Acidity in Transformer oil is measured by the TAN (the Total acidity number). Acids cause the breakdown of oil which results in sludge 
Thus, measuring the acidity of Transformer is an important parameter. The acidity is expressed in Total Acidity Number (TAN) which is the milligrams of Potassium Hydroxide (KOH) required to neutralize the acid present in one gram of transformer oil.
Oils which have a high value of TAN will have to be treated.
Useful Links
http://www.machinerylubrication.com/Read/1052/acid-number-test