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A Critique of the Concept of Measurement in Financial Accounting

Abstract

The purpose of this paper is to discuss the concept of measurement in financial accounting,starting with an examination of the approach to measurement taken by the InternationalAccounting Standards Board (IASB), followed by a summary of the general theory ofmeasurement employed in the natural sciences, and finally a review of the arguments raised byvarious accounting theorists including Edwards and Bell, Chambers and Sterling. While agreeinggenerally with Sterlingsargument that enterprise income should be measured by the differencebetween owners equity (i.e. assets minus liabilities) at two points in time adjusted forinvestments and disinvestments, and also his argument that the difference in owners equityshould be determined by the market (i.e. exit) prices of the net assets of the entity at thebeginning and the end of the accounting period, the conclusion that the determination of exitprices is a measurement process is unfounded. This leads to the primary argument of this

paper, which is that financial accounting measurementis not measurement.


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A Critique of the Concept of Measurement in Financial Accounting

1. Introduction

Measurement is one of the most important issues in financial accounting; however, it is also one

of the least developed areas of all accounting theory in terms of the degree of guidance provided

to preparers and users of financial statements. Statement of Financial Accounting Concepts No. 5

(CON 5) of the United States Financial Accounting Standards Board entitled, Recognition and

Measurement in Financial Statements of Business Enterprises (FASB, 1984) provides a list of

measurement bases that might be used under different circumstances to measure financial

statement elements. Similarly, the conceptual framework of the International Accounting

Standards Board lists examples of measurement bases that standard setters might consider

(IASB, 2007b). However, neither of these frameworks provides an analysis of the strengths and

weaknesses of different measurement bases, nor do they offer guidance regarding choices among

them. Consequently, there is a diversity of measurement practices in financial accounting (e.g.

current market value for marketable securities; lower of cost or market for inventory stocks;

amortized historical cost for fixed assets).

The argument of this paper is that the use of the word measurementis a misnomer with

respect to financial accounting, and that financial accounting measurement ought to be

described as simply a calculative practice in which certain numbers are associated with elements

in financial statements, leading to an aggregation of such numbers, resulting in summations

which are difficult to interpret. This is not a new topic; various scholars have previously

addressed the issue of measurement in financial accounting (see for example: Hicks, 1946;

Boulding, 1955; Haig, 1959; Gordon, 1960; Edwards and Bell, 1961; Chambers, 1966; Ijiri,


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1967; Sterling, 1970). It is also recognized that the IASB and the FASB have expended

significant amounts of time and effort directed towards the improvement of measurement

practices in financial reporting. It must be recognized, however, that these efforts will not

produce numbers that are measurements; rather, financial accounting ought not to be called a

process of measurement, but recognized for what it is, a calculative practice with social

implications.

The remainder of this paper proceeds as follows. Section 2 presents a summary of the

approaches to measurement contained in FASB Concepts Statement No. 2, and the FASB/IASB

joint Conceptual Framework project. Section 3 summarizes the principles of measurement theory

as they pertain to measurement in financial accounting. Section 4 discusses the arguments of

Robert Sterling in his book Theory of the Measurement of Enterprise Income and uses these

arguments to critique current measurement practices in financial accounting. While agreeing

with Sterlings premise that enterprise income should be measured by the difference between

owners equity (i.e. assets minus liabilities) at two points in time adjusted for investment and

disinvestment, and also his argument that the difference in owners equity should be determined

by calculating the current exit prices of the net assets at the beginning and the end of the period,

we disagree that the process of determining current exit prices is a measurementprocess.

2. Measurement in Financial Accounting

2.1 Measurement in the FASB Conceptual Framework

The use of the word measurement in financial accounting is commonplace1. The fundamental

premise ofFASB Statement of Financial Accounting Concepts No. 5 (CON 5), Recognition and

1A search of the FASB website at:http://www.fasb.org/SearchEngine/search.php?zoom_query=measurement&x=11&y=8,using the word
http://www.fasb.org/SearchEngine/search.php?zoom_query=measurement&x=11&y=8http://www.fasb.org/SearchEngine/search.php?zoom_query=measurement&x=11&y=8http://www.fasb.org/SearchEngine/search.php?zoom_query=measurement&x=11&y=8


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Measurement in Financial Statements of Business Enterprises (FASB, 1984) is that the issuance

of financial statements is central to financial reporting, and that the recognition and measurement

criteria for inclusion of elements (e.g. assets, liabilities, equity, revenues and expenses) in

financial statements is essential to the financial reporting process. Consequently, the concept of

measurement in financial reporting is directly connected with the idea of recognition in financial

statements. CON 5 sets forth recognition criteria and guidance about what information should be

incorporated into financial statements and when (p. 1).

CON 5 defines recognition as a process of formally incorporating an item into financial

statements (p. 1). Since a recognized item is depicted in both words and numbers, the recognition

process has the appearance of producing a measurement (p. 1). Recognition in financial

statements allows the aggregation of numerical amounts, resulting in totals which may be

interpreted in various ways by financial statement users. While emphasizing the importance of

financial statements in the financial reporting process, CON 5 acknowledged that financial

statements involve simplified, condensed, and aggregated data (p. 1). It warns against undue

reliance on aggregate measures like earnings (p. 1). Moreover, while a statement of financial

position provides information about an entitys assets, liabilities, and equity, such statements do

not purport to measure the value of a business enterprise (p. 2). CON 5 states that: valuations

belong to the realm of financial analysis, not financial reporting (p. 2). In the same way,

statements of earnings and comprehensive income reflect the ways in which the equity of an

entity increased or decreased from sources other than transactions with owners during a period.

measurement produced 1605 citations to authoritative accounting literature. The word measurement appears 60

times in FASB Concepts Statement No. 5 alone.


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Such statements do not purport to represent the increase in value of the enterprise during a

particular period (p. 2).

CON 5 acknowledges that the items currently recognized in financial statements may be

measured according to different calculative practices which seek to represent a certain attribute

of the item being measured (e.g. historical cost, current replacement cost, current market value,

net realizable value, or the present value of future cash flows)(p. 3). Thus, it is questionable

whether any meaningful measurement results from aggregating numbers produced through

different calculative practices. CON 5 also acknowledged that the measurement scale is a

nominal monetary unit unadjusted for changes in purchasing power (p. 3), thereby producing

aggregated numbers from different time periods representing different values which are difficult

or impossible to interpret. Finally, subjective judgments about the outcomes of uncompleted

transactions lead to the recognition of revenues which may not be realized, thereby questioning

both the relevance and the reliability of the measured numbers. In sum, while current accounting

practice conveys the impression of precision, it is questionable whether financial accounting

practice constitutes a measurement process at all as that term is commonly understood in the

sciences.

2.2. Measurement in the FASB/IASB Joint Conceptual Framework Project

In 2004, the FASB and IASB initiated a joint project to revise their existing conceptual

frameworks. The goal of this project was to create a new conceptual framework which both

Boards would use to develop and revise their accounting standards. The Boards have been

conducting the project in eight phases (A to H). Phase C deals with measurement (FASB

2007b). The previous conceptual frameworks did not provide an analysis of the strengths and


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weaknesses of measurement bases, nor did they offer guidance concerning preferable choices

among bases. Hence, the overall objective of Phase C has been to provide improved guidance

regarding measurement in financial reporting (FASB, 2007b). While, the Boards began their

deliberations with a discussion of measurement concepts, principles, and terms (FASB, 2008),

there is no public record concerning whether the boards considered whether measurement in

financial accounting is actually a measurement process.

Two problems have arisen on a regular basis when discussing measurement. The first

problem is a language problem. More than one definition can apply when a particular item is

measured (e.g. replacement cost can mean an occurrence where an asset is replaced with an

identical asset, or with a similar but not identical asset, or with a technologically improved asset).

In addition, more than one term can refer to several different measurement bases, none of which

is clearly defined (e.g. the fair value of an asset can be measured by current exit price, current

entry price or the discounted present value of future cash flows). To help resolve these problems,

a specific set of definitions has been developed by the FASB and IASB as indicated in Table 1

(FASB, 2007b).

***Insert Table 1 here***

The second problem relates to the way that different measurements are used. A particular

accounting standard may specify how an item ought to be measured in financial statements, but

this can differ from one standard to another. Moreover, some standards combine measurement

bases (e.g. the lower-of-cost-or-market rule). Phase C of the Conceptual Framework Project has

been intended to resolve these problems (FASB, 2007b, p. 5)


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Table 1 provides two definitions for each measurement basisone from the perspective of

an asset and one from the perspective of a liability. It also provides examples. Unfortunately, the

definitions do not address the way the items ought to be measured. For example, the current

entry price of an asset is defined as the price that an entity would pay to purchase an asset. This

price depends on the transaction. If an entity acquires a new asset, the current entry price might

be measured by the actual price for the asset. If the entity already owns the asset, the entry price

might be measured by the price that would be paid to acquire an identical or similar asset (FASB,

2007b, p. 6 and Appendix C). Clearly these are not the same.

Most of the proposed measurement bases are either prices or values. In addition, each basis

provides information about a past, present, or future event. Of the nine bases, seven are prices

(past entry price, past exit price, current entry price, current exit price, current equilibrium price,

future entry price, and future exit price), one is a value (value in use), and one is neither a price

nor a value (modified past amount). Both prices and values are assessments of economic utility.

However, values are specific to an entity, whereas prices are determined by markets. There is no

indication whether a price or a value is preferable as a measurement basis.. While, the FASB and

IASB have been attempting to develop a logically consistent approach to measurement, they

have not concluded whether accounting measurement is actually a measurement process. The

following section discusses this issue.

3. Is Financial Accounting Measurement a Measurement Process?

In a general sense, measurement can be defined as a process which associates numbers with

certain attributes of objects or phenomenon (Suppes, 1959). Many different attributes can be


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measured, including physical quantities, time duration, or economic values (Churchman and

Ratoosh, 1959). In the classical definition, measurement involves the estimation of ratios of

quantities. In that sense, quantity and measurement are mutually defined. Quantitative attributes

are those that can be measured; if something cannot be measured, it is not quantitative; and if it

is not quantitative it is not measurement (Nagel, 1961).

The theory of measurement focuses on three basic issues: representation (the degree to

which the measured attribute provides an accurate representation of the physical reality of the

object in question); uniqueness (the degree to which the representation is the only

representation possible for the object in question); and error (the deviation between

measurements of the same attribute at several points in time) (Roberts, 1979). In the

representational approach to measurement there must be a correspondence between numbers and

objects that are not numbers. In the strictest sense, a representational theory of measurement

rests on a relationship between an attribute and the real number system. A true measurement

requires a close correspondence between the measured attribute and the system of real numbers

(Churchman, 1949). For example, the assignment of numbers to members of a sports team does

not constitute measurement because there is no correspondence between the assigned numbers

and the real number system (i.e. the team member who wears number 20 is not twice as much of

anything as the team member who wears number 10)(Campbell, 1928).

An axiomatic approach to measurement develops a series of axioms in order to determine

the necessary conditions for measurement. Among the axioms are: axioms of order; axioms of

extension; axioms of difference; axioms of conjointness; and axioms of geometry. Axioms of

order require that the order imposed on objects through the assignment of numbers to be


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consistent with the empirically observed ordering. Axioms of extension deal with the

measurement of attributes like time, length, and mass, which are capable of being combined

(concatenated). Axioms of difference govern the intervals between points in the measurement

scale which are must be equal. Axioms of conjointness assume that attributes which cannot be

readily measured (for example: astronomical distances) can be measured by observing the way

their dimensions change in relation to each other. Axioms of geometry govern the representation

of complex attributes through geometric principles (Nagel, 1961; Roberts, 1979).

Measurement in financial accounting satisfies the extension and conjointness

assumptions in certain cases (i.e. $20 of cash is twice as much as $10 of cash), but in other cases

it does not (i.e. $20 of cash reported in 2008 does not equal twice as much cash as $10 of cash

reported in 2007 due to the instability of the monetary unit scale). Moreover, $20 of cash may

consist of $10 of cash in an American bank and the exchange equivalent of $10 of cash in a

French bank. Thus, the extension and conjointness assumptions are not satisfied in financial

reporting. In addition, even though measurement in financial accounting is said to possess

representational faithfulness, this claim is questionable because there is often little

representational faithfulness between the measured attribute and the economic reality of the

object in question (e.g. amortized historical cost does not represent the market value of an asset).

It is also clear that measurement in financial accounting does not satisfy the uniqueness criterion

because different measurement bases are used and combined in practice. Finally, measurement in

financial accounting does not address the problem of error, except on an ex postbasis (i.e. errors

are corrected if they are discovered). Thus, from the perspective of measurement theory,

measurement in financial accounting does not constitute a measurement process. That being


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said, what is the nature of so-called measurement in financial reporting, and even by its own

standards, is it a measurement process.

4. Sterlings Concept of Measurement

In Theory of the Measurement of Enterprise Income, Robert Sterling (1970) developed an

axiomatic approach to measurement in financial reporting. The starting point for Sterlings

approach to income measurement was Hicksian income, whereby income is defined as the

maximum amount that can be consumed during a period while leaving the entity as well off at

the end of the period as at the beginning (Hicks, 1946, p. 172). Consequently, the definition of

enterprise income can be stated as follows:

AiLi= PiPi+1 - Pi= Y

where A stands for assets, L stands for liabilities, P stands for owners equity and Y stands for

enterprise income, assuming that there has been no investment or disinvestment (Sterling, 1970,

p. 11). While there is virtual unanimity regarding this definition of income, there is a great deal

of disagreement regarding the application of this definition in practice. The disagreement centers

around the phrase as well off as.

Sterling indicated that there have been four different approaches to measuring the

welloffness (hereafter: net worth or wealth): (1) the Fisher Tradition, (2) the Accounting

Tradition, (3) Present Market, and (4) Bouldings Constant (p. 12). In the Fisher Tradition,

expectations about the future are assumed to be the basis for measuring income, hence, the

discounted present value of future cash flows is considered to be the correct way to measure the

net worth of an entity at the beginning and the end of a period. In contrast, the Accounting

Tradition, does not seek to measure the net worth of an entity, but rather seeks to match costs


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against revenues. In the Present Market tradition, the measurement of net worth is based on

current exit prices, while in the Bouldings Constant tradition, the argument is that income is

essentially unmeasurable; therefore any constant factor would perform equally well as long as

the asset structure remains heterogeneous (Boulding, 1955, p. 45).

Sterling developed several propositions about measurement based on the definitions of

Churchman and Ratoosh (1959). These propositions rest on the premise that all measurements

are made with respect to a particular decision making context. Fore example: which piece of

wood is long enough to be used to construct a house; if the temperature reaches a certain level,

which clothes should be worn; when making an investment decision, which enterprise has the

greater net income). In a general sense, measurement is a process of comparison (Sterling, 1970,

p. 72). Comparisons are complied in order to distinguish between attributes of objects for the

purpose of making a decision. Thus:

Measurement Proposition 1: The purpose of measurement is to order or compare objectsto other objects.

Because measurement is concerned with comparisons between objects, the measured

attributes must be amenable to comparison. In financial reporting, comparisons are often made

between incomes of different entities; however, if the enterprises use different measurement

scales to report their income, it is difficult to make comparisons. Thus, the scale or dimension of

measurement is important.

Measurement Proposition 2: The construction and definition of a dimension is aprerequisite to the operation of measurement.


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While the overall purpose of measurement is to make comparisons between objects in

order to make decisions, it is also useful to compare objects with respect to a known dimension.

Thus, a unit of measurement is needed, and this requires numbers. Measurement involves the

comparison of a particular attribute to a known unit of measurement. The use of a unit of

measurement makes the comparisons possible. Ordinal scales of measurement without units can

be used, but this produces an inability to compare objects in one class with objects from another

class. For example, there may be an ordinal scale in a one dimension which indicates that A is

greater than B and an ordinal scale in a second dimension which indicates that X is greater than

Y. These facts do not permit comparison of X to A (Sterling, 1970, p. 75). In financial

accounting, for example, inventory valuations using FIFO and LIFO are in different dimensions.

The need for a unit of measurement also leads to the following proposition:

Measurement Proposition #3: A known unit of measurement allows the general use ofmeasurements by different users.

If numbers are assigned to units of measurement, the properties of the real number system can be

used to make comparisons between objects. Moreover, a measurement expressed in numbers

can be carried to any degree of precision. The limits of precision arise from errors in the

measurement process and not from the characteristics of the number system (p. 78). Thus:

Measurement Proposition #4: The use of numbers is more convenient and permits ahigher degree of precision than a classification scheme.

It is important to emphasize that the assignment of numbers to attributes should not be arbitrary;

instead, once the dimension has been conceived and the unit of measurement has been defined,

the objects can then be said to possess a certain number of units (p. 79). The goal of


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measurement is then to determine the number of units that the object possesses. Consequently,

in a true process of measurement, if an asset is recognized in financial statements at $100, the

asset would possess $100 of economic value. Finally:

Measurement Proposition #5: The purpose of measurement is to determine the properplacement of a given object in a given scale.

These five propositions lead to a process of measurement which proceeds through four steps:

1. Development of a dimension2. Definition of a unit of measurement3.

Expression of the unit of measurement in numbers

4.

Development of an operation that determines the number of units in a category.

The application of the operation in step 4 determines the placement of an object on a particular

scale and expresses that placement in terms of a specific number of units. Thus, an asset that is

recognized in financial statements at $200 would be placed on a scale which is twice that of an

asset recognized at $100, regardless of the type of asset concerned.

Sterling argued in favor of Present Market (i.e. current exit price) as the most logical way

of measuring net worth at any point in time. In making this argument, Sterling listed the

following advantages of Present Market: (1) it is relevant to all users of financial statements

because it specifies the currently available resources of the entity and measures the ability to

satisfy current obligations; (2) it is verifiable, in that all neutral observers would agree on the

value; (3) it is a measurement of an empirically meaningful dimension; (4) it is additive, in the

sense that the sum of the parts is equal to the independent measurement of the whole; (5) it is

temporally consistent, in that the measurement is made at a point in time as opposed to a

prediction; (6) it is a valuation, in that it can be inferred that the entity values the position it is in


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more than any other position at that point in time; (7) it is more informative than any other

figure, because it indicates the direction of the expectations of the managers of the entity

(Sterling, 1970, p. 360).

While arguing in favor of Present Market (i.e. current exit prices), Sterling acknowledged

that markets are imperfect and that there will be disagreement among observers regarding current

exit prices, particularly if there is no intention to actually dispose of the assets. There are also

questions about the additivity of measurements when the price level is unstable. Sterling

counters these criticism by arguing that current exit price is superior to all other ways of

measuring wealth or welloffness. However, he is less convincing when he argues that the

determination of current exit prices is a measurement process. Thus, while it may be agreed that

the measurement of income is correctly determinedby the difference between owners equity (or

wealth) at two points in time adjusted for investment and disinvestment, and also that the

difference in owners equity should be determined by calculating the current exit prices (i.e.

Present Market) of the net assets of the entity at the beginning and the end of the period, the

process of determining current exit prices does not constitute a measurement as that term is

defined by measurement theory. This is because there is no unique and consistent way to

measure exit prices. Thus, the efforts of the FASB and IASB will not produce numbers that are

measurements. Instead, it should be recognized that financial accounting is not a process of

measurement, but rather a calculative practice with social implications.

5. Discussion

One of the reasons for revisiting the question of measurement in financial reporting at this time is

the growing emphasis by financial accounting standards setters on fair value measurements


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combined with recent allegations on the part of political actors that fair value measurements were

instrumental in the worldwide financial crisis. In this regards, it is important to note that the

term fair value has been used in financial reporting over many years and in a variety of

different circumstances for different accounting pronouncements. There have been numerous

definitions of fair value and little guidance regarding the application of fair value to particular

situations (FASB, 2006). To resolve this issue, the FASB issued Statement of Financial

Accounting Standards No. 157, Fair Value Measurements in September 2006 (FASB, 2006)

Statement No. 157 defines fair value as: the price in an orderly transaction between market

participants to sell an asset or transfer a liability in the principal market in which the reporting

entity would transact for the asset or liability (Statement No. 157, paragraph 5). Thus, fair

value is very similar to Sterlings idea of Present Market.

The central feature of Statement No. 157 is a Fair Value Hierarchy (paragraphs 2231).

In this hierarchy, the FASB establishes a procedure for fair value measurement. This procedure

contains three levels.Level 1, focuses on what is the FASB considers to be the most reliable way

to measure fair value, that is: quoted prices in active markets for identical assets or liabilities.

In Level 1 measurement, the determination of fair value is based on direct observations of

transactions involving the same assets and liabilities. The FASB acknowledges that relatively

few items trade in active markets, thus making this type of measurement impracticable in most

cases, except for financial assets traded in active markets. Thus, it seems clear that Level 1 fair

value measurments are not measurements as defined by measurement theory, even though

Sterling would probably accept Level 1 measurements as being consistent with his framework.


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Level 2. The Level 2 approach to fair value measurement contemplates one of three

situations. The first situation focuses on a determination of fair values by reference to the prices

of identical assets or liabilities traded in markets in which the trading is infrequent. The problem

with this approach is that there is a low degree of consensus about prices in markets with low

trading activity. The second situation focuses on determining the fair value of an asset or liability

by reference to the price of a similar asset or liability traded in an active market. The problem

here is that assumptions must be made about prices of non-identical assets or liabilities. The

reliability of such measures is questionable. The third situation arises when there are no active

markets, but some information is available. For example, a company may determine the fair

value of an untraded liability by applying the effective interest rate on its traded debt securities.

This third possibility reduces the reliability of the fair value measurement even further, and, it is

clearly not a measurement process, even by Sterlings standards.

Level 3.If the Level 1 and Level 2 conditions for fair value measurements do not exist, a

Level 3 is proposed which focuses on unobservableinput factors. Level 3 is used to measure

fair value when observable inputs are not available. This category allows for situations in which

there is little, if any, market activity for the asset or liability (paragraph 30). The FASB

concluded that Level 3 inputs can provide useful information if estimates are generated in a

rational manner and without an attempt to bias users decisions. This may be a useful criterion,

but it does not constitute a measurement process; it is merely a subjective evaluation.

Therefore, it is clear that Statement No. 157 places an emphasis on Present Market or exit

values (i.e. the price that would be received when selling an asset) rather than entry value (i.e.


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the price that would be paid to buy a new asset). The difference between exit value and entry

value has perplexed accounting theorist for a long time. For example, one could consider a

specialized machine purchased by one company at a high price even though it could only be sold

to another company at a substantially lower amount. The outcome of applying an exit value

approach to fair value measurement would result in an immediate loss to the buyer. However,

reporting the machine at entry value (i.e. replacement cost) would conceal the risk inherent in the

specialized strategy (Miller and Bahnson, 2007). Thus, there are inherent difficulties with

defining fair value, and there is little agreement on the best definition. Consequently,

measurement in financial reporting is confusing even after the issuance of Statement No. 157.

5.2 The IASB Fair Value Measurement Project

In November 2006, the IASB issued a Discussion Paper requesting comments on the use of fair

value measurements in international financial reporting (IASB, 2006). The IASB intended to

issue exposure draft regarding fair value measurement in 2009; however, due to the financial

crises and outside political pressures, the issuance has been delayed. In comment letters to the

IASB, various parties expressed disagreement with the approach to fair value measurement

contained in Statement No. 157 and the IASB exposure draft. For example, Deloitte argued that

for items not continuously measured at a current value (e.g. held to maturity securities, fixed

assets) an entry price instead of an exit price is a more relevant measure (Deloitte, 2007).

Deloitte also argued that the most appropriate measure for recognizing an asset or

liability that is not subsequently measured at fair value is entry price. If an asset is acquired but

not subsequently measured at fair value under current standards (e.g. a fixed asset), it is not


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correct to recognize an up-front gain or loss (as in the case of the specialized machine discussed

above). With respect to subsequent measurements, exit price is not the most relevant measure for

non-financial items not traded in active markets; for example nonfinancial assets that will be

consumed, or a non-financial liability that will be settled through the delivery of goods or

services. In a business combination, all identifiable assets and liabilities are recognized at fair

value. However, for subsequent measurement purposes, some assets and liabilities are retained

at their initial entry prices (e.g. goodwill), whereas other assets and liabilities are re-measured to

fair value; thus, current exit price is not applicable to all assets and liabilities, and fair value

should not be defined as current exit price. Given a general inability to apply a common measure

to all assets and liabilities, financial reporting does not constitute a true measurement process.

6. Conclusion

The purpose of this paper has been to present a critical examination of measurement issues in

financial reporting, starting with a discussion of the different approaches to measurement taken

by the Financial Accounting Standards Board (FASB) and the International Accounting

Standards Board (IASB), followed in turn by a summary of the general theory of measurement

used in the sciences, and finally a review of the arguments raised by Robert Sterling in his book

Theory of the Measurement of Enterprise Income. While agreeing with Sterlings argument that

enterprise income should be measured by the difference between owners equity (i.e. asset minus

liabilities) at two points in time adjusted for investment and disinvestment, and also his argument

that the difference in owners equity should be determined by calculating the current exit prices

of the entitys net assets at the beginning and end of the period, we disagree that the

determination of fair value or current exit price is a measurement process as that term is


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defined in the sciences. This leads to the primary argument of the paper, which is that

accounting does not constitute a measurement process.


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Table 1

IASB Conceptual Framework Project

Phase C-Measurement

Measurement Basis CandidatesBasis Definition Synonyms

1. Past entry price Asset:The price that an entity would have had to pay in the past inexchange for purchasing an asset.

Example: The amount paid to purchase an office computer.

Liability:

The funds that an entity would have received in the past inexchange for incurring a liability.

Example: The proceeds from issuing a corporate bond.

Historical cost

Net Proceeds

2. Past exit price Asset:The price that an entity would have received in the past in

exchange for selling an asset.Example: The proceeds received from selling an investment.

Liability:

The price that an entity would have had to pay in the past inexchange for extinguishing a liability.Example: The amount paid to settle an account payable.

Past selling price

Past settlement

amount

3. Modified past

amount

Asset:The remainder of an assets original past entry after assigningsome of that price to subsequent accounting periods, according toan accounting rule for amortization or depreciation.

Example: The depreciated book value of a vehicle, using straight-

line depreciation.

Liability:The remainder of a liabilitys original past entry price afterassigning some of that price to subsequent accounting periods,according to an accounting rule for amortization.

Example: The carrying value of a corporate bond issue sold at a

premium, using straight-line amortization.

Historical cost

Depreciated cost

Amortized cost

Net book value

Amortized cost

Carrying value

4. Current entry

priceAsset:

i. Identical replacementThe current entry price of replacing an existing asset with anidentical one through a purchase.

ii. Identical reproductionThe current entry price of replacing an existing asset with an

identical one by reproducing it.iii. Equivalent replacementThe current entry price of replacing an existing asset with anequivalent asset.

Example: The current entry price to replace a used Nikon

microscope with a used Leica microscope with the same powerand features.

iv. Productive capacity replacement

The current entry price of replacing the productive capacity of an

Replacement cost

Reproduction cost

Replacement cost


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existing asset with the most current technology available.

Example: The current entry price to replace an air conditioning

unit with one that has the same cooling capacity but is moreenergy efficient.

Liability:

The amount that an entity would receive currently in exchange for

incurring a liability.Example: The amount that a bank would receive currently from a

depositor for a certificate of deposit.

Replacement cost

Current settlement

amount

5. Current exit price Asset:The price that an entity would receive currently in exchange forselling an asset.

Example: The amount that an entity would receive currently from

selling a parcel of land.

Liability:

The price that an entity would have to pay currently in exchange

for extinguishing a liability.Example: The amount that an entity would have to pay currently topay off a mortgage.

Current exit value

Current market

value

Net realizable value

Current settlement

amount

6. Current

equilibrium price

Asset:

The price at which an asset could be exchanged currently betweenknowledgeable, willing parties in an arms-length transactionconducted in an efficient, complete, and perfect market.

Example: The price at which a security could be purchased or sold

currently, if the securities markets were efficient, complete, andperfect.

Liability:

The price at which a liability could be exchanged currently

between knowledgeable, willing parties in an arms-lengthtransaction conducted in an efficient, complete, and perfectmarket.

Example: The price at which an insurance obligation could beincurred or extinguished currently, if the market for insurance

contracts was efficient, complete, and perfect.

Fair value

Fair value

7. Value in use Asset:The value that an entity places on an asset; typically, thediscounted net cash flow that the entity expects to receive fromusing the asset.

Example: The forecast future cash flows(both positive andnegative) from using a printing press , discounted at the entitys

cost of capital.

Liability:

The value that an entity places on a liability; typically, the amountof discounted net cash flow that the entity expects to pay withrespect to the liability.

Example: The forecast future cash outflows for a pension liability,

discounted at the entitys cost of capital.

Discounted value of

future

cash flows

Present value of

futurecash flows

Present value

Present value of

future

cash outflows


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8. Future entry

price

Asset:

The price that an entity would have to pay in the future inexchange for purchasing an asset.

Example: The amount that an entity forecasts it would have to payto purchase a replacement jet airplane eight years in the future.

Liability:The price that an entity would receive in the future in exchange forincurring a liability.

Example: The amount of premium that an insurance companyforecasts it would receive for issuing a life insurance policy.

Future cost

Future proceeds

9. Future exit price Asset:The price that an entity would receive in the future in exchange forselling an asset.

Example: The amount that an entity forecasts it would receive in

exchange for selling a patent five years from now.

Liability:

The price that an entity would have to pay in the future in

exchange for extinguishing a liability.Example: The amount that an entity forecasts it would have to paynext year to satisfy a lawsuit that it expects to lose..

Future selling price

Expected outcomeFuture settlement

amount

measurement in accounting

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