The Governmental Accounting Standards Board (GASB) on Monday defined two approaches for measuring assets and liabilities, which officials said will guide the standard-setting organization in establishing accounting and financial reporting standards for state and local governments.
The two approaches, as defined in Concepts Statement No. 6, Measurement of Elements of Financial Statements, are:
- Initial amount: Determined at the time an asset is acquired or a liability is incurred.
- Remeasured amount: Determined as of the date of each year’s financial statements.
According to the GASB, 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, as well as for liabilities for which there is uncertainty about the timing and amount of payments.
While primarily intended for use by the board, the new guidelines may also benefit preparers and auditors of financial statements when evaluating transactions for which there are no existing standards, GASB officials said.
“Measurement is an integral component of a fully developed GASB conceptual framework. Our stakeholders should be able to count on the GASB’s standards consistently addressing financial transactions and other events in a similar manner,” GASB Chairman David Vaudt said in a written statement. “The conceptual framework helps to promote that consistency.”
Concepts Statement 6 also establishes four measurement attributes – the characteristics of an asset or liability that is being measured:
- Historical cost: The price paid to acquire an asset or the amount received pursuant to the incurrence of a liability in an actual exchange transaction.
- Fair value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
- Replacement cost: The price that would be paid to acquire an asset with equivalent service potential in an orderly market transaction at the measurement date.
- Settlement amount: The amount at which an asset could be realized or a liability could be liquidated with the counterparty, other than in an active market.