Conceptual Framework - Measurement principles
The staff presented to the Board an early draft of the section on measurement principles that would be included within the Conceptual Framework discussion paper (DP). It was noted that there was another paper on initial and subsequent measurement that would also be discussed in the February Board meeting.
The Staff noted that this section of the DP would discuss principles for identifying appropriate measurement methods. The section on measurement principles would state that the term measurement is used to describe the process for determining which numbers to present or disclose in the financial statements. The Staff noted that the section on measurement principles in the DP would be based upon the premise that the IASB would not select the same measure for all items in the statement of financial position and statement of comprehensive income.
The Staff asked the IASB whether they agreed that there was no single measurement method that would provide users with the most relevant information for all assets and liabilities in all circumstances.
One Board member questioned this conclusion being reached in the DP. He noted that the DP should note that the number of alternative measurement methods should be kept to a minimum but should not start with the conclusion that you cannot only have one, although this could be the case. The Staff commented that the drafting was based upon their experience and that it was rare that there would only be one measurement method.
No Board conclusions were reached on this question raised by the Staff. The general feeling amongst Board members was that there may be cases where one measurement method could be used but this should not be formed as a conclusion in the DP.
The Staff highlighted to the Board that the DP would include three fundamental principles of measurement that were derived from the objectives of financial reporting and the qualitative characteristics of useful financial information within chapters 1 and 3 of the Conceptual Framework.
- Principle 1: The objective of measurement is to represent faithfully the most relevant information about the economic resources of the reporting entity, the claims against the entity, and how efficiently the entity’s management and governing board have discharged their responsibilities to use the entity’s resources.
- Principle 2: Although measurement generally starts with an item in the statement of financial position, the relevance of information provided by a particular measurement method also depends on how it affects the statement of comprehensive income and if applicable, the statements of cash flows and of equity and the notes to the financial statements.
- Principle 3: The cost of a particular measurement must be justified by the benefits of that information to existing and potential investors, lenders, and other creditors of reporting that information.
The DP would note that all three of these principles would need to be considered by the IASB when selecting an appropriate measurement method and none had automatic priority over the other. The Staff noted that the section on measurement principles in the DP would include a discussion that judgement would be required to apply the three principles. The Staff noted that the IASB would need to consider cost/benefit which every decision would require and would also need to apply judgement where there was a conflict with principle 2 (i.e. where it was considered that one measurement base would be best for the statement of financial position and another that would be considered better for the statement of comprehensive income).
The Staff asked the Board whether they agreed with the three fundamental principles of measurement.
One Board member questioned the wording in principle 2 as to how the measurement could affect the statement of cash flows. The Staff did not have a response to this and agreed that the measurement method would not affect the bottom line of the cash flow statement. The Board member noted that the Staff should remove this reference in principle 2 or provide further explanation in the DP of the effect of the measurement method on the cash flow statement. This Board member also commented that he would like the DP to include a discussion of the difference between present value measurement and fair value measurement (i.e. that present value did not always mean fair value and vice versa). The Staff noted that this discussion would be included in the part of the DP that would be drafted for the March Board meeting on other measurement methods. This Board member also commented that although principle 2 would generally be true (i.e. the measurement usually starts from an item in the statement of financial position) it would not always be the case. He noted that he would like the DP to contain a discussion of situations of where an item in the statement of comprehensive income may be used to drive the measurement method (i.e. this was considered more relevant information) over the statement of financial position. Another Board member commented that examples could be included in the DP and the Staff agreed that this would be included (i.e. manufacturing industry the statement of financial position was usually less important than in the financial industries so in the former example the measurement of items within the statement of comprehensive income would be more relevant). This gained general support among other Board members.
Another Board member questioned whether there should be a principle that would point the IASB as to which measurement method to select rather than, as is currently drafted, there be three very high level principles that would require a number of judgements to be made. The Board member noted that he favoured a “value realisation” model and the Staff noted that this was discussed in the other paper on initial and subsequent measurement. The Staff noted that post the discussion on that paper another principle could be developed if considered a requirement by the Board.
One Board member questioned how one would determine cost/benefit considerations to determine whether a measurement method should be selected (i.e. principle 3). This Board member commented that cost/benefit considerations would need to be made for recognition (as discussed in other sessions of the Board meeting earlier in the week) and also when determining the measurement method, however it was noted that there was no guidance within the framework as to how this notion would be applied to form a conclusion. The Staff noted that cost/benefit would be specific to each circumstance and it would be difficult to come up with a set of rules to be applied consistently. One Board member agreed with the Staff comment.
Overall there was a general amount of Board agreement for the inclusion of the three principles in the DP. However, it was tentatively agreed that changes were required to principle 2 in line with the Board comments above.
The Staff noted that the section on measurement principles in the DP would also include other observations about measurement and reporting changes in measures that the IASB would need to consider when establishing requirements for measurement, presentation and disclosure:
- Gains and losses reported because of changes from one measurement method to another may mislead users.
- The cost of using one measure of an item in the statement of financial position and providing a second measure in notes probably would not be justified by the benefits in many cases.
- As the number of different measures in a set of financial statements decreases, the information becomes easier to understand. Therefore, the number of different measures used should be the minimum number necessary to provide relevant information.
The DP would note that changes in measurement method should be avoided whenever possible.
The Staff asked the IASB whether they agreed with these other observations around measurement.
One Board member commented that observation (c) could be made into a principle and this gained tentative Board support from some other Board members.
Another Board member commented on observation 16 (b) and noted that there were a number of situations where using one measure in the statement of financial position and another in the notes was valuable. He gave the example of financial instruments where this is currently the case where amortised cost is used in the statement of financial position and fair value in the notes. This member wanted 16 (b) to be amended to remove the idea that a different measurement method may not be a good idea and noted that the wording was currently too strong. Another Board member was in agreement with this. The Staff noted that the wording of 16 (b) would be amended to clarify this.
The final part of the current draft of the section on measurement principles discussed the measurement bases of cost and fair value based upon existing definitions within IFRSs. It was noted by the Staff that other measures would be discussed at the March meeting.
Overall there was a general amount of Board agreement for the inclusion of the other observations in the DP. However, it was tentatively agreed that changes were required in line with the Board comments above.