Definition
Money Measurement Concept in accounting, also known as Measurability
Concept, means that only transactions and events that are capable of being
measured in monetary terms are recognized in the financial statements.
Explanation
All transactions and events recorded in the financial statements must be
reduced to a unit of monetary currency. Where it is not possible to assign a
reliable monetary value to a transaction or event, it shall not be recorded in
the financial statements.
However, any material transactions and events that are not recorded for
failing to meet the measurability criteria might need be disclosed in the
supplementary notes of financial statements to assist the users in gaining a
better understanding of the financial performance and position of the entity.
Recognition Criteria
The recognition criteria defined by IASB and FASB require that the elements of
financial statements (i.e. assets, liabilities, income and
expense) must only be recognized in the financial statements if its cost or
value can be measured with sufficient reliability. Therefore, an entity shall
not recognize an element of financial statement unless a reliable value can be
assigned to it.
In many cases however the preparers of financial statements are unable to
arrive at a precise amount to be recognized in the financial statements and
must resort to the use of reasonable estimates in arriving at an approximate
value. The use of reasonable estimates is a very important component in the
preparation of financial statements and as long as forming estimates do not
involve a high degree of subjectivity and uncertainty they do not undermine the reliability
of financial information.
Where a significant element of financial statement is not recognized
because of the inability to measure its monetary value with sufficient
reliability, it may be disclosed in the supplementary notes of financial
statements to enhance the users' understandability and completeness of
the presented financial information.
Examples of Application
Skills and competence of employees cannot be attributed an objective
monetary value and should therefore not be recognized as assets in the balance
sheet. However, those transactions related to employees that can be measured
reliably such as salaries expense and pension obligations are recognized in the
financial statements.
Where it is not possible to measure reliably the amount of settlement of
a legal claim against the company, no liability is recognized in the financial
statements. Instead, the nature and circumstances surrounding the lawsuit are
disclosed in the supplementary notes to the financial statements if considered
material.
IAS 38 Intangible Assets and ASC 350 Intangibles -
Goodwill and Other require that internally generated goodwill
shall not be recognized as an asset in the balance sheet. This is due to the
difficulty in identifying and measuring the cost of internally generated
goodwill as distinct from the cost of running the day to day operations of the
business.
However, IFRS 3 Business Combinations and ASC 805 Business Combinations permit purchased goodwill to be recognized as an asset in the financial statements since the cost of purchased goodwill is usually determinable objectively as the amount of consideration paid in excess of the value of other identifiable assets of the acquired business.
However, IFRS 3 Business Combinations and ASC 805 Business Combinations permit purchased goodwill to be recognized as an asset in the financial statements since the cost of purchased goodwill is usually determinable objectively as the amount of consideration paid in excess of the value of other identifiable assets of the acquired business.
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