Reporting the financial performance of a range of entities (C7)

Different Measurement Methods:

20 Key Points with Examples on Measurement Bases in Financial Reporting

Two Broad Measurement Bases
- Historical cost and current value are the two broad measurement bases identified in the Conceptual Framework.
- Example: Inventory is often measured at the lower of cost and net realizable value.
Mixed Measurement Basis
- IFRS Accounting Standards adopt a mixed measurement basis to provide relevant information to users.
- Example: Financial instruments may be measured at fair value, while property, plant, and equipment are measured at historical cost.
Challenges of Mixed Measurement
- Mixed measurement can make the totals in financial statements less meaningful.
- Example: Combining assets measured at cost with those measured at fair value may obscure the economic substance.
Benefits of Historical Cost
- Historical cost is easier to understand, more verifiable, and cheaper to implement.
- Example: The purchase price of a building recorded at historical cost is straightforward to verify.
Complexity of Cost-Based Measurements
- Issues arise in cases such as deferred payments or asset exchanges.
- Example: Recording a machine purchased on credit with interest involves additional calculations.
Subsequent Accounting Challenges
- Impairment testing and depreciation rely on management judgment and estimates.
- Example: Impairment testing for goodwill requires subjective forecasts of future cash flows.
Relevance of Current Value
- Current values like fair value are useful for assets intended for sale.
- Example: Investment properties held for capital appreciation are often measured at fair value under IAS 40.
Business Model Influence
- The measurement basis should align with how an asset or liability contributes to cash flows.
- Example: A factory used for production is measured at cost, while a factory held for sale is measured at fair value.
IAS 40 Investment Property Options
- Properties held for rental or capital appreciation can be measured at cost or fair value.
- Example: A mall held for rental income may be measured using the cost model or fair value model, depending on its purpose.
Measurement Uncertainty

High measurement uncertainty can reduce relevance.
Example: Estimating the recoverable amount of a cash-generating unit in an impairment test involves uncertainty.

Fair Value Hierarchy in IFRS 13

Level 2 and 3 fair value measurements involve significant estimation and uncertainty.
Example: Estimating the value of a private company’s shares involves unobservable inputs (Level 3).

Disclosure of Uncertainty

Disclosures help users understand the areas with measurement uncertainty.
Example: Notes to financial statements explain the valuation techniques used for Level 3 fair values.

Measurement Uncertainty and Relevance

Despite the uncertainty, some measurements remain relevant.
Example: Measuring derivative financial instruments at fair value provides useful information, even if uncertain.

Exclusion of Assets or Liabilities Due to Uncertainty

Extreme uncertainty may lead to non-recognition.
Example: Due to uncertainty about future benefits, research expenditures are not recognized as intangible assets.

Relevance and Faithful Representation

Measurement bases must provide relevant and faithfully represented information.
Example: The fair value of a marketable security faithfully represents its current market value.

Cost vs. Fair Value for Depreciating Assets

Depreciating assets, like machinery, are often measured at cost, not fair value, for practical reasons.
Example: A factory machine used in production is depreciated based on historical cost.

Impairment under IAS 36

Impairment losses are calculated using recoverable amounts, which are subject to estimation.
Example: Testing a patent for impairment involves estimating future cash flows.

Impact of Business Strategy

Measurement bases reflect the entity’s strategy for using the asset.
Example: Land held for development is measured differently than land held for investment purposes.

Fair Value for Financial Instruments

Financial instruments not traded in active markets require fair value estimates.
Example: The fair value of a corporate bond issued by a small company may require significant estimation.

Link Between Measurement and Disclosure

Disclosures bridge the gap between measurement uncertainty and user understanding.
Example: Disclosures about the valuation of biological assets under IAS 41 explain assumptions used in fair value calculations.

These points outline the mixed measurement approach's practical implications, benefits, and challenges in financial reporting under IFRS.

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