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MEASUREMENT THEORY
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[PLO 3]Menguasai konsep dan teknik penyusunan

informasi akuntansi dan memanfaatkan teknologi informasi
dan mengkomunikasikan hasilnya

[CLO 1] Mampu memahami dan menjelaskan konsep

konsep teori akuntansi untuk pengambilan keputusan.

[Sub CLO 1.7] Mampu memahami dan menjelaskan

measurement theory in accounting pada laporan
keuangan
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PENTINGNYA PENGUKURAN

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)

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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

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Scales

Setiap pengukuran dilakukan pada skala

Dibuat ketika aturan semantik digunakan untuk
menghubungkan pernyataan matematika dengan
objek atau peristiwa
Skala menunjukkan informasi apa yang diwakili oleh
angka-angka itu

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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

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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

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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

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Ratio scale

In this scale, rank orders objects with respect to a

given property
Intervals between objects are known and equal
A unique origin exists
e.g. measurement of length
e.g. use of dollars to measure assets and liabilities

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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

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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

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(1) Fundamental measurements

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

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(2) Derived measurements

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

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(3) Fiat measurements

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

In fiat measurement, the associative relation between the property

to be measured and one or more observable properties which
serve as indices of it is somewhat arbitrarily defined. The
measurement of the observable property is considered an index
of the underlying non-observable property.

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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

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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

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Reliable measurement

What is reliable measurement?

proven consistency
repeatable or reproducible
precision

Reliability incorporates two aspects

accuracy and certainty of measurement
representative faithfulness

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Accurate measurement

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

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Accurate measurement

Many accounting measurements are on a ratio scale

This is the most informative scale
Weakest theoretical foundation as they are fiat measurements

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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

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Measurement in accounting

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

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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

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Measurement issues for auditors

Auditors must determine whether management has made

appropriate and reasonable valuations
e.g. at least 12 methods of valuing intangibles

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Measurement issues for auditors

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

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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
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Key terms and concepts

Measurement
Nominal scale
Ordinal scale
Interval scale
Ratio scale
Invariance of a scale
Fundamental measurements
Derived measurements
Fiat measurements
Reliability in measurement
Accuracy in measurement
Capital and profit as derived measurements
Appropriate measurement in an auditing context

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ACCOUNTING MEASUREMENT SYSTEMS

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Three main income and capital

measurement systems

• The historic cost accounting system emerged after the

1929 Wall Street collapse
• In the 1960s several alternatives were developed
– current cost accounting
• financial capital maintenance (the purchasing power of
the financial capital)
• physical capital maintenance (the physical ability to
produce goods and services)
– exit price accounting
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Historic cost accounting

• Separation of ownership and control

– information asymmetry
• Most critical objective of accounting is
accountability - stewardship (conservatism)
• The income statement is paramount
– transaction based
– revenue recognition
– matching
– profit measurement
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Arguments for historic cost

accounting
• Relevant in making economic decisions
• Based on actual, not merely possible, transactions
• Data have been found to be useful
• The best understood concept of profit
• Must guard data against internal modifications
• Profit based on alternatives may not be useful
• Market prices can be supplementary data
• Insufficient evidence to reject it
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Objective of current cost

accounting
• CCA values assets at their current market buying price and
profit is determined using matching expense allocations based
on the current cost to buy
• Profit is more precisely defined as the change in capital over
the accounting period
• Managers are better able to evaluate their past decisions and
better use the firm’s resources to maximise future profits
• Shareholders, investors and others are able to make better
allocations of their resources
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Exit price accounting

• Exit price = selling price = fair market value

• Has two major departures from historic cost accounting:
– the values of non-monetary assets are selling prices and any
changes are included in profit as unrealised gains
– changes in the general purchasing power of money affect
both financial capital and profits
• Represents clean surplus accounting
• The income statement explains all of the differences existing
between the opening and closing balance sheets
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Objective of accounting
• Objective = data for adaptive decision making
• The assumption is that the business world is dynamic and
business must adapt to survive
• Firms and those associated with them go into markets to take
advantage of opportunities as they arise
• The ability to engage in market transactions is revealed by net
financial position (net current market value)
• Ultimately all accounting information users are interested in
cash and cash equivalent values
• In the final analysis, the economic survival and performance of
a firm depends on the amount of cash it can command
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International accounting
standards and current costs
• IASB/FASB have agreed that fair value is the best measurement
basis (2004)
– the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arm’s length transaction
• Historic cost accounting still generally applied
• Distinct movement toward current value systems
• IASB moving toward exit prices (2004)
• But still a mixed valuation approach
• Fair value means – current market entry price, current market
selling price, historic cost and discounted future cash flows
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Historic cost under attack

• The era of historic cost accounting has ‘ended’

– it produces irrelevant, unreliable, non-comparable
and non-understandable data
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A mixed measurement system

and international standards
• Market values - exit prices - are implied in the
‘fair value’ approach in international financial
reporting standards
• A lack of a theoretical concept of valuation,
capital maintenance and profit measure, has
resulted in a still mixed measurement system
and a lack of consistency
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Issues for auditors

• The mixed measurement model creates

misstatement so that auditors struggle to meet
one of their primary objectives
– determining whether the financial statements
present a true and fair view