The additions in 2018 to the IASB’s Conceptual Framework for Financial Reporting included a table summarising what information various measurement basis provide. It seems that people have paid little attention to that table. In this post, I highlight that table, summarise its role and content, and explain why it is important.
Role of table 6.1
The IASB revised the Conceptual Framework for Financial Reporting in 2018. Among other things, that revision added a much deeper and more helpful discussion of measurement. To my mind, one of the most important (and helpful) items added in that deeper discussion is a table (table 6.1). That table summarises what information various measurement basis provide. It has always surprised me how little attention that table has attracted, both when the IASB was developing the revision and since then.
The Conceptual Framework (in paragraphs 6.23 and 6.43) directs people to consider the following when they select a measurement basis for an asset or liability and for the related income and expenses:
- the nature of the information provided by that measurement basis both in the statement of financial position and in the statement of financial performance. Paragraphs 6.24-6.42 discuss that topic and table 6.1 summarises the information provided by various measurement bases.
- the need for the selected measurement basis to provide information that both: (i) is relevant to users of financial statements; and (ii) faithfully represents what it purports to represent. In addition, the information needs to be, as far as possible, comparable, verifiable, timely and understandable. (paragraph 6.45)
- various other factors, discussed in paragraphs 6.44-6.86.
In selecting a measurement basis, it is vital to consider the whole discussion in paragraphs 6.23-6.86—including the information in table 6.1.
Who needs to look at table 6.1?
For most assets and liabilities, the IASB selects the measurement basis when it writes a Standard. So, the discussion on that topic in the Conceptual Framework is mainly important:
- for the IASB itself when it is developing standards; and
- for organisations and people commenting to the IASB on its proposals.
Nevertheless, in some circumstances, preparers of financial statements need to select the measurement basis:
- if a Standard permits a choice between different measurement bases.
- if no IFRS Standard specifically applies to the transaction, other event or condition and if, also, no IFRS Standards deal with similar and related issues. In such cases, preparers need to refer to the measurement concepts in the Conceptual Framework. That is discussed in Guide to Selecting and Applying Accounting Policies—IAS 8, published by the IFRS Foundation in 2019. The guide is available at https://www.ifrs.org/content/dam/ifrs/news/2019/november/guide-to-selecting-and-applying-accounting-policies-ias-8.pdf
Preparers may also find table 6.1 helpful when they consider:
- how to present their income and expenses; and
- what information to disclose about their income and expenses.
What does Table 6.1 contain?
Table 6.1 summarises the information provided by the following measurement bases discussed in the Conceptual Framework:
- historical cost
- fair value
- value in use (of an asset) / fulfilment value (of a liability)
- current cost
For each of those 4 measurement bases, table 6.1 lists the information provided by that measurement basis in both:
- the statement of financial position; and
- the statement of financial performance.
It is reasonably obvious what information each measurement produces in the statement of financial position. Table 6.1 probably won’t provide great insight into that—though possibly a little more for liabilities than for assets.
But table 6.1 says a lot more about information in the statement of financial performance. It summarises what information is provided about the following:
- income and/or expenses (if any) recognised on initial recognition of an asset or liability
- income and expenses recognised on selling or consuming an asset
- income (and sometimes expenses) recognised on fulfilling a liability, or on transferring a liability to another party
- interest income and interest expense (if any)
- impairment losses on an asset and the effect of a liability becoming onerous
- value changes (if any)
Tables 1 and 2 below give an example of what table 6.1 says. They show what table 6.1 says about the information that two measurement bases (historical cost and fair value) provide in the statement of financial performance about:
- sale or consumption of assets; and
- fulfilment of liabilities.
Table 1. Sale or consumption of assets:
information provided by historical cost and by fair value
|Historical cost||Fair value|
|Expenses equal to historical cost of the asset sold or consumed||Expenses equal to fair cost of the asset sold or consumed|
|Income received||Income received|
|(The income and expenses could be presented gross or net)|
(The income and expenses could be presented gross or net)
|Expenses for transaction costs on selling the asset||Expenses for transaction costs on selling the asset|
Table 2. Fulfilment of liabilities:
information provided by historical cost and by fair value
|Historical cost||Fair value|
|Expenses equal to historical cost of the liability fulfilled |
(reflects historical consideration)
|Expenses equal to fair value of the liability fulfilled|
|Expenses for costs incurred in fulfilling the liability||Expenses for costs incurred in fulfilling the liability|
|(The income and expenses could be presented gross or net)||(The income and expenses could be presented gross or net. |
If gross, historical consideration could be presented separately.)
Why is table 6.1 important?
Financial statements provide users with information. The nature of that information depends on the measurement basis used in those financial statements. Thus, selecting a measurement basis determines whether the information will be useful to users—whether it will be relevant and represent faithfully what it purports to depict.
Focus of past discussions
In the past, discussions about selecting a measurement basis seem to have focused largely on whether particular measurement bases:
- produce relevant information about financial position;
- make profit or loss volatile;
- result in measurements that are sufficiently verifiable for users to rely on them;
- can be implemented without disproportionate cost.
Most of those discussions paid little or no attention to the fact that different measurement bases provide different types of information about an entity’s financial performance. The information in table 6.1 will provide a useful resource for future discussions.
Nature of information about financial performance
I mentioned above that past discussions have often focused on whether a particular measurement basis generates volatile numbers in profit or loss. The reference to the nature of the information isn’t just (or even mainly) about whether the numbers are volatile. It is about the subject matter of the information produced.
For example, if a preliminary decision has been made to select fair value as the measurement basis for a type of asset or liability:
- will changes in that fair value be reported just as a single amount?
- or will they be separated into components depicting separate components of an entity’s financial performance? For example, will interest income be reported as a separate component? And if interest income is reported separately, how will that interest income be measured?
If it is not possible (or desirable) to separate the total change in fair value into components, it may be a good idea to reconsider the preliminary decision if information about that component would be relevant to users of financial statements. Perhaps a different measurement basis might provide relevant information about that component.
To take one hypothetical example, if there is a possibility of selecting fair value as the measurement basis for interest-bearing financial assets, it might be important to consider the following questions (and others):
- is information about interest income sometimes, always or never useful to users of financial statements?
- if information about interest income is to be provided, what should that information be based on? On historical cost and on the original interest rate? Or should it be based on a current value and on current interest rates?
- could the answers to the above questions depend on the circumstances? For example, would the answers for a bank’s loan book be the same as for its trading assets?
Presentation and disclosure
The benefits of thinking carefully about the nature of the information provided by a measurement basis do not end when the measurement basis has been selected. That thinking can also give insights in thinking about:
- how best to present information generated by that measurement basis on the face of the primary financial statements; and
- what information needs to be disclosed to meet the needs of users of financial statements
When considering which measurement basis to select for particular assets and liabilities, there are several things to consider. One important thing to consider is what information that measurement basis will provide—not only in the statement of financial position but also in the statement of financial performance.
Considering that question could also generate some of the input needed for decisions about:
- how to present information generated by the measurement bases selected; and
- what information to disclose about an asset or liability measured using that measurement basis, and about related income and expenses.
Table 6.1 in the Conceptual Framework is a useful tool that can help gather some of the inputs needed for those decisions.