Recognition – FAQ | IFRS

Recognition

The process of capturing, for inclusion in the statement of financial position or the statement(s) of financial performance, an item that meets the definition of an element. It involves depicting the item (either alone or as part of a line item) in words and by a monetary amount, and including that amount in totals in the relevant statement.


Conceptually the process of recognising a element/item/transaction/event in the financial statements is discussed in the Conceptual Framework  caption 5.1 – 5.25.  To summarise the concept of recognition here is caption 5.1:

‘Recognition is the process of capturing for inclusion in the statement of financial position or the statement(s) of financial performance an item that meets the definition of one of the elements of financial statements—an asset, a liability, equity, income or expenses. Recognition involves depicting the item in one of those statements—either alone or in aggregation with other items—in words and by a monetary amount, and including that amount in one or more totals in that statement. The amount at which an asset, a liability or equity is recognised in the statement of financial position is referred to as its ‘carrying amount’.’

Then there are the nitty gritty details in almost each IFRS, summarised here along the most unusual or interesting or whatever topic:

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Financial reporting line

IFRS 9 3.1.1

An entity shall recognise a financial asset or a financial liability in its statement of financial position when, and only when, the entity becomes party to the contractual provisions of the instrument (see IFRS 9 B3.1.1, IFRS 9 B3.1.2). When an entity first recognises a financial asset, it shall classify it in accordance with IFRS 9 4.1.1–4.1.5 and measure it in accordance with IFRS 9 5.1.1–5.1.3. When an entity first recognises a financial liability, it shall classify it in accordance with IFRS 9 4.2.1, IFRS 9 4.2.2 and measure it in accordance with IFRS 9 5.1.1.

IFRS 9 3.1.2

A regular way purchase or sale of financial assets shall be recognised and derecognised, as applicable, using trade date accounting or settlement date accounting (see IFRS 9 B3.1.3–B3.1.6).

IFRS 9 3.3.2

An exchange between an existing borrower and lender of debt instruments with substantially different terms shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. Similarly, a substantial modification of the terms of an existing financial liability or a part of it (whether or not attributable to the financial difficulty of the debtor) shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability.

IFRS 9 4.1.4

A financial asset shall be measured at fair value through profit or loss unless it is measured at amortised cost in accordance with IFRS 9 4.1.2 or at fair value through other comprehensive income in accordance with IFRS 9 4.1.2A. However an entity may make an irrevocable election at initial recognition for particular investments in equity instruments that would otherwise be measured at fair value through profit or loss to present subsequent changes in fair value in other comprehensive income (see IFRS 9 5.7.5–5.7.6).

IFRS 9 4.1.5

Option to designate a financial asset at fair value through profit or loss

Despite IFRS 9 4.1.1–4.1.4, an entity may, at initial recognition, irrevocably designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an ‘accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases (see IFRS 9 B4.1.29–B4.1.32).

IFRS 9 4.2.1(c)

Financial guarantee contracts. After initial recognition, an issuer of such a contract shall (unless IFRS 9 4.2.1(a) or (b) applies) subsequently measure it at the higher of:

  1. the amount of the loss allowance determined in accordance with IFRS 9 5.5 Impairment, and
  2. the amount initially recognised (see IFRS 9 5.1.1) less, when appropriate, the cumulative amount of income recognised in accordance with the principles of IFRS 15.

IFRS 9 4.2.2

Option to designate a financial liability at fair value through profit or loss

IAS 32 15

The issuer of a financial instrument shall classify the instrument, or its component parts, on initial recognition as a financial liability, a financial asset or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial liability, a financial asset and an equity instrument.

IAS 36 58 – 64

Recognising and measuring an impairment loss

IAS 36 60

An impairment loss shall be recognised immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another Standard (for example, in accordance with the revaluation model in IAS 16). Any impairment loss of a revalued asset shall be treated as a revaluation decrease in accordance with that other Standard.

IAS 37 14

A provision shall be recognised when:

  1. an entity has a present obligation (legal or constructive) as a result of a past event;
  2. it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
  3. a reliable estimate can be made of the amount of the obligation.

If these conditions are not met, no provision shall be recognised.

IAS 37 27

An entity shall not recognise a contingent liability.

IAS 37 31

An entity shall not recognise a contingent asset.

IAS 38 18

The recognition of an item as an intangible asset requires an entity to demonstrate that the item meets:

  1. the definition of an intangible asset (see IAS 38 8, IAS 8 9–17); and
  2. the recognition criteria (see IAS 38 21–23).

This requirement applies to costs incurred initially to acquire or internally generate an intangible asset and those incurred subsequently to add to, replace part of, or service it.

IAS 38 48

Internally generated goodwill shall not be recognised as an asset.

IAS 40 16

An owned investment property shall be recognised as an asset when, and only when:

  1. it is probable that the future economic benefits that are associated with the investment property will flow to the entity; and
  2. the cost of the investment property can be measured reliably.

IAS 40 68

If, in accordance with the recognition principle in paragraph 16, an entity recognises in the carrying amount of an asset the cost of a replacement for part of an investment property, it derecognises the carrying amount of the replaced part. For investment property accounted for using the cost model, a replaced part may not be a part that was depreciated separately. If it is not practicable for an entity to determine the carrying amount of the replaced part, it may use the cost of the replacement as an indication of what the cost of the replaced part was at the time it was acquired or constructed. Under the fair value model, the fair value of the investment property may already reflect that the part to be replaced has lost its value. In other cases it may be difficult to discern how much fair value should be reduced for the part being replaced. An alternative to reducing fair value for the replaced part, when it is not practical to do so, is to include the cost of the replacement in the carrying amount of the asset and then to reassess the fair value, as would be required for additions not involving replacement.

IAS 16 7

The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:

  1. it is probable that future economic benefits associated with the item will flow to the entity; and
  2. the cost of the item can be measured reliably.

IAS 16 16

An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost.

IAS 19 11

When an employee has rendered service to an entity during an accounting period, the entity shall recognise the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service:

  1. as a liability (accrued expense), after deducting any amount already paid. If the amount already paid exceeds the undiscounted amount of the benefits, an entity shall recognise that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund.
  2. as an expense, unless another IFRS requires or permits the inclusion of the benefits in the cost of an asset (see, for example, IAS 2 Inventories and IAS 16 Property, Plant and Equipment).

IAS 19 165

An entity shall recognise a liability and expense for termination benefits at the earlier of the following dates:

  1. when the entity can no longer withdraw the offer of those benefits; and
  2. when the entity recognises costs for a restructuring that is within the scope of IAS 37 and involves the payment of termination benefits.

IAS 21 21

A foreign currency transaction shall be recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.

IAS 23 8

An entity shall capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. An entity shall recognise other borrowing costs as an expense in the period in which it incurs them.

IAS 28 10

Under the equity method, on initial recognition the investment in an associate or a joint venture is recognised at cost, and the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition. The investor’s share of the investee’s profit or loss is recognised in the investor’s profit or loss. Distributions received from an investee reduce the carrying amount of the investment. ………

General model of measurement of insurance contracts

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