CONCEPTUAL FRAMEWORK - Recognition and Measurement

CHAPTER 6: CONCEPTUAL FRAMEWORK – Recognition and Measurement

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.

Recognition links the elements to the statement of financial position and statement of financial
performance.
The statements are linked because the recognition of an item in one statement requires the recognition
of the same item in another statement.
Recognition criteria
Only items that meet the definition of an asset, a 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.
An asset or liability and any corresponding income or expense can exist even if the probability of inflow
or outflow of the benefits is low.
Point of sale income recognition
The 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
The basic expense recognition means that expenses are recognized when incurred.
The expense recognition principle is the application of the matching principle. The matching principle
requires that those costs and expenses incurred in earning a revenue shall be reported in the same
period.
The matching principle has three applications, namely:
a) Cause and effect association

b) Systematic and rational allocation
c) Immediate recognition
Cause and effect association
Under this principle, the expense is recognized when the revenue is already recognized.
The 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.
The best example is the cost of merchandise inventory.
Such cost is considered as an asset in the meantime that the merchandise is on hand. When the
merchandise is sold, the cost thereof is expensed in the form of “cost of goods sold” because at such
time revenue may be recognized.
Systematic and rational allocation
Under this principle, some costs are expensed by simply allocating them over the period 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.
Immediate recognition
Under this principle, the cost incurred is expensed outright because of uncertainty of future economic
benefits or difficulty of reliably association certain costs with future revenue.
An 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
Derecognition is defined as the removal of all or part of a recognized asset or liability from the
statement of financial position. Derecognition 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 no longer has a present obligation for all or part of the
liability.
Measurement
Measurement is defined as quantifying in monetary terms the elements in the financial statements.
The Revised Conceptual Framework mentions two categories:
a) Historical cost
b) Current value
Historical cost
Historical cost is the entry price or entry value to acquire an asset or to incur a liability.
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 the liability minus transaction cost.
An application of the 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 at a rate
determined at initial recognition.
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 the liability
d) Amortized cost measurement of financial liability
Current value
Current value includes:
a) Fair value
b) Value in use for asset
c) Fulfillment value for liability
d) Current cost
Fair value
Fair value is an exit price or exit value. Fair value can be observed directly using market price of the asset
or liability in an active market.
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 be paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
Value in use
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.
Fulfillment value
Fulfillment value is the present value of cash that an entity expects to transfer in paying or settling 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 transaction cost.
Current cost of a liability is the consideration that would be received less any transaction cost at
measurement date.
Selecting a measurement basis
In selecting a measurement basis for an asset or a liability and for the related income and expense, it is
necessary to consider the nature of the information that the measurement basis will produce.
The information produced by the measurement basis must be useful to the users of financial
statements. To achieve this, the information must be both relevant and faithfully represented.
Historical cost is the measurement basis most commonly adopted in preparing financial statements. In
many situations, it is simpler and less costly to measure historical cost than it is to measure a current
value.
MULTIPLE CHOICE THEORIES
1. It is the process of incorporating in the statement of financial position or statement of comprehensive

income an item that meets the definition of an element of the financial statements.
a. Recognition c. Realization
b. Measurement d. Allocation
2. It is the process that involves the simultaneous or combined recognition of revenue and expenses that
result directly from the same transactions and other events.
a. Matching of cost with revenue

b. Matching of revenue with cost
c. Systematic and rational allocation
d. Immediate recognition
3. Generally, revenue is recognized
a. At the point of sale

b. When cause and effect are associated
c. At the point of cash collection
d. At appropriate points throughout the operating cycle
4. The primary measurement basis is
a. The current market price if the asset currently held was sold on the open market.
b. The current market price if the asset held was purchased on the open market.
c. The present value of the cash flows that the asset is expected to generate.
d. The market price at the date the asset was acquired.
5. Revenue from artistic performance is recognized when
a. The audience register for the event online.

b. The tickets for the concert are sold.
c. Cash has been received from the ticket sales.
d. The event takes place.

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CHAPTER 6: CONCEPTUAL FRAMEWORK – Recognition and Measurement

Point of sale income recognition

The matching principle has three applications, namely:

a) Cause and effect association

Cause and effect association

Systematic and rational allocation

An expense is recognized immediately:

a) When an expenditure produces no future economic benefit.

The Revised Conceptual Framework mentions two categories:

Historical cost updated

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

Current value includes:

Selecting a measurement basis

1. It is the process of incorporating in the statement of financial position or statement of comprehensive

a. Matching of cost with revenue

3. Generally, revenue is recognized

a. At the point of sale

4. The primary measurement basis is

5. Revenue from artistic performance is recognized when

a. The audience register for the event online.

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