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Conceptual Framework Module 5

1) Recognition is the process of including an item that meets the definition of an asset, liability, equity, income, or expense in the financial statements. The amount recognized is the carrying amount reported in the statement of financial position. 2) For recognition, items must meet the definition of an element and provide relevant and faithfully presented information to users. Income is recognized at the point of sale, while expenses are recognized when incurred based on the matching and allocation principles. 3) Measurement quantifies recognized elements in monetary terms using historical cost or current values like fair value, value in use, and fulfillment value. Historical cost uses original acquisition cost updated for factors like depreciation, while current value uses market

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60 views3 pages

Conceptual Framework Module 5

1) Recognition is the process of including an item that meets the definition of an asset, liability, equity, income, or expense in the financial statements. The amount recognized is the carrying amount reported in the statement of financial position. 2) For recognition, items must meet the definition of an element and provide relevant and faithfully presented information to users. Income is recognized at the point of sale, while expenses are recognized when incurred based on the matching and allocation principles. 3) Measurement quantifies recognized elements in monetary terms using historical cost or current values like fair value, value in use, and fulfillment value. Historical cost uses original acquisition cost updated for factors like depreciation, while current value uses market

Uploaded by

Jaime Larona
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© © All Rights Reserved
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CONCEPTUAL FRAMEWORK 5

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 an asset, liability, equity,
income, or expense.
The amount at which an asset, a liability or equity is recognized in the statement of financial
position is reported as carrying amount.
Recognition Criteria
Only items that meet the definition of an asset, liability, or equity are recognized in the
statement of financial position. Similarly, only items that meet the definition of income or expense
are recognized in the statement of financial performance.
In addition to meeting the definition of an element, items are recognized only when their
recognition provides user of financial statements with information that is both relevant and
faithfully presented.
Point of sale recognition
The basic principle of 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.
However, certain conditions, income may be recognized at the point of production, during
production, and at the point of collection.
Expense Recognition
The basic expense recognition means that expenses are recognized when incurred.
Actually, the expense recognition principle is the application of the matching principle.
The matching principle has three applications, namely:
1. Cause and effect association – Under this principle, the expense is recognized when the
revenue is already recognized.
2. Systematic and Rational Allocation – Under this principle, some costs are expensed by
simply allocating them over the periods benefitted.
When economic benefits are expected to arise over several accounting periods and
association with income can only be broadly or indirectly determined, expenses are
recognized on the basis of systematic and allocation procedures.
3. Immediate Recognition – Under this principle the cost incurred is expensed outright
because of uncertainty of future economic benefits or difficulty of reliably associating
certain cost with future revenue.
An expense is recognized immediately when:
1) When an expenditure produces no future economic benefits
2) When cost incurred does not qualify or ceases to qualify for recognition of
asset
Derecognition
Derecognition is defined as the removal of all or part of a recognized asset or liability from
the statement of financial position.
MEASUREMENT
Measurement is defined as quantifying in monetary terms the elements of financial
statements.
The Revised Conceptual Frameworks mentions category:
a. Historical Cost
b. Current Value
HISTORICAL COST
The historical cost or original acquisition cost of an asset is 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 liability minus
transaction cost. Simply stated, historical cost is the entry price or entry value to acquire an asset
or to incur liability.
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 because of:
a. Payment made or satisfying an obligation to deliver goods
b. Increase in value of the obligation transfer economic resources such that the
liability becomes onerous
c. Accrual of interest reflect any financing component of the liability
d. Amortized cost measurement of financial liability
CURRENT VALUE
Current Value includes:
a. Fair value – 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 a liability is the price that would be paid to transfer a liability in an
orderly transaction between transaction between market participants at the measurement
date.
Fair value is an exit price or exit value
b. Value in use – is 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 - is the present value of cash that an entity expects to transfer in
paying or settling a liability.
d. Current cost – Similar to historical cost, current cost is also based on the entry price
or entry value but reflects market conditions on measurement date.
Current cost of an asset is the cost of an equivalent asset at the measurement
date comprising the consideration paid and transaction cost.
Current cost of a liability is the consideration that would be received less
any transaction cost at measurement date.

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