A Critique of the Concept of Measurement in Financial Accounting

Abstract

The purpose of this paper is to discuss the concept of measurement in financial accounting, starting with an examination of the approach to measurement taken by the International Accounting Standards Board (IASB), followed by a summary of the general theory of measurement employed in the natural sciences, and finally a review of the arguments raised by various accounting theorists including Edwards and Bell, Chambers and Sterling. While agreeing generally with Sterling’s argument that enterprise income should be measured by the difference between owners’ equity (i.e. assets minus liabilities) at two points in time adjusted for investments and disinvestments, and also his argument that the difference in owners’ equity should be determined by the market (i.e. exit) prices of the net assets of the entity at the beginning and the end of the accounting period, the conclusion that the determination of exit prices is a “measurement” process is unfounded. This leads to the primary argument of this paper, which is that financial accounting “measurement” is not measurement.