Concepts Statement No. 6
Measurement of Elements of Financial Statements
This Concepts Statement is one of a series that the GASB has issued or will issue. Concepts Statements are intended to provide a conceptual framework of interrelated objectives and fundamental principles that can be used as a basis for establishing consistent accounting and financial reporting standards.
Concepts Statements identify the objectives and fundamental principles of financial reporting that can be applied to solve numerous accounting and financial reporting issues. They provide the GASB with the basic conceptual foundation for considering the merits of alternative approaches to financial reporting and help the GASB develop well-reasoned accounting and financial reporting standards. These Concepts Statements also assist preparers, auditors, and users in better understanding the fundamental concepts underlying accounting and financial reporting standards. Concepts Statements do not prescribe the accounting and financial reporting standards that apply to a particular item or event.
This Concepts Statement establishes concepts for measurement of elements of financial statements. The Concepts Statement addresses both measurement approaches and measurement attributes. The measurement approach identifies the point in time to which the amount reported for an element of financial statements directly refers. The choice of a measurement approach determines whether an asset or liability presented in a financial statement should (1) be reported at an amount that reflects a value at the date the asset was acquired or the liability was incurred or (2) be remeasured and reported at an amount that reflects a value at the financial statement date. A measurement attribute is the feature or characteristic of the asset or liability that is measured.
This Concepts Statement establishes the two measurement approaches that are used in financial statements, as follows:
- Initial-Transaction-Date-Based Measurement (Initial Amount)—The transaction price or amount assigned when an asset was acquired or a liability was incurred, including subsequent modifications to that price or amount that are derived from the amount at which the asset or liability was initially reported.
- Current-Financial-Statement-Date-Based Measurement (Remeasured Amount)—The amount assigned when an asset or liability is remeasured as of the financial statement date.
This Concepts Statement also establishes the four measurement attributes that are used in financial statements, as follows:
- Historical cost is the price paid to acquire an asset or the amount received pursuant to the incurrence of a liability in an actual exchange transaction.
- Fair value is 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.
- Replacement cost is the price that would be paid to acquire an asset with equivalent service potential in an orderly market transaction at the measurement date.
- Settlement amount is the amount at which an asset could be realized or a liability could be liquidated with the counterparty, other than in an active market.
This Concepts Statement improves financial reporting by augmenting the framework through which the Board maintains consistency in standards setting. These concepts address measurement, which is a necessary component of a complete framework for reporting in traditional financial statements. These concepts also may benefit preparers and auditors when evaluating transactions for which there are no existing standards or in implementing existing standards.
Unless otherwise specified, pronouncements of the GASB apply to financial reports of all state and local governmental entities, including public benefit corporations and authorities, public employee retirement systems, utilities, hospitals and other healthcare providers, and colleges and universities. Paragraph 7 discusses the applicability of this Concepts Statement.