Summary
Highlights
Recognition is the process of including items that meet the definitions of assets, liabilities, equity, income, or expenses in financial statements. The recognized amount in the statement of financial position is called the 'carrying amount'. Recognition links the statement of financial position and the statement of financial performance. Derecognition is the removal of all or part of a recognized item when it no longer meets the definition, such as an entity losing control of an asset or no longer having an obligation for a liability.
Measurement involves assigning monetary amounts to recognized items. Historical cost measures items at their transaction price at the time of acquisition or incurrence, reflecting the cost incurred plus relevant transaction costs. Current value measures reflect conditions at the measurement date and include fair value (market participant perspective), value in use (present value of future cash flows from asset use and disposal), fulfillment value (present value of future cash flows to fulfill a liability), and current cost (cost to acquire an equivalent asset or receive consideration for a liability at the measurement date). Historical cost and current cost are entry values, while fair value, value in use, and fulfillment value are exit values.
Presentation and disclosure are communication tools for an entity's financial information. Effective communication requires balancing flexibility for relevant and faithfully represented information with comparability across periods and entities. Classification involves sorting items based on shared characteristics (nature, function, measurement) to enhance understandability. Offsetting, where assets and liabilities are grouped into a single net amount, is generally not appropriate for dissimilar items as it obscures details. Aggregation summarizes details, but a balance is needed to avoid obscuring important information. Income and expenses are classified into profit or loss or other comprehensive income (OCI), with profit or loss being the primary indicator of financial performance.
Two main concepts are discussed: financial concept of capital and physical concept of capital. The financial concept, most commonly used, defines capital as invested money or purchasing power (net assets or equity). The physical concept defines capital as the entity's operating capability or productive capacity. The choice depends on user needs; financial concept for maintaining nominal invested capital, physical concept for operating capability. Under financial capital maintenance, profit occurs if net assets at the end exceed the beginning amount (excluding owner transactions). Under physical capital maintenance, profit occurs if the physical productive capacity at the end exceeds the beginning. Revaluation adjustments are treated as capital maintenance adjustments rather than included in the income statement.