The FASB has issued a sixth chapter of its Concepts Statement No. 8, Conceptual Framework for Financial Reporting, entitled “Measurement.” This chapter seeks to establish criteria and guidance on how items recognized in financial statements should be measured and when specific measurement systems should be applied to those items. This new chapter represents the completion of the FASB’s Conceptual Framework for Financial Reporting.

Concepts Statement No. 8 concludes that measurement should be anchored in prices and defines the following two measurement systems to objectively measure the financial effects of transactions on the reporting entity included in the financial statements:

1. Entry Price — the price paid to acquire an asset or received to assume a liability in an exchange transaction
2. Exit Price — the price received to sell an asset or paid to transfer or settle a liability in an exchange transaction

The choice between the systems should be guided by whichever system best meets the objective of general purpose financial reporting for the particular asset or liability being measured. For example, the entry price measurement system better maintains the historical relationship between recognized assets and liabilities. The exit price system requires that an asset or liability be recorded at the value from a market participant perspective or entity-specific perspective. An entity should not measure an asset or liability in excess of what is recoverable or able to be settled for, regardless of which system is utilized. In addition, an entity should consider measurement uncertainty when determining which measurement system is most relevant to the asset or liability being measured.

The FASB Concepts Statements are not authoritative, and the FASB acknowledges that the Concepts Statements are not meant to override authoritative standards. However, if a transaction is not specified in authoritative GAAP, an entity must first consider accounting principles for similar transactions or events within authoritative GAAP and then consider nonauthoritative guidance from other sources such as the Concepts Statements.

The full text of Concepts Statement No. 8 can be found here.

Published: 09/01/2024

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