Practical Insights on Ind AS and SAs | Measurement Framework under Ind AS

Editorial Team – [2026] 185 taxmann.com 827 (Article)

Taxmann presents Practical Insights on Ind AS and SAs, a weekly series exclusively for Accounts and Audit Module subscribers on Taxmann.com, that simplifies complex accounting concepts through real-world applications.

This edition explains the measurement framework under Ind AS in a simple, practical, and relatable manner, so that users not only understand the concepts but can also apply them confidently in real-life situations.

Introduction

Financial statements are not merely a record of transactions; they are intended to present a meaningful and faithful picture of an entity’s financial position and performance. To achieve this, every recognised element, i.e., assets, liabilities, equity, income, and expenses, must be expressed in monetary terms. This process, known as “measurement”, lies at the very heart of financial reporting under Ind AS.

A key question inevitably arises while preparing financial statements is

“ At what value should an asset or liability be reported? ” The answer to this question directly affects how relevant, reliable, and comparable the financial statements will be for users.

The Ind AS Conceptual Framework does not mandate a single measurement approach. Instead, it follows a principles-based framework that allows entities to select the most appropriate measurement basis, considering the nature of the item and the information needs of users. This flexibility ensures that financial information remains meaningful and decision-useful, rather than mechanically uniform.

For instance, consider land purchased for ₹10 lakh five years ago, which is now valued at ₹50 lakh. Whether the asset is reported at its historical cost or current value depends on the measurement basis applied. Such decisions require careful evaluation and professional judgment.

This article explores the different measurement bases under Ind AS, their practical application, and the challenges encountered in real-world scenarios.

1. Different Measurement Bases under Ind AS Framework

Measurement is the process of determining the monetary amount at which assets and liabilities are recognised and carried in financial statements. It requires selecting an appropriate measurement basis, such as historical cost, fair value, or fulfilment value, which determines how an item is valued and also affects related income and expenses.

Different measurement bases may be applied to different elements depending on what provides the most relevant and reliable information, guided by the qualitative characteristics of useful financial information and the cost constraint.

Ind AS may further explain how a selected measurement basis is to be applied, including estimation techniques, simplified approaches, and any necessary modifications, such as excluding own credit risk when measuring fulfilment value. In essence, measurement is like choosing a lens, where each basis offers a different perspective depending on the context.

Financial statements use different measurement bases to determine the value of assets, liabilities, income, and expenses. The two main categories are historical cost and current value, each providing different types of information.

1.1 Historical Cost

Historical cost measures assets, liabilities, and related income and expenses using the price of the transaction or event that gave rise to them. It reflects the actual amount paid or received at the time of acquisition or incurrence, adjusted only for impairment, depreciation, amortisation, or similar changes.

For assets, historical cost includes the purchase price along with transaction costs, while for liabilities, it includes the consideration received minus transaction costs.

Over time, historical cost is updated to reflect depreciation or amortisation, representing the consumption of the asset; payments received or made; impairment losses when the carrying amount is no longer recoverable; and interest where a financing component exists.

In the case of liabilities, historical cost is further adjusted for the settlement of obligations and for onerous liabilities where the cost becomes insufficient to fulfil the obligation.

For example, if machinery is purchased for ₹10 lakh, it will continue to be reported at that cost (less depreciation), even if its market value changes over time. Historical cost is simple, verifiable, and based on actual transactions, but it does not reflect current market conditions.

In essence, it answers the question: “What did it cost at the time of purchase?”

1.2 Current Value

Current value measures assets and liabilities based on conditions at the measurement date, using updated estimates rather than the original transaction price, thereby providing a more current view of their worth. It includes measures such as fair value, value in use or fulfilment value, and current cost.

It is forward-looking and typically involves estimation and judgment, yet it enhances decision-making relevance in changing economic conditions. The current value reflects up-to-date information by capturing changes in cash flow estimates, market conditions, and other economic factors.

In essence, current value answers the question of “what an asset or liability is worth at present.”

(a) Fair Value

Fair value is 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. It is determined based on the assumptions of market participants and reflects current market conditions.

Fair value may be directly observed from quoted market prices or estimated using appropriate valuation techniques when active markets do not exist. In determining fair value, factors such as expected future cash flows, uncertainty and risk, including risk premiums, the time value of money, and liquidity and credit risk are considered.

For example, listed shares are measured at their current market price, which reflects their real-time value.

However, fair value has certain limitations, as it may introduce volatility in financial statements due to frequent market fluctuations and often requires significant estimation when observable market data is unavailable.

(b) Value in Use and Fulfilment Value

Value in use represents the present value of future cash inflows expected from the use and eventual disposal of an asset, while fulfilment value represents the present value of future cash outflows required to settle a liability. These are entity-specific measures based on expected future cash flows and internal assumptions rather than market data.

Value in use, applicable to assets, reflects the present value of cash inflows generated from using and disposing of the asset, whereas fulfilment value, applicable to liabilities, reflects the present value of cash outflows needed to fulfil the obligation.

These measures are based on the entity’s own assumptions rather than market participant views, include expected disposal or settlement costs, and are calculated using discounted cash flow techniques. For example, an asset may have a low market value but high internal usefulness, resulting in a higher value in use.

(c) Current Cost

Current cost represents the amount that would currently be required to acquire an equivalent asset or incur an equivalent liability, including transaction costs, and reflects present conditions rather than past transaction prices. It focuses on the replacement value of an asset or liability and may be adjusted to account for the age and condition of the existing asset.

Current cost includes the current purchase price and related transaction costs, with appropriate adjustments where necessary for factors such as wear and tear or obsolescence. It is an entry value, similar in nature to historical cost, but it differs in that it reflects current economic conditions instead of the original transaction price.

Thus, different measurement bases can lead to significantly different financial outcomes. Historical cost provides stability and verifiability, while current value approaches offer relevance and reflect economic reality. The choice of measurement basis, therefore, directly influences reported assets, liabilities, and profit, shaping an entity’s overall financial picture.

2. How does Measurement Affect Financial Statements under Ind AS?

The choice of measurement basis does not merely change numerical values; it significantly influences how financial performance and position are interpreted. As illustrated in the Conceptual Framework, different bases affect both the balance sheet and profit and loss in distinct ways.

For instance, under historical cost, gains are recognised only when realised. Under fair value, gains and losses are recognised as market values change, while value in use reflects estimates of future cash flows. Consequently, two entities holding identical assets may report very different financial results depending on the measurement basis applied.

Thus, when selecting a measurement basis, it is important to consider the nature of information it produces in both the balance sheet and the statement of profit and loss. Different bases provide different types of decision-useful information.

2.1 Historical Cost

Historical cost provides information derived from the original transaction price or event that gave rise to the asset or liability. This makes it relevant and reliable, particularly when transactions occur on market terms.

It assumes that the cost incurred is generally recoverable through future economic benefits. As a result, assets are carried at cost adjusted for consumption and impairment, while liabilities are increased when they become onerous.

Under this approach, consumption or disposal of assets results in expenses based on their original cost, and related income recognition helps determine margins. Similarly, settlement of liabilities generates income based on consideration received. This allows users to assess margins, predict future cash flows, and evaluate management efficiency.

2.2 Fair Value

Fair value reflects current market expectations regarding the amount, timing, and uncertainty of future cash flows. It is based on market participant assumptions and incorporates risk preferences.

Changes in fair value arise from various market factors and may be separately analysed to provide more meaningful information. In many cases, transactions at fair value result in minimal gains or losses at the point of sale or transfer, as carrying amounts already reflect market conditions.

Fair value information has both predictive and confirmatory value, as it reflects current expectations and provides feedback on past estimates.

2.3 Value in Use and Fulfilment Value

Value in use represents the present value of future cash flows expected from an asset, while fulfilment value represents the present value of cash outflows required to settle a liability.

Both measures are entity-specific and based on internal assumptions. They are particularly useful for predicting future net cash flows and assessing the economic benefits or obligations associated with assets and liabilities. Updated estimates also provide feedback on previous expectations, thereby enhancing decision usefulness.

2.4 Current Cost

Current cost reflects the amount required to acquire or replace an equivalent asset or settle an equivalent liability at the measurement date.

Unlike historical cost, it incorporates current price levels, making it more relevant in periods of significant price changes. It helps in determining current margins and improving predictions of future margins. However, it requires separating changes arising from consumption or fulfilment from those arising due to price movements, often referred to as holding gains or losses.

Thus, different measurement bases provide different perspectives on the same economic reality. Historical cost emphasises reliability and transaction evidence, fair value focuses on market conditions, while value in use and current cost highlight future economic benefits and replacement considerations. As a result, measurement choices directly shape reported profits, asset values, and overall financial interpretation.