created at the measurement date or the consideration that would be received for
incurring or taking on an equivalent liability. [CF 6.40].
Like historical cost, current cost provides information about the cost of an asset
consumed or about income from the fulfilment of liabilities. That information can be
used to derive current margins and can be used as an input in predicting future margins.
Unlike historical cost, current cost reflects prices prevailing at the time of consumption
or fulfilment. When price changes are significant, margins based on current cost may be
more useful for predicting future margins than margins based on historical cost. [CF 6.41].
To report the current cost of consumption (or current income from fulfilment), it is
necessary to split the change in the carrying amount in the reporting period into the
current cost of consumption (or current income from fulfilment), and the effect of
changes in prices. The effect of a change in prices is sometimes referred to as a ‘holding
gain’ or a ‘holding loss’. [CF 6.42].
9.3
Factors to consider in selecting measurement bases
In selecting a measurement basis it is necessary to consider not just the nature of the
information that it will produce (discussed at 9.2 above), but also other factors (including
the qualitative characteristics discussed at 5 above). [CF 6.43]. These other factors set out
in the Framework are discussed in this section and comprise:
• relevance (see 9.3.1 below);
• faithful representation (see 9.3.2 below);
• enhancing characteristics and the cost constraint (see 9.3.3 below);
These discussions focus on the factors to be considered in selecting a measurement
basis for recognised assets and recognised liabilities. Some of those discussions
may also apply in selecting a measurement basis for information provided in the
notes, for recognised or unrecognised items. [CF 6.47].
• factors specific to initial measurement (see 9.3.4 below); and
• the use of more than one measurement basis (see 9.3.5 below).
In most cases, no single factor will determine which measurement basis should be
selected. The relative importance of each factor will depend on facts and circumstances.
[CF 6.44].
The information provided by a measurement basis must be useful to users of financial
statements. To achieve this, the information must be relevant and it must faithfully
represent what it purports to represent. In addition, the information provided should
be, as far as possible, comparable, verifiable, timely and understandable. [CF 2.4, 6.45].
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As noted at 5.1.3 above, the Framework states that the most efficient and effective
process for applying the fundamental qualitative characteristics would usually be to
identify the most relevant information about an economic phenomenon. If that
information is not available or cannot be provided in a way that faithfully represents the
economic phenomenon, the next most relevant type of information is considered. The
role played in the selection of a measurement basis by the fundamental qualitative
characteristics is discussed at 9.3.1 and 9.3.2 below. That played by the enhancing
characteristics and the cost constraint is discussed at 9.3.3. [CF 6.46].
Additional factors to consider in selecting a measurement basis on initial recognition are
discussed at 9.3.4 below. If the initial measurement basis is inconsistent with the
subsequent measurement basis, income and expenses might be recognised at the time
of the first subsequent measurement solely because of the change in measurement basis.
Recognising such income and expenses might appear to depict a transaction or other
event when, in fact, no such transaction or event has occurred. Hence, the choice of
measurement basis for an asset or liability, and for the related income and expenses, is
determined by considering both initial measurement and subsequent measurement.
[CF 6.48, 6.77].
9.3.1 Relevance
The relevance of information provided by a measurement basis for an asset or liability
and for the related income and expenses is affected by:
• the characteristics of the asset or liability (see 9.3.1.A below); and
• how that asset or liability contributes to future cash flows (see 9.3.1.B below).
[CF 6.49].
9.3.1.A
Characteristics of the asset or liability
The relevance of information provided by a measurement basis depends partly on the
characteristics of the asset or liability, in particular, on the variability of cash flows and
on whether the value of the asset or liability is sensitive to market factors or other risks.
[CF 6.50].
If the value of an asset or liability is sensitive to market factors or other risks, its
historical cost might differ significantly from its current value. Consequently, historical
cost may not provide relevant information if information about changes in value is
important to users of financial statements. For example, amortised cost cannot provide
relevant information about a financial asset or financial liability that is a derivative.
[CF 6.51].
Furthermore, if historical cost is used, changes in value are reported not when that value
changes, but when an event such as disposal, impairment or fulfilment occurs. This
could be incorrectly interpreted as implying that all the income and expenses
recognised at the time of that event arose then, rather than over the periods during
which the asset or liability was held. Moreover, because measurement at historical cost
does not provide timely information about changes in value, income and expenses
reported on that basis may lack predictive value and confirmatory value by not
depicting the full effect of the entity’s exposure to risk arising from holding the asset or
liability during the reporting period. [CF 6.52].
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Changes in the fair value of an asset or liability reflect changes in expectations of market
participants and changes in their risk preferences. Depending on the characteristics of
the asset or liability being measured and on the nature of the entity’s business activities,
information reflecting those changes may not always provide predictive value or
confirmatory value to users of financial statements. This may be the case when the
entity’s business activities do not involve selling the asset or transferring the liability, for
example, if the entity holds assets solely for use or solely for collecting contractual cash
flows or if the entity is to fulfil liabilities itself. [CF 6.53].
9.3.1.B
Contribution to future cash flows
As noted at 4.2.1 above, some economic resources produce cash flows directly; in other
cases, economic resources are used in combination to produce cash flows indirectly.
How economic resources are used, and hence how assets and liabilities produce cash
flows, depends in part on the nature of the business activities conducted by the entity.
[CF 6.54].
When a business activity of an entity involves the use of several economic resources
that produce cash flows indirectly, by being used in combination to produce and market
&nbs
p; goods or services to customers, historical cost or current cost is likely to provide
relevant information about that activity. For example, property, plant and equipment is
typically used in combination with an entity’s other economic resources. Similarly,
inventory typically cannot be sold to a customer, except by making extensive use of the
entity’s other economic resources (for example, in production and marketing activities).
The manner in which measuring such assets at historical cost or current cost can provide
relevant information that can be used to derive margins achieved during the period is
discussed at 9.2.1 and 9.2.2 above. [CF 6.55].
For assets and liabilities that produce cash flows directly, such as assets that can be sold
independently and without a significant economic penalty (for example, without
significant business disruption), the measurement basis that provides the most relevant
information is likely to be a current value that incorporates current estimates of the
amount, timing and uncertainty of the future cash flows. [CF 6.56].
When a business activity of an entity involves managing financial assets and financial
liabilities with the objective of collecting contractual cash flows, amortised cost may
provide relevant information that can be used to derive the margin between the interest
earned on the assets and the interest incurred on the liabilities. However, in assessing
whether amortised cost will provide useful information, it is also necessary to consider
the characteristics of the financial asset or financial liability. Amortised cost is unlikely
to provide relevant information about cash flows that depend on factors other than
principal and interest. [CF 6.57].
9.3.2 Faithful
representation
When assets and liabilities are related in some way, using different measurement bases
for those assets and liabilities can create a measurement inconsistency (accounting
mismatch). If financial statements contain measurement inconsistencies, those financial
statements may not faithfully represent some aspects of the entity’s financial position
and financial performance. Consequently, in some circumstances, using the same
The IASB’s Conceptual Framework
93
measurement basis for related assets and liabilities may provide users of financial
statements with information that is more useful than the information that would result
from using different measurement bases. This may be particularly likely when the cash
flows from one asset or liability are directly linked to the cash flows from another asset
or liability. [CF 6.58].
As noted at 5.1.2 above, although a perfectly faithful representation is free from error,
this does not mean that measures must be perfectly accurate in all respects. [CF 6.59].
When a measure cannot be determined directly by observing prices in an active market
and must instead be estimated, measurement uncertainty arises. The level of
measurement uncertainty associated with a particular measurement basis may affect
whether information provided by that measurement basis provides a faithful
representation of an entity’s financial position and financial performance. A high level
of measurement uncertainty does not necessarily prevent the use of a measurement
basis that provides relevant information. However, in some cases the level of
measurement uncertainty is so high that information provided by a measurement basis
might not provide a sufficiently faithful representation (see 5.1.3 above). In such cases,
it is appropriate to consider selecting a different measurement basis that would also
result in relevant information. [CF 6.60].
Measurement uncertainty is different from both outcome uncertainty and existence
uncertainty:
• outcome uncertainty arises when there is uncertainty about the amount or timing of
any inflow or outflow of economic benefits that will result from an asset or liability.
• existence uncertainty arises when it is uncertain whether an asset or a liability
exists (see 8.2.1.A above). The manner in which existence uncertainty may affect
decisions about whether an entity recognises an asset or liability when it is
uncertain whether that asset or liability exists. [CF 6.61].
The presence of outcome uncertainty or existence uncertainty may sometimes
contribute to measurement uncertainty. However, outcome uncertainty or existence
uncertainty does not necessarily result in measurement uncertainty. For example, if the
fair value of an asset can be determined directly by observing prices in an active market,
no measurement uncertainty is associated with the measurement of that fair value, even
if it is uncertain how much cash the asset will ultimately produce and hence there is
outcome uncertainty. [CF 6.62].
9.3.3
Enhancing characteristics and the cost constraint
The enhancing qualitative characteristics of comparability, understandability and
verifiability, and the cost constraint, have implications for the selection of a
measurement basis (discussed at 5.2 above). The enhancing qualitative characteristic of
timeliness has no specific implications for measurement. [CF 6.63].
Just as cost constrains other financial reporting decisions, it also constrains the selection
of a measurement basis. Hence, in selecting a measurement basis, it is important to
consider whether the benefits of the information provided to users of financial
statements by that measurement basis are likely to justify the costs of providing and
using that information. [CF 6.64].
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Consistently using the same measurement bases for the same items, either from period
to period within a reporting entity or in a single period across entities, can help make
financial statements more comparable. [CF 6.65].
A change in measurement basis can make financial statements less understandable.
However, a change may be justified if other factors outweigh the reduction in
understandability, for example, if the change results in more relevant information. If a
change is made, users of financial statements may need explanatory information to
enable them to understand the effect of that change. [CF 6.66].
Understandability depends partly on how many different measurement bases are used
and on whether they change over time. In general, if more measurement bases are used
in a set of financial statements, the resulting information becomes more complex and,
hence, less understandable and the totals or subtotals in the statement of financial
position and the statement(s) of financial performance become less informative.
However, it could be appropriate to use more measurement bases if that is necessary to
provide useful information. [CF 6.67].
Verifiability is enhanced by using measurement bases that result in measures that can
be independently corroborated either directly, for example, by observing prices, or
indirectly, for example, by checking inputs to a model. If a measure cannot be verified,
users of financial statements may need explanatory information to enable them to
understand how the measure was determined. In some such cases, it may be necessary
to specify the use of a different measurement basis. [CF 6.68
].
9.3.3.A Historical
cost
In many situations, it is simpler, and hence less costly, to measure historical cost than it
is to measure a current value. In addition, historical cost is generally well understood
and, in many cases, verifiable. [CF 6.69].
However, estimating consumption and identifying and measuring impairment losses or
onerous liabilities can be subjective. Hence, the historical cost of an asset or liability can
sometimes be as difficult to measure or verify as a current value. [CF 6.70].
Using a historical cost measurement basis, identical assets acquired, or liabilities
incurred, at different times can be reported in the financial statements at different
amounts. This can reduce comparability, both from period to period for a reporting
entity and in a single period across entities. [CF 6.71].
9.3.3.B Current
value
Because fair value is determined from the perspective of market participants, not from
an entity-specific perspective, and is independent of when the asset was acquired or
the liability was incurred, identical assets or liabilities measured at fair value will, in
principle, be measured at the same amount by entities that have access to the same
markets. This can enhance comparability both from period to period for a reporting
entity and in a single period across entities. In contrast, because value in use and
fulfilment value reflect an entity-specific perspective, those measures could differ for
identical assets or liabilities in different entities. Those differences may reduce
comparability, particularly if the assets or liabilities contribute to cash flows in a similar
manner. [CF 6.72].
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95
If the fair value of an asset or liability can be determined directly by observing prices in
an active market, the process of fair value measurement is low-cost, simple and easy to
understand; and the fair value can be verified through direct observation. [CF 6.73].
Valuation techniques, sometimes including the use of cash-flow-based measurement
techniques, may be needed to estimate fair value when it cannot be observed directly
in an active market and are generally needed when determining value in use and
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 20
