CHAPTER 6

RECOGNITION

- Process of capturing for inclusion in the financial statements an item that meets the definition of
an asset, liability, equity, income or expense

Carrying amount – amount which an asset, liability or equity is recognized in the statement of
financial position

Recognition criteria

- Only items that meet the definition of an asset, a liability or equity are recognized in the
statement of financial position.
- Only items that meet the definition of income or expense are recognized in the statement of
financial performance
- Items are recognized only when their recognition provides users of financial statements with
information that is both relevant and faithfully represented.

Point of sale income recognition

- Basic principle of income recognition is that income shall be recognized when earned
- With respect to sale of goods in the ordinary course of business, the point of sale is
unquestionably the point of income recognition

Expense recognition

- Expenses are recognized when incurred

- Expense recognition principle is the application of the matching principle

Matching principle requires that those costs and expenses incurred in earning a revenue shall be
reported in the same period

Three applications:

a. Cause and effect association – expense is recognized when the revenue is already recognized
- “strict matching concept”
- Matching of cost with revenue, involves the simultaneous or combined recognition of revenue
and expenses that result directly and jointly from the same transactions or events

b. Systematic and rational allocation – some costs are expensed by simply allocating them over the
periods benefited
- When economic benefits are expected to arise over several accounting periods and the
association with income can only be broadly or indirectly determined, expenses are recognized
on the basis of systematic and allocation procedures
 c. Immediate recognition – cost incurred is expensed outright because of uncertainty of future
economic benefits or difficulty of reliably associating certain costs with future revenue
Expense is recognized immediately:
a. When an expenditure produces no future economic benefit
b. When cost incurred does not qualify or ceases to qualify for recognition as an asset

Derecognition – removal of all or part of a recognized asset or liability from the statement of
financial position

- Normally occurs when an item no longer meets the definition of an asset or a liability
Derecognition of an asset – occurs when the entity loses control of all or part of the asset
Derecognition of a liability - occurs when the entity loses control of all or part of the liability

MEASUREMENT

- Quantifying in monetary terms the elements in the financial statements

Two categories:

a. Historical cost
- Original acquisition cost of an asset - is the cost incurred in acquiring or creating the asset
comprising the consideration paid plus transaction cost
- Entry price or entry value to acquire an asset or to incur a laibility

Historical cost of a liability – consideration received to incur the liability minus transaction cost

HISTORICAL COST UPDATED

1. Historical cost of an asset is updated because of:

a. Depreciation and amortization
b. Payment received as a result of disposing part or all of the asset
c. Impairment
d. Accrual of interest to reflect any financing component of the asset
e. Amortized cost measurement of financial asset
2. Historical cost of a liability is updated because of:
a. Payment made or satisfying an obligation to deliver goods
b. Increase in value of the obligation to transfer economic resources such that the liability
becomes onerous
c. Accrual of interest to reflect any financing component of liability
d. Amortized cost measurement of financial liability

CURRENT VALUE

Includes:

a. Fair value –
- An exit price or exit value
 Of an asset - price that would be received to sell an asset in an orderly transaction between
market participants at measurement date

Of a liability - price that would be paid to transfer a liability in an orderly transaction between
market participants at measurement date

b. Value in use for asset

- The present value of the cash flows that an entity expects to derive from the use of an asset and
from the ultimate disposal

c. Fulfillment value for liability

- Present value of cash that an entity expects to transfer in paying or settling a liability

d. Current cost

Of an asset – the cost of an equivalent asset at the measurement date comprising the consideration
paid and transaction cost

Of a liability – consideration that would be received less any transaction cost at measurement date