Financial Reporting · Recognition and measurement

Factors in Selecting a Measurement Basis in the Conceptual Framework

Updated 11 October 2026 · Fact-checked

The Conceptual Framework says you choose a measurement basis by asking which one gives the most useful information. Consider relevance, faithful representation, the cost of producing the figure, and the effect on the statement of financial position and the statement of profit or loss and OCI. Comparability, verifiability, timeliness and understandability also matter.

Understand Factors in Selecting a Measurement Basis

A measurement basis is the way you put a number on an asset, a liability, income or an expense. The two main families are historical cost and current value. Current value includes fair value, value in use (for assets), fulfilment value (for liabilities) and current cost.

The Conceptual Framework does not pick one basis for everything. It tells you to select the basis that gives the most useful information to users. Usefulness is judged using the qualitative characteristics. The two fundamental ones are relevance and faithful representation. The enhancing ones are comparability, verifiability, timeliness and understandability.

Relevance asks whether the figure helps users predict future cash flows or confirm past expectations. This depends on how the asset contributes to future cash flows and on the nature of the business activity. If an asset produces cash flows by being used together with other assets, a current value of that asset alone may say little. If an asset is held for sale or its value is volatile, a current value is usually more relevant.

Faithful representation asks whether the figure is complete, neutral and free from error. A current value that rests on uncertain estimates may be less faithful than a cost that can be checked to an invoice. The Framework accepts that measurement uncertainty exists. It says that a high level of uncertainty does not always stop an estimate from being useful.

Two further factors complete the picture. The first is cost constraint: the benefit of the information must justify the cost of providing it. Regular revaluation of every asset costs money and may not be worth it. The second is the effect on the financial statements. Each basis changes the figures in the statement of financial position. It also changes the profit or loss and OCI, for example through depreciation, gains on revaluation and fair value changes. You must discuss both statements in your answer.

Historical cost is cheap, verifiable and objective. But it can be out of date, ignores inflation and can hide gains. Fair value is more up to date and relevant, but it can be subjective, costly to obtain and volatile.

Key rules to remember

Fundamental qualitative characteristics: Useful information = relevance + faithful representation; These two must both be present. Choose the basis that best serves them, then check the enhancing characteristics.
Enhancing characteristics: Comparability, verifiability, timeliness, understandability; They improve information that is already relevant and faithfully represented. They cannot rescue irrelevant information.
Cost constraint: Benefit of the information ≥ cost of providing it; This is a pervasive limit on reporting. It is not a mathematical test, so argue it in words.
Current value bases: Fair value; value in use (assets) / fulfilment value (liabilities); current cost; Learn these as the current value family. Historical cost is the other main basis.
Factors in the Framework's selection: Relevance (nature of asset and how it produces cash flows) + faithful representation (measurement uncertainty) + effect on both statements; Use this as your answer outline.

How to solve Factors in Selecting a Measurement Basis questions

Use this method for any question that asks you to discuss, compare or recommend a measurement basis.

1Identify the item (for example land, inventory, a financial investment or a liability) and how the entity uses it.
2Name the candidate bases, usually historical cost and a current value such as fair value.
3Test relevance: does the basis help users predict future cash flows for this item, given how it earns cash?
4Test faithful representation: is the figure complete, neutral and free from error, and how uncertain is the estimate?
5Consider the cost constraint and the enhancing characteristics, mainly verifiability and comparability.
6State the effect on the statement of financial position and on profit or loss and OCI.
7Conclude with a clear recommendation tied to the scenario, not a generic list.

Quickest way: R-F-C-E checklist

When to use it: Use it for a short Section B or C discussion when you have a few minutes to plan.

R: relevance of the basis for this item.
F: faithful representation and measurement uncertainty.
C: cost versus benefit, plus comparability and verifiability.
E: effect on the statement of financial position and on profit or loss and OCI.
Finish with one sentence of recommendation using facts from the scenario.

Common mistakes in Factors in Selecting a Measurement Basis

Listing advantages and disadvantages of historical cost without linking them to usefulness.
Students memorise a pros and cons list and stop there.
Fix: Tie each point to relevance, faithful representation or cost. For example, say cost is verifiable, so it supports faithful representation.
Saying fair value is always better because it is up to date.
Current figures feel more relevant.
Fix: Point out that fair value can be subjective and costly. Relevance depends on how the asset produces cash flows.
Ignoring the effect on profit or loss and OCI.
Students focus on the asset figure in the statement of financial position.
Fix: Always state what changes in performance: depreciation, revaluation gains in OCI, or fair value gains in profit or loss.
Treating the enhancing characteristics as equal to the fundamental ones.
All the characteristics are learned as one list.
Fix: Say relevance and faithful representation come first. Enhancing characteristics only help choose between options that already pass.
Forgetting the cost constraint.
It seems a minor point.
Fix: Add a sentence on whether the extra information justifies the cost, especially for items that are small or rarely change in value.
Giving a general essay with no reference to the scenario.
Students write what they know instead of what is asked.
Fix: Use the facts given, such as asset type, volatility or how the entity uses the item, in every paragraph.

Worked examples

Example 1

A company holds an office building that it uses in its own operations. The directors ask whether historical cost or fair value is the better measurement basis. Discuss, using the Conceptual Framework.

Show the solution

Item and use: the building is used with other assets to produce cash flows, it is not held for sale.
Relevance: because the building generates cash flows together with other assets, its current market value alone says less about future cash flows. Cost less depreciation shows the resources used.
Faithful representation: historical cost is verifiable to documents and has low uncertainty. Fair value needs a valuer and involves estimates.
Cost constraint: regular valuations cost money, and the benefit may be limited for an owner-occupied asset.
Effect on statements: under cost, depreciation is charged in profit or loss on a fixed base. Under fair value the asset is higher and so is depreciation, while a gain goes to OCI.
Enhancing characteristics: cost is easier to verify. Comparability may suffer if other firms use a different basis.

Answer: Historical cost is likely to be the more suitable basis for an owner-occupied building. It is verifiable, cheap and suits an asset used together with others. Fair value would give a more current figure, but it is costlier and more subjective. The company should disclose enough to let users see the building's current value if it differs materially.

Example 2

An entity holds a portfolio of listed shares as an investment, to be sold when prices rise. Explain the factors that support measuring the portfolio at fair value rather than historical cost.

Show the solution

Item and use: the shares are held to generate gains from price changes, so cash flows come from sale, not use.
Relevance: the current market price shows the cash the entity could obtain. Cost is out of date and says little about future cash flows.
Faithful representation: listed prices are observable, so uncertainty is low and the figure is neutral and verifiable.
Cost constraint: obtaining a quoted price is cheap, so the benefit exceeds the cost.
Effect on statements: the statement of financial position shows the current value. Changes in value are reported in profit or loss for shares held for trading, which shows performance but can create volatility.
Conclusion: relevance is high and uncertainty is low, so fair value is supported.

Answer: Fair value is the more useful basis. It is highly relevant because the cash flows come from selling the shares at current prices. It is faithfully represented because quoted prices are observable and cheap to obtain. The drawback is volatile profit or loss, which users should be told about.

Exam tips

In discuss questions, structure the answer around relevance, faithful representation, cost and effect on the statements. Markers look for these headings.
Always use the scenario. A generic list of pros and cons earns few marks.
Show balance: give a point for and a point against each basis, then reach a conclusion.
Remember that objective test questions are all or nothing. Learn which characteristics are fundamental and which are enhancing.
Keep the answer short and well spaced. One clear point per paragraph with a reason is better than long blocks.

Practice questions from Recognition and measurement

Factors in Selecting a Measurement Basis: frequently asked questions

What factors does the Conceptual Framework say to consider when selecting a measurement basis?

Consider relevance and faithful representation first. Also consider the cost constraint, the enhancing characteristics, and the effect on the statement of financial position and the statement of profit or loss and OCI. How the asset or liability produces cash flows also matters.

What are the advantages and disadvantages of historical cost?

Historical cost is objective, verifiable and cheap to produce. Its disadvantages are that values can be out of date, inflation is ignored and gains can be hidden. Link each point to relevance or faithful representation in your answer.

Is fair value more relevant than historical cost?

Not always. Fair value is often more relevant for items held for sale or with volatile value. For assets used together with others to produce cash flows, cost may say more about the resources used. Fair value can also be less reliable if estimates are uncertain.

How do I answer a measurement basis discuss question?

Identify the item, name the bases, then test each against relevance, faithful representation and cost. State the effect on both statements and give a reasoned conclusion that uses the facts in the scenario.