Conceptual Framework for Financial Reporting

Diagram 5.1: How recognition links the elements of financial statements
Statement of fi nancial position at beginning of reporting period
Assets minus liabilities equal equity
Statement(s) of fi nancial performance
Income minus expenses
Statement of fi nancial position at end of reporting period
Assets minus liabilities equal equity
Contributions from holders of equity claims minus
distributions to holders of equity claims
Changes
in equity
The initial recognition of assets or liabilities arising from transactions or other
events may result in the simultaneous recognition of both income and related
expenses. For example, the sale of goods for cash results in the recognition of
both income (from the recognition of one asset—the cash) and an expense
(from the derecognition of another asset—the goods sold). The simultaneous
recognition of income and related expenses is sometimes referred to as the
matching of costs with income. Application of the concepts in the Conceptual
Framework leads to such matching when it arises from the recognition of
changes in assets and liabilities. However, matching of costs with income is
not an objective of the Conceptual Framework. The Conceptual Framework does not
allow the recognition in the statement of financial position of items that do
not meet the definition of an asset, a liability or equity.
Recognition criteria
Only items that meet the definition of an asset, a liability or equity are
recognised in the statement of financial position. Similarly, only items that
meet the definition of income or expenses are recognised in the statement(s)
of financial performance. However, not all items that meet the definition of
one of those elements are recognised.
Not recognising an item that meets the definition of one of the elements
makes the statement of financial position and the statement(s) of financial
performance less complete and can exclude useful information from financial
statements. On the other hand, in some circumstances, recognising some
items that meet the definition of one of the elements would not provide
useful information. An asset or liability is recognised only if recognition of
that asset or liability and of any resulting income, expenses or changes in
equity provides users of financial statements with information that is useful,
ie with: 
5.5
5.6
5.7
Conceptual Framework
© IFRS Foundation
A53

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(a)
relevant information about the asset or liability and about any
resulting income, expenses or changes in equity (see paragraphs
5.12–5.17); and
(b)
a faithful representation of the asset or liability and of any resulting
income, expenses or changes in equity (see paragraphs 5.18–5.25).
Just as cost constrains other financial reporting decisions, it also constrains
recognition decisions. There is a cost to recognising an asset or liability.
Preparers of financial statements incur costs in obtaining a relevant measure
of an asset or liability. Users of financial statements also incur costs in
analysing and interpreting the information provided. An asset or liability is
recognised if the benefits of the information provided to users of financial
statements by recognition are likely to justify the costs of providing and using
that information. In some cases, the costs of recognition may outweigh its
benefits.
It is not possible to define precisely when recognition of an asset or liability
will provide useful information to users of financial statements, at a cost that
does not outweigh its benefits. What is useful to users depends on the item
and the facts and circumstances. Consequently, judgement is required when
deciding whether to recognise an item, and thus recognition requirements
may need to vary between and within Standards.
It is important when making decisions about recognition to consider the
information that would be given if an asset or liability were not recognised.
For example, if no asset is recognised when expenditure is incurred, an
expense is recognised. Over time, recognising the expense may, in some cases,
provide useful information, for example, information that enables users of
financial statements to identify trends.
Even if an item meeting the definition of an asset or liability is not recognised,
an entity may need to provide information about that item in the notes. It is
important to consider how to make such information sufficiently visible to
compensate for the item’s absence from the structured summary provided by
the statement of financial position and, if applicable, the statement(s) of
financial performance.