measurement

Rana Muhammed Helal Ali

Salma Nabil Abd elmoneem
Salma Abdallah Hussien AbdAlsayed
 analyse the concept of measurement in
the context of financial reporting and
demonstrate an understanding of its
many benefits and limitations ?
• Conceptual framework definition:

the process of determining the monetary

amounts at which the elements of the financial
statements are to be recognised and carried in
the balance sheet and income statement.
• Benefits of Measurement

1. Makes financial statements decision useful.

2. Assess an entity's financial performance and position .
3. Compare the entity's performance and position over time.
4. Compare entities.
 • Limitations of Measurement
1. The inherent flexibility and the nature of a mixed measurement approach
reduces comparability.
2. Measurement can be quite subjective.
3. With flexibility comes opportunistic accounting choices.
4. The current approach results in the additivity problem.
 describe the standard setters'
approach to measurement and
evaluate different measurement
approaches ?
 • Measurement Approaches And Accounting
Standards
• The Conceptual Framework does not provide guidance as to which
measurement bases should be used
• In reality a range of bases are used
• Historic cost remains dominant
• Steady shift towards fair value
 • Historical Cost
Defined in the Conceptual Framework as:
- Assets are recorded at the amount of cash or cash equivalents
paid or the fair value of consideration given to acquire them at
the time of their acquisition.-
- Liabilities are recorded at the amount of proceeds received in
exchange for the obligation, or in some circumstances (for
example, income taxes), at the amounts of cash or cash
equivalents expected to be paid to satisfy the liability in the
normal course of business.
• Current Cost — Replacement Cost

Defined in the Conceptual Framework as:

- Assets are carried at the amount of cash or cash equivalents
that would have to be paid if the same or an equivalent
asset was acquired currently.
- - Liabilities are carried at the undiscounted amount of cash
or cash equivalents that would be required to settle the
obligation currently.
• Fair Value — Realisable or Settlement
Value

Defined in the Conceptual Framework as:

- Assets are carried at the amount of cash or cash equivalents that could
currently be obtained by selling the asset in an orderly disposal.
- Liabilities are carried at their settlement values; that is, the undiscounted
amounts of cash or cash equivalents expected to be paid to satisfy the
liabilities in the normal course of business.
• Present Value

Defined in the Conceptual Framework as:

- Assets are carried at the present discounted value of the future net cash in
flows that the item is expected to generate in the normal course of business.
- Liabilities are carried at the present discounted value of the future net cash
out flows that are expected to be required to settle liabilities in the normal
course of business.
 • Deprival Value

Essentially the loss that would be suffered if an entity was deprived of

the asset.
Determination of the deprival value of an asset may incorporate:
• present value if the item was held for use
• net realisable value if the item was held for sale
• replacement cost associated with replacing the item or the services that were
received from the item.
 • Measurement and International Accounting
Standards

IASBs use a mixed measurement model

• different measurement bases are employed to different degrees
and in varying combinations during the preparation of the financial
statements.
This leaves a large amount of flexibility and choice within
particular standards
 • Future Directions on Measurement

• Measurements an important part of the IASB Conceptual Framework Project

• Approaches tentatively considered:
 Actual or estimated current prices
 Actual past entry prices with adjustment
Prescribed computations or calculations based on discounted or undiscounted estimates of
future cash flows
• Decision criteria and influences on choice of
measurement approach
 evaluate the impact of measurement
choice on the quality of accounting
information?
 Measurement And The Quality Of Accounting
Information
• Measurement is an important aspect in the production of accounting information
• Measurement choices impact
• Relevance
• Faithful Representation
• Understandability
• Comparability
• this means that measurement plays a key role and choices made in relation to measurement to
determine whether the financial statements fulfill that decision usefulness objective which is the
purpose for which they are prepared
 • Historic Cost

• Relevance
– Low: Especially as time passes
• Faithful Representation
– High: Measures an objective transaction
• Understandability
– High: Concept well known and understood
• Comparability
– Medium: Purchasing power of money changes
 • Current Cost

• Relevance
– High: Indicative of future potential
• Faithful Representation
– High: Determined by reference to actual costs
• Understandability
– Low: Can be subjective, depends
• Comparability
– Medium: Can be subjective, depends
 • Present Value

• Relevance
– High: Indicative of future potential
• Faithful Representation
– Low: Can be very subjective
• Understandability
– Medium: Assumptions used can be complex
• Comparability
– Medium: Involves many different assumptions
 • Deprival Value

• Relevance
– Low: Not related to business case
• Faithful Representation
– Low: Can be very subjective
• Understandability
– Low: Assumptions used can be complex
• Comparability
– Low: Involves many different assumptions
 • Fair Value

• There appears to have been a distinct move from historical cost to

fair value accounting.
• Valuation Methods
– Market Approach
– Cost Approach
– Income Approach
 • Arguments for Fair Value

• Relevance
– Focuses on future potential
• Faithful Representation
– Determined using objective market prices
• Understandability
– Simply representation of current market value
• Comparability
– Focus on market value not individual entity
 • Arguments Against Fair Value

• Relevance
– Hypothetical and not relevant to specific entity
• Faithful Representation
– If no objective market prices then highly subjective
• Understandability
– Often based on complex assumptions and calculation
• Comparability
– Different models lead to very different results
 explain the controversial nature of
fair value as a measurement
approach and consider the
arguments for and against a shift
toward fair value under the
accounting standards ?
• Stakeholders And The Political Nature Of Accounting
Measurement

• Users have different and sometimes conflicting needs when it comes to

accounting information.
• The impact and relevance of measurement to investors and other users of
the financial statements is obvious.
 • Existing and Potential Investors

• Concerned with the risk inherent in, and the return provided by, their
investments.
• They want accounting information that:
Assists them in deciding whether to buy, hold, or sell their shares.
Enables them to assess the entity's ability to pay dividends..
 • Creditors/Lenders

• Interested in information that enables them to determine whether amounts

owing to them will be paid when due.
• Particularly interested in the entity's net position
Liabilities it has compared to its assets.
• Fair value would seem to be the most useful approach, assuming that items
can be reliably measured
 explain the political nature of
accounting measurement by
developing an understanding of the
different stakeholders in the
financial reporting pro ?
 • The Political Nature of Accounting
Measurement

• Different interest groups may favour different accounting measurement

approaches.
• Fair value has been particular focus during the GFC.
1) May not be reliable
2) May have hidden problems
3) May be difficult to regulate
4) May have made economic crisis worse
 describe the issues which contribute
to the controversial nature of
accounting measurement ?
• Why Measurement Is A Controversial Accounting Issue
• Inappropriate choices of method
• Tension between flexibility and potential to mislead
• Variability in practice Tradition has led to difference
• Subjectivity involved
• Impact of measurement on organisation Short/long term impact on profit
 analyse current measurement
challenges faced by the accounting
profession with particular reference
to environmental sustainability,
green assets, intangible assets and
water assets ?
• A "green asset" typically refers to an asset that has environmentally
friendly characteristics or contributes positively to environmental
sustainability. These assets are often associated with renewable energy,
energy efficiency, clean technology .
• Intangible Assets
• Complexity and variation exists in terms of how intangible assets are
measured on recognition
• Recognizing and measuring the cost of intangible assets :
1. Separate acquisition
2. Acquisition as part of a business combination.
3. Internally generated
• Water Assets
• Water accounting standards are being developed in several countries, with
no single body taking responsibility for international standards.
• Measurement and Valuation
• Wide range of stakeholders
• How should value be determined
• Water quality and recognition