital over the period
 # SCALE

• Every measurement is made on a scale

• Created when a semantic rule is used to relate the

mathematical statement to objects or events

• The scale shows what information the numbers

represent
< >
NOMINAL SCALE

• In this scale, numbers used only as labels

• Numbers represent classification

• e.g. numbering footballers

• e.g. the classification of assets and liabilities into different

classes
< >
ORDINAL SCALE

• In this scale, rank orders objects with respect to a given

property
- e.g. tallest to shortest person
- e.g. investment alternatives that are ranked 1, 2, 3
according to the size of their net present values

• Intervals between the numbers are not necessarily equal

< >
INTERVAL SCALE

• In this scale, rank orders objects with respect to a given

property
• The distance between each interval is equal and known
• An arbitrarily selected zero point exists on the scale
- e.g. celsius temperature scale
- e.g. standard cost accounting
< > PERMISSIBLE OPERATIONS OF SCALES

• Invariance of a scale means that the measurement system will provide the same
general form of the variables, and the decision maker will make the same
decisions

• This is not the case in accounting – there is more than one accounting system

• The information they provide will differ and different decisions will be made

• Nominal and ordinal scales

- no arithmetic operations
• Interval scale
- addition and subtraction
• Ratio scale
- all arithmetic operations
 # TYPES OF MEASUREMENT

• There must be a rule to assign numbers before

there can be measurement

• The formulation of the rules gives rise to a scale

• Measurement can be made only on a scale

 # FUNDAMENTAL MEASUREMENT

• Numbers are assigned by reference to natural laws

• Fundamental properties are additive

- e.g. length, number and volume

• In accounting there is considerable debate over the nature

of fundamental value
 # DERIVED MEASUREMENT

• Is one that depends on the measurement of two or more other

quantities

• Depends on known relationships to fundamental properties

- e.g. the measurement of density depends on the measurement of
both mass and volume
- e.g. the measurement of profit depends on the measurement of
both income and expenses
 # FIAT MEASUREMENT

• Typical in social sciences including accounting

• Based on arbitrary definitions - e.g. of profit

• Numerous ways in which scales can be constructed

• May lead to poor levels of confidence in the scale – e.g. there

are hundreds of ways to measure profit
 # RELIABILITY AND ACCURACY
• No measurement is free of error except counting
e.g. we can count the chairs in a room and be exactly correct

• What is reliable measurement?

- proven consistency
- repeatable or reproducible
- precision

• Reliability incorporates two aspects

- accuracy and certainty of
measurement
- representative faithfulness

RELIABLE MEASUREMENT
< > RELIABILITY AND ACCURACY

• Consistency of results, precision and

reliability do not necessarily lead to
accuracy
• Accuracy has to do with how close the measurement is to the ‘true
value’ of the attribute measure - representation
• ‘True value’ may not be known
- e.g. in accounting accuracy relates to the pragmatic notion of
usefulness
• Many accounting measurements are on a ratio scale
• This is the most informative scale
• Weakest theoretical foundation as they are fiat measurements

ACCURATE MEASUREMENT
 # SOURCES OF ERROR

• The sources of error include the following:

- Measurement operations stated imprecisely
- Measurer
- Instrument
- Environment
- Attribute unclear
- Risk and uncertainty

We need to establish limits of acceptable error

 # MEASUREMENT IN ACCOUNTING

• Two fundamental measures

- capital & profit

• Capital and profit can be defined & derived in various ways

• Concepts of capital & profit have changed over time

- number of concepts of fundamental measurement

• Two notable developments in international standards (2005, IASB)

- profit measurement and revenue recognition should be linked to timely
recognition
- the fair value approach should be adopted as the working measurement
principle

At no stage has the principle of capital maintenance been explicitly discussed

 # MEASUREMENT ISSUES FOR AUDITORS

• The focus of profit measurement has shifted from matching revenues and expenses to assessing
the changes in the fair value of net assets
- e.g. immediate recognition of impairment losses

• Auditors must determine whether management has made appropriate and reasonable valuations
- e.g. at least 12 methods of valuing intangibles

• It is possible for several different but reasonable measurements and impairment losses to be
recognised by management
• These would all be acceptable to an auditor if management have
- applied the valuation models correctly
- used appropriate data
- made appropriate assumptions
- acted in a consistent manner
 SUMMARY

• Measurement involves the formal linking of numbers to some property

or event via semantic rules
• Rules used to assign numbers are determined according to four scales
• Invariance of a scale means the measurement system will provide the
same general form of the variables and the decision maker will make the
same decisions
• There are three different types of measurement
• Reliability refers to consistency, and accuracy refers to the
representation of a fundamental value
• The two fundamental measures in accounting are capital and profit and
they are both derived measures
• The existence of alternative valuation methods creates auditing issues