CICA DP: Toward a Measurement Framework for Financial Reporting by Profit-Oriented Entities

In 2012, the Canadian Institute of Chartered Accountants (CICA) published , at the request of Canada's Accounting Standards Board, a paper written by Alex Milburn to stimulate the study and debate on the development of a measurement framework.

Proposals

The paper included the following six main proposals:

Principle 1: Market value created by a cash-generating process (revenue) should be recognised when the process (1) has achieved an output that has a current market value that is practicable of faithful representation, and (2) has generated the good and/or service that is the source of that output market value.

Principle 2: Assets that are inputs to a cash-generating process should be measured at current prices in the markets in which the input would be acquired by the entity, or when such prices are not practicable of faithful representation, on the basis of the most relevant substitute that is practicable of faithful representation. Changes in current market values or in substitute measurement bases that reflect current input values would be reported immediately in the statement of income.

Principle 3: Except as provided by Principle 4, business operating liabilities should be measured at current prices in the markets in which the liabilities were issued or incurred, or when such prices are not practicable of faithful representation, on the basis of the most relevant substitute that is practicable of faithful representation. Changes in current market values, or in substitute measurements that reflect current values, would be immediately reported in the statement of income.

Principle 4: Business operating liabilities should be measured at current prices in markets in which they could be settled prior to maturity when such prices are lower than would be determined under Principle 3, if these prices could be achieved without additional cost to the entity (other than transaction costs) and are practicable of faithful representation.

Principle 5: Investing and financing assets and liabilities should be measured at current prices in the markets in which they were acquired, issued or incurred or, when such prices are not practicable of faithful representation, on the basis of the most relevant substitute that is practicable of faithful representation. Changes in current market values, or in substitute measurements that reflect current values, should be immediately reported in the statement of income.

Principle 6: The sum of the carrying amounts of business operating assets (less liabilities) comprising a cash-generating unit should not exceed the current market value of that cash-generating unit or, if that market value is not practicable of faithful representation, of a current value substitute that is practicable of faithful representation.

EFRAG comments

Draft comment letter

On 20 November 2012 EFRAG issued its draft comment letter in response to the paper.

Comment letter

Based on comments received in response to its draft comment letter, EFRAG issued its comment letter on 24 January 2013.

In its comment letter EFRAG welcomed the work carried out in relation to the research paper.

EFRAG agreed with the paper that stewardship should be considered when determining how to measure assets and liabilities. EFRAG also agrees with the paper that if a measurement basis in practice would result in estimates with large margins of errors, disclosure about the uncertainty cannot solve this problem. Instead another measurement basis should be chosen.

EFRAG, however, disagreed with the proposed model for measuring assets and liabilities. The paper proposed that Current Market Value is the most ideal (relevant) measurement basis, when the value is practicable of faithful representation. The paper also proposed that matching current input costs sacrificed against current revenues is a better starting point for estimating an entity's future sustainable earning than historical cost-based accounting, and reflecting holding gains and losses on input assets and liabilities always provides useful information.

EFRAG did not believe that it would be possible to identify an ideal measurement basis. Instead the role of a measurement framework should be to explain the properties of various bases of measurement and, by reference to empirical evidence on various users' needs, provide directions on when the different properties are important. In doing so, implications of a measurement basis on both an entity's financial position and performance should be considered. A measurement framework should also take into account that the information that is most relevant for estimating future cash flows might not be most relevant for assessing stewardship and that different types of users would likely have different needs.

EFRAG considered that reporting holding gains and losses on input assets and liabilities is irrelevant if the entity is not generating its cash flows from holding and selling these assets and liabilities. For self-constructed assets, the reported holding gains and losses may even represent very abstract information as it may be impossible to re-sell input assets that have been used to create other assets.

EFRAG believed that information about actual cash flows is often considered more useful for predicting future cash flows than information about hypothetical cash flows.