Conceptual Framework Phase C — Measurement

Date recorded:

Choosing between a current and a non-current measure

The Board held a lively, if inconclusive, discussion of an aspect of the measurement chapter of the proposed conceptual framework. The staff continues to develop issues for inclusion in a discussion paper. After the last Board discussion of this aspect of measurement (see November 2008 IASPlus Notes), the staff determined that 'value-flow weighting' was the primary factor to be used when distinguishing between items to be reported at 'current amounts' and items to be reported at a past transaction amount. Consequently, the staff examined this further and used it to divide the population of assets and liabilities into two subpopulations:

  • Those whose value is realised directly
  • Those whose value is realised indirectly

The staff also presented the view of a Board member, who had proposed an alternative view too late to be incorporated in the agenda papers. That view centred on the fact that future cash flows are fundamental to investors and that a better way to implement this idea in measurement would be to incorporate 'anticipated realisation or settlement' in that measure. This would address (a) whether there was a market for an item; and (b) whether the entity would access that market for that item. If there was no market for the item, and there were fixed or contractual cash flows, the item would be measured on the basis of those contractual cash flows. The result would be that the statement of financial position would contain measurements that reflected the cash flows the entity would expect.

The Board discussed this alternative model for a while (before they addressed the model advanced by the staff). One Board member suggested that his colleague's alternative approach put forward a measurement attribute based on management intent (or 'business model', which he sees as a synonym for management intent). Other Board members were uncomfortable discussing an alternative approach without proper documentation or analysis.

The discussion returned to the staff paper. During the discussion, the staff clarified that, in their view, financial instruments - and especially financial liabilities - would always be measured using direct measurement.

A Board member noted that the 'direct' approach resulted in a 'current measure' that was not 'fair value' as defined by the Board in the forthcoming ED on fair value measurement. Thus, an item would be measured based on current inputs for some but not necessarily all components of the item's value. He also suggested that if all of the components of the indirect measurement were done correctly, the measure derived should be the same as would be achieved under the direct method. If this was indeed the case, the staff had proposed a distinction without a difference.

Another Board member did not agree with the staff conclusions. The member thought that a 'current measure' could only be the present value of the expected future cash flows, and that this measure should always be better than an indirect measure based on historical costs. In addition, the Board member did not support layering business model/management intent considerations over the measurement attributes. Another Board member supported these concerns, especially with respect to biological assets (for which indirect, historical measures were meaningless) and investment properties (which had elements of both direct and indirect measures inherent in them).

At least one Board member disagreed with his colleagues and found the proposed staff approach useful: it matched how investors looked at a business. Items used in conjunction with other things, like employees and unrecognised intangible assets, to generate value were measured indirectly; those held for sale or realisation would be measured directly.

After much discussion, a Board member intervened suggesting that the staff needed to restructure their proposals along the following lines:

  • The ideal measurement objective for all assets and liabilities should be fair value, but there are situations in which the utility or cost-benefit considerations were such that fair value would not provide useful information to users.
  • To the extent that fair value is determinable it should be used.
  • Point estimates of fair value (especially with respect to some liabilities) might not provide the type of information that users want or need, for example because it gives no information about variability in the outcome.
  • In addition, a current measure will not convey the most useful information to investors, so another measure (other than fair value) would be necessary. It is likely that such a measure would be based in historical cost, but might not be 'pure' historical cost.
  • The measurement attribute must be chosen to reflect the utility in determining future cash flows.
The staff will return to this topic at a later meeting, taking into account the views expressed by Board members on the staff proposals as well as the suggestion about how to restructure them.


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