GASB Issues Concepts Statement on Financial Statement Measurement
Author: Anne Coughlan
On April 14, 2014, the Governmental Accounting Standards Board (GASB) issued Concepts Statement No. 6, Measurement of Elements of Financial Statements. This statement establishes the concepts that will guide GASB’s standard setting for how state and local governments determine and measure the amounts for reporting assets and liabilities in financial statements. This statement formalizes the framework for the exposure draft on fair value measurement and application expected in the second quarter of 2014.
Concepts statements provide GASB with a framework to be used for establishing consistent accounting and financial reporting standards. They do not prescribe the standards that apply to an item or event. This concepts statement does not require a change in existing GAAP or amend, modify or interpret any established accounting principles. Previously, GASB relied on the conceptual framework of other standards setters and practice examples to determine whether an item should be recognized in the financial statements, when an item should be recognized and at what amount it should be recognized. This led to inconsistencies in financial reporting standards and overreliance on accounting concepts not developed for governmental entities.
Measurement of Elements of Financial Statements
This concepts statement establishes the two measurement approaches that would be used in financial statements, noted below, and identifies circumstances in which one measurement attribute is more appropriate than the other. Measurement approach identifies the point in time to which the amount reported for an element of financial statements directly refers. A measurement attribute is the particular characteristic of an asset or liability that's being measured. Only one measurement approach would be applied for a specific asset or liability.
- Initial Amount – The transaction price or amount assigned when an asset was acquired or a liability was incurred. This includes subsequent modifications to that price or amount if derived from the initial amount reported, e.g., depreciation or impairment. Initial amounts are more appropriate for assets used directly in providing services.
- Remeasured Amount – The amount assigned when an asset or liability is remeasured as of the financial statement date. Remeasurement establishes a new carrying value determined without reference to previously reported amounts. For assets that will be converted to cash, a remeasured amount better reflects the current value of cash flows. Because remeasured amounts provide a better assessment of resources needed to currently satisfy an obligation, it's more appropriate for liabilities for which there is uncertainty about the timing or amount of payments.
The statement establishes four measurement attributes that would be used in financial statements:
- Historical Cost – The amount paid to acquire an asset or the amount received pursuant to the incurrence of a liability in an actual exchange transaction. Historical cost is an entry price and only can be used when measuring initial amounts.
- 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. Fair value is an exit price. Fair value can be used in either an initial measurement or remeasured approach.
- Replacement Cost – The price that would be paid to acquire an asset with equivalent service potential in an orderly market transaction at thSe measurement date. Replacement cost only would be appropriate for assets used in providing services rather than assets that will be converted to cash.
- Settlement Amount – The amount at which an asset could be realized or a liability could be liquidated with the counterparty other than in an active market. Settlement amount can be used in either an initial measurement or remeasured approach.
For additional questions regarding this issue, please contact your BKD advisor.