What is it about?
Financial reporting should provide an insight into the results of an entity's business model. This requires that entry (cost) values are used for businesses that make profits by transforming their inputs into outputs. In contrast, for businesses that trade in assets and whose profits mainly reflect price changes exit values (such as fair value) may often be more appropriate. The paper also discusses the importance of prudence and makes suggestions for better reporting of business performance, including the importance of disclosing operating profit.
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Why is it important?
The paper is aimed at guiding standard setters in the development of accounting standards, and, in particular, the Conceptual Framework for financial reporting.
Perspectives
The paper grew out of a series of presentations to the IASB's Accounting Standards Advisory Forum (ASAF). It is published together with contributions from other ASAF participants and a synthesis. The important distinction between entry values and exit values is often neglected by accounting standard setters, and the loss of information that is caused by the use of exit values, such as fair value, in inappropriate cases is insufficiently appreciated.
Andrew Lennard
Financial Reporting Council
Read the Original
This page is a summary of: The Reporting of Income and Expense and the Choice of Measurement Bases, Accounting Horizons, December 2016, American Accounting Association,
DOI: 10.2308/acch-51541.
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