How a company measures and accounts for an item may be appropriate for the individual firm but can reduce comparability between firms.
What is the impact of choosing different measurement approaches on the quality of accounting information produced?
The way items are measured in accounting affects the quality of accounting information produced. Specifically, poor quality accounting information, as a result of inappropriate measurement methods, can deceive users (stakeholders) and subsequently lead them to make inappropriate decisions.
Financial statements must have good quality accounting information in order to assess how well management has managed the company’s resources. On the other hand, poor quality accounting information will give an incorrect assessment of how well management has performed.
There are variations in accounting practice that allow firms to choose how they wish to account for an item in different ways, using different measurement methods. Such discretion can give management the chance to make opportunistic accounting choices, thereby creating a biased picture of the company’s actual performance or mislead stakeholders. Furthermore, how a company measures and accounts for an item may be suitable for the individual firm but can reduce comparability between different organisations.
For example, companies can use historical cost as a measurement base. Whilst there are good arguments for using historical cost; such as being an objective measurement based on actual transactions and allowing for a clear audit trail, there are also number of drawbacks. For instance, historical cost does not take into consideration the changes in the value of money over time, in other words it ignores price inflation. Judgement is involved in calculating depreciation, which can lead to inconsistencies. Also, some items can be internally generated instead of being purchased.