Inclusion in financial position or financial performance
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.
Assets, liabilities, equity, income and expenses The recognition process
5.2 The statement of financial position and statement(s) of financial performance depict an entity’s recognised assets, liabilities, equity, income and expenses in structured summaries that are designed to make financial information comparable and understandable. An important feature of the structures of those summaries is that the amounts recognised in a statement are included in the totals and, if applicable, subtotals that link the items recognised in the statement.
Linking elements and main statements The recognition process
5.3 Recognition links the elements, the statement of financial position and the statement(s) of financial performance as follows (see Diagram 5.1 below):
- in the statement of financial position at the beginning and end of the reporting period, total assets minus total liabilities equal total equity; and
- recognised changes in equity during the reporting period comprise:
- income minus expenses recognised in the statement(s) of financial performance; plus
- contributions from holders of equity claims, minus distributions to holders of equity claims.
Diagram 5.1 How recognition links the elements of financial statements
Communicating Vessels The recognition process
5.4 The statements are linked because the recognition of one item (or a change in its carrying amount) requires the recognition or derecognition of one or more other items (or changes in the carrying amount of one or more other items). For example:
- the recognition of income occurs at the same time as:
- the initial recognition of an asset, or an increase in the carrying amount of an asset; or
- the derecognition of a liability, or a decrease in the carrying amount of a liability.
- the recognition of expenses occurs at the same time as:
- the initial recognition of a liability, or an increase in the carrying amount of a liability; or
- the derecognition of an asset, or a decrease in the carrying amount of an asset.
Matching of costs with income
5.5 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.