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Statement of Federal Financial Accounting Concepts 7:
Measurement of the Elements of Accrual-Basis
Financial Statements in Periods After Initial Recording
Status
See pages 6-7 for the preamble to Statements of Federal Financial Accounting Concepts.
Summary
In financial reporting, measurement is the act or process of assigning dollar amounts to the
elements of the financial statements (assets, liabilities, and so forth). This Concepts Statement
addresses the measurement of the elements of accrual-basis financial statements of federal
government entities in periods after amounts are initially recorded. It identifies and elucidates
conceptual issues for the Board to consider when deliberating measurement standards in the
future. It does not change existing standards.
A principal question for the Board to resolve in future standards is whether and under what
circumstances it might be more useful for users' decision making to report an asset or liability in
periods after its acquisition or incurrence (a) at the amount initially recorded ("initial amount"),
i.e., the historical cost or historical proceeds (which may be adjusted subsequently for
amortization, depreciation, or depletion, if applicable) or (b) at an amount measured at each
financial statement date ("remeasured amount"), such as the fair value. This Concepts Statement
discusses the advantages and disadvantages of different alternatives for measurement.
However, conclusions as to which measurement approach or attribute may be selected for
reporting an element under different circumstances are deferred for consideration in the
standard-setting process. Standard-setting deliberations also would appropriately consider cost-
benefit implications and other practical reporting concerns.
The measurement approach (initial or remeasured amounts), attributes, and methods used for
measuring assets and liabilities affect how the information is reported and interpreted. The
analysis in this Concepts Statement includes a comparison of the advantages and disadvantages
for achieving the federal financial reporting objectives (SFFAC 1) of continuing to report an initial
amount after the recognition period versus remeasuring an asset or liability at each financial
statement date. Also included is a discussion of how well attributes that are commonly applied or
available for measuring assets and liabilities, such as fair value and settlement amount, comply
with the qualitative characteristics (SFFAC 1). The analysis suggests that, when the goal is to
help ensure that reported information achieves several financial reporting objectives in response
to the various decision-making needs of a range of users, it is necessary to accept that different
Issued August 16, 2011
Affects None.
Affected by None.
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measurement approaches, attributes, and methods may be needed to convey useful information
about different transactions and underlying events. The identification and discussion of the
different measurement possibilities is expected to enhance the understanding of users and
preparers as well as the Board's deliberations of future standards.
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Table of Contents
Page
Summary 1
Introduction 4
Objective 4
Focus on Assets and Liabilities 5
Financial Reporting Objectives and Qualitative Characteristics 5
Concepts 7
Measurement Approaches and Attributes 7
Measurement Approaches 8
Changes in Specific Prices Versus Changes in the General Price Level 8
Four Possible Measurement Approaches 9
Focus of This Statement 12
Initial Amounts, Remeasured Amounts, and the Financial Reporting 12
Initial Amounts Versus Remeasured Amounts 12
Achieving Financial Reporting Objectives 14
Measurement Attributes and Qualitative Characteristics 17
Fair Value 18
Settlement Amount 19
Replacement Cost 20
Value in Use 21
Fulfillment Cost 22
Appendix A: Basis for Conclusions 23
Background 23
Statement Objectives and Content 24
Outreach, Responses, and Board Conclusions 25
Board Approval 27
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Introduction
1. In financial reporting, measurement is the act or process of assigning dollar amounts to the
elements of the financial statements. This Concepts Statement addresses the measurement
of the elements of accrual-basis financial statements of federal government entities in
periods after their initial recording. The elements are assets, liabilities, net position,
revenues, and expenses, as defined in Statement of Federal Financial Accounting Concepts
5, Definitions of Elements and Basic Recognition Criteria for Accrual-Basis Financial
Statements. Different measurements and considerations may apply for financial statements
that are not presented on the accrual basis, such as a statement of budgetary resources,
statement of social insurance, or statement of long-range fiscal projections, and for required
supplementary information and other types of general purpose financial reporting.
Objective
2. The objective of this Statement is to identify and elucidate the conceptual issues relevant to
establishing measurement standards in the future for accrual-basis financial statements.
1
A
principal question for the Board to resolve in future standards is whether and under what
circumstances it might be more useful for users' decision making
2
to report an asset or
liability in periods after its acquisition or incurrence (a) at the amount initially recorded
(“initial amount”), i.e., the historical cost or historical proceeds (which may be adjusted
subsequently for amortization, depreciation, or depletion, if applicable) or (b) at an amount
measured at each financial statement date (“remeasured amount”), such as the fair value.
This Concepts Statement discusses the advantages and disadvantages of different
alternatives for measurement. However, conclusions as to which measurement approach
or attribute may be selected for reporting an element under different circumstances are
deferred for consideration in the standard-setting process. Standard-setting deliberations
also would appropriately consider cost–benefit implications and other practical reporting
concerns.
1
This Statement does not establish federal financial accounting standards or change existing standards.
2
References in this Statement to usefulness for decision making encompass decisions related to accountability,
management, and other needs of internal and external users, as discussed in Statement of Federal Financial
Accounting Concepts 1, Objectives of Federal Financial Reporting (SFFAC 1).
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Focus on Assets and Liabilities
3. The measurement concepts in this Statement focus on assets and liabilities because
remeasuring elements after their initial recording is directly applicable only to assets and
liabilities, insofar as the other elements are derived from them.
3
That is, balance sheets and
operating statements articulate and, therefore, the measurement and recognition of
changes in assets and liabilities affect reported revenues and expenses.
4. Expenses for a reporting period result from consuming assets and incurring liabilities, as
well as from accounting adjustments that increase existing liabilities or decrease existing
assets. Revenues result from acquiring assets and from accounting adjustments that
increase existing assets or decrease existing liabilities. Consequently, expenses and
revenues arise either from current-period transactions in which the resulting initial and
remeasured amounts are the same (e.g., salaries expense and tax revenue), or from
adjustments to existing assets and liabilities, such as for changes in the applicable discount
rate (e.g., increases in pension liabilities), or for decreases in liabilities due to recognizing
revenues for amounts previously reported as deferred revenues.
Financial Reporting Objectives and Qualitative Characteristics
5. The concepts in this Statement are considered with reference to the federal financial
reporting objectives and the qualitative characteristics of information in financial reports.
4
The most relevant objectives to the questions discussed in this Statement are:
a. Budgetary Integrity. To help the reader determine how information on the use of
budgetary resources relates to information on the costs of program operations and
whether information on the status of budgetary resources is consistent with other
accounting information on assets and liabilities
b. Operating Performance. To help the reader determine
(1) The costs of providing specific programs and activities and the composition of,
and changes in, these costs
3
The balance sheet element of net position is not separately addressed because it is defined as the difference
between total assets and total liabilities.
4
SFFAC 1.
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(2) The efforts and accomplishments associated with federal programs and the
changes over time and in relation to costs
(3) The efficiency and effectiveness of the government’s management of its assets
and liabilities
c. Stewardship. To help the reader determine whether
(1) The government’s financial position improved or deteriorated over the period
(2) Future budgetary resources will likely be sufficient to sustain public services and
to meet obligations as they come due
(3) Government operations have contributed to the nation’s current and future well-
being
6. The qualitative characteristics of information in financial reports are:
a. Relevance—The capacity of information to make a difference in a decision by helping
users to form predictions about the outcomes of past, present, and future events or to
confirm or correct prior expectations
b. Understandability—The quality of information that enables users to perceive its
significance
c. Reliability—The quality of information that assures that information is reasonably free
from error and bias and faithfully represents what it purports to represent
d. Comparability—The quality of information that enables users to identify similarities in
and differences between two sets of economic phenomena
e. Consistency—Conformity from period to period with unchanging policies and
procedures
f. Timeliness—Having information available to a decision maker before it loses its
capacity to influence decisions
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Concepts
Measurement Approaches and Attributes
7. The questions surrounding the measurement of assets and liabilities in accrual-basis
financial statements can be grouped into two broad areas of consideration:
a. Measurement Approach
The measurement approach is how an asset or liability is measured in periods after initial
recording—i.e., at the historical cost or initial transaction amount (with subsequent
adjustments for amortization, depreciation, or depletion, if applicable) or at an amount, such
as fair value, measured at each financial statement date. A different measurement approach
may be appropriate for different assets and liabilities. This Statement refers to the amount
initially recorded as the "initial amount" and to amounts measured at each subsequent
financial statement date as "remeasured amounts."
b. Measurement Attribute and Method
The measurement attribute (or measurement basis)
5
is a measurable characteristic of an
asset or liability, such as its fair value or settlement amount.
6
Major questions are: Which
attributes result in more useful information for decision making, and what factors and
circumstances may contribute to that result, such as the class of asset or liability, the type of
transaction, and variations in users' decision-making needs? Also, the selection of a
measurement attribute often entails the selection of a measurement method. For example,
if the measurement approach for a particular asset is to report a remeasured amount and
the measurement attribute selected is fair value, possible measurement methods could be
to research quoted market prices, if available, or to obtain a professional appraisal. Different
measurement attributes and methods may be used for different assets and liabilities, and
the selections made can affect the usefulness of reported information for decision making.
8. The next section discusses different measurement approaches with reference to the
financial reporting objectives. A later section discusses measurement attributes and
methods with reference to the qualitative characteristics.
5
Both terms are currently in use in the accounting measurement literature and convey a similar concept.
6
These and other measurement attributes are defined and discussed in a later section.
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Measurement Approaches
9. The most basic accounting and financial reporting questions relate to recognition and
measurement. When should a government measure the existence of, or changes in, the
value of an asset or liability? When and how should revenues and expenses resulting from
these changes be measured and recognized? Should a government record changes in
economic values that have occurred, even though no transaction by the government has
taken place? Would the reliability of financial statements suffer if such changes were
accounted for as they occur, or would the failure to account for them reduce the decision-
usefulness and representational faithfulness of financial statements? Financial reporting
standards traditionally have permitted or required recognition of value changes for some
assets and liabilities but not for others. The issues are complicated because value changes
may be due to changes in interest rates or service potential, or to different types of price
changes.
Changes in Specific Prices Versus Changes in the General Price Level
10. Prices of goods and services increase or decrease for primarily two reasons:
a. A change in the demand for or supply of a specific product, such as materials or
equipment, which affects the market value of the product. The accounting and financial
reporting question is whether these changes should be included in the balance sheet in
the period in which they occur or entirely in the period when an asset or liability is
disposed of or settled. For flows statements, the question is whether they should
report only realized gains and losses or also the unrealized gains and losses generated
by price changes before disposition of the assets or liabilities ("holding" gains and
losses).
b. A change in the purchasing power of the monetary unit (e.g., the dollar). That is, taking
into account all goods and services bought and sold in the economy, the general price
level might change such that the monetary unit buys more or less today than in a
previous period. Although the number of monetary units required to buy a product
might change, the relationship between the price of that product and the price of other
goods or services will remain the same. For example, if the price of machine A was
higher than that of machine B before the change in purchasing power, it would also be
higher afterward, because the change in purchasing power would affect both prices
equally. Increases (or decreases) in the number of monetary units required to
purchase goods and services are referred to as inflation (or deflation).
11. Whether inflation is taken into account can affect how information is reported and
interpreted. For example, assume that a federal agency acquired land for $100,000 in
December 20x0 and sold it in December 20x1 for $125,000—an apparent gain of $25,000.
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Suppose, however, that during the year the general level of prices increased by 15 percent.
That is, goods and services that could have been purchased in December 20x0 for $1,000
would have cost $1,150 in December 20x1.
7
Thus, in the example, the land acquired for
$100,000 in 20x0 dollars can be thought of as having a remeasured cost of $115,000
($100,000 x 115/100) in 20x1 dollars. The gain on sale, expressed in constant dollars—in
this case, 20x1 dollars—is therefore only $10,000 ($125,000 - 115,000), rather than $25,000
in nominal (unadjusted) dollars. The $15,000 difference between reporting the gain on sale
in nominal dollars and reporting it in constant dollars is relevant to users' assessment of the
stewardship and operating performance of the agency's management.
Four Possible Measurement Approaches
12. The distinction between changes in specific prices (or values) and changes in the general
price level (purchasing power of the dollar) suggests four possible measurement
approaches:
a. Initial amounts/nominal dollars. This is the traditional measurement approach. Assets
and liabilities are stated at their initial (historical cost or historical proceeds) amounts,
without adjustment for changes in prices, whether general or specific.
b. Initial amounts/constant dollars. Assets and liabilities are stated at their initial amounts
expressed in dollars as of the balance sheet (current) date, rather than dollars of the
acquisition date, so that general price level adjustments are recognized.
c. Remeasured amounts/nominal dollars. Assets and liabilities are adjusted to take into
account changes in the prices of specific goods or services, but no separate
recognition is given to changes in the general price level.
d. Remeasured amounts/constant dollars. Assets and liabilities are remeasured to take
into account the current prices of goods and services—that is, adjustments are
required for changes in the general price level as well as for changes in specific prices.
13. The following expansion of the earlier example compares results for the four measurement
approaches. The results are illustrated in Table A.
7
Changes in the general price level generally are stated as an index value. For example, the implicit price deflator for
gross domestic product (GDP deflator), maintained by the U.S. Department of Commerce, Bureau of Economic
Analysis, expresses prices of various years as percentages of prices of a selected base year, which is assigned a
value of 100. If, for example, 20x0 is the base year (100) and prices in 20x1 are 15 percent higher, then the GDP
deflator for 20x1 would be 115.
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Example
A federal entity purchased land for $100,000 in December 20x0. The land increased in
value to $125,000 by December 20x1. The entity retained the land for another year and
sold it on December 31, 20x2 for $130,000. The general price level was 100 when the entity
acquired the land, 115 on December 31, 20x1, and 127 on December 31, 20x2.
On December 31, 20x1, the land was worth $125,000—meaning, the entity could have
realized a $25,000 nominal dollar gain by selling it. Further analysis reveals, that $15,000 of
that gain resulted from general price level changes ($100,000 x 115/100) while the
remaining $10,000 resulted from specific price increases. The next year, 20x2, the land
reached a value of $130,000 and management sold it for a net gain of $30,000 over the two-
year period.
All four measurement approaches result in a $30,000 gain being reported, but different
information is available for each of the two years. Under the initial amounts/nominal dollars
approach, the entire $30,000 gain is reported in 20x2. Using the initial amounts/constant
dollars approach, $15,000 of the gain ($115,000 - 100,000) is reported in 20x1 and $15,000
in 20x2 ($130,000 - 115,000). Under both the remeasured amounts approaches, $25,000 of
the gain ($125,000 - 100,000) is reported in 20x1 and $5,000 in 20x2 ($130,000 - 125,000).
Further analysis reveals that, under both approaches reported using constant dollars, the
purchasing power gain in 20x2 is $13,043 [$125,000 x (127/115) – 125,000]. Thus, under
the initial amounts/constant dollars approach, the remainder of the 20x2 gain ($15,000 –
13,043 = $1,957) is attributed to a specific price increase. In contrast, under the
remeasured amounts/constant dollars approach, the specific price change in 20x2 is a loss
of $8,043 ($5,000 – 13,043).
Such differences can affect users' evaluation of operating performance. For example, the
increase in the value of the land attributable to the 20x1 management team would be either
zero or $15,000 under the initial amounts approaches versus $25,000 under the two
remeasured amounts approaches.
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TABLE A. Purchase and Sale of Land: Comparative Results under Four Measurement
Approaches
1
$100,000 x 115/100 = $115,000
2
Market value at 12/31/x1
3
$115,000 – 100,000 = $15,000
4
$125,000 – 100,000 = $25,000
5
($100,000 x 115/100) – 100,000 = $15,000
6
$130,000 – 100,000 = $30,000
7
$130,000 – 115,000 = $15,000
8
$130,000 – 125,000 = $5,000
9
($125,000 x 127/115) – 125,000) = $13,043
Measurement Approach
Initial
Amounts/
Nominal
Dollars
Initial
Amounts/
Constant
Dollars
Remeasured
Amounts/
Nominal
Dollars
Remeasured
Amounts/
Constant
Dollars
Acquisition cost = book value at
12/31/x0 (20x0 dollars)
$100,000 $100,000 $100,000 $100,000
Reported book value of land,
12/31/x1
Current value of land, 12/31/x1
100,000
125,000
115,000
1
125,000
125,000
2
125,000
125,000
2
125,000
Reported total gain, 20x1
— Purchasing power gain
— Specific price gain
0
0
0
15,000
3
15,000
0
25,000
4
0
25,000
25,000
4
15,000
5
10,000
Sale price of land, 12/31/x2 130,000 130,000 130,000 130,000
Reported total gain, 20x2
— Purchasing power gain
— Specific price gain/(loss)
30,000
6
0
30,000
15,000
7
13,043
9
1,957
5,000
8
0
5,000
5,000
8
13,043
9
(8,043)
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14. Although certain federal government statistics are reported in constant dollars, there has not
been a strong call to adjust the financial statements in recent decades, when inflation has
been low. However, should high inflation be experienced in the future, consideration might
be given to reporting financial statement information in constant dollars to assist users in
assessing an entity's financial position and operating results after adjusting for inflation. If
so, an examination of the advantages and disadvantages of reporting in constant dollars
would be appropriate at that time.
Focus of This Statement
15. The remainder of this Statement focuses on the differences between reporting initial
amounts and remeasured amounts in nominal dollars (measurement approaches a. and c.
in the previous section). Under approach a., initial amounts are not adjusted for changes in
either general or specific prices. Under approach c., remeasured amounts and resulting
holding gains and losses incorporate the combined effects of both general and specific price
changes without separately identifying them.
16. The analysis in this Statement addresses assets and liabilities in general. However, a
particular financial reporting standard may permit or require the reporting of initial amounts
for some assets and liabilities and remeasured amounts for others, based on the anticipated
usefulness to decision makers of one approach versus the other for the reporting issues
addressed in the standard.
Initial Amounts, Remeasured Amounts, and the Financial Reporting
Objectives
17. This section discusses initial amounts and remeasured amounts in general and the extent to
which each measurement approach helps achieve the federal financial reporting objectives.
Different measurement attributes are discussed in a later section on "Measurement
Attributes and Qualitative Characteristics."
Initial Amounts Versus Remeasured Amounts
18. Traditionally, the amount at which a transaction is reported has been determined in a
manner appropriate to the nature of the transaction. For example, assets acquired by
purchase are initially reported at the amount of the consideration surrendered by the
purchaser (plus any additional costs incurred to bring the asset to a serviceable condition).
Assets acquired through donation are reported at their fair value at the date of donation.
Accounts receivable and payable are reported at their anticipated net settlement amounts,
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which are future exit values.
8
Examples include reporting accounts receivable at net
realizable value and reporting accounts payable at invoice amount less any discounts (e.g.,
for prompt payment). Once recorded, the amounts initially determined are often referred to
as the "historical cost" of an asset or "historical proceeds" of a liability, regardless of how
they were determined. In this Statement they are referred to as initial amounts.
19. Certain features of a transaction may make identification of an initial amount more difficult.
For example, transactions may have associated costs, such as legal fees, which generally
are reported as part of the initial amount. A single transaction may involve more than one
asset or liability, requiring the total transaction amount to be allocated to the components.
Indirect costs, such as certain labor costs, may need to be allocated to constructed assets
through cost accounting procedures. Initial amounts for longer lived assets and liabilities
generally are allocated to reporting periods. For example, capital assets are depreciated or
amortized over their estimated useful lives. Discounts or premiums from issuance of debt
are amortized or accreted over the term of the debt. Many of these features present
practical questions to be resolved when setting standards.
20. Remeasured amounts of assets and liabilities are determined using one of several possible
measurement attributes that reflect economic conditions at the financial statement date,
including, for example, fair value or settlement amount. Remeasurement updates a
previously determined carrying amount to reflect a change in the economic value of an
asset or liability that has occurred since the previous financial statement date. A
remeasured amount thus differs from an adjustment to an initial amount that does not reflect
a change in value. For example, an increase in the accumulated depreciation balance on a
building does not change the economic value of the building and does not constitute
remeasurement of its carrying amount. Unless the value of the building itself is remeasured
at, for example, its fair value, the reported amount will continue to be considered the initial
amount. In contrast, an adjustment to an allowance for uncollectible accounts receivable
due to an increased risk of noncollection constitutes remeasurement of the carrying amount,
even when the gross amount of receivables is not remeasured, because the adjustment
reflects a change in the economic value of the receivables—the anticipated net settlement
amount.
8
An exit value is the price or amount at which an asset could be sold or a liability extinguished. An entry value is the
estimated price at which an asset which is currently on the books may be purchased. (Kohler's Dictionary for
Accountants, sixth edition, W. W. Cooper and Yuji Ijiri, eds.; Prentice-Hall, Inc., Englewood Cliffs, N.J., 1983). Entry
and exit values are referred to again in the section on measurement attributes.
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Achieving the Financial Reporting Objectives
21. Assessments of which nominal-dollar measurement approach—initial amounts or
remeasured amounts—better enables achievement of one or more of the financial reporting
objectives vary according to the kinds of information users need and the decisions to be
made.
9
In practice, federal financial statements traditionally have followed a "mixed-
attribute" model. That is, some assets and liabilities, such as general property, plant, and
equipment, have been reported at initial amounts (adjusted for depreciation, depletion, or
amortization, if applicable), and others, such as direct loans and loan guarantees, have
been reported at remeasured amounts.
22. Given the objective of reporting information that is useful for accountability and users'
decision-making needs and the range of different users and information needs to be
addressed, it is likely that federal financial statements will continue to include both
measurement approaches as well as different measurement attributes and measurement
methods under each approach. Consequently, this Concepts Statement identifies
advantages and disadvantages of reporting initial amounts and remeasured amounts and of
applying different measurement attributes, but no conclusions are drawn as to which
measurement approach or attribute may be preferable either in general or in particular
circumstances. Such conclusions are the province of the standard-setting process, in the
course of which the concepts in this Statement will be considered on a project-by-project
basis, along with cost–benefit considerations and other practical reporting concerns that
may arise under different alternatives.
23. Continuing to report assets and liabilities at their initially recorded amounts in periods
following their acquisition or incurrence is a long-established approach to financial reporting
and users are accustomed to that approach. Initial amounts generally are reliable and
objective, based on documented evidence, although subjectivity subsequently may be
introduced through the assumptions or methods adopted for calculating depreciation or
amortization, such as depreciable lives and salvage values, or, as previously indicated,
through the allocation of indirect costs. Initial amounts establish a historical record of
transactions that have occurred that facilitates the control and safeguarding of resources.
24. Proponents cite these advantages in support of reporting at their initial amounts the costs of
inventory and capital assets and the resultant costs of providing programs and activities
(referred to in the operating performance objective). These proponents believe that it is not
useful to remeasure and report assets at their potential sales prices or settlement amounts
when they are being held to provide services, rather than for sale. In this view, assets held
to provide services should be reported at the amounts paid for them (or other initial
9
SFFAC 1 describes the users of federal financial reporting and their decision-making needs.
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amounts), and the reported cost of using them each period should be a function of that
amount. With this approach, the initial amounts of assets will be allocated to service costs
over the periods when the assets are used to provide services, based on the prices paid for
the assets.
25. Many also support reporting initial amounts for assets used to provide services because
they believe that the adequacy of taxes and other revenues should be assessed based on
the amounts actually expended to acquire existing assets, rather than on the current-period
costs of equivalent assets or service potential. These proponents suggest that reporting
program and activity costs based on the initial amounts facilitates users’ ability to assess
how the use of budgetary resources relates to the costs of operations (budgetary integrity
objective), whereas reporting costs each period at remeasured amounts does not. Initial
amounts also may be advocated when there are significant barriers to the realization or
settlement of a remeasured amount.
26. Proponents of reporting initial amounts hold that the reliability and objectivity of initial
amounts is critical for users' decisions. Reporting remeasured amounts may introduce
significant uncertainties and subjectivity into the information provided to users because of
the extent of judgment involved in developing these estimates. Those who hold these views
point out that remeasured information may reduce the reliability of financial statements.
Further, they note that information that is not reliable is rarely relevant.
27. Supporters of remeasurement believe that users require up-to-date information about the
price of assets held for sale or to generate future cash inflows. Further, they believe that
users also need information about the costs of programs and other ongoing activities based
on the current costs of the underlying assets, particularly infrastructure and other capital
assets that likely were acquired many years ago. In this view, a comparison of current-
period taxes and other revenues with remeasured (current) costs of the resources
consumed in providing goods and services is more relevant for assessing operating
performance, stewardship, and the sustainability of services than is a comparison with initial
amounts that are no longer current. To provide up-to-date information on the costs of
services, the underlying assets need to be reported at a remeasured amount, such as
replacement cost.
28. Similarly, supporters of remeasurement believe that remeasured amounts of assets and
liabilities, especially for assets acquired many years ago, are more relevant than initial
amounts for assessing an entity's current financial position, service potential, and ability to
meet obligations when due, as well as the magnitude of the entity's current and probable
future resource needs. Over time, critical factors, such as prices and interest rates, change,
yet initial amounts reflect the prices and interest rates in effect at the various transaction
dates, not at the reporting date. For example, it is possible for assets acquired at different
dates to be reported at different amounts, even though they have the same service
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potential. Similarly, it is possible for liabilities incurred at different dates to be reported at the
same initial amount, even though they do not represent equivalent economic claims on the
entity's resources, because they bear different interest rates.
29. The contrasting views about the usefulness of initial amounts versus remeasured amounts
suggest that an important consideration is whether the reporting objectives generally are
more concerned with informing users about how efficiently and effectively budgetary
resources were ultimately used to deliver goods and services, or about how all economic
resources were used. The principal difference between the two goals is the treatment of the
effects of price changes (unrealized or "holding" gains and losses) on reported assets and
liabilities and related operating costs. The different treatments provide different information
to users of the financial statements.
30. If an entity reports initial amounts, the statement of net cost reports the expiring benefits
from previously expended budgetary resources only when the underlying assets are
consumed or sold. The statement of net cost does not provide information about changes
that occur in resource prices or the values of existing assets in the intervening periods. In
contrast, if the entity reports remeasured amounts, the information reflects the capacity of
the underlying assets to provide goods and services in changing circumstances. The
statement of net cost captures the period-to-period changes in asset amounts (holding
gains and losses) in the periods in which they occur and reports the resources consumed at
current amounts, information that can help users assess stewardship and operating results
each period.
31. The reporting of holding gains and losses can help fulfill the financial reporting objectives by
providing information about management’s performance that is useful to agency and
program managers as well as to taxpayers and other users of financial reports, including, for
example, the economic results of decisions to hold rather than to sell assets. This
information may enhance understanding of the costs of programs and activities based on
current costs, how costs are changing, the sufficiency of current resources, and future
resource needs. The information also may help users assess the efficiency and
effectiveness of the management of the entity’s assets and liabilities, including whether a
change in financial position resulted from management’s operating decisions or from
changes in prices beyond management’s control. These kinds of information are available
from the financial statements when holding gains and losses are separately displayed in the
statement of net cost. Reporting initial amounts without adjustment for holding gains and
losses (and excluding amortization, depreciation, and depletion) may help users compare
the resources consumed for goods and services with the resources provided for those
purposes. On the other hand, without information about current prices it is difficult for users
to assess future resource needs and whether the entity’s financial position has improved or
deteriorated.
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32. The expenses related to capital assets that are reported in a resource flows statement are a
component of the cost of current-year services. Initial amounts may be more useful than
remeasured amounts for reporting certain costs of services when the objective is to enable
tracking of budgetary resources expended. For example, costs, such as amortization or
depreciation of capital assets, may be viewed as the expiration of benefits derived from prior
expenditures of budgetary resources. Remeasured amounts may be more useful than initial
amounts for assessing operating performance when the objective is to consider the
economic costs of providing specific programs and activities and to compare costs with
accomplishments. Remeasured amounts also may be more useful for assessing
stewardship, including whether the entity’s financial position improved or deteriorated over
the period, whether public services are sustainable, whether obligations can be met as they
come due, and for assessing future resource needs.
33. The previous discussion suggests that there are different views and factors to be considered
concerning whether the financial reporting objectives are better achieved by reporting initial
amounts or remeasured amounts. Also, some individuals believe that a mixed measurement
approach, whereby some assets or liabilities are reported at initial amounts and others at
remeasured amounts, serves a wider range of decision-making needs than either of the two
measurement approaches alone.
10
Ultimately, which measurement approach is more useful
depends on the types of transactions and other events that have occurred and the
information needed for the decisions to be made. Requiring the same measurement
approach for all assets and/or liabilities and related costs is unlikely to be conceptually
appropriate or useful for decision makers. Rather, when the goal is to help ensure that
reported information meets several financial reporting objectives in response to the various
decision-making needs of a range of users, it is necessary to accept that different
measurement approaches, measurement attributes, and measurement methods may be
appropriate to convey useful information about different transactions and underlying events.
Measurement Attributes and Qualitative Characteristics
34. The previous section evaluates two measurement approaches—reporting initial amounts
and reporting remeasured amounts—in relation to the financial reporting objectives. This
section examines initial and remeasured amounts in relation to the qualitative
characteristics that information in financial reports should demonstrate.
11
10
For example, some who support reporting initial amounts for assets used to provide services also support reporting
remeasured amounts for assets expected to be converted into cash.
11
The qualitative characteristics are discussed in SFFAC 1.
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35. Initial amounts are referred to in general terms because they are not changed from period to
period (except for appropriate adjustments for amortization, depreciation, or depletion).
Remeasured amounts are discussed with reference to the attribute measured because the
attribute selected may affect the degree to which a particular qualitative characteristic is
met. Also, different attributes may be selected for different assets and liabilities and,
because the amounts are remeasured each period, it is possible to change the attribute, if
appropriate to achieve the financial reporting objectives under changed circumstances.
36. The measurement attributes discussed are those most commonly applied or available for
use: fair value, settlement amount, replacement cost, value in use, and fulfillment cost.
Additional measurement attributes may be developed in the future. Fair value and
settlement amount may be used to determine either the initial amount (historical cost or
historical proceeds) or the remeasured amount of an asset or liability. Replacement cost
and value in use (for assets) and fulfillment cost (for liabilities) are not applicable for
assessing initial amounts because they are attributes of assets and liabilities that an entity
already has recorded. These attributes may be used to remeasure recorded amounts at
subsequent financial statement dates.
37. Different measurement methods, with varying degrees of precision, may be used in applying
measurement attributes. For example, fair value may be measured by selecting a market
price from applicable quotations, by estimating the present value of future resource flows,
through a professional appraisal, or by applying a variety of other estimation techniques.
The methods used may introduce different degrees of uncertainty in the resultant amounts
and may, therefore, affect the degree to which the qualitative characteristics are met.
Fair Value
38. Fair value is the amount at which an asset or liability could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
39. The fair value of an asset or liability may be measured at the market value in established
markets, such as those for certain investment or debt securities, or it may be estimated
when there is no active market. Estimated fair value is commonly used for the initial
amounts of assets acquired through donation or other types of nonexchange transactions.
40. The fair value may be an entry (purchase) value or an exit (selling or settlement) value. For
exchanges in established markets, the entry and exit values for the same item should be the
same except for transaction costs and differences attributable to the value of services
provided by the seller of an asset (e.g., a merchandise vendor) to the buyer.
12
When there is
no established market for the exchange, differences between entry and exit prices may
arise due to the use of different assumptions in arriving at an estimate of market value.
12
For example, a PX acquires a variety of goods at a wholesale (entry value) price, provides the service of assembling
the goods in a location and display that is convenient to customers, and sells them at a retail (exit value) price.
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Also, when a federal entity acquires or constructs an asset for a specific public purpose, the
exit value may be lower than the entry value if, for example, a potential purchaser would
expect to pay a reduced price to allow for the cost of adapting the asset to an alternative
use.
41. Methods used to measure fair value include calculating the present value of estimated
future cash flows and estimating the fair value by reference to the current purchase or
selling prices or other settlement amounts of similar assets or liabilities. A present value
measurement that fully captures the economic differences among different assets and
liabilities would most often include the following factors:
a. An estimate of the future cash flow, or in more complex cases, series of future
cash flows at different times
b. Expectations about possible variations in the amount or timing of those cash flows
c. The time value of money, represented by the risk-free rate of interest
d. The price for bearing the uncertainty inherent in the asset or liability
e. Other, sometimes unidentifiable, factors including illiquidity and market
imperfections.
13
42. When fair value is used to measure and report an initial transaction, the amount becomes
the historical cost or historical proceeds of the resultant asset or liability. The relevance,
reliability, understandability, and comparability across entities of the reported amount are
high in the initial reporting period, but they may decline with each successive period when
compared with remeasured amounts. When market values can be used, amounts that are
remeasured at fair value generally are high in relevance, reliability, and understandability,
and in their comparability to equivalent amounts reported by other entities and their
contribution to timely reporting. When fair values must be estimated, the degree to which
the qualitative characteristics are met may vary depending on the availability of information
about similar assets and liabilities and the degree of estimation required.
Settlement Amount
43. Settlement amount is the amount at which an asset can be realized or a liability can be
liquidated.
13
Financial Accounting Standards Board, Statement of Financial Accounting Concepts No. 7, Using Cash
Flow Information and Present Value in Accounting Measurements, February 2000, par. 23.
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44. Settlement amounts are exit values that are based on transactions and may be adjusted by
the reporting entity for expectations regarding circumstances that may influence future
settlement. When used to report receivables, the settlement amount is often referred to as
the net realizable value. For example, the settlement amount or net realizable value for a
receivable would be the invoiced amount adjusted for expectations regarding credit losses.
For accounts payable, the settlement amount is the amount that the creditor will accept in
settlement of its claim for compensation for goods or services provided. For long-term
liabilities, the settlement amount is often calculated by applying net present value
techniques to expected future cash flows. For example, the settlement amount for loan
guarantees may be measured by projecting defaults, and subsequent recoveries, on
guaranteed loans and applying an entity-specific discount rate to the resultant cash flows.
The resultant measure represents the amount of cash that would need to be invested at the
stated interest rate (i.e., the discount rate) to provide cash flows equal to the expected future
cash payments required to settle the guaranteed loans. In contrast to fair value, the
settlement amount would not take into account the price that the market would charge for
bearing the risk or uncertainty associated with the asset or liability.
45. When used for initially recording and reporting short-term assets and liabilities, the degree
of relevance, reliability, and understandability of settlement amounts could be similar to that
afforded by fair values. However, the relevance of initial amounts for longer term assets and
liabilities would decline in subsequent periods. Remeasured settlement amounts would
seem to be more appropriate because their relevance and reliability would be maintained or
enhanced as the reporting dates approached the final settlement date. For some long-term
liabilities, remeasurement may require the professional expertise of disciplines such as, for
example, that of actuaries with respect to pension liabilities.
Replacement Cost
46. Replacement cost is the amount required for an entity to replace the remaining service
potential of an existing asset in a current transaction at the reporting date, including the
amount that the entity would receive from disposing of the asset at the end of its useful life.
47. Replacement cost is a remeasured amount, an entry value that is often advocated for
assets used in providing services, such as capital assets and inventory not held for sale.
Replacing the remaining service potential of an existing asset is not the same as acquiring
an identical asset. However, in practice, it may be difficult to measure remaining service
potential directly. There may be several ways of arriving at an approximation. For example,
one way would be to measure the current cost of a similar asset, reduced by an appropriate
amount to allow for the lower service potential of the existing asset due to its age and
condition. Thus, the replacement cost of an asset is not the same as the fair value of either
an equivalent new asset or the existing asset at the reporting date. For example, to arrive at
the replacement cost of a fifty-year-old office building at the mid-point of its expected life, the
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fair value of an equivalent, newly constructed office building would have to be adjusted for
the value of the difference in age or service potential. In addition, the fair value of the
existing building may be higher than the replacement cost because the building can be put
to alternative uses that produce greater benefits to the owner.
48. The relevance of replacement cost is high, especially for assessments of financial position
and future resource needs. The level of understandability, reliability, and comparability
across entities of reported replacement cost amounts may vary according to the data used
and the complexity of the calculation.
49. Reporting the replacement cost of capital assets used in providing services and related
service costs can facilitate comparisons between program and activity costs and
accomplishments related to the same period. An objection sometimes raised is that
replacement cost is not an attribute of the asset that is actually owned. However, the asset
being measured is not the physical asset but the services it can provide.
Value in Use
50. Value in use is the benefit to be obtained by an entity from the continuing use of an asset
and from its disposal at the end of its useful life.
51. Value in use is a remeasured amount for assets used to provide services. It can be
measured at the present value of future cash flows that the entity expects to derive from the
asset, including cash flows from use of the asset and eventual disposition. Value in use is
entity specific and differs from fair value. Fair value is intended to be an objective, market-
based estimate of the exchange price of an asset between willing parties. Value in use is an
entity’s own estimation of the service potential of an asset that it holds to provide a specific
service. Examples include inventory and equipment with a unique design and purpose, and
special-purpose buildings, such as prisons. In those cases, the value in use may be greater
than the amount the entity could obtain from selling the asset because the selling price
would need to accommodate the purchaser's need to adapt the asset to another purpose.
52. The service potential of an asset may be difficult to assess when the asset is used in
combination with other assets and the total assessment must be allocated to the individual
assets. In those cases, the reliability, consistency, and understandability of the remeasured
amounts may be lower than when a direct assessment can be made of the value in use of
each asset. The relevance of value in use is high for assessments of an individual entity,
both with regard to the entity’s management and for users’ evaluations of operating
performance, especially the entity’s efficiency and effectiveness in managing its assets.
However, the entity-specific nature of value in use reduces inter-entity comparability.
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Fulfillment Cost
53. Fulfillment cost includes all costs that an entity will incur in fulfilling the promises that
constitute a liability.
54. Fulfillment cost is a remeasured, entity-specific amount. It is an exit value that includes
payments to the counterparty and other costs that arise from fulfilling the promises that
constitute a liability assumed by an entity, such as for environmental remediation. The
fulfillment cost differs from the settlement amount. The settlement amount is based on a
transaction with an external party, potentially adjusted by the entity for circumstances that
may affect the payment amount. The fulfillment cost, in contrast, is the value to the entity of
the resources that will be used in liquidating the entity's assumed liability and is not
necessarily equal to the carrying amount or the fair value of those resources. Thus, the
fulfillment cost of an entity's liability is analogous to the value in use of an entity's asset.
55. When the fulfillment cost depends on uncertain future events, possible alternative outcomes
need to be considered when developing the estimated cost to reduce the potential for bias
in the assessment. When fulfillment requires work to be done—for example, when the
liability is for environmental remediation—the relevant costs are those that the entity will
incur for either doing the work itself or employing a contractor. The fulfillment costs of long-
term liabilities would be discounted to the reporting date, adjusting for risk at the risk-free
rate, if appropriate.
56. Fulfillment costs are relevant to assessments of an entity's financial position but, because
they are entity specific, they may not be comparable for assessments of other entities. Their
reliability and understandability may vary depending on the complexities and uncertainties
reflected in their measurement.
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Appendix A: Basis for Conclusions
This appendix discusses factors considered significant by members in reaching the conclusions
in this Concepts Statement. It includes the Board's reasons for accepting certain proposals and
rejecting others. Some factors were given greater weight than other factors. The concepts
enunciated in this Concepts Statement—not the material in this appendix—should guide the
resolution of measurement issues that affect specific transactions, events, or conditions.
This Statement may be affected by later Statements. The FASAB Handbook is updated annually
and includes a status section directing the reader to any subsequent Statements that amend this
Statement. Within the text of the Statements, the authoritative sections are updated for changes.
However, this appendix will not be updated to reflect future changes. The reader can review the
basis for conclusions of the amending Statement for the rationale for each amendment.
Background
A1. Early in its operations, the FASAB developed a core set of accounting standards and initial
statements of federal financial accounting concepts (SFFACs or concepts statements) on
reporting objectives and entity and display. Concepts were developed as initial standards
were developed. In 2003, the Board decided that it should review and add to or modify its
concepts statements as needed. In addition to the initial SFFACs, the Board has issued
concepts statements on management's discussion and analysis; the consolidated financial
report of the U.S. government; the definition of elements and basic recognition criteria for
accrual-basis financial statements; and distinguishing among basic information, required
supplementary information, and other accompanying information. This Concepts Statement
further expands the Board's conceptual framework.
A2. SFFAC 1, Objectives of Federal Financial Reporting (September 1993), defined the users
and objectives of federal financial reporting, as well as the qualitative characteristics of
reported financial information. SFFAC 5, Definitions of Elements and Basic Recognition
Criteria for Accrual-Basis Financial Statements (December 2007) identified and defined the
elements of accrual-basis financial statements and established basic criteria for recognizing
them. This Concepts Statement builds on the concepts established in SFFACs 1 and 5 by
discussing different alternatives for measuring assets and liabilities (and, by extension,
revenues and expenses) and the extent to which the alternatives meet the objectives and
qualitative characteristics established in SFFAC 1.
A3. FASAB has established requirements for measuring certain assets, liabilities, revenues and
expenses through federal financial reporting standards without the benefit of an underlying,
cohesive framework of measurement concepts. Such a framework can provide significant
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guidance to the current and successor Boards when establishing financial reporting
standards in the future. As a result, the consistency, understandability, and usefulness of
reported information to decision makers, including preparers and users of financial
information, should be enhanced. Consistent with the role of the Board's conceptual
framework, this Concepts Statement does not change current financial reporting standards
or establish new standards.
Statement Objectives and Content
A4. This Concepts Statement identifies and elucidates conceptual issues for the Board to
consider when deliberating measurement standards in the future. A principal question for
the Board to resolve in future standards is whether and under what circumstances it might
be more useful for users' decision making to report an asset or liability in periods after its
acquisition or incurrence at the amount initially recorded ("initial amount") or at an amount
measured at each financial statement date ("remeasured amount"). The measurement
approach (initial or remeasured amounts), measurement attributes, and measurement
methods used for measuring assets and liabilities affect how the information is reported and
interpreted.
A5. The analysis in this Concepts Statement includes a comparison of the advantages and
disadvantages for achieving the federal financial reporting objectives of different
measurement approaches and attributes. The analysis suggests that, when the goal is to
help ensure that reported information achieves several financial reporting objectives,
different measurement approaches, attributes, and methods may be needed to convey
decision-useful information about different transactions and underlying events.
A6. The Board considered whether it should indicate that some of the measurement alternatives
discussed in this Concepts Statement are preferred to others in certain specified
circumstances. The Board concluded, however, that to indicate preferences would
effectively result in establishing financial reporting standards in a concepts statement. The
Board reasoned that decisions concerning whether certain measurement alternatives are
preferred should be made in the context of deliberations on specific financial reporting
standards. That context will enable the Board to focus on the specific reporting issues to be
addressed and to consider the benefit vs. the cost of different measurement alternatives
and other practical concerns, as well as the conceptual guidance provided by this
statement.
A7. In developing this Concepts Statement, the Board benefited from research conducted in
similar projects on measurement concepts under development by the Governmental
Accounting Standards Board (GASB), the International Public Sector Accounting Standards
Board, and the Financial Accounting Standards Board in collaboration with the International
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Accounting Standards Board. The FASAB met several times in joint session with the GASB
on matters of mutual interest in their respective measurement concepts projects.
Outreach, Responses, and Board Conclusions
A8. An Exposure Draft (ED) of this Concepts Statement was issued September 13, 2010, with a
comment deadline of November 30, 2010. The issuance was announced in the Federal
Register, FASAB News, the Journal of Accountancy, and AGA Today. Listserv notices
announced the ED and periodically reminded subscribers about the comment deadline.
Notices were sent directly to organizations responding to past EDs. In addition, the ED was
included in updates provided to liaison groups, such as the Financial Statement Audit
Network.
A9. The Board received a total of 16 responses from these sources:
A10.A large majority of the respondents supported the ED and the measurement concepts
proposed by the Board, including the measurement approaches, attributes, and methods.
Very few concerns were expressed. A few respondents' comments appeared to be based
on an assumption that the Board was proposing new measurement standards. The Board
may consider those comments when it deliberates future measurement standards.
However, the purpose of this Concepts Statement is to establish measurement concepts to
guide the standard-setting process in the future.
A11.No concerns were raised by a majority of the respondents. However, the Board does not
rely on the number in favor of or opposed to a given position. The Board considered the
arguments in each response and weighed the merits of the points raised. The following
points were raised by a minority of the respondents and the Board reached the conclusions
indicated.
a. The Concepts Statement should discuss cost–benefit issues (four respondents). As
discussed in paragraph 22, the Board concluded that the cost–benefit of different
measurement alternatives should be addressed in deliberations on specific
FEDERAL
(Internal)
NON-FEDERAL
(External)
TOTAL
Users, academics, others 3 3
Auditors 3 1 4
Preparers and financial
managers 9 9
Totals 12 4 16
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measurement standards.
b. The ED refers to the selection of an initial amount or a remeasured amount for
reporting as the "principal question," but the ED does not answer the question (two
respondents). The Board reaffirmed that it did not intend to establish preferred
measurement approaches or attributes, which would be addressed in the standard-
setting process. The Board revised certain wording in the Executive Summary and in
paragraph 2 of this Statement to avoid potential misunderstandings.
c. The list of measurement attributes should include "going-concern"—"the value of the
entity as a whole" (one respondent). The Board reaffirmed that the goal of this
Concepts Statement is to present concepts that the Board should consider when
setting standards that include requirements for measuring the elements of the financial
statements. Consistent with that goal, a measurement attribute is defined in paragraph
7b as "a measurable characteristic of an asset or liability, such as its fair value or
settlement amount." The Board concluded that "going-concern" is not an attribute of an
individual asset or liability. Rather, it is a concept that applies to the entity as a whole.
Moreover, financial reporting standards do not address the direct measurement of the
current value of entities as a whole. When setting standards, a going-concern is
assumed.
d. Delete the attributes "replacement cost" and "fulfillment cost" because they "are not
intended to reflect the current value or historical cost of an asset or liability" (one
respondent). Delete "value in use" because of its "inherent subjective nature" (one
respondent). Delete "fair value," "replacement cost," "value in use," and "fulfillment
cost" because they do not meet the needs of the respondent's agency (one
respondent). The Board reaffirmed that the purpose of this Concepts Statement is to
present measurement concepts that the Board will consider when establishing future
financial reporting standards. The Board concluded that this Concepts Statement
should be comprehensive in terms of available measurement attributes, even though
the Board may decide when setting financial reporting standards that certain attributes
may not be appropriate for a particular measurement standard or for certain agencies'
activities.
e. Provide examples of how the attributes are used currently (one respondent). Some of
the measurement attributes are not currently used in the federal reporting environment.
The Board agreed, however, that more descriptive information about the attributes
would be useful. The Board has added language in the discussion of attributes
(paragraphs 38–56) to clarify how certain attributes could provide useful information.
f. Provide a comparative chart or table to illustrate the pros and cons of different
measurement alternatives, including, for example, preferred alternatives under various
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circumstances or pros and cons for different accounting line items (two respondents).
As discussed in paragraph A6, the Board concluded that to indicate preferences for
particular alternatives would effectively result in establishing financial reporting
standards in a concepts statement. In this Concepts Statement, the Board has
provided a balanced discussion of the different measurement approaches and
attributes, leaving decisions on which approach and attribute may be preferred for
particular classes of assets or liabilities or for specific types of transactions to be made
when setting standards.
A12.In deliberating the final Concepts Statement, the Board concluded that the attribute
"settlement amount" could be usefully applied for reporting non-financial as well as financial
assets and liabilities. As a result, the definition of this attribute (paragraph 43) was
reworded to: "Settlement amount is the amount at which an asset can be realized or a
liability can be liquidated." The Board also added language to the discussion of settlement
amount and fulfillment cost to clarify the differences among settlement amount, fair value,
and fulfillment cost.
Board Approval
A13.This Concepts Statement was approved for issuance by all members of the Board.
