Measurement choices for recording transactions discusses factors to consider when selecting a measurement basis, whether for initial recognition or subsequent measurement. Here some additional factors to consider at initial recognition are considered.
At initial recognition, the cost of an asset acquired, or of a liability incurred, as a result of an event that is a transaction on market terms is normally similar to its fair value at that date, unless transaction costs are significant. Nevertheless, even if those two amounts are similar, it is necessary to describe what measurement basis is used at initial recognition. If historical cost will be used subsequently, that measurement basis is also normally appropriate at initial recognition. Similarly, if a current value will be used subsequently, it is also normally appropriate at initial recognition. Using the same measurement basis for initial recognition and subsequent measurement avoids recognising income or expenses at the time of the first subsequent measurement solely because of a change in measurement basis.
When an entity acquires an asset, or incurs a liability, in exchange for transferring another asset or liability as a result of a transaction on market terms, the initial measure of the asset acquired, or the liability incurred, determines whether any income or expenses arise from the transaction. When an asset or liability is measured at cost, no income or expenses arise at initial recognition, unless income or expenses arise from the derecognition of the transferred asset or liability, or unless the asset is impaired or the liability is onerous. Factors specific to initial measurement
Assets may be acquired, or liabilities may be incurred, as a result of an event that is not a transaction on market terms. For example:
- the transaction price may be affected by relationships between the parties, or by financial distress or other duress of one of the parties;
- an asset may be granted to the entity free of charge by a government or donated to the entity by another party;
- a liability may be imposed by legislation or regulation; or Factors specific to initial measurement
- a liability to pay compensation or a penalty may arise from an act of wrongdoing.
In such cases, measuring the asset acquired, or the liability incurred, at its historical cost may not provide a faithful representation of the entity’s assets and liabilities and of any income or expenses arising from the transaction or other event. Hence, it may be appropriate to measure the asset acquired, or the liability incurred, at deemed cost. Any difference between that deemed cost and any consideration given or received would be recognised as income or expenses at initial recognition. Factors specific to initial measurement
When assets are acquired, or liabilities incurred, as a result of an event that is not a transaction on market terms, all relevant aspects of the transaction or other event need to be identified and considered.
For example, it may be necessary to recognise other assets, other liabilities, contributions from holders of equity claims or distributions to holders of equity claims to faithfully represent the substance of the effect of the transaction or other event on the entity’s financial position (see Substance of contractual rights and contractual obligations) and any related effect on the entity’s financial performance.