Toward a Measurement Framework for Financial Reporting by Profit-oriented Entities

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• Abstract
• Invitation to Comment and Participate in Debating the Issues
• Comment Letters 

This research paper "Toward a Measurement Framework for Financial Reporting by Profit-oriented Entities" by J. Alex Milburn, PhD, FCA is published by the Canadian Institute of Chartered Accountants (CICA) at the request of Canada’s Accounting Standards Board (AcSB), to stimulate study and debate, and to provide input for the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB). The paper is put forward as a call for further study and discussion.

The paper sets out the views of its author and has not been deliberated by any CICA committee.  Accordingly, it does not necessarily reflect the views of the CICA.

Accountants, academic and practicing, and all others who have an interest in the improvement of financial reporting measurement principles are invited to study this paper and submit their questions, comments and ideas.

• Toward a Measurement Framework for Financial Reporting by Profit-oriented Entities by J. Alex Milburn, PhD, FCA

This paper’s proposals for developing a measurement framework for financial reporting by profit-oriented entities are founded on fundamental premises about economic business purposes, financial reporting objectives, and the role of markets and market prices.

It envisages profit-oriented (business) entities as processes for transforming market input values into market output values. This leads to the conclusion that market values should be expected to play a critical role in financial reporting measurement theory.

The paper proposes a definition of current market value as the present exchange price determined, on the basis of publicly available information, by the competitive interaction of willing buyers and sellers in an open, active and orderly market.

 It is proposed that current market value, so defined, embodies a set of properties that make it the ideal (most relevant) measure of assets and liabilities for financial reporting purposes. Other commonly advocated measurement bases are examined and demonstrated to lack one or more crucial properties of current market value.

Certain other measurement bases can embody some significant relevant properties, however, so that they may be evaluated as possible substitutes when current market value is not practicable of faithful representation.

The paper reasons that measurement for financial reporting purposes is crucially dependent on determining when an entity should be recognized to have created economic value.

The paper proposes that two conditions must be met: (1) the entity must have achieved an output that has a current market value that is practicable of faithful representation, and (2) the entity must have generated the good or service that is the source of that market value.

It is deduced from this that assets that are inputs to entity cash-generating processes should be measured at their current market prices in the markets in which they would be acquired or, when such prices are not practicable of faithful representation, on the basis of the closest (most relevant) substitutes for these current market values that are practicable of faithful representation.

Parallel principles are proposed for operating liabilities, and investing and financing assets and liabilities, and the implications of these principles for recognizing and measuring impairment are assessed.

The approach proposed in this paper would have major implications for financial reporting measurement.

The paper, supported by an extensive appendix, endeavours to identify and address the most fundamental of these implications, and to examine critical premises and assumptions, issues and alternative views and arguments that have been, or may be expected to be, expressed in response to these proposals. It is hoped that this paper will help to stimulate a long overdue rigorous reexamination of financial reporting measurement theory.

The paper is premised in the belief that substantial improvement in the conceptual underpinnings of financial reporting measurement is possible, and urgently needed.

Included in the paper is a set of questions that may help respondents focus their thoughts and facilitate discussion and sharing of views. However, respondents should not feel compelled to address all the questions, and may wish to address additional issues.

Comments

Respondents should e-mail their comments to CICA at: measurement@cica.ca, or mail them to:

Attn: Alex Milburn, PhD, FCA

The Canadian Institute of Chartered Accountants

277 Wellington Street West, Toronto, ON, Canada M5V 3H2

Comments received will be posted online under Comment Letters, unless a respondent specifically requests otherwise.

Deadline for comments

While there is no fixed deadline for the submission of comments, it would be helpful if comments were received by November 30, 2012. A decision will be made at that time whether to continue or close formal comments and/or discussion on the blog.

Online Discussion

In addition to sending formal comments to CICA, respondents are invited to interact directly with Alex on his blog, where he intends to respond to comments, encourage further exchanges of views on the paper and a sharing of information, ideas and views on fundamental measurement issues generally.

• http://measurementframework.blogspot.ca/