Measurement of Elements in the Framework: Bases and How to Choose

Understand Measurement of Elements

Key rules to remember

Historical cost (asset)

Cost at acquisition = price paid + transaction costs; later carrying amount = cost − depreciation/amortisation − impairment

Updated for consumption, impairment and, for financial items, accrued interest.

Fair value

Price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Market-based, exit price, not entity-specific.

Value in use

Present value of expected future cash flows from using the asset and from its ultimate disposal

Entity-specific. The liability counterpart is fulfilment value.

Fulfilment value

Present value of the cash or other resources the entity expects to transfer to settle the liability

Entity-specific, includes the entity's own expected costs of settling.

Current cost

Asset: cost of an equivalent asset now (price + transaction costs). Liability: consideration receivable now for an equivalent liability, less transaction costs

Entry-type value, not an exit price.

Factors in selecting a basis

Relevance (contribution to future cash flows, characteristics of the item) + Faithful representation (measurement uncertainty, mismatches) + Cost constraint

Use these as headings in any 'how do you choose' answer.

How to solve Measurement of Elements questions

1. 1Identify the element and whether it is an asset or a liability. The names of bases differ (value in use versus fulfilment value).
2. 2Name the two families: historical cost and current value.
3. 3If asked to define, give the exact meaning of each basis in one or two lines, and state whether it is market-based or entity-specific.
4. 4If asked to compare, use fixed points: what the number represents, entry or exit, market or entity view, updated or not, verifiability.
5. 5If asked to select, apply the factors: how the item contributes to future cash flows, how it is used or settled, measurement uncertainty, and mismatches.
6. 6Add the cost constraint: the benefit of information must justify its cost.
7. 7If numbers are given, compute each basis from the data, using only what the basis allows, then compare.
8. 8End with a conclusion that names the basis and gives the reason in one sentence.

Quickest way: Entry versus exit, market versus entity

Common mistakes in Measurement of Elements

• Treating fair value and current cost as the same

  Both are current values and both use today's prices.

  Fix: Fair value is the exit price (selling or transferring). Current cost is the entry price (buying an equivalent asset, with transaction costs).

• Calling value in use a market measure

  It sounds like a value any buyer would see.

  Fix: Value in use is entity-specific. It reflects the cash flows this entity expects, not market participants' views.

• Saying historical cost never changes after purchase

  Students read 'historical' as 'fixed'.

  Fix: Historical cost is updated for depreciation, amortisation, impairment and accrued interest. The starting point is the past transaction.

• Using value in use for a liability

  Students remember one term and apply it everywhere.

  Fix: For assets say value in use. For liabilities say fulfilment value.

• Giving a choice of basis without reasons

  Students memorise the list but skip the selection factors.

  Fix: Always tie the choice to relevance, faithful representation and cost constraint, and to how the item is used or settled.

• Treating transaction costs the same way under every basis

  The definitions are remembered loosely, so students apply one rule to all bases and forget the liability side.

  Fix: For an asset, historical cost and current cost include transaction costs. Fair value is not adjusted for transaction costs. For a liability, transaction costs are deducted from the value received (historical cost) or from the consideration receivable now (current cost).

Worked examples