Executive Summary

This paper introduces the measurement under the accounting Framework. Since measurement is basic information gathered from the business activities and transactions, it should reliably to reflect the reality of the report objectors so which type of the measurement should be chosen in the financial report is important to the report users. Also, which type of the measurement should be chosen should depend on respective criteria. In this paper, there are three issues indicated to illustrate the different type of measurement consideration in terms of the different business activity and purpose. The three issues are foreign currency exchange, agriculture accounting and public sector accounting. During the comparison, readers may conclude some ideas to apply four types of accounting measurement systems in the different business environments.

Introduction

Measurement is the fundamental framework in accounting. This paper reviews the definition of accounting measurement and the different types of measurement. Meanwhile, this paper uses three issues in accounting area to illustrate the implication of the different measurement systems. The three accounting issues are public sector, foreign currency and agriculture accounting. By choosing the correct measurement system, financial report can reflect true and fair business information.

Accounting Measurement

As generally considered, accounting is a measurement and communication discipline. There are two principles relating to accounting measurement. One is to identify appropriate objects of a measurement. The other is the way that the objects are measured so as to identify properties of alternative measurement approaches or to estimate a given measurement object (Belkaoui and Jones 1996; Clinch 2000). Yet, Staubus (2004) suggests that there are two views included in accounting theory literatures. The first one is the Chambers/Sydney view asserting only one measurement method through current net realizable price. The other view is the Staubus/mainstream view accepting several measurement methods in one same financial report.

The Accounting Handbook (2011) indicates that there are several objectives for financial report. The financial reports provide necessary information for common needs of users to understand financial situations in regard of financial effects of past events of their entities such as financial positions, financial performance and cash flow. Such understanding enables the users to make economic decision. Also, the financial reports provide information regarding results of stewardship or accountability of management that relates to resources entrusted to, which, again enable users to make economic decisions such as whether or not to sell investment in their entities. Nevertheless, the Handbook (2011) further indicates that financial reports do not necessarily convey non-financial information which is also needed for economic decision-making.

To achieve the objectives of the financial report, measurement that is adopted for the report needs to be considered. Normally, the study of accounting practices starts from considering the range of technical issues in relation to record and report financial or economic activities. In the fifteenth century, Pacioli (cited inGodfry, Hodgson et al. 2010) described a double-entry accounting system stemmed from the basic technical processes. In 1929, the traditional historical cost system emerged after collapse of the Wall Street. In the 1960s, a few alternative systems were developed such as updated cost system for measurement of current costs of resources usage and for evaluation of capital at current buying prices as well as systems applied current selling prices. Two major current buying price systems were proposed. One was the fair value accounting system that was proposed by Edwards and Bell on the basis of the concept of financial capital maintenance using physical capital maintenance and significantly affects the derived measure of profit. In another system, income and capital are measured by selling prices or exit value (Godfry, Hodgson et al. 2010). Noteworthy, though entities usually combine different measurement bases, they commonly adopt the historical measurement basis to prepare their financial reports. Another fact is that, some entities adopts the current cost basis for effects regarding changing prices of non-monetary assets, which falls into the inability of the historical cost accounting model (Shying and Ngiam 2011).

Nonetheless, according to The Accounting Handbook (2011), measurement refers to a process for monetary amounts determining. During this process, elements of the financial statements are recognized to produce balance sheet and income statement. This process involves selecting particular basis of measurement. Thus, there are several measurement bases that are considered for different degrees and are combined variously in financial reports.

There are four measurement bases are identified in The Accounting Handbook (2011). The first one is historical cost assets. They are recorded at the amount of cash or cash equivalents paid for fair values of the considerations when acquired at the time of their acquisition. Liabilities are recorded, at the same time, at the amount of proceeds received in exchange for obligation. The liabilities can also be recorded at the amounts of cash or cash equivalents under certain circumstances when such cash or cash equivalents are expected to be payments in regard of satisfaction of the liabilities in the normal course of business. The second one is current cost assets. They are recorded as the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently (Shying and Ngiam 2011). The liabilities are recorded at the amount of the cash or cash equivalents that are not discounted but that would be required for current obligation settlement. The third one is realised value assets or settlement value assets. They are recorded at the amount of cash or cash equivalents that can be current obtainable when the asset is sold in an orderly disposal. Liabilities are recorded at the settlement values. In other words, the undiscounted amounts of cash or cash equivalents are paid under expectation to satisfy the liabilities in the normal course of business. The fourth one is present value assets. They are recorded at the present discounted value of future net cash flows. Meanwhile, the item is expected to generate in the normal course of business. Liabilities are recorded at the present discounted value of the future net cash outflows to settle the liabilities in the normal course of business (Godfry, Hodgson et al. 2010).

Various types of measures in accounting are possible for respective purposes. For example, there are direct or indirect accounting measures. The former are primary and actual measures of an object or its attributes. The latter are secondary measures derived indirectly though algebraic transformation of certain set of numbers representing direct measure of an object or its attributes. Another type of measure is classified as a past, present or future measure to refer respectively to a measure of a future event under consideration of decision time dimension. Also, there is measure type that can be classified as a retrospective, contemporary or prospective measure when referring to whether an object or its attribute measures belong to a past, present or future event under consideration of the time when measurement is made (Belkaoui and Jones 1996). To illustrate, there are three issues are indicated below which are foreign currency exchange, agriculture accounting and public sector accounting.

Measurement in Public Sector Accounting

Public sector is important to a country because it acts on behalf of its people and communities for their interests and provide collective goods and services that cannot be accomplished by private sector (Deegan 2010). There are three broad groups of public sector which are government trading enterprises, government departments, and whole of government (Henderson, Peirson et al. 2011). The development of accounting regulation of public sector reporting has been one of the most important projects of the AASB/PSASB because it directly influences with a significant degree on the Australian people’s well-being and public resources. With improved financial reporting practices, the government and taxpayers are provided with information to make informed decision on the way that the resources are to be allocated (Deegan 2010).

There are several differences between the public sector and the private sector. Their bases are different. Public sector is based on budget when the other is on a self-sustaining basis. When considering transfers, the public sector holds objective of inequality of exchange and redistributive transfer while the private sector has each transaction in the form of an exchange of resources between the enterprise and its environment. In the aspect of performance, the public sector has little connection between taxed and the benefits at the level of individuals. Yet for the private sector, its performance is considered as its marketability of its output compared to its input. Thus, compared to private sector, public sector faces problems of absence of profitability as a regulatory mechanism as well as a measurement framework. Further, the accountability of public sector has to respond to questions from individuals and organizations for their conduct, responsibilities and activities; has to provide information for evaluation of the performance of the parties concerned; and has to provide financial reports to set an important example of the accounts for process of evaluation (Moxham 2009; Deegan 2010; Henderson, Peirson et al. 2011).

Three issues are inherent in the public sector accounting which are infrastructure and heritage assets, land under roads and form as well as content of financial statements. Of the three issues, the first two need to be considered with the measurement issues. The priority is to make clear definition of the issues with essential features.

The infrastructure assets are public facilities, immovable and require sustainability of living standards and relevant essential services. Whereas for heritage assets, they are considered as assets that are unreplaceable or indefinitely preserved such as museum collections, national parks, and nature reserves. However, infrastructure assets and heritage assets are difficult to be measured because their characteristics are different from that of other assets. Firstly, costs of such assets are ‘sunk’. Secondly, they are not vendible or evaluated by marked value. Thirdly, information that they convey is rather socially than commercial benefits. Also, such assets do not have physical life that can be determined. Besides, they actually are liabilities rather than assets (Deegan 2010). As a result, it is argued that these assets need to be measured with special treatment. For example, the amounts of infrastructure ad heritage assets need to be disclosed as two separate categories of non-current assets in the statement of financial position of government departments (Sutcliffe, Micallef et al. 1991; Deegan 2010; Henderson, Peirson et al. 2011).

As for the issue of land under roads, the major features include three aspects. First, it is the uncertainty about the land under roads that is to be controlled by which entities. Secondly, there is not much reliability in measuring the land under roads. Also, to recognize land under roads costs a lot which exceeds its relevant benefits. Yet the framework notes that assets are to be recognized when they meet the definition and recognition criteria of assets. The recognition criteria include asset with a reliably measured cost or other value. Current value also needs to be estimated and determined for land under the roads in the absence of a market transactions through analysis of market transactions for adjacent land (Deegan 2010; Henderson, Peirson et al. 2011).

Measurement in Agricultural Activity

Agriculture Sector involves biological assets which are non-human living assets such as animals and plants controlled by entities. There are two broad categories of the biological assets. One is bearer biological assets that generate revenue by producing output more than once. The other is consumable biological asset generating revenue only once when the assets are slaughtered, harvested or sold.

The consideration of biological asset measurement roots in their essential features that such assets are living and capable of biological transformation. Such features make the biological assets different from other assets and lead to certain accounting problems for classification, measurement and recognition of changes in asset value. Nevertheless, the biological assets are basically classified into to two categories: animal and plants. Such classification enables an easier consideration for measurement (Henderson, Peirson et al. 2011).

Animals

After series of arbitrary assumptions and allocations, costs of animals can be estimated and determined. It is commonly agreed that cost is not a satisfactory basis for measuring animal due to unreliable measuring to recognize such assets. Also, it provides irrelevant data which brings more practical difficulties for measuring such assets (Roberts, Staunton et al. 1995). However, there are several alternative ways to measure market value of animals.

There are three variations of market value. Firstly, the net price is the net realisable value obtained after the animal is sold with deducted transaction costs at the end of each reporting period in an orderly market. Secondly, discounted market value is net realisable value achieved after market value is reduced by a certain amount to a possible future market price. Thirdly, agreed values for animal are involved in standard value which is based on conservatively estimated market prices in foreseeable future. As the market changes all the time, the animals are recognized in the accounts at the standard values. Thus, generally, net realisable value becomes the best alternative to measure the value of the animals by providing more relevant and reliable information than merely cost.

Plants

Noteworthy, compared to measuring the animal, measuring bearer plant biological assets through the net realisable value is particularly difficult. For example, results of measuring a vineyard or an orchard by the net realisable value are usually a sum of the net realisable values consisting land, improvements and the plant biological assets. The fact is that bearer plant biological assets are seldom measured separately from the land on which they grow. Also, the fact is that the net realisable value is usually considered and determined by the price at which the land, improvements and bearer plant biological assets are sold as a unit. Besides, some other issues need to be considered when measuring forestry assets. There are three possible const-based methods for the forestry assets measurement which are historical cost, compounded historical cost, and replacement cost. To incorporate current value-based methods of accounting for such assets, the suggested ways are net-present-value method and net-realisable-value method(Henderson, Peirson et al. 2011).

Measurement in Foreign Currency

AASB121 contains accounting principles for companies regarding foreign currency translation and presentation in the balance sheet and profit and loss account. Effects of changes in foreign exchange rates were introduced for annual reporting periods beginning on or after 1 January 2005. The Financial Reporting Standard 121 states the principal issues determining which exchange rates to be uses and how to report the effects of changes in exchange rates in the financial statements. The magnitude of the exchange rate valuation effect has been increasing during recent years. There are two main reasons. One is that it is considered as a part of reflect of large fluctuations. The other reason is that it reflects increasing degree of international financial integration. As higher cross-holdings of financial assets across countries increase, the exchange rate valuation effect is concentrated on gross assets (Shying and Ngiam 2011).

AASB121 specifically defines 3 different exchange rates for foreign currency translation which are closing rate, exchange rate and spot exchange rate. All the entities’ transactions are recognised in the functional currency when all currencies other than the functional currency are foreign currencies. Meanwhile, foreign accounts should be translated at the exchange rate in effect at the date of transaction which is spot exchange rate or at the first date of the month when transactions occur. Also at the end of month, foreign accounts should be translated at the exchange rate in effect at the closing date of the month(Shying and Ngiam 2011).

Notably, any foreign accounts denominated monetary items are measured using the closing rate. On the other hand fair value is used to measure any non-monetary items arising from transactions denominated in foreign accounts. A part of non-monetary items that are measured in foreign currency at historical cost in a foreign currency are translated using the exchange rate at the date of transaction. Nonetheless, depending on the accounting regulations that affect the parent company, the translations can be done at the exchange rate at the end of the period or at the average exchange of the period. As a result, income statement are usually translated at the average exchange rate over the period when balance sheet that exposures foreign subsidiaries are usually translated at the prevailing current exchange rate at the time of consolidation. The differences caused by translations are exchange differences which recorded in financial report in accounts of assets, capitalisation or expenses in the period in which they arise (Dumas 1984; Board 2010).

IAS 36 Impairment of assets states that all assets are subject to impairment tests such as recoverable amount test as well as in IAS 2 Inventories states that net realisable value tests. These two requirements interact through the comparing process of non-monetary assets measured in a foreign current that are assessed for impairment. There are two aspects involved in the comparing process. One is the carrying amount that is translated at the rate when the amount was determined. The other is the net realisable value or recoverable amount translated at the rate then the value was determined. Based on the comparison, assets are impaired in the functional currency instead of in the foreign currency. Such situation roots in the factor that some amounts used in impairment testing are translated to the functional currency at the current rates while the carrying amounts are translated with historic rates(Board 2010).

Conclusion

In general, there are many different types of business activities and transactions. Through illustration of three issues, the understanding is that appreciate types of measurement need to be considered to record the real information about the reporting entities. Therefore, nature of respective business procedure and purposes of the report need be justified before choosing the measurement system. To achieve, keeping knowledge update is necessary as well as being aware of debates in applying the measurement. Also, it is important to produce financial reporting that reliably reflects the reality of the report objectors to the report users. Thus, different types of accounting measurement need to be considered and chosen in accordance with different business environment.