This does not mean either that their understanding is wrong or that the description in the report is wrong views on these things simply differ. Some readers may therefore find that the way a particular basis is described does not match how they understand it. Different people have different views on how each basis should work, and meanings evolve as practice changes.
In reading the analyses that follow, the following comments should be borne in mind.īases of measurement in financial reporting are not carved in stone. The question of measurement costs is also considered briefly. The most important of these characteristics are generally considered to be relevance and faithful representation / reliability (older term).įor each basis, an outline is given of how it works and the relevance and faithful representation of the resulting measurements.
However, in the absence of direct evidence on these matters, it is usual to argue in terms of various secondary characteristics that ought to be relevant in assessing the quality of information (see the key indicators in What is useful information?). In forming a judgment on the appropriateness of measurement bases, in literature, the overriding tests has been identified to be their cost-effectiveness and fitness for purpose. The last four are all forms of current value measurement. The key is to keep good records and simplify the investment strategy where possible.All these bases are forms of accrual accounting – that is, they are intended to measure income as it is earned and costs as they are incurred, as opposed to simply recording cash flows. Tracking cost basis is required for tax purposes but also is needed to help track and determine investment success. The concept of cost basis is basically straightforward, but it can become complicated in many ways. Brokerage firms will provide investors with appropriate annual tax documentation on mutual fund sales based on their cost basis method elections. Once a cost basis method is determined for a specific mutual fund it must remain in effect. Investors can also choose from other methods including: first in first out ( FIFO), last in first out ( LIFO), high cost, low cost and more. Many brokerage firms default to the average cost basis method. A cost basis method is reported with the brokerage firm where your assets are held. The average cost basis method is commonly used by investors for mutual fund tax reporting. Reinvesting dividends increase the cost basis of a stock because dividends are used to buy more shares.
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