Week 2

Measurement

The Accounting Cycle!

Measurement
• Recall from Week 1:
• Need to measure elements of financial
statements
• Need to decide on a measurement basis for
each element
• Need to disclose uncertainty in measurement
• General principle: choose a basis that is useful
to users
• Remember the QCs? Relevance, representational
faithfulness
• Comparable, verifiable, timely, understandable
Measurement
• A “mixed-attribute” model:
• Some things are at historical cost (e.g., property,
plant, and equipment at cost)
• Some things are at current value (e.g., investments)
• Some things are partly historical cost and partly
current value (e.g., inventory at lower of cost and net
realizable value, impaired property, plant, and
equipment)
• Good or bad?
Measurement
• Measurement models:
• Income: estimate present value of future cash flows
• Market: use market value of similar transactions
• Cost: cost to replace asset’s service capacity
• Best model depends on item
Measurement
• Disclosures about measurement:
• Sources of measurement uncertainty
• Accounting policies for measurement
• How did you measure it?
• Assumptions about the future
• Source: IAS 1; ASPE 1505 and 1508
• Note: “IFRS”, “IAS”, “IFRIC”, and “SIC” are all IFRS
standards
• Examples of measurement uncertainty:
• Future cash flows for impairments
• Amount recoverable for obsolete inventory
• Outcome of litigation settlements
IFRS 13: Fair value
measurement
Fair value:
• The price that would be received to sell an
asset or paid to transfer a liability in an orderly
transaction between market participants at the
measurement date
• Exit price/
IFRS 13: Fair value
measurement
• Consider characteristics of asset or liability
being measured:
• Condition and location of asset
• Restrictions on use or sale of asset
• Principal market for asset/liability
• Usually the most advantageous market
• The most appropriate valuation technique
• Highest and best use (for non-financial assets)
• physically possible, legally permissible and financially
feasible
• IFRS 13.28
IFRS 13: Fair value
measurement
• Disclosure about inputs to come up with FV:
• Level 1: Observable inputs that reflect quoted
prices for identical assets and liabilities
• Level 2: Inputs other than quoted prices
observable for assets and liabilities
• E.g., quoted prices for similar assets/liabilities in
active markets
• Level 3: Unobservable inputs
• Source: IFRS 13.93
• More reliable inputs are preferred
• Level 1: least subjective; Level 3: most
subjective
Measurement
• IFRS has a well developed framework for fair
value measurement
• Guidance concentrated in IFRS 13
• ASPE provides less detail on fair value
measurement
• Guidance is spread throughout ASPE standards
• Generally, not inconsistent with IFRS
• We’re going to cover a lot of measurement in
this course
• We’re going to cover specific IFRS/ASPE
differences