Importance of Measurement in Accounting
The primary purpose of the given study is to outline and understand the concept and significance of measurement in accounting. In this context, the qualitative characteristics which are essential to be judged while selecting the measurement approaches have also been identified. In line with this, the measurement bases as prescribed in the IASB conceptual framework in line with the financial statements would also be discussed (Adegboyegun et al. , 2020). In line with this, the explanation of the fair value hierarchy alongside the measurement bases may be applied for the various items of the financial statements in regard to the chosen company Amcor Plc. The secondary research technique has been applied in regard to the study whereby the different sources related to the annual reports and the AASB and related framework have been sourced with respect to the data collection.
The accounting measurement can be identified as the representation of data in the context of specific methods such as hours, units and currency. According to Ahn, Hoitash, and Hoitash (2020), the same data can be analysed in several techniques but the consistency in accounting measurement allows the different enterprises to compare several variables over a period of time. The main reason why the concept of measurement in accounting exists is due to the fact that it helps in observing the market prices in a scenario the market existed. There does not exist an observable market price in regards to the assets and liabilities with respect to the same value which affects properties associated with the assets and the liabilities to be engaged in. Hence, by telling the firm about the prices, an equitable stand can be taken. The reason why measurement in accounting is taken to be critical is due to the fact that it helps in comparing and evaluating the accounting data as available (Allini, Spanò, Du & Ronen, 2021). In a scenario where the enterprise makes use of the accounting measures, the variables can be compared easily and identification of techniques to make engagements are critical. The key contribution of measurement in accounting may be identified as follows:
1. It helps in comparing the data in a suitable manner over the years. This ensures better engagements and overall comparisons being made.
2. It helps in evaluation of business performance in the context of assessing values to the different measures. This ensures that the business is being able to make the right choices and undertake the right decisions (Perera, Ajward & Jayasekara, 2021).
3. Lastly, it ensures that a market value to the assets and liabilities can be given. This would give way to better performance and related engagements (Ward, 2021).
According to Martin-Sardesai et al. (2020), when selecting the measurement approaches, it becomes relatively crucial that the right approach has to be adopted. This right approach may be engaged in when the appropriate qualitative characteristics can be opted for. Some of the fundamental qualitative characteristics can be identified as relevance and faithful representation. In this regard, the relevance tends to imply that information needs to have predictive and confirmatory value for the users while engaging in economic decisions. In regards to this, the representation of information has to be rather faithful in nature. In addition to this, enhancement of the qualitative characteristics is also required which would lead to better results in the context of the business (Millimet & Parmeter, 2022). These may be rightly identified as the comparability, verifiability, timeliness and understandability. Here it is significant to note that the comparability and verifiability gibe way to ensuring that the financial statements may be compared easily over the course of time and in consideration with this, they can also be verified to get the information to represent the right data (Maroun and van Zijl, 2021). The timeliness and understandability suggest that information must be available at all times and in regard to the understandability, the information must be engaged in a manner such that it represents the details clearly (Oyewo, Emebinah & Savage, 2020).
Qualitative Characteristics for Choosing Measurement Approaches
According to Khan (2019), measurement basis may be rightly identified as the method of quantifying monetary amounts for the elements in the financial statements which gave way to identifying and understanding of the critical information in the financial statements. Pertaining to this, the two measurement basis which are largely relevant and available for this purpose may be rightly identified as the follows:
Historical cost – This measurement is based on the transaction price when the element is being recognized. In this regard the price paid when engaging in the purchase of the assets can be taken as the historical cost (Malikov et al., 2022).
Current value – The current value is involved in the measurement of the value based on the current value which is an updated value which is engaged in identifying and assessing the conditions at the chosen measurement date (Khan, 2019). The different techniques used in the current value measurement can be identified as the fair value, value in use and current cost. Pertaining to this, it is significant to outline the fact that under the fair value system, the focus lies on ensuring that the appropriate value as per the market values are engaged in. This is then followed by the value in use which assesses the contribution as made by the asset involved. This is then followed by the current cost whereby the value as per the latest trends is measured. The focus behind the current costing is to ensure that the value of the assets is engaged in as per the measurement date (Haswell & Evans,2018).
Other than the fair value accounting, the other measures and basis for comparison can be primarily observed as the historical cost measurement basis and the related current costing measurement basis. Both these approaches essentially involve the measurement of the values of an asset or a security in a manner such that it can be rightly recorded in the balance sheet of an enterprise (Haswell & Evans, 2018). The historical cost is involved in calculating and consulting the original cost of the item at the time of the purchase as well as acquisition. On the other hand, the current value system is engaged in tabulating the overall accounting involved which regularly updates the value of the items which are recorded at a particular price and can be sold in a systematic manner at a given rate in the market. The recording of the values as available helps in generating the difference between them. Hassan and Marston (2019) mentions that the historical cost of accounting is acritical to the financial reporting in regards to the fact that it gives away to an objective view which makes the actual cost traceable. Moreover, the historical cost involves providing a fair basis of deprecation and is a stable means of identifying and assessing the cost of the items. It is the best suited to ensure that the business is successful in its strategies to utilise the assets and get involved in the manufacturing of the items (Godnev et al., 2020). However, the reason why the historical costing is not generally preferred in the domain of management can be identified to be due to the fact that it is essentially outdated. In this regard, it is evident to consider the fact that the current value accounting holds importance as it considers a realistic approach towards the determination of the monetary value (Yao et al., 2018). In addition to this, it engages in comparisons which are not complicated in nature. In this regard, it is evident to consider the fact that various businesses are engaged in purchasing and selling of the assets and securities in a manner such that the volatile changes can be engaged and incorporated (Georgiou, 2018). The key disadvantage of this is that the value is estimated and subjected which may be prone to the manipulation.
Measurement Bases in Accounting
According to deHaan, Lawrence and Litjens (2019), the fair value hierarchy categorizes the inputs which are essentially used in the valuation techniques into three different levels. These hierarchy levels are generally given these priority levels such as the Level 1 which has the highest price in active markets for the assets and the liabilities to the lowest priority which is level 3. The International financial reporting standards seeks to increase the consistent and comparability in the fair value measurements and has intended to engage in the disclosures through the fair value hierarchy. In a scenario where the multiple inputs are used to measure the fair value which is categorized into different levels which have different prices as quoted (Cristea, 2018).
Level 1 inputs
The level 1 inputs can be identified as quoted prices within the active markets for the identical assets and the liabilities which can be accessed at the given measurement date. Here it is evident to note that the quoted market price in this scenario is largely focused on activating the reliable level of fair value without the application of any other related adjustments (Fortin, Hammami & Magnan, 2021). In this context, if the entity holds a position in a single asset or relatable liability then it is measured within the first level even though the asset or the liability and the quantity even if its trading volume is not sufficient in nature to absorb the quantity held and other orders placement.
Level 2 inputs
The level 2 inputs are the inputs which are different from the quoted market prices which are located within the level 1 (Crain & Law, 2018). The key considerations which are made within the level 2 may comprises of the quoted price for similar assets, liabilities within the active market. The interest rates and yield curves, the implied volatilities and the credit spreads (Gebreiter, 2021).
Level 3 inputs
Level 3 inputs can be identified as the unobservable inputs in regards to the assets or available liabilities. These are essentially used to measure the fair value to an extent such that the relevant inputs are not available and hence, any market activity for the liabilities and the assets can be engaged in (Buachoom, 2022). The entity has the overall capacity to develop the unobservable inputs by making use of the best information available at a given measurement date. Some of the key examples of the same may be identified as the constant prepayment rate, financial forecasting of cash flows to generate cash generating units and forecast of the profit and loss for a cash generating unit based on own data and assumptions.
When assessing the overall assumptions related to the fair value measurement, it can be mentioned that the first assumption states that the transactions to engage in selling the asset take place in the principal market for the asset or the liability. In consideration with this, it becomes effective to understand the fact that there often does not exist a principle market and in the same, there may not take place an activity which can be assessed (Andrejcik, Singh & Halari, 2021). Another assumption is that an orderly transaction takes place between the parties. However, this may not be the case at all times and in this regard, the value of the assets may not always engage in a fair and organized manner.
Historical Cost and Current Value as Key Measurement Bases
The Amcor Plc has engaged in separate measurement bases for the different engagements and business opportunities which has helped it in ensuring that the measurement of the fair value of assets and liabilities can be made in the right manner. In this concern, it is evident to understand the fact that the following findings have been assessed in relation to the measurement bases and the dates as identified for each aspect of the firm:
- Firstly, the enterprise reviews its discount rate annually and uses this technique to calculate the present value of the pension plan liabilities. Moreover, the discount rate which is used at each measurement date is based on the corporate bond yield curve. The information is sourced from the third party indexes, rating agencies and he data providers as present (com ,2022).
- The fair value measurements are based on the historical information and related expectations and assumptions relating to the future. The considerations in regard to the perspective of the marketplace participants is made.
- In regard to the acquisitions which tend to take place in the market, the evaluation of these pre acquisition contingencies take place throughout the measurement period and applies fair value.
- The enterprise appears to use the fair value measurement in relation to the assets and the liabilities so that they reflect the amounts which would be received in order to engage in the sales of the assets or transfers the liabilities in an orderly manner.
- The firm follows the three tiered fair value hierarchy which comprises of the level 1, level 2 and level 3 aspects (com , 2022).
- Moreover, when a transaction has to be engaged in, the financial instruments including the cash and cash equivalents alongside the trade and related receivables alongside the short term debt and the long term debt before being carried on to the next financial year, takes hold of the fair value hierarchy (com ,2022). The fair value hierarchy comprises of the Significant Accounting policies. Moreover, the fair value of the long term debt with fixed interests is essentially based on the market prices.
Conclusion
Therefore, the report followed a structured format in regard to which the concept of measurement has been discussed. The measurement can be identified as a key engagement which is adopted in the context of deciding the exact value of the assets based on the current or historic value available. The report assessed the different qualitative characteristics associated with measurement and analysed the fair value hierarchy and concepts in detail. This was then followed by the Amcor Plc’s fair value engagement and it was assessed that the firm uses the fair value hierarchical system to measure its assets and liabilities.
References
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