(i) According to the Conceptual Framework, the objective of measurement is to select those measurement bases that most fairly reflect the cost of services, operational capacity, and financial capacity of the entity in a manner that is useful in holding the entity to account and for decision-making purposes.

This implies that the choice of measurement basis should ensure that the basis provides useful information that enables the users to assess the cost of services provided, the operational capacity of the entity, and the capacity of the entity to fund its activities.

(Award 3 marks when all the key terms are indicated in the candidate’s explanation) (1 mark for the Implication)

(ii) The selection of the measurement bases is guided by the extent to which the basis fairly reflects information on the cost of service, operational capacity, and financial capacity of the entity.

• Human resource software package developed by the entity.
  This is an intangible asset developed by the entity. The most appropriate measurement basis is historical cost since the cost of developing the software package can be determined reliably. Historical cost is the consideration given to acquire or develop an asset, which is the cash or cash equivalents or the value of the other consideration given, at the time of its acquisition or development. In the instant case, historical cost is the most appropriate measurement basis because it fairly reflects the:
  ✓ Cost of service through the amount of the resources expended to acquire or develop assets consumed in the provision of services.
  ✓ Operational capacity through information on the resources available to provide services in future periods based on their acquisition cost.
  ✓ Financial capacity by providing information on the amount of assets that may be used as effective security against borrowing.
• Stock books in the library
  For this asset, current value measurement basis is most appropriate to reflect the economic environment prevailing at the reporting date. Specifically, replacement cost is the measurement basis that fairly reflects the cost of service, operational capacity, and financial capacity of the library books. Replacement cost is the most economic cost required for the entity to replace the service potential of an asset at the reporting date. The use of replacement cost for the stock of the library books provides information that fairly reflects the:
  ✓ Cost of service to be equivalent to the amount of sacrifice of service potential incurred by that use.
  ✓ Operational capacity by the resources available to provide services in future periods, as it focuses on the current value of the assets and its service potential to the entity.
  Note: that financial capacity is not reflected by replacement cost basis as it does not provide information on the amounts that would be received on the sale of the asset.
• Vehicle donated to the entity
  Since the vehicle was donated to the entity, it lacks purchase cost. The appropriate measurement basis is the market value. Market value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction. The vehicle is traded in the open, active, and orderly markets so obtaining the market value is practicable. Market value of the vehicle fairly reflects the:
  ✓ Cost of service by allocating the cost of assets to reflect their consumption in the current reporting period based on current market values of the vehicles.
  ✓ Operational capacity by providing information on the market value of assets held to provide services in future periods.
  ✓ Financial capacity by providing information on the amount that would be received on the sale of the assets.

(Award ½ marks for each point raised with a maximum of 4 points per each asset measurement.
½ marks * 4 * 3 = 6 marks)