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Recognition answers whether an item enters the financial statements. Initial measurement answers the next question: what amount does the company assign when the item first enters?
The answer needs more than a number. Identify the unit of account, measurement date, required measurement basis, included and excluded inputs, and any uncertainty in those inputs.
Build the opening amount from the required inputs
Northline pays $100,000 for a machine, $4,000 to deliver it, and $6,000 to install it. Assume the applicable guidance includes all three amounts in the cost needed to prepare the machine for use:
$100,000 invoice + $4,000 delivery + $6,000 installation
= $110,000 initial carrying amount
The $110,000 amount is not simply the largest number on the invoice. It is the result of applying the stated cost requirements to the identified machine at the date Northline first recognizes it.
Do not assume that every opening amount equals cash paid
Cash paid can be an input without being the required measurement basis. A company may need to allocate one transaction price across several units, discount future payments, estimate variable amounts, or use fair value under another Topic. Transaction costs may be included for one item and excluded for another.
For example, a governing Topic can require or permit fair value. The accountant then applies the method in ASC 820. ASC 820 does not establish that every new asset starts at fair value. First use the governing Topic to determine whether fair value applies and which unit the company measures.
Preserve the opening measurement record
Keep the source paragraph, unit, date, basis, inputs, calculations, and judgments together. That record lets another person distinguish a measurement error from a later change in estimate or a required update.
FASB addresses measurement at initial recognition and at later reporting dates in its Conceptual Framework. The framework is nonauthoritative. Apply the relevant ASC Topic to determine the required treatment for the transaction.
Carry the amount to the next reporting date
Initial measurement establishes the starting amount. It does not say that the amount stays unchanged. Continue with subsequent measurement to determine how the applicable guidance updates, allocates, or tests that amount later.
Put the concept to work
Understand this concept
- Explain initial measurement as the amount assigned at first recognition under a required basis, date, unit of account, and set of included inputs.
Analyze this concept
- Analyze an opening amount by identifying the governing guidance, unit, measurement date, basis, included and excluded inputs, uncertainty, and statement effects.
Learning resources
Choose a lesson, try an application, or inspect the sources behind this concept.
Build on these ideas
- Initial measurement — Understand
To analyze this concept: Required. The learner must identify the opening measurement question before testing its inputs and effects.
- Measurement basis — Understand
To understand this concept: Required. The opening amount is interpretable only when the learner knows what attribute it measures.
- Recognition — Understand
To understand this concept: Required. Initial measurement supplies an amount when an item first enters the financial statements.
Show 1 more prerequisites
- Unit of account — Understand
To understand this concept: Required. The learner must identify the item or group being measured before assigning an amount.
Practice
Sources
Standard references
Related concepts
Show 1 more related concepts
Use this idea next
- Initial measurement — Analyze
Required level here: understand. Required. The learner must identify the opening measurement question before testing its inputs and effects.
- Subsequent measurement — Understand
Required level here: understand. Required. A later measurement begins with the recognized item and its supported opening amount.