24 January 2013

EFRAG's comment letter on financial reporting measurement framework

EFRAG welcomes the work carried out in relation to the research paper Toward a Measurement Framework for Financial Reporting by Profit-Oriented Entities, issued by the Canadian Institute of Chartered Accountants (the 'paper').

EFRAG agrees with the paper that stewardship should be considered when determining how to measure assets and liabilities. EFRAG also agrees with the paper that if a measurement basis in practice would result in estimates with large margins of errors, disclosure about the uncertainty cannot solve this problem. Instead another measurement basis should be chosen.

EFRAG, however, disagrees with the proposed model for measuring assets and liabilities. The paper proposes that Current Market Value is the most ideal (relevant) measurement basis, when the value is practicable of faithful representation. The paper also proposed that matching current input costs sacrificed against current revenues is a better starting point for estimating an entity’s future sustainable earning than historical cost-based accounting, and reflecting holding gains and losses on input assets and liabilities always provides useful information.

EFRAG does not believe that it would be possible to identify an ideal measurement basis. Instead the role of a measurement framework should be to explain the properties of various bases of measurement and, by reference to empirical evidence on various users’ needs, provide directions on when the different properties are important. In doing so, implications of a measurement basis on both an entity’s financial position and performance should be considered. A measurement framework should also take into account that the information that is most relevant for estimating future cash flows might not be most relevant for assessing stewardship and that different types of users would likely have different needs.

EFRAG considers that reporting holding gains and losses on input assets and liabilities is irrelevant if the entity is not generating its cash flows from holding and selling these assets and liabilities. For self-constructed assets, the reported holding gains and losses may even represent very abstract information as it may be impossible to re-sell input assets that have been used to create other assets.

EFRAG believes that information about actual cash flows is often considered more useful for predicting future cash flows than information about hypothetical cash flows. 

EFRAG thinks that a conceptual framework for measurement should work for all entities. In this respect EFRAG notes that EFRAG found it difficult to apply the distinction between operating, financing and investing activities to financial institutions such as banks and insurance companies.

Press release

Comment letter

© EFRAG - European Financial Reporting Advisory Group