The Standards in International Financial Reporting Standards (IFRS) are one collection of financial reporting practices. They keep important because of the growing number of companies around the world (especially listed companies) that are required to comply with them, and the growing number of countries, that continue to model their own more general financial reporting requirements on them.
IFRS incorporates and builds on the accumulated, often inconsistent practical solutions devised by national standard-setters to deal with financial reporting problems that have emerged over many years, solutions which are in turn built on the accumulated business practices of centuries. IFRS is not a completely new and uniform approach to financial reporting, but the outcome of a long and continuing evolution.
Regarding measurement standards, IFRSs have been developed sometimes trying to develop generic, universal standards (PP&E,) and at other moments trying to develop industry standards (investment property etcetera).
This is a high level summary of current IFRS requirements on measurement, showing some inherently existing inconsistencies and ideas of the intricacies of the current position, as follows:
- Property, plant, equipment, intangible assets and exploration and evaluation assets for mineral resources may be carried at either historical cost or fair value.
- Assets on finance leases must be carried at the lower of fair value at the date of acquisition and the discounted value of the minimum lease payments at that date, less subsequent depreciation. IFRS Measurement requirements
- Pension scheme assets are measured at fair value.
- Biological assets (living plants and animals) must be carried at fair value.
- Agricultural assets must be carried at their net fair value when they were harvested.
- Some financial instruments must be carried at fair value; others at historical cost.
- Inventories must be carried at the lower of historical cost and net realisable value.
- Construction contracts must be carried at historical cost plus a proportion of the expected profit.
- Mineral resources (mines, oil and gas wells), other than exploration and evaluation assets, are not covered by IFRS, which means that they can be measured on various bases.
Current IFRS bases are:
- The historical cost of a fixed asset is its gross cost less depreciation, calculated taking into account its expected remaining useful life and its likely residual value at the end of it. However, if the asset’s recoverable amount is less than its depreciated historical cost, it must be written down to its recoverable amount, which is the higher of its net fair value and its value in use. Net fair value is fair value less selling costs. Value in use is the discounted value of future attributable cash flows.
- Pension scheme liabilities must be measured by the projected unit credit method of actuarial calculation, which uses discounting. Deferred tax liabilities must not be discounted. Provisions must be stated at the best estimate of the expenditure required to settle the obligation; discounting is required where its effect would be material.
- The liability for a finance lease must be stated at the lower of the related asset’s fair value at the date of acquisition and the discounted value of the minimum lease payments at that date, less amounts written back so as to produce a constant periodic rate of interest on the remaining balance.
- The initial cost of assets and liabilities acquired in a business combination is their fair value at the date of acquisition. Fair value in this context can be measured by, among other things:
- market value, IFRS Measurement requirements
- estimated value, IFRS Measurement requirements
- present value, IFRS Measurement requirements
- selling price less the costs of disposal plus a reasonable profit allowance,
- selling price less the sum of costs to complete and costs of disposal, plus a reasonable profit allowance,
- current replacement cost,
- depreciated replacement cost,
- reference to an active market,
- the amount that a third party would charge.
- With some exceptions, internally generated intangibles are not recognised; where they are recognised, they are measured at historical cost.
- Internally generated intangibles acquired in a business combination are, subject to conditions, recognised and measured at fair value at the date of the combination.
- Goods and services received in share-based payment transactions are measured at their fair value where this can be measured reliably, otherwise at the fair value of the equity instruments granted. IFRS Measurement requirements
- Transactions with employees and others providing similar services are required to be measured at the fair value of the equity instruments granted.
- Financial statements of companies that report in the currency of a hyper-inflationary economy must be restated in terms of current purchasing power. Financial statements of companies that report in a less than hyper-inflationary currency are not restated.
- There are specific areas of concern that affect the different bases of measurement available to financial reporting: historical cost, value to the business, fair value, realisable value and value in use. How the different bases work has been considered in literature (see hyperlinks above), but it will also be helpful to look first at some challenges included in financial reporting measurement.
BUT: – do not forget, IFRS’s Conceptual Framework – Objective, usefulness and limitations of general purpose financial reporting.
Chapter 1.11 ‘To a large extent, financial reports are based on estimates, judgments and models rather than exact depictions. The Conceptual Framework establishes the concepts that underlie those estimates, judgments and models. The concepts are the goal towards which the IASB and preparers of financial reports strive. As with most goals, the Conceptual Framework’s vision of ideal financial reporting is unlikely to be achieved in full, at least not in the short term, because it takes time to understand, accept and implement new ways of analysing transactions and other events. Nevertheless, establishing a goal towards which to strive is essential if financial reporting is to evolve so as to improve its usefulness.’