Kel 2 - Measurement.pptx

8/9/2019 Kel 2 - Measurement.pptx

1/46

MEASUREMENT THEORY


2/46

Campbell:

The assignment of numerals to representproperties of material systems other than

numbers

2

Importance ofmeasurement

Assignment of numerals to objects or events

according to rules. (Stevens)

Assignment of numerals to objects or events

according to rules. (Stevens)


3/46

Involves linking the formal number systemto some property of objects or events bymeans of semantic rules◦ e.g. semantic rules in accounting are represented

by transactions

In accounting we measure prot by:◦ rst assigning a value to capital

◦ then calculating prot as the change in capitalover the period

3

Importance ofmeasurement


4/46

We eamine the relationship between the fair value measurement and theaudit !uality. "ur evidence suggests that the fair value measurement has anegative impact on the overall C#$s% audit !uality. $nd this negative e&ectdepends on the application scale of the fair value measurement.'owadays( large)scale application of the fair value measurement doesdecrease the overall audit !uality( but a modest application re*ects the

intention of improving the value relevance of accounting information andplays its proper role.

They should pay more attention to the audit of fair value and reduce theadverse e&ect of fair value measurement on eternal audit( so that thismeasurement can play its proper role as soon as possible.

Provide will dier and dierentdecisions

INTL Page 31 4


5/46


6/46

Copyright © 2009 by Pearson

Education Canada6 - 6

#!at is t!e MeasurementApproac!$

+reater ,se of Current -alues in the inancial/tatements #roper

Two versions of current value◦ 0it price: /$/ 123 denes fair value as eit price

◦ -alue)in)use: present value of future cash receiptsor payments

4ole of measurement approach is to increasedecision usefulness over that of informationapproach


7/46



#!% are Accountants Movin&Towards a Measurement

Approac!$

/ecurities markets may not be ase5cient as previously believed◦

To etent markets not fully e5cient( ameasurement perspective is supported 6ow 47

◦ 8etter measurement may increase accounting9market share in eplaining share price

changes


8/46



#!% are Accountants Movin&Towards a Measurement

Approac!$

"hls;n%s clean surplus theory◦ $ theoretical framework supportive of a

measurement approach

$uditor 6iability◦ 8etter measurement may reduce auditor

liability when rms become nancially

distressed


9/46



Are Securities Mar'ets (ull%E)cient$

8ehavioural nance◦ 8ehavioural characteristics that !uestion market

e5ciency 6imited attention

"vercondence

4epresentativeness

/elf)attribution bias

6eading to momentum


10/46

0very measurement is made on a scale Created when a semantic rule is used to

relate the mathematical statement toobjects or events

The scale shows what information thenumbers represent

1

Scales


11/46

Semantic Rules and MeasurePro*t

11


12/46

'ominal scales◦ 'umber used only for labels<

◦ 'umbers represent classications<

◦ e.g. the classication of assets and liabilitiesinto di&erent classes

"rdinal scales

◦ 4ank orders objects with respect to a givenproperty

◦ Intervals between the numbers are notnecessarily e!ual

12

Scales


13/46

Interval scale◦ 4ank orders objects with respect to a given

property◦ The distance between each interval is e!ual and

known◦ $n arbitrarily selected =ero point eists on the

scale e.g. celsius temperature scale e.g. standard cost accounting

4atio scale◦ 4ank orders objects with respect to a given

property◦ Intervals between objects are known and e!ual

13

Scale


14/46

Nominal Scales

14


15/46

Intl 2! 1"

RATIO SCALE


16/46


17/46

There must be a rule to assign numbersbefore there can be measurement

The formulation of the rules gives rise to ascale

?easurement can be made only on a scale

1$

T%pes of measurement


18/46

'umbers are assigned by reference tonatural laws

undamental properties are additive◦ e.g. length( number and volume

In accounting there is considerable debateover the nature of fundamental value

1!

(undamentalmeasurements


19/46

Is one that depends on the measurement oftwo or more other !uantities

@epends on known relationships tofundamental properties◦ e.g. the measurement of density depends on the

measurement of both mass and volume

◦ e.g. the measurement of prot depends on themeasurement of both income and epenses

1%

"erived measurements


20/46

Typical in social sciences includingaccounting

8ased on arbitrary denitions ) e.g. of prot

'umerous ways in which scales can beconstructed ?ay lead to poor levels of condence in the

scale > e.g. there are hundreds of ways to

measure prot

2

(iat measurements


21/46

'o measurement is free of error eceptcounting◦ e.g. we can count the chairs in a room and be

eactly correct

21

Relia+ilit% and accurac%


22/46

What is reliable measurementA◦ proven consistency

◦ repeatable or reproducible

◦ precision

4eliability incorporates two aspects◦ accuracy and certainty of measurement

◦ representative faithfulness

22

Relia+le measurement


23/46

Intl 2% 23


24/46


25/46

?any accounting measurements are on aratio scale

This is the most informative scale

Weakest theoretical foundation as they areat measurements

2"

Accurate measurement


26/46

The sources of error include the following: ?easurement operations stated imprecisely ?easurer Instrument 0nvironment $ttribute unclear 4isk and uncertainty

We need to establish limits of acceptableerror

2#

Sources of error


27/46

2$


28/46

2!


29/46

Two fundamental measures◦ capital prot

Capital and prot can be dened derivedin various ways

Concepts of capital prot have changedover time◦ number of concepts of fundamental measurement

2%

Measurement inaccountin&


30/46

Two notable developments in internationalstandards D7EE2( I$/8F◦ prot measurement and revenue recognition

should be linked to timely recognition

◦ the fair value approach should be adopted as theworking measurement principle

At no stage has the principle of capital

maintenance been explicitly discussed

3

Measurement inaccountin&


31/46

The focus of prot measurement has shiftedfrom matching revenues and epenses toassessing the changes in the fair value ofnet assets◦ e.g. immediate recognition of impairment losses

$uditors must determine whethermanagement has made appropriate andreasonable valuations◦ e.g. at least 17 methods of valuing intangibles

31

Measurement issues forauditors


32/46

It is possible for several di&erent butreasonable measurements and impairmentlosses to be recognised by management

These would all be acceptable to an auditorif management have◦ applied the valuation models correctly

◦ used appropriate data

◦ made appropriate assumptions

◦ acted in a consistent manner

32

Measurement issues forauditors


33/46

Intl 2$ 33


34/46

Main income and capitalmeasurement s%stems

The historic cost accounting system current cost accounting

34


35/46

Historic cost accountin&

/eparation of ownership and control◦ information asymmetry

?ost critical objective of accounting isaccountability ) stewardship DconservatismF

The income statement is paramount◦ transaction based

◦ revenue recognition

◦ matching

◦ prot measurement

3"


36/46

Ar&uments for !istoric costaccountin&

4elevant in making economic decisions 8ased on actual( not merely possible(

transactions @ata have been concept of prot ?ust guard data against internal

modicationsfound to be useful The best understood #rot based on alternatives may not be useful ?arket prices can be supplementary data Insu5cient evidence to reject it

3#


37/46

,riticisms of Historical,ost "bjective of accounting Information for decision making 8asis of historic cost

?atching 'otions of investor needs

3$


38/46

O+-ective of current costaccountin& CC$ values assets at their current market buying price

and prot is determined using matching epenseallocations based on the current cost to buy

#rot is more precisely dened as the change incapital over the accounting period

?anagers are better able to evaluate their pastdecisions and better use the rm%s resources tomaimise future prots

/hareholders( investors and others are able to make

better allocations of their resources ?anagers will eamine

3!


39/46

Ar&uments for and a&ainstcurrent cost

4ecognition principle◦ violates the conservatism principle ) but actual

phenomena

◦ are holding gains prots or revaluation

adjustmentsA "bjectivity of current cost

◦ lacks objectivity

Technological change◦ appears to ignore technological advances

3%


40/46

International accountin&standards and current costs

I$/8G$/8 have agreed that fair value isthe best measurement basis D7EEHF◦ the amount for which an asset could be

echanged( or a liability settled( between

knowledgeable( willing parties in an arm%slength transaction

4


41/46

A mi.ed measurement s%stemand international standards

?arket values ) eit prices ) are implied inthe Bfair value% approach in internationalnancial reporting standards

$ lack of a theoretical concept of valuation(capital maintenance and prot measure(has resulted in a still mied measurementsystem and a lack of consistency

41


42/46

Issues for auditors

The mied measurement model createsmisstatement so that auditors struggle tomeet one of their primary objectives◦ determining whether the nancial statements

present a true and fair view

42


43/46

Copyright © 2009 by PearsonEducation Canada6 - 43

Auditor /ia+ilit%

Will a measurement approach reduce auditorliabilityA◦ #erhaps( if investors subject to limited attention $uditor can claim that the nancial statements proper

anticipated value changes 8ut( current values may be subject to

manager bias if no market value available Then( may be hard to resist manager bias


44/46


Auditor /ia+ilit% and,onservative Accountin&

0ample: conditional conservatism◦ $ change in asset value has already occurred

◦ $ssume investor is risk averse

◦ Investor opportunity loss of epected utility if adecline in asset value is not recorded 1.E7

◦ Investor loss if an increase in asset value notrecorded .27

◦ Investor more likely to sue auditor if a decline in

asset value not recorded.◦ $uditor reaction: conservative accounting( to

reduce likelihood of lawsuit

Continued


45/46


Auditor /ia+ilit% and ,onservativeAccountin& 0continued1

0ample: unconditional conservatism

◦ $sset value J1E(EEE at nancial statement date(but value may change in future If asset declines in value( investor loses utility of 1.E7

If asset increases in value( investor loses utility of .2H

Kow should auditor value asset at statement dateA

◦ If asset valued at J1E(EEE Dcurrent valueF( investorepected utility LM.ML

◦If asset valued at JM(HEE Dconservative valuationF(investor epected utility HE.EE

This suggests an investor demand forconservatism


46/46

,onclusions

$ssuming reasonable reliability( current valueaccounting can increase decision usefulnessrelative to information perspective

Increased use of current value accounting in

nancial reporting◦ 4easons

?arkets not fully e5cient

6ow eplanatory power of net income for share returns

"hls;n clean surplus theory $uditor liability

@ecision usefulness for investors may befurther increased by conservative accounting

Documents

Kel 2 - Measurement.pptx