GASB establishes approaches for measurement

Newly defined approaches for measuring assets and liabilities issued Monday by GASB will guide the board as it sets accounting standards for U.S. state and local governments.

Concepts Statement No. 6, Measurement of Elements of Financial Statements, establishes two approaches for measuring assets and liabilities:

• Initial amounts: These are determined at the time an asset is acquired or a liability is incurred.
• Remeasured amounts: These are determined as of the date of each year’s financial statements.

Previously, GASB has relied on approaches for measurement that were established by other standard setters and analogous examples from practice or previous standards. GASB was concerned that inconsistencies could develop if the board relied on concepts established by other standard setters that were not necessarily created with a governmental environment in mind.

“Measurement is an integral component of a fully developed GASB conceptual framework,” GASB Chairman David Vaudt said in a news release. “Our stakeholders should be able to count on the GASB’s standards consistently addressing financial transactions and other events in a similar manner. The conceptual framework helps to promote that consistency.”

Concepts Statement 6 also establishes four measurement attributes that define the characteristics of an asset or liability that is being measured:

• Historical cost is the price paid to acquire an asset or the amount received pursuant to the incurrence of a liability in an actual exchange transaction.
• Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
• Replacement cost is the price that would be paid to acquire an asset with equivalent service potential in an orderly market transaction at the measurement date.
• Settlement amount is the amount at which an asset could be realized or a liability could be liquidated with the counterparty, other than in an active market.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.