When applied to financial reporting the term measurement can give a misleading impression of certainty and objectivity. In daily life, measurements are typically made of the physical characteristics of physical objects – such as height, weight, temperature and so on. If accurate measurement tools are employed, information of this sort is objective and uncontroversial (a ‘fact’). The subjects of measurement in financial reporting, however, are abstract concepts of uncertain meaning such as income and net assets (an ‘estimate’). Some challenges in measurement bases for financial reporting
For this reason alone, their measurement is always liable to be controversial.
All measurements in financial reporting are expressed in monetary terms and therefore purport to be measurements of value. However, value can mean different things. A particular asset might be valued at, for example, its historical cost, its replacement cost or its market value. It cannot be said that any one of these measurements is the one and only correct value for the asset. Each value, if the measurement is made properly, will be correct on the basis being used. In the conceptual framework, the financial reporting standard-setters refer to the different attributes of assets and liabilities, which give different values when measured. Historical cost, replacement cost and market value are all attributes in this sense.
The diversity of the purposes for which financial reporting information is used means that a basis of measurement appropriate for one purpose may not be appropriate for all other purposes. If you ask someone the question, ‘What is this company’s income?’, the reply ‘Why do you want to know?’ may be a sensible first step towards providing a useful answer. There is no single, right answer to the question. Some challenges in measurement bases for financial reporting
As said before financial reporting measurements are inherently a matter of judgment, subjectivity and convention. Measurements of transactions for financial reporting that are affected by one or more of these fundamental problems when one measurement technique is used may well be faced by another fundamental problem if an alternative technique is tried. For such items there is no escape from subjectivity in measurement. Some challenges in measurement bases for financial reporting
As part of this search for measurement bases always being liable for controversy let’s have a look in the hyperlinks into four sections deal respectively with the determination of separable assets, prediction, allocation to periods and assets, and identification of markets and transactions.