CP 6 : Measurement

Question 1

Introduction 1

Elements recognised in financial statements are quantified in monetary terms.

This requires the selection of a measurement basis, which is defined in the Framework as an identified feature (for example, historical cost, fair value or
fulfilment value) of the item being measured.

Applying a measurement basis to an asset or liability creates a measure for that asset or liability and for related income and expenses

Answer 1

Elements recognised in financial statements are quantified in monetary terms.

This requires the selection of a measurement basis, which is defined in the Framework as an identified feature (for example, historical cost, fair value or
fulfilment value) of the item being measured.

Applying a measurement basis to an asset or liability creates a measure for that asset or liability and for related income and expenses

Question 2

Introduction 2

The Framework does not provide detailed guidance on when a particular measurement basis would be suitable.

Rather, it describes various measurement bases, the information they provide and the factors to consider in their selection.

Answer 2

The Framework does not provide detailed guidance on when a particular measurement basis would be suitable.

Rather, it describes various measurement bases, the information they provide and the factors to consider in their selection.

Question 3

Introduction 3

This approach reflects the belief of the Board that that in different circumstances:

• different measurement bases may provide information relevant to users of financial statements; and
• a particular measurement basis may be:
  • easier to understand and implement than another;
  • more verifiable, less prone to error or subject to a lower level of measurement uncertainty than another; or
  • less costly to implement than another.

Answer 3

This approach reflects the belief of the Board that that in different circumstances:

• different measurement bases may provide information relevant to users of financial statements; and
• a particular measurement basis may be:
  • easier to understand and implement than another;
  • more verifiable, less prone to error or subject to a lower level of measurement uncertainty than another; or
  • less costly to implement than another.

Question 4

Introduction 4

Consideration of the qualitative characteristics of useful financial information and of the cost constraint is likely to result in the selection of different measurement bases for different assets, liabilities, income and expenses.

Answer 4

Consideration of the qualitative characteristics of useful financial information and of the cost constraint is likely to result in the selection of different measurement bases for different assets, liabilities, income and expenses.

Question 5

Measurement bases - Historical cost 1

Historical cost measures provide monetary information about assets, liabilities and related income and expenses, using information derived, from the price
of the transaction or other event that gave rise to them.

Unlike current value, historical cost does not reflect changes in values, except to the extent that those changes relate to impairment of an asset or a liability becoming onerous.

Answer 5

Historical cost measures provide monetary information about assets, liabilities and related income and expenses, using information derived, from the price
of the transaction or other event that gave rise to them.

Unlike current value, historical cost does not reflect changes in values, except to the extent that those changes relate to impairment of an asset or a liability becoming onerous

Question 6

Measurement bases - Historical cost 2

The historical cost of an asset when it is acquired or created is the value of the costs incurred in acquiring or creating the asset, comprising the consideration paid to acquire or create the asset plus transaction costs.

The historical cost of a liability when it is incurred or taken on is the value of the consideration received to incur or take on the liability minus transaction costs.

Answer 6

The historical cost of an asset when it is acquired or created is the value of the costs incurred in acquiring or creating the asset, comprising the consideration paid to acquire or create the asset plus transaction costs.

The historical cost of a liability when it is incurred or taken on is the value of the consideration received to incur or take on the liability minus transaction costs.

Question 7

Measurement bases - Historical cost 3

When an asset is acquired or created, or a liability is incurred, as a result of an event that is not a transaction on market terms, it may not be possible to identify a cost, or the cost may not provide relevant information about the asset or liability.

In some such cases, a current value of the asset or liability is used as a deemed cost on initial recognition and that deemed cost is then used as a starting point for subsequent measurement at historical cost

Answer 7

When an asset is acquired or created, or a liability is incurred or taken on, as a result of an event that is not a transaction on market terms, it may not be possible to identify a cost, or the cost may not provide relevant information about the asset or liability.

In some such cases, a current value of the asset or liability is used as a deemed cost on initial recognition and that deemed cost is then used as a starting point for subsequent measurement at historical cost

Question 8

Measurement bases - Historical cost 4

The historical cost of an asset is updated over time to depict, if applicable:

• the consumption of part or all of the economic resource that constitutes the asset (depreciation or amortisation);
• payments received that extinguish part or all of the asset;
• the effect of events that cause part or all of the historical cost of the asset to be no longer recoverable (impairment); and
• accrual of interest to reflect any financing component of the asset.

Answer 8

The historical cost of an asset is updated over time to depict, if applicable:

• the consumption of part or all of the economic resource that constitutes the asset (depreciation or amortisation);
• payments received that extinguish part or all of the asset;
• the effect of events that cause part or all of the historical cost of the asset to be no longer recoverable (impairment); and
• accrual of interest to reflect any financing component of the asset.

Question 9

Measurement bases - Historical cost 5

The historical cost of a liability is updated over time to depict, if applicable:

• fulfilment of part or all of the liability, for example, by making payments that extinguish part or all of the liability or by satisfying an obligation to deliver goods;
• the effect of events that increase the value of the obligation to transfer the economic resources needed to fulfil the liability to such an extent that the liability becomes onerous.

  A liability is onerous if the historical cost is no longer sufficient to depict the obligation to fulfil the liability; and

• accrual of interest to reflect any financing component of the liability.

Answer 9

The historical cost of a liability is updated over time to depict, if applicable:

• fulfilment of part or all of the liability, for example, by making payments that extinguish part or all of the liability or by satisfying an obligation to deliver goods;
• the effect of events that increase the value of the obligation to transfer the economic resources needed to fulfil the liability to such an extent that the liability becomes onerous.

  A liability is onerous if the historical cost is no longer sufficient to depict the obligation to fulfil the liability; and

• accrual of interest to reflect any financing component of the liability.

Question 10

Measurement bases - Historical cost 6

One way to apply a historical cost measurement basis to financial assets and financial liabilities is to measure them at amortised cost.

The amortised cost of a financial asset
or financial liability reflects estimates of future cash flows, discounted at a rate determined at initial recognition. For variable rate instruments, the discount rate is updated to reflect changes in the variable rate.

The amortised cost of a financial asset or financial liability is updated over time to depict subsequent changes, such as the accrual of interest, the impairment of a financial asset and receipts or payments.

Answer 10

One way to apply a historical cost measurement basis to financial assets and financial liabilities is to measure them at amortised cost.

The amortised cost of a financial asset
or financial liability reflects estimates of future cash flows, discounted at a rate determined at initial recognition. For variable rate instruments, the discount rate is updated to reflect changes in the variable rate.

The amortised cost of a financial asset or financial liability is updated over time to depict subsequent changes, such as the accrual of interest, the impairment of a financial asset and receipts or payments.

Question 11

Measurement bases - Current value

Current value measures provide monetary information about assets, liabilities and related income and expenses, using information updated to reflect conditions at the measurement date.

Because of the updating, current values of assets and liabilities reflect changes, since the previous measurement date, in estimates of cash flows and
other factors, reflected in those current values.

Unlike historical cost, the current value of an asset or liability is not derived, even in part, from the price of the transaction or other event that gave rise to the asset or liability

Answer 11

Current value measures provide monetary information about assets, liabilities and related income and expenses, using information updated to reflect conditions at the measurement date.

Because of the updating, current values of assets and liabilities reflect changes, since the previous measurement date, in estimates of cash flows and
other factors, reflected in those current values.

Unlike historical cost, the current value of an asset or liability is not derived, even in part, from the price of the transaction or other event that gave rise to the asset or liability

Question 12

Measurement bases - Current value(Fair value) 1

Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.

Fair value reflects the perspective of market participants; that is, participants in a market
to which the entity has access.

The asset or liability is measured using the same assumptions that market participants would use when pricing the asset or liability if those market participants act in their economic best interest.

Answer 12

Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.

Fair value reflects the perspective of market participants; that is, participants in a market
to which the entity has access.

The asset or liability is measured using the same assumptions that market participants would use when pricing the asset or liability if those market participants act in their economic best interest.

Question 13

Measurement bases - Current value(Fair value) 2

In some cases, fair value can be determined directly by observing prices in an active market. In other cases, it is determined indirectly using measurement techniques, for example, cash-flow-based measurement techniques, reflecting all the following factors:

(a) estimates of future cash flows;

(b) possible variations in the estimated amount or timing of future cash flows for the asset or liability being measured, caused by the uncertainty inherent in
the cash flows;

(c) the time value of money;
(d) the price for bearing the uncertainty inherent in the cash flows (a risk premium or risk discount).
(e) other factors, for example, liquidity, if market participants would take those factors into account in the circumstances.

Answer 13

In some cases, fair value can be determined directly by observing prices in an active market. In other cases, it is determined indirectly using measurement techniques, for example, cash-flow-based measurement techniques, reflecting all the following factors:

(a) estimates of future cash flows;

(b) possible variations in the estimated amount or timing of future cash flows for the asset or liability being measured, caused by the uncertainty inherent in
the cash flows;

(c) the time value of money;
(d) the price for bearing the uncertainty inherent in the cash flows (a risk premium or risk discount).
(e) other factors, for example, liquidity, if market participants would take those factors into account in the circumstances.

Question 14

Measurement bases - Current value(Fair value) 3

Because fair value is not derived, even in part, from the price of the transaction or other event that gave rise to the asset or liability, fair value is not increased by the transaction costs incurred when acquiring the asset and is not decreased by the transaction costs
incurred when the liability is incurred or taken on.

In addition, fair value does not reflect the transaction costs that would be incurred on the ultimate disposal of the asset or on transferring or settling the liability

Answer 14

Because fair value is not derived, even in part, from the price of the transaction or other event that gave rise to the asset or liability, fair value is not increased by the transaction costs incurred when acquiring the asset and is not decreased by the transaction costs
incurred when the liability is incurred or taken on.

In addition, fair value does not reflect the transaction costs that would be incurred on the ultimate disposal of the asset or on transferring or settling the liability

Question 15

Measurement bases - Current value(Value in use and fulfilment value) 1

Value in use is the present value of the cash flows, or other economic benefits, that an entity expects to derive from the use of an asset and from its ultimate disposal.

Fulfilment value is the present value of the cash, or other economic resources, that an entity expects to be obliged to transfer as it fulfils a liability.

Answer 15

Value in use is the present value of the cash flows, or other economic benefits, that an entity expects to derive from the use of an asset and from its ultimate disposal.

Fulfilment value is the present value of the cash, or other economic resources, that an entity expects to be obliged to transfer as it fulfils a liability.

Question 16

Measurement bases - Current value(Value in use and fulfilment value) 2

Those amounts of cash or other economic resources include not only the amounts to be transferred to the liability counterparty, but also the amounts that the entity expects to be obliged to transfer to other parties to enable it to fulfil the liability.

Value in use and fulfilment value cannot be observed directly and are determined using cash-flow-based measurement techniques

Answer 16

Those amounts of cash or other economic resources include not only the amounts to be transferred to the liability counterparty, but also the amounts that the entity expects to be obliged to transfer to other parties to enable it to fulfil the liability.

Value in use and fulfilment value cannot be observed directly and are determined using cash-flow-based measurement techniques

Question 17

Measurement bases - Current value(Value in use and fulfilment value) 3

Because value in use and fulfilment value are based on future cash flows, they do not include transaction costs incurred on acquiring an asset or taking on a liability.

However, value in use and fulfilment value include the present value of any transaction costs an entity expects to incur on the ultimate disposal of the asset or on fulfilling the liability.

Answer 17

Because value in use and fulfilment value are based on future cash flows, they do not include transaction costs incurred on acquiring an asset or taking on a liability.

However, value in use and fulfilment value include the present value of any transaction costs an entity expects to incur on the ultimate disposal of the asset or on fulfilling the liability.

Question 18

Measurement bases - Current value(Value in use and fulfilment value) 4

Value in use and fulfilment value reflect entity-specific assumptions rather than assumptions by market participants.

Answer 18

Value in use and fulfilment value reflect entity-specific assumptions rather than assumptions by market participants.

Question 19

Measurement bases - Current value(Current Cost) 1

The current cost of an asset :
the cost of an equivalent asset at the measurement date, comprising the consideration that would be paid at the measurement date plus the transaction costs that would be incurred at that date.

The current cost of a liability :
the consideration that would be received for an equivalent liability at the measurement date
minus the transaction costs that would be incurred at that date.

Answer 19

The current cost of an asset :
the cost of an equivalent asset at the measurement date, comprising the consideration that would be paid at the measurement date plus the transaction costs that would be incurred at that date.

The current cost of a liability :
the consideration that would be received for an equivalent liability at the measurement date
minus the transaction costs that would be incurred at that date.

Question 20

Measurement bases - Current value(Current Cost) 2

Current cost, like historical cost, is an entry value: it reflects prices in the market in which the entity would
acquire the asset or would incur the liability.

Hence, it is different from fair value, value in use and fulfilment value, which are exit values. However, unlike historical cost, current cost reflects conditions at the measurement date.

Answer 20

Current cost, like historical cost, is an entry value: it reflects prices in the market in which the entity would
acquire the asset or would incur the liability.

Hence, it is different from fair value, value in use and fulfilment value, which are exit values. However, unlike historical cost, current cost reflects conditions at the measurement date.

Question 21

Measurement bases - Current value(Current Cost) 3

In some cases, current cost cannot be determined directly by observing prices in an active market and must be determined indirectly by other means.

For example, if prices are available only for new assets, the current cost of a used asset might need to be estimated by adjusting the current price of a new asset to reflect the current age and condition of the asset held by the entity. (refer example OT for this explanation)

Answer 21

In some cases, current cost cannot be determined directly by observing prices in an active market and must be determined indirectly by other means.

For example, if prices are available only for new assets, the current cost of a used asset might need to be
estimated by adjusting the current price of a new asset to reflect the current age and condition of the asset held by the entity. (refer example OT for this explanation)

Question 22

Factors to consider in selecting measurement bases 1

These other factors set out in the Framework are discussed in this section and comprise:

• relevance
• faithful representation

• enhancing characteristics and the cost constraint.
These discussions focus on the factors to be considered in selecting a measurement basis for recognised assets and recognised liabilities. Some of those discussions may also apply in selecting a measurement basis for information provided in the notes, for recognised or unrecognised items.

• factors specific to initial measurement
• the use of more than one measurement basis

Answer 22

These other factors set out in the Framework are discussed in this section and comprise:

• relevance
• faithful representation

• enhancing characteristics and the cost constraint.
These discussions focus on the factors to be considered in selecting a measurement basis for recognised assets and recognised liabilities. Some of those discussions may also apply in selecting a measurement basis for information provided in the notes, for recognised or unrecognised items.

• factors specific to initial measurement
• the use of more than one measurement basis

Question 23

Factors to consider in selecting measurement bases 2

Framework states that the most efficient and effective
process for applying the fundamental qualitative characteristics would usually be to identify the most relevant information about an economic phenomenon.

If that information is not available or cannot be provided in a way that faithfully represents the
economic phenomenon, the next most relevant type of information is considered.

The role played in the selection of a measurement basis by the fundamental qualitative characteristics is discussed below. That played by the enhancing
characteristics and the cost constraint is discussed at below.

Answer 23

Framework states that the most efficient and effective
process for applying the fundamental qualitative characteristics would usually be to identify the most relevant information about an economic phenomenon.

If that information is not available or cannot be provided in a way that faithfully represents the economic phenomenon, the next most relevant type of information is considered.

The role played in the selection of a measurement basis by the fundamental qualitative characteristics is discussed below. That played by the enhancing
characteristics and the cost constraint is discussed at below.

Question 24

Factors to consider in selecting measurement bases 3

The information provided by a measurement basis must be useful to users of financial statements. To achieve this, the information must be relevant and it must faithfully represent what it purports to represent. In addition, the information provided should be, as far as possible, comparable, verifiable, timely and understandable.

Answer 24

The information provided by a measurement basis must be useful to users of financial statements. To achieve this, the information must be relevant and it must faithfully represent what it purports to represent. In addition, the information provided should be, as far as possible, comparable, verifiable, timely and understandable.

Question 25

Factors to consider in selecting measurement bases 4

Framework states that the most efficient and effective
process for applying the fundamental qualitative characteristics would usually be to identify the most relevant information about an economic phenomenon.

If that information is not available or cannot be provided in a way that faithfully represents the
economic phenomenon, the next most relevant type of information is considered.

The role played in the selection of a measurement basis by the fundamental qualitative characteristics is discussed below. That played by the enhancing
characteristics and the cost constraint is discussed at below.

Answer 25

Framework states that the most efficient and effective
process for applying the fundamental qualitative characteristics would usually be to identify the most relevant information about an economic phenomenon.

If that information is not available or cannot be provided in a way that faithfully represents the
economic phenomenon, the next most relevant type of information is considered.

The role played in the selection of a measurement basis by the fundamental qualitative characteristics is discussed below. That played by the enhancing
characteristics and the cost constraint is discussed at below.

Question 26

Relevance

The relevance of information provided by a measurement basis for an asset or liability and for the related income and expenses is affected by:

• the characteristics of the asset or liability; and
• how that asset or liability contributes to future cash flows

Answer 26

The relevance of information provided by a measurement basis for an asset or liability and for the related income and expenses is affected by:

• the characteristics of the asset or liability; and
• how that asset or liability contributes to future cash flows

Question 27

Relevance : Characteristics of the asset or liability 1

The relevance of information provided by a measurement basis depends partly on the
characteristics of the asset or liability, in particular, on the variability of cash flows and on whether the value of the asset or liability is sensitive to market factors or other risks.

Answer 27

The relevance of information provided by a measurement basis depends partly on the
characteristics of the asset or liability, in particular, on the variability of cash flows and on whether the value of the asset or liability is sensitive to market factors or other risks.

Question 28

Relevance : Characteristics of the asset or liability 2

If the value of an asset or liability is sensitive to market factors or other risks, its historical cost might differ significantly from its current value.

Consequently, historical cost may not provide relevant information if information about changes in value is
important to users of financial statements.

For example, amortised cost cannot provide
relevant information about a financial asset or financial liability that is a derivative.

Answer 28

If the value of an asset or liability is sensitive to market factors or other risks, its historical cost might differ significantly from its current value.

Consequently, historical cost may not provide relevant information if information about changes in value is
important to users of financial statements.

For example, amortised cost cannot provide
relevant information about a financial asset or financial liability that is a derivative.

Question 29

Relevance : Characteristics of the asset or liability 3

Furthermore, if historical cost is used, changes in value are reported not when that value changes, but when an event such as disposal, impairment or fulfilment occurs.

This could be incorrectly interpreted as implying that all the income and expenses recognised at the time of that event arose rather than over the periods during which the asset or liability was held.

Moreover, because measurement at historical cost
does not provide timely information about changes in value, income and expenses reported on that basis may lack predictive value and confirmatory value by not depicting the full effect of the entity’s exposure to risk arising from holding the asset or liability during the reporting period.

Answer 29

Furthermore, if historical cost is used, changes in value are reported not when that value changes, but when an event such as disposal, impairment or fulfilment occurs.

This could be incorrectly interpreted as implying that all the income and expenses recognised at the time of that event arose rather than over the periods during which the asset or liability was held.

Moreover, because measurement at historical cost
does not provide timely information about changes in value, income and expenses reported on that basis may lack predictive value and confirmatory value by not depicting the full effect of the entity’s exposure to risk arising from holding the asset or liability during the reporting period.

Question 30

Relevance : Characteristics of the asset or liability 4

Changes in the fair value of an asset or liability reflect changes in expectations of market participants and changes in their risk preferences.

Depending on the characteristics of the asset or liability being measured and on the nature of the entity’s business activities, information reflecting those changes may not always provide predictive value or confirmatory value to users of financial statements.

This may be the case when the entity’s business activities do not involve selling the asset or transferring the liability, for example, if the entity holds assets solely for use or solely for collecting contractual cash flows or if the entity is to fulfil liabilities itself.

Answer 30

Changes in the fair value of an asset or liability reflect changes in expectations of market participants and changes in their risk preferences.

Depending on the characteristics of the asset or liability being measured and on the nature of the entity’s business activities, information reflecting those changes may not always provide predictive value or confirmatory value to users of financial statements.

This may be the case when the entity’s business activities do not involve selling the asset or transferring the liability, for example, if the entity holds assets solely for use or solely for collecting contractual cash flows or if the entity is to fulfil liabilities itself.

Question 31

Relevance : Contribution to future cash flows 1

Some economic resources produce cash flows directly; in other cases, economic resources are used in combination to produce cash flows indirectly.

How economic resources are used, and hence how assets and liabilities produce cash flows, depends in part on the nature of the business activities conducted by the entity.

Answer 31

Some economic resources produce cash flows directly; in other cases, economic resources are used in combination to produce cash flows indirectly.

How economic resources are used, and hence how assets and liabilities produce cash flows, depends in part on the nature of the business activities conducted by the entity.

Question 32

Relevance : Contribution to future cash flows 2

When a business activity of an entity involves the use of several economic resources that produce cash flows indirectly, by being used in combination to produce and market goods or services to customers, historical cost or current cost is likely to provide relevant information about that activity.

For example, property, plant and equipment is
typically used in combination with an entity’s other economic resources. Similarly, inventory typically cannot be sold to a customer, except by making extensive use of the entity’s other economic resources (for example, in production and marketing activities).

The manner in which measuring such assets at historical cost or current cost can provide relevant information that can be used to derive margins achieved during the period

Answer 32

When a business activity of an entity involves the use of several economic resources that produce cash flows indirectly, by being used in combination to produce and market goods or services to customers, historical cost or current cost is likely to provide relevant information about that activity.

For example, property, plant and equipment is
typically used in combination with an entity’s other economic resources. Similarly, inventory typically cannot be sold to a customer, except by making extensive use of the entity’s other economic resources (for example, in production and marketing activities).

The manner in which measuring such assets at historical cost or current cost can provide relevant information that can be used to derive margins achieved during the period

Question 33

Relevance : Contribution to future cash flows 3

For assets and liabilities that produce cash flows directly, such as assets that can be sold
independently and without a significant economic penalty (for example, without significant business disruption), the measurement basis that provides the most relevant information is likely to be a current value that incorporates current estimates of the amount, timing and uncertainty of the future cash flows.

Answer 33

For assets and liabilities that produce cash flows directly, such as assets that can be sold
independently and without a significant economic penalty (for example, without significant business disruption), the measurement basis that provides the most relevant information is likely to be a current value that incorporates current estimates of the amount, timing and uncertainty of the future cash flows.

Question 34

Faithful representation 1

When assets and liabilities are related in some way, using different measurement bases for those assets and liabilities can create a measurement inconsistency (accounting mismatch).

If financial statements contain measurement inconsistencies, those financial statements may not faithfully represent some aspects of the entity’s financial position and financial performance.

Answer 34

When assets and liabilities are related in some way, using different measurement bases for those assets and liabilities can create a measurement inconsistency (accounting mismatch).

If financial statements contain measurement inconsistencies, those financial statements may not faithfully represent some aspects of the entity’s financial position and financial performance.

Question 35

Faithful representation 2

Consequently, in some circumstances, using the same measurement basis for related assets and liabilities may provide users of financial statements with information that is more useful than the information that would result from using different measurement bases. This may be particularly likely when the cash flows from one asset or liability are directly linked to the cash flows from another asset or liability.

Although a perfectly faithful representation is free from error, this does not mean that measures must be perfectly accurate in all respects.

Answer 35

Consequently, in some circumstances, using the same measurement basis for related assets and liabilities may provide users of financial statements with information that is more useful than the information that would result from using different measurement bases. This may be particularly likely when the cash flows from one asset or liability are directly linked to the cash flows from another asset or liability.

Although a perfectly faithful representation is free from error, this does not mean that measures must be perfectly accurate in all respects.

Question 36

Faithful representation 3

When a measure cannot be determined directly by observing prices in an active market and must instead be estimated, measurement uncertainty arises.

The level of measurement uncertainty associated with a particular measurement basis may affect whether information provided by that measurement basis provides a faithful representation of an entity’s financial position and financial performance.

A high level of measurement uncertainty does not necessarily prevent the use of a measurement basis that provides relevant information. However, in some cases the level of measurement uncertainty is so high that information provided by a measurement basis
might not provide a sufficiently faithful representation . In such cases, it is appropriate to consider selecting a different measurement basis that would also
result in relevant information.

Answer 36

When a measure cannot be determined directly by observing prices in an active market and must instead be estimated, measurement uncertainty arises.

The level of measurement uncertainty associated with a particular measurement basis may affect whether information provided by that measurement basis provides a faithful representation of an entity’s financial position and financial performance.

A high level of measurement uncertainty does not necessarily prevent the use of a measurement basis that provides relevant information. However, in some cases the level of measurement uncertainty is so high that information provided by a measurement basis
might not provide a sufficiently faithful representation . In such cases, it is appropriate to consider selecting a different measurement basis that would also
result in relevant information.

Question 37

Faithful representation 4

Measurement uncertainty is different from both outcome uncertainty and existence uncertainty:

• outcome uncertainty arises when there is uncertainty about the amount or timing of any inflow or outflow of economic benefits that will result from an asset or liability.
• existence uncertainty arises when it is uncertain whether an asset or a liability exists. The manner in which existence uncertainty may affect decisions about whether an entity recognises an asset or liability when it is uncertain whether that asset or liability exists.

Answer 37

Measurement uncertainty is different from both outcome uncertainty and existence uncertainty:

• outcome uncertainty arises when there is uncertainty about the amount or timing of any inflow or outflow of economic benefits that will result from an asset or liability.
• existence uncertainty arises when it is uncertain whether an asset or a liability exists. The manner in which existence uncertainty may affect decisions about whether an entity recognises an asset or liability when it is uncertain whether that asset or liability exists.

Question 38

Faithful representation 5

The presence of outcome uncertainty or existence uncertainty may sometimes contribute to measurement uncertainty. However, outcome uncertainty or existence
uncertainty does not necessarily result in measurement uncertainty.

For example, if the fair value of an asset can be determined directly by observing prices in an active market, no measurement uncertainty is associated with the measurement of that fair value, even if it is uncertain how much cash the asset will ultimately produce and hence there is outcome uncertainty.

Answer 38

The presence of outcome uncertainty or existence uncertainty may sometimes contribute to measurement uncertainty. However, outcome uncertainty or existence
uncertainty does not necessarily result in measurement uncertainty.

For example, if the fair value of an asset can be determined directly by observing prices in an active market, no measurement uncertainty is associated with the measurement of that fair value, even if it is uncertain how much cash the asset will ultimately produce and hence there is outcome uncertainty.

Question 39

Enhancing characteristics and the cost constraint 1

The enhancing qualitative characteristics of comparability, understandability and verifiability, and the cost constraint, have implications for the selection of a measurement basis.

The enhancing qualitative characteristic of
timeliness has no specific implications for measurement.

Answer 39

The enhancing qualitative characteristics of comparability, understandability and verifiability, and the cost constraint, have implications for the selection of a measurement basis.

The enhancing qualitative characteristic of
timeliness has no specific implications for measurement.

Question 40

Enhancing characteristics and the cost constraint 2

Just as cost constrains other financial reporting decisions, it also constrains the selection of a measurement basis.

Hence, in selecting a measurement basis, it is important to consider whether the benefits of the information provided to users of financial statements by that measurement basis are likely to justify the costs of providing and using that information.

Answer 40

Just as cost constrains other financial reporting decisions, it also constrains the selection of a measurement basis.

Hence, in selecting a measurement basis, it is important to consider whether the benefits of the information provided to users of financial statements by that measurement basis are likely to justify the costs of providing and using that information.

Question 41

Enhancing characteristics and the cost constraint 3

Consistently using the same measurement bases for the same items, either from period to period within a reporting entity or in a single period across entities, can help make financial statements more comparable.

Answer 41

Consistently using the same measurement bases for the same items, either from period to period within a reporting entity or in a single period across entities, can help make financial statements more comparable.

Question 42

Enhancing characteristics and the cost constraint 4

A change in measurement basis can make financial statements less understandable. However, a change may be justified if other factors outweigh the reduction in understandability, for example, if the change results in more relevant information.

If a change is made, users of financial statements may need explanatory information to enable them to understand the effect of that change.

Answer 42

A change in measurement basis can make financial statements less understandable. However, a change may be justified if other factors outweigh the reduction in understandability, for example, if the change results in more relevant information.

If a change is made, users of financial statements may need explanatory information to enable them to understand the effect of that change.

Question 43

Enhancing characteristics and the cost constraint 5

Understandability depends on how many different measurement bases are used and on whether they change over time.

In general, if more measurement bases are used
in a set of financial statements, the resulting information becomes more complex and, hence, less understandable and the totals or subtotals in the statement of financial position and the statement(s) of financial performance become less informative.

However, it could be appropriate to use more measurement bases if that is necessary to provide useful information.

Answer 43

Understandability depends on how many different measurement bases are used and on whether they change over time.

In general, if more measurement bases are used
in a set of financial statements, the resulting information becomes more complex and, hence, less understandable and the totals or subtotals in the statement of financial position and the statement(s) of financial performance become less informative.

However, it could be appropriate to use more measurement bases if that is necessary to provide useful information.

Question 44

Enhancing characteristics and the cost constraint 6

Verifiability is enhanced by using measurement bases that result in measures that can be independently corroborated either directly, for example, by observing prices, or indirectly, for example, by checking inputs to a model.

If a measure cannot be verified, users of financial statements may need explanatory information to enable them to understand how the measure was determined. In some such cases, it may be necessary
to specify the use of a different measurement basis.

Answer 44

Verifiability is enhanced by using measurement bases that result in measures that can be independently corroborated either directly, for example, by observing prices, or indirectly, for example, by checking inputs to a model.

If a measure cannot be verified, users of financial statements may need explanatory information to enable them to understand how the measure was determined. In some such cases, it may be necessary
to specify the use of a different measurement basis.

Question 45

Factors specific to initial measurement 1

At initial recognition, the cost of an asset acquired, or of a liability incurred, as a result of an event that is a transaction on market terms is normally similar to its fair value at that date, unless transaction costs are significant.

Nevertheless, even if those two amounts are similar, it is necessary to describe what measurement basis is used at initial recognition. If historical cost will be used subsequently, that measurement basis is also normally appropriate at initial recognition. Similarly, if a current value will be used subsequently, it is also normally appropriate at initial recognition.

Using the same measurement basis for initial recognition and subsequent measurement avoids recognising income or expenses at the time of the first subsequent measurement solely because of a change in measurement basis.

Answer 45

At initial recognition, the cost of an asset acquired, or of a liability incurred, as a result of an event that is a transaction on market terms is normally similar to its fair
value at that date, unless transaction costs are significant.

Nevertheless, even if those two amounts are similar, it is necessary to describe what measurement basis is used at initial recognition. If historical cost will be used subsequently, that measurement basis is also normally appropriate at initial recognition. Similarly, if a current value will be used subsequently, it is also normally appropriate at initial recognition.

Using the same measurement basis for initial recognition and subsequent measurement avoids recognising income or expenses at the time of the first subsequent measurement solely because of a change in measurement basis.

Question 46

Factors specific to initial measurement 2

When an entity acquires an asset, or incurs a liability, in exchange for transferring another asset or liability as a result of a transaction on market terms,,, the initial measure of the asset acquired, or the liability incurred, determines whether any income or expenses arise from the transaction.

When an asset or liability is measured at cost, no
income or expenses arise at initial recognition, unless income or expenses arise from the derecognition of the transferred asset or liability, or unless the asset is impaired or the liability is onerous.

Answer 46

When an entity acquires an asset, or incurs a liability, in exchange for transferring another asset or liability as a result of a transaction on market terms,,, the initial measure of the asset acquired, or the liability incurred, determines whether any income or expenses arise from the transaction.

When an asset or liability is measured at cost, no
income or expenses arise at initial recognition, unless income or expenses arise from the derecognition of the transferred asset or liability, or unless the asset is impaired or the liability is onerous.

Question 47

Factors specific to initial measurement 3

Assets may be acquired, or liabilities may be incurred, as a result of an event that is not a transaction on market terms. For example :

• the transaction price may be affected by relationships between the parties, or by financial distress or other duress of one of the parties;
• an asset may be granted to the entity free of charge by a government or donated to the entity by another party;
• a liability may be imposed by legislation or regulation; or
• a liability to pay compensation or a penalty may arise from an act of wrongdoing.

Answer 47

Assets may be acquired, or liabilities may be incurred, as a result of an event that is not a transaction on market terms. For example :

• the transaction price may be affected by relationships between the parties, or by financial distress or other duress of one of the parties;
• an asset may be granted to the entity free of charge by a government or donated to the entity by another party;
• a liability may be imposed by legislation or regulation; or
• a liability to pay compensation or a penalty may arise from an act of wrongdoing.

Question 48

Factors specific to initial measurement 4

In such cases, measuring the asset acquired, or the liability incurred, at its historical cost may not provide a faithful representation of the entity’s assets and liabilities and of any income or expenses arising from the transaction or other event.

Hence, it may be appropriate to measure the asset acquired, or the liability incurred, at deemed cost. Any difference between that deemed cost and any consideration given or received would be recognised as income or expenses at initial recognition.

Answer 48

In such cases, measuring the asset acquired, or the liability incurred, at its historical cost may not provide a faithful representation of the entity’s assets and liabilities and of any income or expenses arising from the transaction or other event.

Hence, it may be appropriate to measure the asset acquired, or the liability incurred, at deemed cost. Any difference between that deemed cost and any consideration given or received would be recognised as income or expenses at initial recognition.

Question 49

Factors specific to initial measurement 5

When assets are acquired, or liabilities incurred, as a result of an event that is not a transaction on market terms, all relevant aspects of the transaction or other event need to be identified and considered.

For example, it may be necessary to recognise other assets, other liabilities, contributions from holders of equity claims or distributions to holders of equity claims to represent faithfully the substance of the effect of the transaction or other event on the entity’s financial position and on the entity’s financial performance.

Answer 49

When assets are acquired, or liabilities incurred, as a result of an event that is not a transaction on market terms, all relevant aspects of the transaction or other event need to be identified and considered.

For example, it may be necessary to recognise other assets, other liabilities, contributions from holders of equity claims or distributions to holders of equity claims to represent faithfully the substance of the effect of the transaction or other event on the entity’s financial position and on the entity’s financial performance.

Question 50

More than one measurement basis 1

Sometimes, consideration of the factors described at 9 above may lead to the conclusion that more than one measurement basis is needed for an asset or liability and for related income and expenses in order to provide relevant information that faithfully represents both the entity’s financial position and its financial performance.

Answer 50

Sometimes, consideration of the factors described at 9 above may lead to the conclusion that more than one measurement basis is needed for an asset or liability and for related income and expenses in order to provide relevant information that faithfully represents both the entity’s financial position and its financial performance.

Question 51

More than one measurement basis 2

In most cases, the most understandable way to provide that information is:

• to use a single measurement basis both for the asset or liability in the statement of financial position and for related income and expenses in the statement(s) of
financial performance; and

• to provide in the notes additional information applying a different measurement basis.

Answer 51

In most cases, the most understandable way to provide that information is:

• to use a single measurement basis both for the asset or liability in the statement of financial position and for related income and expenses in the statement(s) of
financial performance; and

• to provide in the notes additional information applying a different measurement basis.

Question 52

More than one measurement basis 3

However, in some cases, that information is more relevant, or results in a more faithful representation of both the entity’s financial position and its financial performance, through the use of:

• a current value measurement basis for the asset or liability in the statement of financial position; and
• a different measurement basis for the related income and expenses in the statement of profit or loss

Answer 52

However, in some cases, that information is more relevant, or results in a more faithful representation of both the entity’s financial position and its financial performance, through the use of:

• a current value measurement basis for the asset or liability in the statement of financial position; and
• a different measurement basis for the related income and expenses in the statement of profit or loss

Question 53

Measurement of equity 1

The total carrying amount of equity (total equity) is not measured directly.

It equals the total of the carrying amounts of all recognised assets less the total of the carrying amounts of all recognised liabilities.

Answer 53

The total carrying amount of equity (total equity) is not measured directly.

It equals the total of the carrying amounts of all recognised assets less the total of the carrying amounts of all recognised liabilities.

Question 54

Measurement of equity 2

Because general purpose financial statements are not designed to show an entity’s value, the total carrying amount of equity will not generally equal:

• the aggregate market value of equity claims on the entity;
• the amount that could be raised by selling the entity as a whole on a going concern basis; or
• the amount that could be raised by selling all of the entity’s assets and settling all of its liabilities.

Answer 54

Because general purpose financial statements are not designed to show an entity’s value, the total carrying amount of equity will not generally equal:

• the aggregate market value of equity claims on the entity;
• the amount that could be raised by selling the entity as a whole on a going concern basis; or
• the amount that could be raised by selling all of the entity’s assets and settling all of its liabilities.

Question 55

Measurement of equity 3

Although total equity is not measured directly, it may be appropriate to measure directly the carrying amount of some individual classes of equity and some components of equity.

Nevertheless, because total equity is measured as a residual, at least one class of equity cannot be measured directly. Similarly, at least one component
of equity cannot be measured directly.

Answer 55

Although total equity is not measured directly, it may be appropriate to measure directly the carrying amount of some individual classes of equity and some components of equity.

Nevertheless, because total equity is measured as a residual, at least one class of equity cannot be measured directly. Similarly, at least one component
of equity cannot be measured directly.

Question 56

Measurement of equity 4

Moreover, some initial recognition of equity will be a consequence of the initial recognition of an asset.

The total carrying amount of an individual class of equity or component of equity is normally positive, but can be negative in some circumstances. Similarly, total equity is generally positive, but it can be negative, depending on which assets and liabilities are
recognised and on how they are measured.

Answer 56

Moreover, some initial recognition of equity will be a consequence of the initial recognition of an asset.

The total carrying amount of an individual class of equity or component of equity is normally positive, but can be negative in some circumstances. Similarly, total equity is generally positive, but it can be negative, depending on which assets and liabilities are recognised and on how they are measured.