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CS Executive · Corporate Accounting and Financial Management · Accounting Standards

Under the Conceptual Framework for Financial Reporting under Indian Accounting Standards, how are cash-flow-based measurement techniques correctly described when a measure cannot be observed directly?

Cash-flow-based measurement techniques are not measurement bases. They are techniques used in applying a measurement basis, such as fair value. So the basis being applied must be identified, together with how far the technique reflects the factors relevant to that basis.

  1. AThey are measurement bases in their own right, replacing fair value and fulfilment value
  2. BThey are techniques used in applying a measurement basis, so the basis being used must be identifiedCorrect
  3. CThey are used only for the statement of cash flows and never for balance sheet items
  4. DThey are valid only when the entity has no own credit risk

Explanation

The Framework says that when a measure cannot be observed directly, one way to estimate it is a cash-flow-based technique. Such techniques are not measurement bases but are used in applying one. The measurement basis in use must therefore be identified, along with the extent to which the technique reflects that basis's factors. Treating them as bases themselves is wrong.

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