Measurement

In this lesson

1. 0:00 Measurement bases in financial statements
2. 0:12 Historic cost: definition and application
3. 0:47 Advantages and disadvantages of historic cost
4. 2:40 Current value: fair value, value in use, current cost
5. 4:54 Comparing fair value and current cost
6. 6:01 Advantages and disadvantages of current value
7. 8:07 Worked example: calculating carrying amounts
8. 10:35 Fair value versus transaction costs clarified

About this lesson

This lesson covers the four main measurement bases—historic cost, fair value, value in use, and current cost—exploring when each is appropriate and how they impact reported figures. Understanding measurement is essential for Financial Reporting and Strategic Business Reporting papers, as different bases produce significantly different asset values and can distort key performance metrics. Through a worked example, you'll see how to calculate carrying amounts using each method and recognise why consistent application and clear disclosure matter for financial statement users. Historic cost measures assets at original purchase price minus depreciation and liabilities at cash received when incurred. It's objective, verifiable, and widely used, but values become outdated and can overstate profit and distort performance ratios like ROCE and ROA. Current value offers three alternatives: fair value (what you'd sell an asset for now), value in use (present value of future cash flows the asset generates), and current cost (replacement cost for assets, equivalent liability value for liabilities). Current value provides more relevant, up-to-date information for decision-making, but introduces subjectivity, can be difficult to obtain, and risks manipulation or inconsistency if applied selectively across assets. The practical question walks you through calculating a machine's carrying amount using all four bases two years after purchase, demonstrating how measurement choice dramatically affects reported figures. Historic cost gives £132,000; current cost £156,000; value in use £95,312; and fair value £90,000. This variation highlights why the framework allows both approaches but requires clear disclosure when measurement bases change, ensuring users can make informed decisions based on comparable, faithfully represented information.

Duration: 12m