Recognition and

Measurement

CFAS

Objectives

Define recognition of elements of financial statements.

Understand and define the recognition criteria for asset,

liability, income and expense.

Define measurement of the elements of financial

statements.

Enumerate the various financial attributes for

measuring assets, liability, income and expense.

Recognition and Derecognition

Recognition

The Revised Conceptual

Framework defines recognition as

the process of capturing for

inclusion in the financial statements

an item that meets the definition of

asset, liability, equity, income or

expense.
CARRYING AMOUNT is the amount at which an

asset, a liability or equity is recognized in the

statement of financial position.

Recognition links the elements of financial position

and the statement of financial performance.

Increase in

Asset

Decrease

in Liability

Decrease

in Asset

Increase in

Liability

Recognition of

Expense

Recognition of

Income

Recognition Criteria

Only items that meet the definition of an asset, a liability or

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.

Recognition does not focus

anymore on how probable

economic benefits will flow

to or from the entity and that

the cost can measured

reliably.

An asset or liability and any

corresponding income or

expense can exist even if the

probability of inflow or

outflow of the benefits are

low.

Point of Sale Income Recognition

Customer Order

Delivery of Goods
Customer Payment

The basic principle of income recognition is that income shall be

recognized when earned.

At the point of sale, the entity has transferred to the buyer the significant

risk the significant risks and rewards of ownership of the goods.

Expense Recognition

The expense recognition principle means that expenses are recognized when incurred.

The matching principle requires that those costs and expenses incurred in earing

a revenue shall be recognized in the same period.

Three application of matching principle:

Cause and effect association

Systematic and rational allocation

Immediate recognition

Derecognition

Derecognition is defined as the removal of all or part of a recognized asset

or liability from the financial position.

part of the asset.

Derecognition of a liability occurs when an entity no longer has a present

obligation for all or part of the liability.

Measurement

Measurement

Measurement is defined as quantifying in monetary terms the elements in

the financial statements.

The Revised Conceptual Framework mentions two categories:

Historical Cost

Current Value

Historical Cost

The historical cost or original acquisition cost of an asset the cost incurred in acquiring

or creating the asset comprising the consideration paid plus transaction cost.

The historical cost of a liability is the consideration received to incur the liability

minus the transaction cost.

An application of historical cost measurement is to measure financial asset and

financial liability at amortized cost. The amortized cost reflects the estimate of future
cash flows discounted a rate determined at initial recognition.

Historical cost of an asset is updated because of:

Depreciation and amortization

Payment received as a result of disposing part or all of the asset

Impairment

Accrual of interest to reflect any financing component of the asset

Amortized cost measurement of financial asset

Historical cost of a liability is updated because of:

Payment made or satisfying an obligation to deliver the goods

Increase in value of the obligation to transfer economic resources such that the liability become

onerous

Accrual of interest to reflect any financing component of the liability

Amortized cost measurement of financial liability

Current Value

Current value includes:

Value in use for asset

Fulfillment value for liability

Current Cost

Fair Value

In cases where fair value cannot be directly measured, an entity can use present value

of cash flows.

Fair value is not adjusted for transaction cost. The reason is that such cost is a

characteristics of the transaction and the asset or liability.

Fair value of an asset is the price that would be received to sell an asset in an orderly

transaction between market participants at measurement date.

Fair value of liability is the price that would paid to transfer a liability in an orderly

transaction between market participants at measurement date.

Value in Use

Value in use is the present value of cash flows that an entity expects to derive from

the use of an asset and from the ultimate disposal.

Value in use does not include transaction cost on acquiring the asset but includes

transaction cost on the disposal of the asset.

Fulfillment value is the present value of cash that an entity expects to transfer in

paying or settling a liability.

Fulfillment value does not include transaction cost on incurring a liability but includes

transaction cost in fulfillment of a liability.

Current Cost

Current cost of an asset is the cost of an equivalent asset at the measurement date

comprising the consideration paid and the transaction cost.

Current cost of a liability is the consideration that would be received less any

transaction cost at measurement date.

Similar to historical cost, current cost is also based on the entry price or entry value

but reflects market conditions on measurement date.

Selecting a Measurement Basis

The IASB did not mandate a single measurement basis because the

different measurement bases could produce useful information under

different circumstances.