Conceptual Framework—Measurement of Elements of Financial Statements

Primary Objective: The objective of this project was to consider the measurement concepts, both the measurement approach or approaches (for example, initial amounts or remeasured amounts) that conceptually should be used in governmental financial statements and measurement attributes (the feature of the assets or liabilities that is measured).

Status:
Concepts Statement No. 6, Measurement of Elements of Financial Statements, was approved March 2014.

• Project Plan
• Minutes for Deliberations
• Tentative Board Decisions to Date
• Project staff:
  • Roberta Reese
  • Ken Schermann
    
    

Conceptual Framework: Measurement of Elements of Financial Statements—Project Plan

Background: The Board frequently must decide whether an item of information should be recognized in the financial statements, when such an item should be recognized, and at what amount it should be recognized. In the past, the Board has relied on the conceptual framework of other standards setters and analogous examples from practice or previous standards to make such decisions. This method of making decisions tends to lead to certain inconsistencies in financial reporting standards and could result in too much reliance being placed on accounting concepts that were not developed for a governmental environment.

Thus, the project on recognition and measurement is needed to provide the GASB with conceptual guidance as to when elements of financial statements should be reported in particular financial statements and at what amount. This will entail developing recognition criteria and will include a discussion of when elements of financial statements are recognized using different measurement focuses. For the GASB to make consistent financial reporting decisions, it is necessary to have (1) definitions of the elements of financial statements, (2) a basis for determining when elements of financial statements should be recognized in the financial statements, and (3) a basis for determining which measurement approach (for example, initial amounts or remeasured amounts) is appropriate for reporting the elements. The GASB issued a Concepts Statement on the definitions for the elements of financial statements in 2007, and a conceptual framework project on recognition and measurement is necessary to complete the conceptual basis for reporting items in traditional financial statements.

Accounting and Financial Reporting Issues:

1. What messages are financial statements conceptually attempting to convey? (In other words, what is the story that the financial statements attempt to communicate, or what questions should be answered by reading different financial statements and financial statements prepared using different measurement focuses? For example, the statement of cash flows answers the question, “What happened to cash during the year?”)
2. What is the relationship among objectives of financial reporting (user needs), financial statements, measurement focuses, and measurement approaches at the conceptual level?
3. How does when an element is recognized affect the meaning that is to be conveyed by a particular financial statement?
4. What measurement approach(es) best conveys the message(s) intended for financial statements? What is the role of initial amounts and remeasured amounts in conveying these messages? Is the same measurement approach applicable in all measurement focuses?
5. Should the application of remeasured amounts be different for the statement of net assets and the statement of activities? How do remeasured amounts relate to the cost of service model of the statement of activities?
6. What measurement attributes should be considered?

Project History: The importance of this conceptual project was confirmed by the Governmental Accounting Standards Advisory Council (GASAC). At its July 2005 meeting, the GASAC discussed the importance of recognition issues in the development of the GASB’s conceptual framework. It was ranked sixth out of 23 current agenda, research agenda, and potential projects by Council members during their discussion of GASB agenda priorities. The potential companion project, measurement attributes, which was on the research agenda since December 2003, was ranked fourth by the GASAC members. Considering this feedback, the GASB formally added a conceptual framework project on recognition to the research agenda in August 2005. A combined recognition and measurement attributes concepts project was added to the current agenda in December 2005.

Subsequently the name of the combined project was changed to recognition and measurement approaches.

In June 2011, the Board approved a Preliminary Views on concepts related to Recognition of Elements of Financial Statements and Measurement Approaches.

In November 2011, the staff provided the Board with comments received on the Preliminary Views, Recognition of Elements of Financial Statements and Measurement Approaches. The comments presented to the Board related to the overall project, to the economic resources measurement focus and the related recognition concepts for deferred outflows of resources and deferred inflows of resources, and to measurement approaches.

Noting a low volume of responses, particularly from financial statement users, the Board considered several options for proceeding with the project: to move the entire Preliminary Views forward to an Exposure Draft, to separate recognition and measurement concepts and continue with only measurement concepts, or to delay the entire project to allow for further research on recognition concepts. The Board decided, at that time, not to split the recognition and measurement concepts into separate projects. The Board further concluded that it had not received sufficient feedback, to move the project forward to an Exposure Draft. The Board requested that the staff draft questions seeking additional financial statement user feedback on the Preliminary Views for review at the December meeting.

In December 2011, in response to the Board’s request at the November meeting, the staff presented the Board with questions to be asked of users during interviews designed to gather feedback from users of governmental fund financial statements in regard to the Preliminary Views, Recognition of Elements of Financial Statements and Measurement Approaches. The questions were submitted for feedback from the Board on whether they were likely to elicit the information sought by the Board. The Board agreed with the overall approach that the project staff will take to elicit user response to the Preliminary Views. The Board further directed the staff to review the 2005 User Needs Study with the goal of identifying user feedback that relates to this subject. The Board tentatively decided that any further research on the use of governmental fund financial statements would be determined after reviewing the results of the Preliminary Views user interviews and the analysis of the User Needs Study.

In April 2012, the staff provided the Board with the results of the user interviews that were designed to gather feedback from users of governmental fund financial statements in regard to the Preliminary Views. In addition, the staff provided the Board with feedback related to this subject gathered from the 2005 User Needs Study.

In July 2012, the Board began redeliberating issues in the Preliminary Views based upon comments from respondents and from participants in the public hearings, as well as the user feedback. The Board discussed issues related to recognition in financial statements prepared using the economic resources measurement focus.

The Board tentatively agreed to define the economic resources measurement focus as follows:

The Board tentatively agreed that the recognition criteria for financial statements prepared using the economic resources measurement focus would continue to include the first criterion proposed in the Preliminary Views—that of meeting the definition of an element of the financial statements—and that the second criterion would be modified to indicate that measurement of the item sufficiently reflects the qualitative characteristics described in Concepts Statement No. 1, Objectives of Financial Statements. The Board believes that emphasis on or reference to only one or some of the qualitative characteristics would inappropriately imply a hierarchy among the qualitative characteristics.

The Board also tentatively agreed to explicitly identify a three-step hierarchy for recognition concepts for financial statements prepared using the economic resource measurement focus, which is consistent with the approach used by the Board in deliberating issues resulting in the issuance of Statement No. 65, Items Previously Reported as Assets and Liabilities. In this three-step hierarchy, an item is first evaluated as to whether it meets the definition of an assets or liability. If the item does not meet the definition of an asset or liability, then the item is evaluated as to whether it meets the definition of a deferred outflow of resources or deferred inflow of resources. If the item does not meet the definition of a deferred outflow of resources or deferred inflow of resources, then the item would be evaluated as to whether it meets the definition of an outflow of resources or inflow of resources.

From August through November, the Board discussed feedback received on the measurement proposals in the Preliminary Views.

At the December 2012 meeting, the Board decided to separate the project into a phase for measurement and a phase for recognition. Each phase would issue a separate Exposure Draft and Concepts Statement.

The Board concluded its evaluation of feedback received on the measurement proposals in the Preliminary Views and issued the Exposure Draft, Measurement of Elements of Financial Statements in June 2013.

Further developments on an Exposure Draft for recognition concepts was put on hold in August 2013 pending research being conducted pursuant to the reexamination of the financial reporting model.

During September 2013, in conjunction with the fair value project, a webcast was presented for users of financial statements covering the porposals in the Exposure Draft, Measurement of Elements of Financial Statements. 25 comment letters were received on the Exposure Draft, and 4 stakeholders responded to the plain-language supplement on the Exposure Draft. On November 1, 2013, the Board conducted a public hearing on the Exposure Draft, again in conjunction with the Preliminary Views issued as part of the fair value project. The Board began evaluating this feedback on the Exposure Draft in December 2013.

Conceptual Framework: Measurement of Elements of Financial Statements—Minutes for Deliberations

Minutes of Teleconference, March 24, 2014

The Board reviewed a ballot draft of Concepts Statement No. 6, Measurement of Elements of Financial Statements, tentatively agreeing on various editorial changes to the draft. Issuance of the Concepts Statement was approved by five members of the Board, with Mr. Fish and Mr. Granof dissenting.

Minutes of Meetings, March 3-5, 2014

The Board reviewed a preballot draft of Concepts Statement No. 6, Measurement of Elements of Financial Statements, tentatively agreeing on various clarifying changes to the draft. The Board then directed the project staff to prepare a ballot draft of the Concepts Statement for consideration at the March teleconference meeting.

Minutes of Meetings, January 27-29, 2014

The Board concluded its review of feedback received on the Exposure Draft, Measurement of Elements of Financial Statements. As a result of that feedback, the Board tentatively decided to include as concepts the following three views proposed in the June 2011 Preliminary Views, Recognition of Elements of Financial Statements and Measurement Approaches:

• Initial amounts are more appropriate for assets that are used directly in providing services.
• Remeasured amounts are more appropriate for assets that will be converted to cash (for example, financial assets).
• Remeasured amounts are more appropriate for variable-payment liabilities, such as compensated absences or pollution remediation obligations.
  

Minutes of Meetings, December 10-12, 2013

The Board began its evaluation of the feedback received on the Exposure Draft, Measurement of Elements of Financial Statements. The feedback received on the overall proposals in the Exposure Draft and on the two measurement approaches was considered at this meeting, with the Board tentatively agreeing to certain clarifying changes to the concepts.

Minutes of Meetings, October 17-19, 2013

The Board reviewed a paper that summarized comments received on the Exposure Draft, Measurement of Elements of Financial Statements, and tentatively approved the proposed schedule for evaluating the feedback received and issuing a final Concepts Statement.

Minutes of Meetings, August 6-8, 2013

The Board resumed deliberations on concepts for recognition of elements in financial statements prepared using the current financial resources measurement focus. The Board discussed various perceived flaws with the current financial resources measurement focus as it presently is applied in governmental funds. After discussing the potential impact the potential reexamination of the financial reporting model could have on the recognition phase of the conceptual framework, the Board decided to place this phase on hold pending future coordination with the proposed reexamination of the financial reporting model.

Minutes of Meetings, June 25-27, 2013

The Board resumed deliberations on concepts for recognition of elements in financial statements prepared using the current financial resources measurement focus. The Board discussed various perceived flaws with the current financial resources measurement focus as it presently is applied in governmental funds. The project staff will present at the next meeting a history of this phase of the project and present options for approaching the development of an Exposure Draft on recognition concepts.

Minutes of Meetings, June 3, 2013

The Board reviewed the ballot draft of an Exposure Draft on concepts related to Measurement of Elements of Financial Statements, tentatively agreeing upon various clarifications. The Board voted 6-1 to issue the Exposure Draft with Mr. Granof dissenting.

Minutes Archive

Conceptual Framework: Measurement of Elements of Financial Statements—Tentative Board Decisions

Concepts Statement No. 6, Measurement of Elements of Financial Statements, was approved in March 2014.