International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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(see 7.1.1 above); and
• if a contract modification both eliminates existing rights or obligations and adds
new rights or obligations, it is necessary to consider both the separate and the
combined effect of those modifications. In some such cases, the contract has been
modified to such an extent that, in substance, the modification replaces the old
asset or liability with a new asset or liability. In cases of such extensive
modification, the entity may need to derecognise the original asset or liability, and
recognise the new asset or liability. [CF 5.33].
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CHAPTER 6: MEASUREMENT
As discussed at 8 above, elements recognised in financial statements are quantified in
monetary terms. This requires the selection of a measurement basis, which is defined in
the Framework as an identified feature (for example, historical cost, fair value or
fulfilment value) of the item being measured. Applying a measurement basis to an asset
or liability creates a measure for that asset or liability and for related income and
expenses. [CF 6.1].
The Framework does not provide detailed guidance on when a particular measurement
basis would be suitable. Rather, it describes various measurement bases, the information
they provide and the factors to consider in their selection (discussed further at 9.1
below). [CF BC6.1]. This approach reflects the belief of the Board that that in different
circumstances:
• different measurement bases may provide information relevant to users of
financial statements; and
• a particular measurement basis may be:
• easier to understand and implement than another;
• more verifiable, less prone to error or subject to a lower level of measurement
uncertainty than another; or
• less costly to implement than another. [CF BC6.10].
Consideration of the qualitative characteristics of useful financial information and of the
cost constraint is likely to result in the selection of different measurement bases for
different assets, liabilities, income and expenses. [CF 6.2].
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A standard may need to describe how to implement the measurement basis selected in
that standard. That description could include:
• specifying techniques that may or must be used to estimate a measure applying a
particular measurement basis;
• specifying a simplified measurement approach that is likely to provide information
similar to that provided by a preferred measurement basis; or
• explaining how to modify a measurement basis, for example, by excluding from
the fulfilment value of a liability the effect of the possibility that the entity may fail
to fulfil that liability (own credit risk). [CF 6.3].
The contents of Chapter 6 of the Framework are discussed in this section as follows:
• Measurement bases (such as historical cost and current value) – discussed at 9.1
below.
• Information provided by different measurement bases – discussed at 9.2 below.
• Factors to consider in selecting measurement bases – discussed at 9.3 below.
• Measurement of equity – discussed at 9.4 below.
• Cash-flow-based measurement techniques – discussed at 9.5 below.
9.1 Measurement
bases
9.1.1 Historical
cost
Historical cost measures provide monetary information about assets, liabilities and
related income and expenses, using information derived, at least in part, from the price
of the transaction or other event that gave rise to them. Unlike current value, historical
cost does not reflect changes in values, except to the extent that those changes relate to
impairment of an asset or a liability becoming onerous. [CF 6.4].
The historical cost of an asset when it is acquired or created is the value of the costs
incurred in acquiring or creating the asset, comprising the consideration paid to acquire
or create the asset plus transaction costs. The historical cost of a liability when it is
incurred or taken on is the value of the consideration received to incur or take on the
liability minus transaction costs. [CF 6.5].
When an asset is acquired or created, or a liability is incurred or taken on, as a result of
an event that is not a transaction on market terms, it may not be possible to identify a
cost, or the cost may not provide relevant information about the asset or liability. In
some such cases, a current value of the asset or liability is used as a deemed cost on
initial recognition and that deemed cost is then used as a starting point for subsequent
measurement at historical cost (see 9.3.4 below). [CF 6.6].
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81
The historical cost of an asset is updated over time to depict, if applicable:
• the consumption of part or all of the economic resource that constitutes the asset
(depreciation or amortisation);
• payments received that extinguish part or all of the asset;
• the effect of events that cause part or all of the historical cost of the asset to be no
longer recoverable (impairment); and
• accrual of interest to reflect any financing component of the asset. [CF 6.7].
The historical cost of a liability is updated over time to depict, if applicable:
• fulfilment of part or all of the liability, for example, by making payments that
extinguish part or all of the liability or by satisfying an obligation to deliver goods;
• the effect of events that increase the value of the obligation to transfer the
economic resources needed to fulfil the liability to such an extent that the liability
becomes onerous. A liability is onerous if the historical cost is no longer sufficient
to depict the obligation to fulfil the liability; and
• accrual of interest to reflect any financing component of the liability. [CF 6.8].
One way to apply a historical cost measurement basis to financial assets and financial
liabilities is to measure them at amortised cost. The amortised cost of a financial asset
or financial liability reflects estimates of future cash flows, discounted at a rate
determined at initial recognition. For variable rate instruments, the discount rate is
updated to reflect changes in the variable rate. The amortised cost of a financial asset
or financial liability is updated over time to depict subsequent changes, such as the
accrual of interest, the impairment of a financial asset and receipts or payments. [CF 6.9].
9.1.2 Current
value
Current value measures provide monetary information about assets, liabilities and
related income and expenses, using information updated to reflect conditions at the
measurement date. Because of the updating, current values of assets and liabilities
reflect changes, since the previous measurement date, in estimates of cash flows and
other factors reflected in those current values. Unlike historical cost, the current value
of an asset or liability is not derived, even in part, from the price of the transaction or
other event that gave rise to the asset or liability. [CF 6.10].
Current value measurement bases include:
• fair value (discussed at 9.1.2.A below);
• value in use for assets and fulfilment value for liabilit
ies (discussed at 9.1.2.B below); and
• current cost (discussed at 9.1.2.C below). [CF 6.11].
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9.1.2.A Fair
value
Fair value is the price that would be received to sell an asset, or paid to transfer a
liability, in an orderly transaction between market participants at the measurement date.
[CF 6.12].
Fair value reflects the perspective of market participants; that is, participants in a market
to which the entity has access. The asset or liability is measured using the same
assumptions that market participants would use when pricing the asset or liability if
those market participants act in their economic best interest. [CF 6.13].
In some cases, fair value can be determined directly by observing prices in an active
market. In other cases, it is determined indirectly using measurement techniques, for
example, cash-flow-based measurement techniques (discussed at 9.5 below), reflecting
all the following factors:
(a) estimates of future cash flows;
(b) possible variations in the estimated amount or timing of future cash flows for
the asset or liability being measured, caused by the uncertainty inherent in
the cash flows;
(c) the time value of money;
(d) the price for bearing the uncertainty inherent in the cash flows (a risk
premium or risk discount). The price for bearing that uncertainty depends on
the extent of that uncertainty. It also reflects the fact that investors would
generally pay less for an asset (and generally require more for taking on a
liability) that has uncertain cash flows than for an asset (or liability) whose
cash flows are certain; and
(e) other factors, for example, liquidity, if market participants would take those
factors into account in the circumstances. [CF 6.14].
The factors mentioned in (b) and (d) above include the possibility that a counterparty
may fail to fulfil its liability to the entity (credit risk), or that the entity may fail to fulfil
its liability (own credit risk). [CF 6.15].
Because fair value is not derived, even in part, from the price of the transaction or other
event that gave rise to the asset or liability, fair value is not increased by the transaction
costs incurred when acquiring the asset and is not decreased by the transaction costs
incurred when the liability is incurred or taken on. In addition, fair value does not reflect
the transaction costs that would be incurred on the ultimate disposal of the asset or on
transferring or settling the liability. [CF 6.16].
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9.1.2.B
Value in use and fulfilment value
Value in use is the present value of the cash flows, or other economic benefits, that an
entity expects to derive from the use of an asset and from its ultimate disposal.
Fulfilment value is the present value of the cash, or other economic resources, that an
entity expects to be obliged to transfer as it fulfils a liability. Those amounts of cash or
other economic resources include not only the amounts to be transferred to the liability
counterparty, but also the amounts that the entity expects to be obliged to transfer to
other parties to enable it to fulfil the liability. [CF 6.17]. Value in use and fulfilment value
cannot be observed directly and are determined using cash-flow-based measurement
techniques (see 9.5 below). [CF 6.20].
Because value in use and fulfilment value are based on future cash flows, they do not
include transaction costs incurred on acquiring an asset or taking on a liability. However,
value in use and fulfilment value include the present value of any transaction costs an
entity expects to incur on the ultimate disposal of the asset or on fulfilling the liability.
[CF 6.18].
Value in use and fulfilment value reflect entity-specific assumptions rather than assumptions
by market participants. Nonetheless, they do reflect the factors set out in (a)-(e) at 9.1.2.A
above. In practice, there may sometimes be little difference between the assumptions that
market participants would use and those that an entity itself uses. [CF 6.19, 6.20].
9.1.2.C Current
cost
The current cost of an asset is the cost of an equivalent asset at the measurement date,
comprising the consideration that would be paid at the measurement date plus the
transaction costs that would be incurred at that date. The current cost of a liability is the
consideration that would be received for an equivalent liability at the measurement date
minus the transaction costs that would be incurred at that date. Current cost, like
historical cost, is an entry value: it reflects prices in the market in which the entity would
acquire the asset or would incur the liability. Hence, it is different from fair value, value
in use and fulfilment value, which are exit values. However, unlike historical cost,
current cost reflects conditions at the measurement date. [CF 6.21].
In some cases, current cost cannot be determined directly by observing prices in an
active market and must be determined indirectly by other means. For example, if prices
are available only for new assets, the current cost of a used asset might need to be
estimated by adjusting the current price of a new asset to reflect the current age and
condition of the asset held by the entity. [CF 6.22].
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9.2
Information provided by different measurement bases
When selecting a measurement basis, it is important to consider the nature of the
information that the measurement basis will produce in both the statement of financial
position and the statement(s) of financial performance. The Framework summarises that
information in a table which is reproduced in figure 2.3 below. [CF 6.23]. This is followed
by some further discussion at 9.2.1 and 9.2.2 below.
Figure 2.3
Summary of information provided by particular measurement bases
Assets
Statement of financial position
Historical cost
Fair value
Value in use
Current cost
(market-participant
(entity-specific
assumptions)
assumptions)(a)
Carrying amount
Historical cost
Price that would be
Present value of future
Current cost
(including
received to sell the
cash flows from the
(including
transaction costs), to
asset (without
use of the asset and
transaction costs), to
the extent
deducting
from its ultimate
the extent
unconsumed or
transaction costs on
disposal (after
unconsumed or
uncollected, and
disposal).
deducting present
uncollected, and
recoverable.
value of transaction
recoverable.
costs on disposal).
(Includes interest
accrued on any
financing
component.)
Statement(s) of financial performance
/> Event
Historical cost
Fair value
Value in use
Current cost
(market-participant
(entity-specific
assumptions)
assumptions)(a)
Initial recognition(b)
– Difference
between
Difference between
–
consideration paid
consideration paid
and fair value of the
and value in use of
asset acquired.(c)
the asset acquired.
Transaction
costs
on Transaction costs on
acquiring the asset.
acquiring the asset.
The IASB’s Conceptual Framework
85
Sale or consumption
Expenses equal to
Expenses equal to
Expenses equal to
Expenses equal to
of the asset(d), (e)
historical cost of the
fair value of the
value in use of the
current cost of the
asset sold or
asset sold or
asset sold or
asset sold or
consumed.
consumed.
consumed.
consumed.
Income received.
Income received.
Income received.
Income received.
(Could be presented
(Could be presented
(Could be presented
(Could be presented
gross or net.)
gross or net.)
gross or net.)
gross or net.)
Expenses for
Expenses for
Expenses
for
transaction costs on
transaction costs on
transaction costs on
selling the asset.
selling the asset.
selling the asset.
Interest income
Interest income, at
Reflected in income
Reflected in income
Interest income, at
historical rates,
and expenses from
and expenses from
current rates.
updated if the asset
changes in fair
changes in value in
bears variable
value.
use.
interest.