Project Pages

Conceptual Framework—Measurement and Recognition

Project Description: This project has two primary objectives. The objectives will be addressed in two subprojects. One objective is to develop recognition criteria for whether information should be reported in state and local governmental financial statements and when that information should be reported. Another objective is to consider the measurement concepts, both the measurement approach or approaches (for example, initial amounts or remeasured amounts) that conceptually should be used in governmental financial statements and measurement attributes (the feature of the assets or liabilities that is measured). This project ultimately will lead to a Concepts Statement on measurement and a Concepts Statement on recognition of elements of financial statements.

Status:
Currently being deliberated.
Preliminary Views issued June 2011
Added to Research Agenda: August 2005
Added to Current Agenda: December 2005

Conceptual Framework: Measurement and Recognition—Project Plan


Background
: The Board frequently must decide whether an item of information should be recognized in the financial statements, when such an item should be recognized, and at what amount it should be recognized. In the past, the Board has relied on the conceptual framework of other standards setters and analogous examples from practice or previous standards to make such decisions. This method of making decisions tends to lead to certain inconsistencies in financial reporting standards and could result in too much reliance being placed on accounting concepts that were not developed for a governmental environment.

Thus, the project on recognition and measurement is needed to provide the GASB with conceptual guidance as to when elements of financial statements should be reported in particular financial statements and at what amount. This will entail developing recognition criteria and will include a discussion of when elements of financial statements are recognized using different measurement focuses. For the GASB to make consistent financial reporting decisions, it is necessary to have (1) definitions of the elements of financial statements, (2) a basis for determining when elements of financial statements should be recognized in the financial statements, and (3) a basis for determining which measurement approach (for example, initial amounts or remeasured amounts) is appropriate for reporting the elements. The GASB issued a Concepts Statement on the definitions for the elements of financial statements in 2007, and a conceptual framework project on recognition and measurement is necessary to complete the conceptual basis for reporting items in traditional financial statements.

Accounting and Financial Reporting Issues:

Overall

  1. What messages are financial statements conceptually attempting to convey? (In other words, what is the story that the financial statements attempt to communicate, or what questions should be answered by reading different financial statements and financial statements prepared using different measurement focuses? For example, the statement of cash flows answers the question, “What happened to cash during the year?”)
  2. What is the relationship among objectives of financial reporting (user needs), financial statements, measurement focuses, and measurement approaches at the conceptual level?
  3. How does when an element is recognized affect the meaning that is to be conveyed by a particular financial statement?
Measurement
  1. What measurement approach(es) best conveys the message(s) intended for financial statements? What is the role of initial amounts and remeasured amounts in conveying these messages? Is the same measurement approach applicable in all measurement focuses?
  2. Should the application of remeasured amounts be different for the statement of net assets and the statement of activities? How do remeasured amounts relate to the cost of service model of the statement of activities?
  3. What measurement attributes should be considered?
Recognition
  1. What are the fundamental recognition criteria necessary to report an element in a financial statement?

Project History: The importance of this conceptual project was confirmed by the Governmental Accounting Standards Advisory Council (GASAC). At its July 2005 meeting, the GASAC discussed the importance of recognition issues in the development of the GASB’s conceptual framework. It was ranked sixth out of 23 current agenda, research agenda, and potential projects by Council members during their discussion of GASB agenda priorities. The potential companion project, measurement attributes, which was on the research agenda since December 2003, was ranked fourth by the GASAC members. Considering this feedback, the GASB formally added a conceptual framework project on recognition to the research agenda in August 2005. A combined recognition and measurement attributes concepts project was added to the current agenda in December 2005.

Subsequently the name of the combined project was changed to recognition and measurement approaches.

In June 2011, the Board approved a Preliminary Views on concepts related to Recognition of Elements of Financial Statements and Measurement Approaches.

In November 2011, the staff provided the Board with comments received on the Preliminary Views, Recognition of Elements of Financial Statements and Measurement Approaches. The comments presented to the Board related to the overall project, to the economic resources measurement focus and the related recognition concepts for deferred outflows of resources and deferred inflows of resources, and to measurement approaches.

Noting a low volume of responses, particularly from financial statement users, the Board considered several options for proceeding with the project: to move the entire Preliminary Views forward to an Exposure Draft, to separate recognition and measurement concepts and continue with only measurement concepts, or to delay the entire project to allow for further research on recognition concepts. The Board decided, at that time, not to split the recognition and measurement concepts into separate projects. The Board further concluded that it had not received sufficient feedback, to move the project forward to an Exposure Draft. The Board requested that the staff draft questions seeking additional financial statement user feedback on the Preliminary Views for review at the December meeting.

In December 2011, in response to the Board’s request at the November meeting, the staff presented the Board with questions to be asked of users during interviews designed to gather feedback from users of governmental fund financial statements in regard to the Preliminary Views, Recognition of Elements of Financial Statements and Measurement Approaches. The questions were submitted for feedback from the Board on whether they were likely to elicit the information sought by the Board. The Board agreed with the overall approach that the project staff will take to elicit user response to the Preliminary Views. The Board further directed the staff to review the 2005 User Needs Study with the goal of identifying user feedback that relates to this subject. The Board tentatively decided that any further research on the use of governmental fund financial statements would be determined after reviewing the results of the Preliminary Views user interviews and the analysis of the User Needs Study.

In April 2012, the staff provided the Board with the results of the user interviews that were designed to gather feedback from users of governmental fund financial statements in regard to the Preliminary Views. In addition, the staff provided the Board with feedback related to this subject gathered from the 2005 User Needs Study.

In July 2012, the Board began redeliberating issues in the Preliminary Views based upon comments from respondents and from participants in the public hearings, as well as the user feedback. The Board discussed issues related to recognition in financial statements prepared using the economic resources measurement focus.

The Board tentatively agreed to define the economic resources measurement focus as follows:

The economic resources measurement focus incorporates all outflows of resources and inflows of resources and all assets, liabilities, deferred outflows of resources, and deferred inflows of resources.
 
The Board tentatively agreed that the recognition criteria for financial statements prepared using the economic resources measurement focus would continue to include the first criterion proposed in the Preliminary Views—that of meeting the definition of an element of the financial statements—and that the second criterion would be modified to indicate that measurement of the item sufficiently reflects the qualitative characteristics described in Concepts Statement No. 1, Objectives of Financial Statements. The Board believes that emphasis on or reference to only one or some of the qualitative characteristics would inappropriately imply a hierarchy among the qualitative characteristics.

The Board also tentatively agreed to explicitly identify a three-step hierarchy for recognition concepts for financial statements prepared using the economic resource measurement focus, which is consistent with the approach used by the Board in deliberating issues resulting in the issuance of Statement No. 65, Items Previously Reported as Assets and Liabilities. In this three-step hierarchy, an item is first evaluated as to whether it meets the definition of an assets or liability. If the item does not meet the definition of an asset or liability, then the item is evaluated as to whether it meets the definition of a deferred outflow of resources or deferred inflow of resources. If the item does not meet the definition of a deferred outflow of resources or deferred inflow of resources, then the item would be evaluated as to whether it meets the definition of an outflow of resources or inflow of resources.

From August through November, the Board discussed feedback received on the measurement proposals in the Preliminary Views.

At the December 2012 meeting, the Board decided to separate the project into a phase for measurement and a phase for recognition. Each phase would issue a separate Exposure Draft and Concepts Statement.

The Board concluded its evaluation of feedback received on the measurement proposals in the Preliminary Views and issued the Exposure Draft, Measurement of Elements of Financial Statements in June 2013.

Further developments on an Exposure Draft for recognition concepts was put on hold in August 2013 pending research being conducted pursuant to the reexamination of the financial reporting model.

Current Developments
: During September 2013, in conjunction with the fair value project, a webcast was presented for users of financial statements covering the porposals in the Exposure Draft, Measurement of Elements of Financial Statements. 25 comment letters were received on the Exposure Draft, and 4 stakeholders responded to the plain-language supplement on the Exposure Draft. On November 1, 2013, the Board conducted a public hearing on the Exposure Draft, again in conjunction with the Preliminary Views issued as part of the fair value project. The Board began evaluating this feedback on the Exposure Draft in December 2013.

Work Plan—Measurement:

Board meetings Topics to be considered
January 2014: Redeliberation of issues raised by respondents to Exposure Draft on measurement.
March 2014: Review preballot draft of a final Concepts Statement on measurement.
March 2014 (T/C): Review ballot draft and issue final Concepts Statement on measurement.

Work Plan—Recognition:


Board meetings Topics to be considered

To be coordinated with the pre-agenda research on the reexamination of the financial reporting model

 

Conceptual Framework: Measurement and Recognition—Recent Minutes


Minutes of Teleconference, March 24, 2014

The Board reviewed a ballot draft of Concepts Statement No. 6, Measurement of Elements of Financial Statements, tentatively agreeing on various editorial changes to the draft. Issuance of the Concepts Statement was approved by five members of the Board, with Mr. Fish and Mr. Granof dissenting.

Minutes of Meetings, March 3-5, 2014

The Board reviewed a preballot draft of Concepts Statement No. 6, Measurement of Elements of Financial Statements, tentatively agreeing on various clarifying changes to the draft. The Board then directed the project staff to prepare a ballot draft of the Concepts Statement for consideration at the March teleconference meeting.

Minutes of Meetings, January 27-29, 2014

The Board concluded its review of feedback received on the Exposure Draft, Measurement of Elements of Financial Statements. As a result of that feedback, the Board tentatively decided to include as concepts the following three views proposed in the June 2011 Preliminary Views, Recognition of Elements of Financial Statements and Measurement Approaches:

  • Initial amounts are more appropriate for assets that are used directly in providing services.
  • Remeasured amounts are more appropriate for assets that will be converted to cash (for example, financial assets).
  • Remeasured amounts are more appropriate for variable-payment liabilities, such as compensated absences or pollution remediation obligations.

Minutes of Meetings, December 10-12, 2013

The Board began its evaluation of the feedback received on the Exposure Draft, Measurement of Elements of Financial Statements. The feedback received on the overall proposals in the Exposure Draft and on the two measurement approaches was considered at this meeting, with the Board tentatively agreeing to certain clarifying changes to the concepts.

Minutes of Meetings, October 17-19, 2013

The Board reviewed a paper that summarized comments received on the Exposure Draft, Measurement of Elements of Financial Statements, and tentatively approved the proposed schedule for evaluating the feedback received and issuing a final Concepts Statement.

Minutes of Meetings, August 6-8, 2013

The Board resumed deliberations on concepts for recognition of elements in financial statements prepared using the current financial resources measurement focus. The Board discussed various perceived flaws with the current financial resources measurement focus as it presently is applied in governmental funds. After discussing the potential impact the potential reexamination of the financial reporting model could have on the recognition phase of the conceptual framework, the Board decided to place this phase on hold pending future coordination with the proposed reexamination of the financial reporting model.

Minutes of Meetings, June 25-27, 2013

The Board resumed deliberations on concepts for recognition of elements in financial statements prepared using the current financial resources measurement focus. The Board discussed various perceived flaws with the current financial resources measurement focus as it presently is applied in governmental funds. The project staff will present at the next meeting a history of this phase of the project and present options for approaching the development of an Exposure Draft on recognition concepts.

Minutes of Meetings, June 3, 2013


The Board reviewed the ballot draft of an Exposure Draft on concepts related to Measurement of Elements of Financial Statements, tentatively agreeing upon various clarifications. The Board voted 6-1 to issue the Exposure Draft with Mr. Granof dissenting.

Minutes of Meetings, May 14–16, 2013

The Board reviewed the preballot draft of an Exposure Draft on concepts related to Measurement of Elements of Financial Statements, tentatively agreeing upon various clarifying changes. The Board then directed the project staff to prepare a ballot draft of the proposed Concepts Statement for consideration at the June teleconference meeting.

Minutes of Meeting, April 2-4, 2013


The Board reviewed the preliminary draft of measurement concepts and made clarifying edits. The next step for the staff is to prepare a preballot draft of the measurement concepts Exposure Draft for the next Board meeting.

Minutes of Meeting, February 19-21, 2013

The Board’s discussion focused on assessing the completeness and potential for overlap of the measurement attributes of historical cost (proceeds), fair value, acquisition value, replacement cost, and settlement amount. The Board tentatively decided that acquisition value should not be presented as a separate measurement attribute. Rather, acquisition value should be identified as a term that refers to either a replacement cost or a settlement amount determined as of the acquisition date of the asset or liability. The Board also tentatively decided that replacement cost should be applicable only to assets.

The Board tentatively decided that with the exception of lower of cost or market measurements, the list of measurement attributes was sufficiently complete based upon the evaluation of the basic characteristics of measurements used in existing standards and that no overlap among the measurement attributes remained to be addressed. With respect to the use of lower of cost or market measurements, the Board determined that it would not be appropriate to include a discussion of this type of measurement in the proposed Concepts Statement because it represents an application of two different measurement attributes, rather than a separate measurement attribute.

Additionally, the Board evaluated the proposed language regarding the definition and discussion of measurement attributes and suggested various edits.

Minutes of Meeting, January 8-9, 2013

The Board discussed which specific measurement attributes should be presented in the forthcoming Exposure Draft on measurement concepts. The Board tentatively decided that the term measurement attribute would be used within the Exposure Draft and that a footnote indicating that certain other standards boards have used the term measurement basis to refer to the same aspect of measurement.

Subsequently, the Board tentatively decided to include the following five measurement attributes in the proposed Concepts Statement: historical cost, fair value, acquisition value, settlement amount, and replacement cost. These measurement attributes were tentatively defined as follows:

  1. Historical Cost (Proceeds)—The amount paid to acquire an asset or the amount received pursuant to the incurrence of a liability in an actual exchange transaction.
  2. Fair Value—The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
  3. Acquisition Value—The price that would be paid to acquire the service potential the entity will obtain from an asset in an orderly market transaction at the acquisition date.
  4. Settlement Amount—The amount at which an asset could be realized or a liability could be liquidated with the counterparty, rather than through an active market.
  5. Replacement Cost—The price that would be paid to acquire the service potential the entity will obtain from an asset in an orderly market transaction at the measurement date.

The Board noted that some measurement attributes may be inherently associated with one measurement approach and other measurement attributes may be appropriate for use under both measurement approaches. For example, historical cost could be used only as an initial amount, and settlement amount could be used under either the initial amount or remeasurement amount measurement approaches.

The Board requested the project staff to continue evaluating these measurement attributes and to develop a discussion of benefits and drawbacks to the use of these measurement attributes for consideration at the next meeting.

Minutes of Meeting, November 28-30, 2012


The Board continued its discussion of concepts for recognition of elements of financial statements and measurement approaches. The Board tentatively affirmed that the concept of a significant external barrier to realization of a remeasured amount is consistent with the proposed concept that initial amounts are most appropriate for assets that are used directly in providing services. The Board also tentatively agreed that the concept of significant external barriers to realization also should be extended to assets that will be converted to cash. The Board acknowledged that in some circumstances, a significant external barrier to realization of a remeasured amount could be reflected in the determination of a remeasured amount, rather than considered to be the reason why a remeasured amount would not be appropriate. The Board requested that the project staff further evaluate this issue.

The Board also tentatively agreed that the timing of the issuance of an Exposure Draft from the measurement approach portion of this conceptual framework project should be linked to the timing of the issuance of the project on the application of fair value. The Board requested that the project staff develop and evaluate technical agenda alternatives that would maintain the linkage between the issuance of the Exposure Drafts in both projects.

As a result of its discussion of the draft language for the measurement approaches section, the Board decided that it should reconsider the objectives of the measurement approaches section. The options could include limiting the objectives to be more consistent with that of other standards setters or expanding the conceptual guidance on when either initial amounts or remeasured amounts are more applicable to all types of assets and liabilities, possibly acknowledging for some types of assets or liabilities that this determination only should be made in setting standards.The Board requested that the project staff further evaluate these options for discussion at the January 2013 Board meeting.

Minutes of Meeting, October 2-4, 2012


The Board continued its discussion of concepts for recognition of elements of financial statements and measurement approaches. This meeting’s discussion focused on measurement concepts associated with liabilities, specifically concepts related to liabilities for which the amount and timing of future payments are known. The Board tentatively decided that the draft Concepts Statement should include the concept that initial amounts are more appropriate when there are significant external barriers to realization of a remeasured amount, citing noncallable long-term debt as a clear example of a liability for which there is a significant barrier to realization of a remeasured amount. The Board also instructed the staff to explore the potential application of the existence of significant external barriers to realization of a remeasured amount concept to the measurement of asset.

Minutes of Meeting, August 22-24, 2012


The Board continued the evaluation of feedback received pursuant to the proposed measurement concepts in the Preliminary Views, Recognition of Elements of Financial Statements and Measurement Approaches.

The Board tentatively agreed that the approach to measurement concepts should continue to reflect the following major features:

  1. The objective of measurement concepts is to establish a framework for when each of the two primary measurement approaches (initial amounts and remeasured amounts) should be used.
  2. A single measurement approach need not be applied to all assets and liabilities.
  3. The overriding criterion in evaluating the measurement approaches is which one best promotes achievement of the applicable objectives of financial reporting, with consideration of the qualitative characteristics of information in financial reporting.

After consideration of respondent feedback on various aspects of the proposals, the Board also tentatively affirmed its proposed preliminary views that (1) initial amounts are more appropriate for assets that are used directly in providing services, (2) remeasured amounts are more appropriate for assets that will be converted to cash (for example, financial assets), and (3) remeasured amounts are more appropriate for variable-payment liabilities, such as compensated absences or pollution remediation obligations, without modification.

Also based upon respondent comments, the Board directed the staff to make various editorial changes to the discussion of measurement concepts to make the language more clear and complete.

The Board also reconsidered the completeness and appropriateness of the proposed measurement concepts on an overall basis and tentatively decided to reexamine the issue of whether either of the principal measurement attributes is more appropriate for use in reporting fixed-payment liabilities.

Minutes of Meeting, July 10-11, 2012

The Board began its deliberations of comments and other feedback received on the Preliminary Views, Recognition of Elements of Financial Statements and Measurement Approaches, focusing on the feedback related to the proposals related to the economic resources measurement focus.

The Board tentatively agreed to propose that the economic resources measurement focus be defined as follows:

The economic resources measurement focus incorporates all outflows of resources and inflows of resources and all assets, liabilities, deferred outflows of resources, and deferred inflows of resources.

The Board tentatively agreed to propose that the recognition criteria for financial statements prepared using the economic resources measurement focus would continue to include the first criterion proposed in the Preliminary Views—that of meeting the definition of an element of the financial statements—and that the second criterion would be modified to indicate that measurement of the item sufficiently reflects the qualitative characteristics described in Concepts Statement No. 1, Objectives of Financial Statements. The Board believes that emphasis on or reference to only one or some of the qualitative characteristics would inappropriately imply a hierarchy among the qualitative characteristics.

The Board also tentatively agreed to propose a three-step hierarchy for recognition concepts for financial statements prepared using the economic resource measurement focus, which is consistent with the approach used by the Board in deliberating issues resulting in the issuance of Statement No. 65, Items Previously Reported as Assets and Liabilities. In this three-step hierarchy, an item is first evaluated to determine whether it meets the definition of an asset or liability. If the item does not meet the definition of an asset or liability, the item is evaluated to determine whether it meets the definition of a deferred outflow of resources or deferred inflow of resources. If the item does not meet the definition of a deferred outflow of resources or deferred inflow of resources, the item would be evaluated to determine whether it meets the definition of an outflow of resources or inflow of resources.

Minutes Archive

Conceptual Framework: Recognition—Tentative Board Decisions to Date


The Preliminary Views, Recognition of Elements of Financial Statements and Measurement Approaches was approved in June 2011.

The Board tentatively proposed that:
  • The economic resources measurement focus be defined as follows:
    The economic resources measurement focus incorporates all outflows of resources and inflows of resources and all assets, liabilities, deferred outflows of resources, and deferred inflows of resources.
  • The recognition criteria for financial statements prepared using the economic resources measurement focus continue to include the first criterion proposed in the Preliminary Views—that of meeting the definition of an element of the financial statements—and the second criterion be modified to indicate that measurement of the item sufficiently reflects the qualitative characteristics described in Concepts Statement No. 1, Objectives of Financial Statements. 
  • Recognition concepts for financial statements prepared using the economic resource measurement focus include a three-step hierarchy, in which an item is first evaluated to determine whether it meets the definition of an asset or liability. If the item does not meet the definition of an asset or liability, the item is evaluated to determine whether it meets the definition of a deferred outflow of resources or deferred inflow of resources. If the item does not meet the definition of a deferred outflow of resources or deferred inflow of resources, the item would be evaluated to determine whether it meets the definition of an outflow of resources or inflow of resources.
    • The continued development of recognition concepts for the current financial resources measurement focus be placed on hold pending future coordination with the proposed reexamination of the financial reporting model.

Conceptual Framework: Measurement—Tentative Board Decisions to Date


The Board tentatively agreed that:
  • There should be two measurement approaches:
    • Initial-Transaction-Date-Based Measurement (Initial Amount)
    • Current-Financial-Statement-Date-Based Measurement (Remeasured Amount).
  • There should be four measurement attributes:
    • Historical cost
    • Fair value
    • Replacement cost
    • Settlement amount.
  • The Concepts Statement should include the following provisions from the Preliminary Views:
    • Initial amounts are more suitable for assets that are used directly in providing services.
    • Remeasured amounts are more suitable for assets that will be converted to cash (for example, financial assets).
    • Remeasured amounts are more suitable for liabilities for which there is uncertainty about the timing and amount of payments.