Conceptual Framework for Financial Reporting

Historical cost
In many situations, it is simpler, and hence less costly, to measure historical
cost than it is to measure a current value. In addition, measures determined
applying a historical cost measurement basis are generally well understood
and, in many cases, verifiable.
However, estimating consumption and identifying and measuring impairment
losses or onerous liabilities can be subjective. Hence, the historical cost of an
asset or liability can sometimes be as difficult to measure or verify as a
current value.
Using a historical cost measurement basis, identical assets acquired, or
liabilities incurred, at different times can be reported in the financial
statements at different amounts. This can reduce comparability, both from
period to period for a reporting entity and in a single period across entities.
Current value
Because fair value is determined from the perspective of market participants,
not from an entity-specific perspective, and is independent of when the asset
was acquired or the liability was incurred, identical assets or liabilities
measured at fair value will, in principle, be measured at the same amount by
entities that have access to the same markets. This can enhance comparability
both from period to period for a reporting entity and in a single period across
entities. In contrast, because value in use and fulfilment value reflect an
entity-specific perspective, those measures could differ for identical assets or
liabilities in different entities. Those differences may reduce comparability,
particularly if the assets or liabilities contribute to cash flows in a similar
manner.
If the fair value of an asset or liability can be determined directly by observing
prices in an active market, the process of fair value measurement is low-cost,
simple and easy to understand; and the fair value can be verified through
direct observation.
Valuation techniques, sometimes including the use of cash-flow-based
measurement techniques, may be needed to estimate fair value when it
cannot be observed directly in an active market and are generally needed
when determining value in use and fulfilment value. Depending on the
techniques used:
(a)
estimating inputs to the valuation and applying the valuation
technique may be costly and complex.
(b)
the inputs into the process may be subjective and it may be difficult to
verify both the inputs and the validity of the process itself.
Consequently, the measures of identical assets or liabilities may differ.
That would reduce comparability.
In many cases, value in use cannot be determined meaningfully for an
individual asset used in combination with other assets. Instead, the value in
use is determined for a group of assets and the result may then need to be
allocated to individual assets. This process can be subjective and arbitrary. In
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Conceptual Framework
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addition, estimates of value in use for an asset may inadvertently reflect the
effect of synergies with other assets in the group. Hence, determining the
value in use of an asset used in combination with other assets can be a costly
process and its complexity and subjectivity reduces verifiability. For these
reasons, value in use may not be a practical measurement basis for regular
remeasurements of such assets. However, it may be useful for occasional
remeasurements of assets, for example, when it is used in an impairment test
to determine whether historical cost is fully recoverable.
Using a current cost measurement basis, identical assets acquired or liabilities
incurred at different times are reported in the financial statements at the
same amount. This can enhance comparability, both from period to period for
a reporting entity and in a single period across entities. However, determining
current cost can be complex, subjective and costly. For example, as noted in
paragraph 6.22, it may be necessary to estimate the current cost of an asset by
adjusting the current price of a new asset to reflect the current age and
condition of the asset held by the entity. In addition, because of changes in
technology and changes in business practices, many assets would not be
replaced with identical assets. Thus, a further subjective adjustment to the
current price of a new asset would be required in order to estimate the
current cost of an asset equivalent to the existing asset. Also, splitting changes
in current cost carrying amounts between the current cost of consumption
and the effect of changes in prices (see paragraph 6.42) may be complex and
require arbitrary assumptions. Because of these difficulties, current cost
measures may lack verifiability and understandability.