The Concept of Measurement in Financial Reporting

Abstract

The purpose of this chapter is to trace the evolution of the concept of measurement in financial reporting and to address the question of whether measurement in financial reporting is a process of “measurement” or whether it constitutes something else, which should not be called measurement, but rather characterized a practice which assigns numbers to elements in financial statements as opposed to the process of measuring. The chapter begins with an examination of the concepts of measurement put forth in recent years by the United States Financial Accounting Standards Board and the International Accounting Standards Board, followed by a summary of the general theory of measurement in the natural sciences, and finally a review of the arguments raised by accounting theorists such as Edwards and Bell (1961), Chambers (1966), and Sterling (1970) with respect to the measurement of business income. We agree with Sterling’s argument that business income should be “measured” by the difference between net equity (i.e., assets − liabilities) at two points in time, adjusted for investments and disinvestments by owners, and also the argument that the difference in equity should be determined by the change in exit prices of net assets at the beginning and the end of the accounting period. However, we are less convinced by his argument that the determination of exit prices constitutes a “measurement” process. This leads to the principle argument of this chapter, which is that “measurement” in financial accounting may not constitute a measurement process at all.

Citation

Baker, C.R. and Persson, M.E. (2021), "The Concept of Measurement in Financial Reporting", Baker, C.R. and Persson, M.E. (Ed.) Historical Developments in the Accountancy Profession, Financial Reporting, and Accounting Theory (Studies in the Development of Accounting Thought, Vol. 25), Emerald Publishing Limited, Leeds, pp. 145-158. https://doi.org/10.1108/S1479-350420210000025010