Meaning of Measurement
Measurement is the process of assigning monetary amounts to the elements of financial statements. Assets, liabilities, equity, income, and expenses are expressed in monetary terms so that they can be recognized and presented in financial statements.
The Conceptual Framework for Financial Reporting describes two primary measurement bases: Historical Cost and Current Value.
Historical Cost
Historical cost reflects the value of the transaction price at the time the transaction takes place. Under this measurement basis, an item is measured using the monetary amount associated with the original transaction.
Thus, historical cost is based on the conditions and transaction value existing at the date of the transaction. It does not reflect the conditions prevailing at a later measurement date.
Current Value
Current value reflects the conditions that exist at the measurement date. Unlike historical cost, which is based on the original transaction price, current value considers the value of an item according to current conditions.
The Conceptual Framework identifies three current value measurement bases: Fair Value, Value in Use, and Current Cost.
Fair Value
Fair value is a current value measurement basis that reflects conditions existing at the measurement date. It measures an item on the basis of its value under current conditions rather than its original transaction price.
Value in Use
Value in use is another current value measurement basis. It reflects the current measurement of an item based on its value in use under conditions existing at the measurement date.
Current Cost
Current cost reflects the current value of an item according to conditions prevailing at the measurement date. It is therefore based on current conditions rather than the historical transaction price.
Historical Cost and Current Value
The basic difference between historical cost and current value is the date or conditions used for measurement. Historical cost reflects the transaction price at the time of the original transaction, whereas current value reflects conditions existing at the measurement date.
Current value includes Fair Value, Value in Use, and Current Cost as its measurement bases.
Key Points
Measurement means assigning monetary amounts to the elements of financial statements. The Conceptual Framework identifies Historical Cost and Current Value as the two primary measurement bases.
Historical Cost reflects the transaction price at the time of the transaction, while Current Value reflects conditions at the measurement date.
The three current value measurement bases are Fair Value, Value in Use, and Current Cost.