The place of measurement is crucial in accounting. Measurement is vital to accountants for recording, summarising, reporting financial transactions and preparing financial statements that should indicate the true position of an entity. However, accounting measurement issues are seen to be problematic as many measurements are derived.
According to Mary E. Barth (2007), an analysis regarding the latest activities of the International Accounting Standard Board (IASB) have revealed that the use of fair value as a measurement base in financial accounting is probable to increase. With the increased probability of using fair value as a measurement base and the adoption of international accounting standards by Australia, it would transform the way to which assets, including intangible assets, and liabilities of Australian entities are being measured.
This report first provides a discussion about role of measurement in accounting and the reasons as to why measurement issues are seen to be problematic. Thereafter, further examine the issue of using fair value as a measurement bases and the requirements in relation to Australia Accounting Standard Board (AASB) 138 intangible assets, as well as the effects of fair value on intangible assets.
Critical roles of measurement exist in accounting. Within accounting, measurement is required for recognition, recording, summarising, reporting financial transactions and preparing financial statements. Financial reports that is “to provide information that is useful to present and potential investors and creditors and others in making investment, credit, and similar resource allocation decisions” (IASB, 2006a, para. OB2 cited in Barth, 2007). Therefore, it is crucial that the components of the financial reports are measured accurately to proper reflect the true position of the Australian entity.
2.1 Definition of Measurement
IASB paragraph 99, Framework for the Preparation and Presentation of Financial Statements states, “Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the balance sheet and income statement. This involves the selection of the particular basis of measurement” (International Accounting Standard Board, 2001).
2.2 Bases of Measurement
The bases of measurement, according to IASB (2001) paragraph 100, are historical cost, current cost, realisation (settlement) value, present value. Though fair value was not listed, fair value was mention by Mary Barth (2007).
However, the framework does not call for the use of a particular measurement base, neither does it provide any concepts or principle as guidance for selecting an appropriate measurement basis for particular component of financial statements or in specific circumstances though historical cost as a measurement basis is widely used today.
2.3 Roles of Measurement
2.3.1 Recognition Role of Measurement
The role of measurement is inevitable when it comes to the recognition of an item or element in the financial reports, where recognition is defined in the IASB (2001) paragraph 82 framework as “the process of incorporating in the balance sheet or income statement an item that meets the definition of an element and satisfies the criteria for recognition.” Measurement therefore provides the basis for which it is necessary to accurately reflect the true value of the item when recognising it. These values will then be report in financial reports, financial reports that is used to provide valuable information to stakeholders of the entity when making investment, credit, and similar resource allocation decisions (IASB, 2006 cited in Leo, Hoggett, Sweeting & Radford, 2008).
2.3.2 Re-measurement of Assets and Liabilities
There is a price or cost assigned to an asset or liability when the business acquires the asset or when the business incurs the liability (Bourke & Smart,...