Measurement choices for recording transactions

The measurement bases that will be considered here are:

All these bases are forms of accrual accounting – that is, they are intended to measure income as it is earned and costs as they are incurred, as opposed to simply recording cash flows. The last four are all forms of current value measurement.

In forming a judgment on the appropriateness of measurement bases, in literature, the overriding tests has been identified to be their cost-effectiveness and fitness for purpose. However, in the absence of direct evidence on these matters, it is usual to argue in terms of various secondary characteristics that ought to be relevant in assessing the quality of information (see the key indicators in What is useful information?). Measurement choices for recording transactions

The most important of these characteristics are generally considered to be relevance and faithful representation / reliability (older term). Measurement choices for recording transactions

For each basis, an outline is given of how it works and the relevance and faithful representation of the resulting measurements. The question of measurement costs is also considered briefly. In reading the analyses that follow, the following comments should be borne in mind.

Bases of measurement in financial reporting are not carved in stone. Different people have different views on how each basis should work, and meanings evolve as practice changes. Some readers may therefore find that the way a particular basis is described does not match how they understand it. This does not mean either that their understanding is wrong or that the description in the report is wrong; views on these things simply differ.

  • Although it is conventional to consider questions of recognition (what items should be recognised in accounts) and measurement (how recognised items should be measured) as entirely separate, in practice different measurement bases lead to the recognition of different assets and liabilities.
  • Assertions on which financial reporting measurements are relevant and which are reliable are debatable, and the statements made in literature and in here can be disputed. Measurement choices for recording transactions
  • Broad generalizations about faithful representation are also open to the objection that faithful representation (just like reliability in the past) is often a question of shades of grey rather than black and white. A measurement may be accurate within a certain range or with a certain degree of probability. To describe it merely as reliable or unreliable remains a simplification. Measurement choices for recording transactions

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