The Conceptual Framework identifies two broad categories of measurement basis available for assets and liabilities. Which option correctly describes them and how they relate to entry and exit values?
- Nominal cost and real cost, where nominal cost is unadjusted for inflation and real cost is adjusted for inflation
- Fair value and value in use only, since the Framework treats these as the sole permissible bases for measuring any asset
- Book value and market value, where book value is always an entry value and market value is always an exit value
- Historical cost and current value, where current value further divides into fair value (a market-participant, exit-value measure) and value in use or fulfilment value (an entity-specific, exit-value measure), while current cost is an entry-value measure
Why D? And why not the others?
Correct answer: D. Historical cost and current value, where current value further divides into fair value (a market-participant, exit-value measure) and value in use or fulfilment value (an entity-specific, exit-value measure), while current cost is an entry-value measure
The Conceptual Framework groups measurement bases into historical cost and current value, and it further splits current value into measures based on market-participant assumptions (fair value, an exit value) and measures based on entity-specific assumptions (value in use for assets or fulfilment value for liabilities, also exit values), while treating current cost as an entry-value measure. The Framework is explicit that IFRS Standards adopt this mixed set of bases rather than a single one, because no single basis provides the most relevant information in every circumstance. The option describing 'nominal cost' and 'real cost' invents terminology the Framework does not use; inflation adjustment is not the organising distinction it draws between measurement bases. The option limiting measurement to fair value and value in use alone wrongly excludes historical cost and current cost, and wrongly asserts these two are the only bases permitted, when the Framework describes a broader mixed-measurement approach. The option using 'book value' and 'market value' substitutes informal terms not found in the Framework and incorrectly assumes book value is always an entry value, when historical cost — the actual entry-value example the Framework gives — is not equivalent to whatever amount happens to be carried in the books under any measurement basis.
Source: IASB Conceptual Framework for Financial Reporting (2018), Chapter 6, paragraphs 6.4-6.14 (measurement bases: historical cost and current value)