Measurement of the Elements of Financial Statements
Measurement involves assigning monetary amounts at which the elements of the financial statements are to be recognized and reported. The Framework acknowledges that a variety of measurement bases are used today to different degrees and in varying combinations in financial statements, including:
- Historical cost
- Current cost
- Net realizable (settlement) value
- Present value (discounted)
Historical cost is the measurement basis most commonly used today, but it is usually combined with other measurement bases. The Framework does not include concepts or principles for selecting which measurement basis should be used for particular elements of financial statements or in particular circumstances. The qualitative characteristics do provide some guidance in this matter.
Concepts of Capital
- Financial concept of capital – capital is synonymous with net assets of the enterprise. This is the concept of capital adopted by most enterprises.
- Physical concept of capital – capital is regarded as the productive capacity of the enterprise based on, for example, units of output per day.
Concepts of Capital Maintenance
- Financial capital maintenance – Under this concept, a profit is earned only if the financial (or money) amount of the net assets at the end of the of the period exceeds the financial (or money) amount of the net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.
- Physical capital maintenance – Under this concept, a profit is earned only if the physical productive capacity (or operating capability) of the enterprise (or the resources need to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.