Conceptual Framework for Financial Reporting

Information provided by particular measurement bases
When selecting a measurement basis, it is important to consider the nature of
the information that the measurement basis will produce in both the
statement of financial position and the statement(s) of financial performance.
Table 6.1 summarises that information and paragraphs 6.24–6.42 provide
additional discussion.
6.18
6.19
6.20
6.21
6.22
6.23
Conceptual Framework
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Historical cost
Information provided by measuring an asset or liability at historical cost may
be relevant to users of financial statements, because historical cost uses
information derived, at least in part, from the price of the transaction or other
event that gave rise to the asset or liability.
Normally, if an entity acquired an asset in a recent transaction on market
terms, the entity expects that the asset will provide sufficient economic
benefits that the entity will at least recover the cost of the asset. Similarly, if a
liability was incurred or taken on as a result of a recent transaction on market
terms, the entity expects that the value of the obligation to transfer economic
resources to fulfil the liability will normally be no more than the value of the
consideration received minus transaction costs. Hence, measuring an asset or
liability at historical cost in such cases provides relevant information about
both the asset or liability and the price of the transaction that gave rise to that
asset or liability.
Because historical cost is reduced to reflect consumption of an asset and its
impairment, the amount expected to be recovered from an asset measured at
historical cost is at least as great as its carrying amount. Similarly, because the
historical cost of a liability is increased when it becomes onerous, the value of
the obligation to transfer the economic resources needed to fulfil the liability
is no more than the carrying amount of the liability.
If an asset other than a financial asset is measured at historical cost,
consumption or sale of the asset, or of part of the asset, gives rise to an
expense measured at the historical cost of the asset, or of part of the asset,
consumed or sold.
The expense arising from the sale of an asset is recognised at the same time as
the consideration for that sale is recognised as income. The difference
between the income and the expense is the margin resulting from the sale.
Expenses arising from consumption of an asset can be compared to related
income to provide information about margins.
Similarly, if a liability other than a financial liability was incurred or taken on
in exchange for consideration and is measured at historical cost, the
fulfilment of all or part of the liability gives rise to income measured at the
value of the consideration received for the part fulfilled. The difference
between that income and the expenses incurred in fulfilling the liability is the
margin resulting from the fulfilment.
Information about the cost of assets sold or consumed, including goods and
services consumed immediately (see paragraph 4.8), and about the
consideration received, may have predictive value. That information can be
used as an input in predicting future margins from the future sale of goods
(including goods not currently held by the entity) and services and hence to
assess the entity’s prospects for future net cash inflows. To assess an entity’s
prospects for future cash flows, users of financial statements often focus on
the entity’s prospects for generating future margins over many periods, not
just on its prospects for generating margins from goods already held. Income
6.24
6.25
6.26
6.27
6.28
6.29
6.30
Conceptual Framework
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and expenses measured at historical cost may also have confirmatory value
because they may provide feedback to users of financial statements about
their previous predictions of cash flows or of margins. Information about the
cost of assets sold or consumed may also help in an assessment of how
efficiently and effectively the entity’s management has discharged its
responsibilities to use the entity’s economic resources.
For similar reasons, information about interest earned on assets, and interest
incurred on liabilities, measured at amortised cost may have predictive and
confirmatory value.