The standards for which the IASB is responsible – International Financial Reporting Standards (IFRS) – are one collection of financial reporting practices. They are increasingly 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 – including the UK – that 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.
One area where IFRS measurement requirements still needed to be developed was in accounting for insurance contracts. With IFRS 17 Insurance contracts an attempt is made to improve insurance reporting. Insurance provides an example of some of the tensions that make measurement issues so difficult to resolve. The ultimate outcome of an insurance contract may remain uncertain for many years, but if profits remain unrecognised until all uncertainties are resolved, the accounts will give a misleading impression of an insurer’s financial position and profitability in the interim. The question, therefore, is how uncertain future outcomes can best be anticipated in accounting so as to provide a fair picture of both the current position and performance to date. It is a question that is proving highly controversial, not so much because insurance poses unique measurement problems, but because it is an extreme example of measurement issues that pervade financial reporting1.
The table below gives a highly simplified summary of current IFRS requirements on measurement, drawing attention to some of the apparent inconsistencies. The summary gives an idea of the intricacies of the current position and shows that, among other things: Measurement under IFRS
- the same assets (eg, plant and equipment) can be measured on different bases; Measurement under IFRS
- different assets are valued on different bases (eg, plant and equipment can be measured at historical cost, biological assets must be carried at fair value);
- different liabilities are measured on different bases (eg, pension scheme liabilities must be discounted, deferred tax liabilities must not); Measurement under IFRS
- fair value can be measured in different ways (e.g, sometimes market value, sometimes depreciated replacement cost); and Measurement under IFRS
- the effects of inflation are treated in different ways (eg, sometimes reflecting the changing value of money, sometimes not). Measurement under IFRS
|SUMMARY OF IFRS MEASUREMENT REQUIREMENTS|
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. 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.
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.
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. Transactions with employees and others providing similar services are required to be measured at the fair value of the equity instruments granted.
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:
Financial statements of companies that report in the currency of a hyperinflationary economy must be restated in terms of current purchasing power. Financial statements of companies that report in a less than hyperinflationary currency are not restated.