New GASB Concepts Address Measurement
April 17, 2014
On April 14, the Governmental Accounting Standards Board (GASB) issued Concepts Statement No. 6, Measurement of Elements of Financial Statements. The new statement establishes two approaches to measuring assets and liabilities in financial statements:
- Initial transaction date measurement, which represents the transaction price or amount assigned when an asset is acquired or a liability is incurred.
- Measurement as of the financial statement date, which represents the amount assigned to an asset or liability when the element(s) are remeasured for reporting in the financial statements.
Concepts Statement 6 relates to the board’s fair value project, which is exploring fair value as a measurement attribute of assets and liabilities. Consequently, the new concepts statement provides an important underpinning that will guide the eventual issuance of a standard on fair value. (The next phase is a fair value exposure draft; the GASB has already issued a preliminary views document that NACUBO responded to in September.)
Concepts statements provide a conceptual framework of interrelated objectives and fundamental principles that are 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. As such, the statements are foundational but do not prescribe standards that might apply to a particular transaction or situation.
Specifically, Concepts Statement 6 identifies circumstances in which one measurement attribute is more appropriate than the other. For instance, initial measurement is more appropriate for assets used directly in providing services. Remeasured amounts are more appropriate for assets that can eventually be converted to cash; the remeasured amount provides better information about the remaining service potential of assets at the financial statement date. Remeasured amounts are more appropriate for liabilities for which there is uncertainty about the timing and amount of payments; in these cases, the remeasured amount provides information concerning the impact the liability might have on future service.
The new Concepts Statement establishes four measurement attributes:
- Historical cost—the price paid to acquire an asset or the amount received pursuant to the incurrence of a liability in an exchange transaction.
- 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.
- Replacement cost—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—the amount at which an asset could be realized or a liability could be liquidated with a counterparty other than in an active market.
Concepts Statement 6 is available on GASB’s website.
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