• Discussed at June 2001 IASB Meeting
• Discussed with SAC: July 2001
• Discussed at March 2003 IASB Meeting
• Discussed at July 2003 IASB Meeting
• Discussed at May 2005 IASB Meeting
• November 2005: Comment Invited on AcSB Discussion Paper
• Discussed at September 2006 IASB Meeting
• Round-table discussions held in January and February 2007

The measurement project would seek to resolve issues and determine a consistent approach related to selection of the appropriate measurement objective for items recognised in the financial statements.

The Canadian Accounting Standards Board (AcSB) has undertaken a Research Project on behalf of the IASB to analyse the various measurement objectives in financial accounting. The purpose of the project is to identify, consider, and make recommendations with respect to issues related to the selection of an appropriate measurement objective or set of objectives.

The IASB project would be likely to result in amendment or expansion of the discussion of measurement in the Framework for the Preparation and Presentation of Financial Statements (the Framework). The former IASC's Present Value Project addressed an aspect of this issue. The IASB Framework acknowledges that a variety of measurement bases are used today in varying combinations in financial statements, including historical cost, current cost, net realisable (settlement) value and present value. Historical cost is most common. The Framework does not include concepts or principles for selecting which measurement basis should be used for particular elements of financial statements or in particular circumstances.

Discussion at the June 2001 IASB Meeting

At its meeting in June 2001, the Board discussed fair value, replacement cost, net selling price, and value in use as bases for measurement, including how to define them and difficulties in applying them.

Observations made during the meeting about the various measurement bases were:

Fair Value

The definition from the IAS Bound Volume was discussed, difficulties in implementing such a model were identified with respect to:

• Measuring 'real' assets, e.g. tangible plant and equipment where separate cash flows do not exist
• Instances where there is no or, alternatively, multiple markets
• Significant transaction costs

Replacement Cost

A working definition of replacement cost is the most economic cost that an entity would incur in replacing the service potential of an asset, at balance sheet date. This, however, is not the only potential definition. One issue is whether proceeds from disposal should be included.

It was argued that replacement cost is an appropriate measurement model because:

• an asset would normally be replaced, if lost, as it is the profit generating means of a business;
• the derived value is justified by future returns; and
• it is a current valuation without taking into account intended future use.

The value will not always equal the present value of future cash flows, as imperfect markets mean that not all people generate the same returns. However, it will often represent the lowest value calculated by any of the measurement models, unless the asset is impaired.

Problems in application however include finding the exact replacement cost of an asset in the market as technology improves, particularly accounting for capacity increases within new assets. In practice, such differences are not usually adjusted for. Multiple markets also create problems. Some argue that an early loss may be made on the move from a new to a second hand market, while others argue that although you are now replacing a second hand asset, you look to the market where you would normally purchase assets. Like most of the methods, this method would not appear to be appropriate if you do not intend to dispose of the asset.

It was debated whether replacement cost was relevant when future returns were less than replacement cost or selling price was less than replacement cost (due to multiple markets) as it would seem logical to sell in these circumstances. Further consideration will be given to this topic after the review of the G4+1 paper case studies, refer discussions below.

Net Selling Price (exit value, includes NRV)

Defined in IAS 36, this method is seen as being easily understood and relevant if an asset can be sold, if it is rational to sell (although this was seen to contradict the relevancy arguments for replacement costs). Note however, it is not seen as a deprival value but immediate sale, under the most reasonable means within the control of the entity. This may include some estimation and, the further into the future the sale will take place, the closer this will represent fair value.

The Board discussed the market mechanism - they believed that the buy and sell price should be the same. However, it was pointed out that it is cost that is being measured and not a price. Overall, the objective of measurement needs to be determined before it is decided whether entity specific adjustments should be made. Problems were identified with respect to:

• aggregation (where an individual asset does not generate individual cash flows);
• specific tailored assets;
• the inability to sell some assets;
• asymmetrical markets (new versus second hand, wholesale versus retail) or the absence of markets; and
• alternative uses for assets.

Value in Use

The present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Such a definition requires that the objective of measurement (value for whom) be defined, in order for the appropriate discount rate to be determined. However, it is unclear whether the assets' value should be measured based on its existing or intended use, a rational entity would take the higher value. Drawbacks of this model were seen to include:

• the fact that future returns are incorporated;
• it is considered inappropriate if replacement cost is lower;
• value must be allocated to individual assets, including intangibles; and
• the subjectivity of estimates.

Value to the Business

This is defined as the lower of replacement cost and recoverable amount (as defined by IAS 36). Assets were seen as impaired when replacement cost was irrecoverable. Currently impairment is identified and quantified by reference to recoverable amount (higher of value in use and net selling price). Therefore a greater write-down would exist under this model.

No preference was given for any one of these models because it is first considered necessary to resolve the overall objective of measurement. Other issues to be resolved include:

• Valuations where there is no active market or, alternatively, multiple markets.
• Measuring fair value for assets, such as tangible plant and equipment, where separate cash flows do not exist.
• Measuring fair value when transaction costs are significant.
• One measurement attribute for all assets in all circumstances versus different attributes for different circumstances.
• Aggregation - at what level should the measurement take place.
• Measurement of specialised assets.
• The objective of measurement - is it recovery of cost incurred or reflection of some sort of current value.

No decisions were reached on the above issues.

Future of the project:

This project will be all embracing as it has an effect not only on measurement of assets and liabilities but also on performance reporting (are changes in value are of a capital or income nature). Therefore the project will be a long-term one and would most likely result in a change to the Framework. However, convergence remains the key priority for the board. The Board will try to improve consistency of measurement as part of the improvements project.

A paper will be prepared for the Board that will take an inventory of how assets and liabilities are currently measured under the existing standards. Also, the Board will consider the measurement paper that was previously presented to the G4+1 as part of their discussion on impairment.

Discussion at July 2001 IASB Meeting

The Board debated the relationship between fair value and the three components of deprival value: replacement costs, value in use, and net realisable value. Members debated the various measurement criteria available and concluded that the papers presented should be amended and resubmitted to the Board to reflect the differing views presented. No conclusions were reached.

The following resources were referred to:

• Measuring Fair Value, FASB June 2001 (PDF 101k).
• Fair Value, Deprival Value and Depreciated Replacement Cost, AASB, Australia, February 2001.

Discussion of the Canadian Accounting Standards Board Measurement Objectives Research Project – March 2003 IASB Meeting

The Canadian Accounting Standards Board (AcSB) has undertaken a research project on behalf of the IASB to analyse the various measurement objectives in financial accounting. The purpose of the project is to identify, consider, and make recommendations with respect to issues related to the selection of an appropriate measurement objective or set of objectives.

The project is intended to provide the IASB and its national standard-setting partners with a basis for initiating active projects to revise/expand their conceptual frameworks and improve their financial reporting standards by basing them on a coherent conceptual basis.

At its March 2003 meeting, the IASB discussed the first sections of a discussion paper addressing the measurement on initial recognition of an asset and liability. No decisions were made. The AcSB will present its final paper to the IASB in September 2003 for further discussion. Parts of this paper may be discussed in July 2003 with the IASB and with the various meetings of the national standard-setting partners.

Discussion at the IASB's July 2003 Meeting

The purpose of the project is to identify, consider, and make recommendations with respect to issues related to the selection of an appropriate basis (or set of bases) for measuring assets and liabilities. The staff did not ask the Board to vote on the proposed issues but for comments and guidance.

Final part of the preliminary conceptual evaluation (dealing with measurement reliability)

The staff proposes that, when more than one alternative measurement basis achieves an acceptable level of reliability, the most relevant of those bases should be adopted. The Board agreed (informal vote) on this principle, however one Board member noted that the notion of relevant will have to be defined, and include a hierarchy demonstrating the notion of relevant could be used.

The first part of the comparative analysis of alternative measurement bases (dealing with fair value)

The paper distinguishes estimation uncertainty from risk-related volatility, concluding that concerns about the volatility of reported amounts under a particular measurement basis are concerns about the relevance (decision-usefulness) of that measurement basis rather than its reliability. The Board strongly supported that the notion that volatility is not a measurement principle.

Concerning the limitations on measurement reliability, the issues are:

• whether estimation uncertainty and economic indeterminacy are the sources of those limitations, or whether there are other possible sources to consider.
• whether the discussion in the paper provides an appropriate foundation for analysing the alternative measurement bases.

• the nature and extent of measurement uncertainty under each basis, and
• the relevance and reliability of supporting information on measurement uncertainty that can be derived under each basis

A point outline of the comparative analysis of the other alternative measurement bases

The Board discussed the following concerns related to the fair value hierarchy:

• fair value determinations are subject to potentially large areas of indeterminacy in some common situations on initial recognition of assets and liabilities (such as unique assets, and block discounts and premiums on shares).
• it is questionable whether a measurement that must rely to any significant extent on entity specific assumptions can rightfully qualify to be described as 'fair value' when what the market may assume is unknowable.
• recourse must be made to some compromising conventions or substitution of other measurement bases for fair value in order to achieve single amount measurements in situations involving significant indeterminacy.

Discussion at the May 2005 IASB Meeting

Measurement on Initial Recognition – Draft Discussion Paper Measurement Bases for Financial Accounting: Measurement on Initial Recognition

The purpose of the discussion at this meeting was to ascertain whether IASB members object to the publication by the IASB, with a 'wrap-around' invitation to comment, of the discussion paper, Measurement Bases for Financial Accounting: Measurement on Initial Recognition, prepared by staff of the Accounting Standards Board of Canada (AcSB).

IASB members were asked whether the paper appropriately identifies and discusses the issues and whether the Invitation to Comment appropriately positions the paper and asks the right questions to seek useful feedback for the IASB in its future standard-setting activities.

Individual Board members commented that the paper was thorough and that it approached the hierarchy in an appropriate manner. Some Board members expressed concern regarding some of the conclusions, and some expressed concern that some aspects had been omitted from the analysis. For example, it was pointed out that the paper seemed dismissive of the notion that a transaction price agreed on a particular date between a willing buyer and willing seller would result in fair value due to the passage of time if delivery takes place subsequently. The Board agreed to communicate the concerns to the AcSB staff.

Generally, the IASB members were supportive of issuing the document to trigger thought and responses on the issues. The Board asked that it be made clear in the paper that the IASB had not debated the issues and, therefore, that the views therein were not those of the IASB.

The Board discussed whether the Invitation to Comment appropriately positions the paper and asks the right questions in order to provide the Board with information to assist in future standard-setting activities. The Board discussed this in a fair amount of detail, with some IASB members disagreeing with specific points. On the whole, the Board agreed that the introductory remarks should be explicit in explaining where and how the paper fits into the IASB agenda as well as clarifying the relationship with the FASB equivalent document.

Regarding the proposed six-month comment period, some Board members expressed concern that this was insufficient time because about 249 pages of material would require translation into various languages. It was agreed that a summary of the key issues would be inserted into the paper to alleviate this problem.

It is anticipated that the paper would be issued in July 2005.

November 2005: IASB Invites Comment on Canadian Discussion Paper

On 17 November 2005, the IASB published for public comment a Discussion Paper Measurement Bases for Financial Reporting - Measurement on Initial Recognition. The Discussion Paper, prepared by staff of the Canadian Accounting Standards Board (AcSB), analyses possible bases for measuring assets and liabilities on initial recognition. These include:

historical cost, current cost, fair value,

net realisable value, value in use, and deprival value.

The Paper evaluates the possible bases against criteria derived from the IASB Framework, as well as developments in finance theory, present value and statistical probability principles, and measurement practices. Neither the IASB nor the AcSB has yet debated the Discussion Paper. The IASB invites comments by 19 May 2006. Comments received will be analysed by staff of the AcSB. Their analysis and copies of responses will be provided to the IASB. The full Discussion Paper and a condensed version are now available to subscribers on the IASB's website. They will be freely available from 28 November 2005.

Click for IASB Press Release (PDF 54k).

Discussion at the September 2006 IASB Meeting

The Board discussed an analysis of the comments received on the Discussion Paper Measurement Bases for Financial Reporting-Measurement on Initial Recognition, which was published for comments in November 2005.

The session was a feedback session and no decisions were taken by the Board at the September meeting, as the staff had no specific questions to raise.

The staff highlighted 13 issues that constitute the main comments that constituents had raised. (These are not reiterated here as they can be found in observer note 'Agenda Paper 6' on the IASB Website).

As a general observation, constituents who provided comments did not support the proposals put forward in the Discussion Paper. A point that was discussed at some length by the Board was the response on the relevance of fair value. Board members were confused by the fact that a majority of respondents were not supportive of the paper's proposal regarding the relevance of fair value on initial recognition, especially that some stated that fair value has no relevance.

The Board intends to consider the comments from constituents on the Discussion Paper during the measurement phase of the joint IASB/FASB Conceptual Framework project. The paper will also be considered in other IASB projects where the responses to this paper could provide valuable input.

November 2006: Round-tables Scheduled for January and February 2007

The IASB and FASB will hold round-table discussions on Measurement in conjunction with their joint Conceptual Framework project in three locations during January and February 2007. The objectives of these round-tables are:

• To hear constituents' views on measurement early in the measurement phase of the conceptual framework project.
• To discuss whether the list of measurement issues identified in the plan for the measurement phase of the conceptual framework project is appropriate and substantially complete.
• To discuss whether the initial inventory of potential measurement bases prepared by the project staff and the terminology associated with that inventory is substantially complete and understandable