MEASUREMENT THEORY

IMPORTANCE OF MEASUREMENT
Campbell defined measurement as the assignment of numerals to represent properties of material
systems other than numbers, in virtue of the laws governing this properties and Steven defined that
measurement as the assignment of numerals to object or events according to rules. In the usual
understanding of measurement, semantic rules are devise and used to link the formal number
system with the property to be measured. The measurement process is similar to the approach to
theory formulation and testing. Semantic rules are devised to connect the symbols of the statement
to particular objects or events. In accounting we measured profit by first assigning a value to a
capital and then calculating profit as the change in capital over the period after accounting for all
economic events that affect the wealth of the firm.
SCALES
Every measurement is made on a scale. A scale is created when a semantic rule is used to relate the
mathematical statement to objects or events. Nominal scale, the numbers is just a label to show the
capability of the object. Ordinal scale, show the ranking of object’s measurement from some
alternatives. Interval scales, give many information than the ordinal scale. Ratio scales, include all
the information of the nominal scale, ordinal scale and interval scale.
TYPES OF MEASUREMENT
a. Fundamental Measurement - happen when the numbers of the measurement can be set to the
character/ ability/ object and not dependent to any measurement’s variable.
b. Derived Measurement – a measurement that can be set to an object with observe the other
measurements.
c. Fiat Measurement – a measurement that can be set based on mutual agreement from an
observation without a support of the theory.
RELIABILITY AND ACCURACY
First we need to define between measurement and counting. Counting is always right but for
measurement will always involves errors. And here are the sources of error in the measurement:
Measurement operations stated imprecisely: To give numbers for a property usually consist of set of
operations. If the set of operation not stated precisely there, so measurer will interpreted it
incorrectly; Measurer: One of the resource is the measurer itself. They can misinterpret the rule /
read the instrument incorrectly; Instrument: Operations use physical and nonphysical instrument
that have potential for error; Environment: Errors can be caused by environmental factors; Attribute
unclear: It is really difficult to measure something that unclear, for especially if it involves a concept
that can’t be measure directly; Risk and uncertainty: Here risk and uncertainty exist because the
return is unknown.
Reliable measurement
It is a must if financial statements should be capable of reliable measurement. Reliability is a proven
of consistency of an operation to produce satisfactory result. It refers to reproducible or repeatable.
We need to know the idea of reliability include 2 aspects those are accuracy and certainty of
measurement. This focuses on precision of measurement itself.
Accurate measurement
Even measurement produce reliable result it doesn’t ensure it if it’s having accurate result. We need
to know that consistency of result, precision and reliability doesn’t matter to accuracy. To determine
accuracy in accounting, we should know the attribute to measure to accomplish the aim of
measurement.
MEASUREMENT IN ACCOUNTING
Accounting measure for both capital and profit. Accounting profit is derived, from changes in the
capital over the period from all activities. Capital is derived frim the net of fair value measure of
assets and liabilities.
FASB / IASB joint project agreed on
1. Acconting information should be aimed at decision makers
2. Every entitiy should present a statement to recognize income and expenses of the financial
statement.
3. Statement should be all inclusive: include the effect of all changes in net assetes and liabilities
during related period; assets and liabilities should be valued at fair value; income should be
devided between before and after remassurement effect.
4. Profit should not based on notion of realisation, and so on.

ACCOUNTING MEASUREMENT SYSTEM

HISTORICAL COST
Objective of accounting
The objective of historical cost management is emphasizes the conservative relationship between
the company and those who provide the resources. Critics argue that historical cost only reports
income without recognition of changes in asset values.
Capital and Profit
Before determining historical cost profit, the accounting entity must first retain the same amount of
the capital at the beginning of the period when all assets and liabilities are valued based on their
historical purchase costs. Therefore, income is an increase of historical cost capital at the end of the
accounting period.
Matching of Cost Theory
Accountant must decide on the costs that are due and should be matched against the income in the
income statement, and which costs are still not due and should be placed on the balance sheet as
residual (unmatched asset).
Conservatism
Expense should be allocated as soon as possible, while income should not be recognized until there
is a high probability that they will be accepted; that is, there is a bias fraud against the recognition of
expense and revenue recognition.
Arguments for Historical Cost Accounting
Historical costs have been attacked by many people, especially on the basis that historical cost does
not report commercial realities or provide a recent assessment of net wealth at present.
Criticisms of Historical Cost Accounting
Historical costs help a lot, but not enough for economic decision-making. When assets are purchased,
the historical cost is appropriate because it shows the current price, but over time it will not be
relevant anymore. When the market price was high, the company's profit will be too high, because
the depreciation of assets is too small. This is a problem, because dividends are distributed based on
accounting earnings, as well as taxes. One big reason we still use the historical cost because the
assumption of business continuity.

CURRENT COST ACCOUNTING

An accounting system when an asset is valued based on market price at the time of purchase and
profit is determined by an allocation based on current costs. The purpose of current cost is the need
for manager's consideration faced with the decision when running the business. One assumption we
can make that is the managers of a company want to know how they should allocate company
resources to maximize profits.

FINANCIAL CAPITAL VS PHYSICAL CAPITAL

Profit is more accurately defined as a capital change during the reporting period and not as an
allocation of cost determined by many accounting conventions. From another standpoint, the main
between the concept of financial capital and the concept of physical capital is whether holding gains
or losses are included in the earnings report. Quantitatively, the difference between the two points
of view is that holding gains are included in profits on financial capital and excluded from physical
capital.

EXIT PRICE ACCOUNTING (BAB 6)

Income and capital
First exit price accounting is a system in the accounting that use market selling prices to measure
financial position and performance of a firm. It has two types: a) value of non monetary assets are
adjusted to measure changes in market selling prices. b) changes in the general purchasing power of
money.
Objective of accounting - Adaptive decision making
Exit price accounting has it’s own comprehensive proposal (CoCoA) then upgrade it into CCE (current
cash equivalent). In Chambers perspective a business firm is an adaptive entity that invloved in
purchasing goods and services. Manager is the one who manage the decisions, for the owner they
hopes from it can increase their wealth. We can called here that a firms need to survive so they need
to adapt. Adaptive behaviour sees a firm is ready in any kind of situation. So as an investors, stakeh-
olders are able to make a better allocation of the resources.
Arguments for exit price accounting – Providing useful information
Using the previous method is only based on the primitive condition. Accounting cost history divided
into 3: first, second, and third era. In the first era, accountant need to provide information to the
owner, this information consists of profit and loss’ info. On the second, from all the circumstances
here, public accounting was born. And the last because of firms grew larger state that accounting
based on historical cost can be false and lead misleading financial statement. The solutions needed
are marketable assets at market price, non-marketable reproducible at replacement costs,
occasional non marketable, non-reproducible at historical cost
 Relevant and reliable information:
1. OBJECTIVE OF CURRENT COST ACCOUNTING CCA values assets at their current
market buying price and profit is determined using matching expense allocations based
on the current cost to buy Profit is more precisely defined as the change in capital over
the accounting period Managers are better able to evaluate their past decisions and
better use the firm’s resources to maximise future profits Shareholders, investors and
others are able to make better allocations of their resources 34
2. 35. OBJECTIVE OF CURRENT COST ACCOUNTING Managers will examine  the
current operating profit the excess of the current value of the output sold over the current
cost of the related inputs  realisable cost savings increases in the current cost of assets
held  holding gains/losses  realised/unrealised 35
3. 36. FINANCIAL CAPITAL VERSUS PHYSICAL CAPITAL Profit is the change in capital
Holding gains are included in profit under financial capital Holding gains are excluded
from profit under physical capital 36
4. 37. ARGUMENTS FOR AND AGAINST CURRENT COST Recognition principle 
violates the conservatism principle - but actual phenomena  are holding gains profits or
 revaluation adjustments? Objectivity of current cost  lacks objectivity Technological
change  appears to ignore technological advances 37
5. 38. MORE SPECIFIC CRITICISMS Advocates of historic cost accounting  violates the
realisation principle; subjectivity of increase Comparisons of the results with historic cost
 industry variations Advocates of exit price  the logical expression of opportunity cost is
the current selling price  the arbitrary allocation of expenses is still a problem issue 
additivity problem exists  number of reasons for an asset having value to a business 
irrelevant to most business decisions  physical capital concept fraught with weaknesses
38
6. 39. EXIT PRICE ACCOUNTING Exit price = selling price = fair market value Has two
major departures from historic cost accounting:  the values of non-monetary assets are
selling prices and any changes are included in profit as unrealised gains  changes in the
general purchasing power of money affect both financial capital and profits Represents
clean surplus accounting The income statement explains all of the differences existing
between the opening and closing balance sheets 39
7. 40. OBJECTIVE OF ACCOUNTING Objective = data for adaptive decision making The
assumption is that the business world is dynamic and business must adapt to survive
Firms and those associated with them go into markets to take advantage of opportunities
as they arise The ability to engage in market transactions is revealed by net financial
position (net current market value) 40
8. 41. OBJECTIVE OF ACCOUNTING Ultimately all accounting information users are
interested in cash and cash equivalent values In the final analysis, the economic survival
and performance of a firm depends on the amount of cash it can command Chambers:
…the single financial property which is uniformly relevant at a point of time for all possible
future actions in markets is the market selling price or realisable price of any or all goods
held. 41
9. 42. ARGUMENTS FOR EXIT PRICE ACCOUNTING Provides useful information
Provides relevant and reliable information  there is one way to determine profit that is
superior to all others profit is the difference between capital at two points in time
exclusive of additional investments by and distributions to owners  to be relevant,
information must be useful in the decision models of accounting data users  the present
selling price is the only item of information that is relevant to all decisions 42
10. 43. ARGUMENTS FOR EXIT PRICE ACCOUNTING Additivity  if we use different
measurement systems then no practical or commercial meaning can be deduced from
the aggregate  even if we use historic cost accounting as the sole measurement system,
the jumble of historic costs on different dates means we cannot put any meaning on the
calculation of net assets or profit  exit price accounting does not have this problem 43
11. 44. ARGUMENTS FOR EXIT PRICE ACCOUNTING Allocation  the financial
statements are allocation free Reality  references are to the real-world in that every
disclosed amount refers to a present, actual market price  exchangeability 44
12. 45. ARGUMENTS FOR EXIT PRICE ACCOUNTING Objectivity  market prices are
relatively more objective than most believe A measure of risk  can indicate the financial
risk of purchasing an asset 45
13. 46. ARGUMENTS AGAINST EXIT PRICE ACCOUNTING Profit concept  does not
provide a meaningful concept of profit  the critical event does not relate to the
performance of the firm  does not produce realistic financial reports Additivity  violates
the principle of exclusion of anticipatory calculation that it claims to reject 46
14. 47. ARGUMENTS AGAINST EXIT PRICE ACCOUNTING The valuation of liabilities 
valuing liabilities at face value and not market value is internally inconsistent Current cost
or exit price  at what stage of the operating cycle should exit price dominate asset
valuation? 47
15. 48. VALUE IN USE VERSUS VALUE IN EXCHANGE Similar when markets are liquid
and efficient There are factors common to both  market prices are more relevant for
decision making  additivity and reliability are prime requirements  historic cost
accounting has too many defects They are complements not substitutes Value in use
 assesses long term survival (solvency), value in exchange assesses the ability to adapt
in the short term (liquidity) 48
16. 49. A GLOBAL PERSPECTIVE AND INTERNATIONAL FINANCIAL REPORTING
STANDARDS Current cost in the United States  an experiment but abandoned (1976 -
1984) Current cost in the United Kingdom  implemented but abandoned (1975 – 1985)
Current cost in Australia  recommended but abandoned (1976 – 1980’s) 49
17. 50. INTERNATIONAL ACCOUNTING STANDARDS AND CURRENT COSTS
IASB/FASB have agreed that fair value is the best measurement basis (2004)  the
amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length transaction 50
18. 51. INTERNATIONAL ACCOUNTING STANDARDS AND CURRENT COSTS Historic
cost accounting still generally applied Distinct movement toward current value systems
IASB moving toward exit prices (2004) But still a mixed valuation approach Fair value
means – current market entry price, current market selling price, historic cost and
discounted future cash flows There is no mention in the standards of capital maintenance
concepts 51
19. 52. HISTORIC COST Subjectivity is involved in the determination of the acquisition cost
of an item Thereafter the measurements are even more subjective The era of historic
cost accounting has ‘ended’  it produces irrelevant, unreliable, non- comparable and
non-understandable data 52
20. 53. A MIXED MEASUREMENT SYSTEM AND INTERNATIONAL STANDARDS Market
values - exit prices - are implied in the ‘fair value’ approach in international financial
reporting standards A lack of a theoretical concept of valuation, capital maintenance and
profit measure, has resulted in a still mixed measurement system and a lack of
consistency 53
21. 54. ISSUES FOR AUDITORS The mixed measurement model creates misstatement so
that auditors struggle to meet one of their primary objectives  determining whether the
financial statements present a true and fair view 54