Measurement in Financial Reporting: The Need for Concepts

Abstract

SYNOPSIS The Conceptual Framework neither specifies the objective or definition of accounting measurement, nor provides a conceptual basis for choosing among alternative measurement bases. This paper offers a starting point for developing measurement concepts based on existing Framework concepts, including the objective of financial reporting, the qualitative characteristics of useful financial information, and the definitions of assets and liabilities. The paper focuses on subsequent measurement of individual assets and liabilities and concludes that fair value measurement is more consistent with existing concepts than either modified or unmodified historical cost. Although unmodified historical cost is consistent with some concepts, modified historical cost—which is widely used today—largely is not. Also, aggregate amounts, such as total assets and total liabilities based on modified or unmodified historical cost, lack meaning. Because financial statements include such aggregate amounts and changes in amounts of individual assets and liabilities determine comprehensive income, measurement concepts also need to contemplate these measurements.