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. [CF 5.9].
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. [CF 5.10].
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. [CF 5.11].
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8.2.1 Relevance
Information about assets, liabilities, equity, income and expenses is relevant to users of
financial statements. However, recognition of a particular asset or liability and any
resulting income, expenses or changes in equity may not always provide relevant
information. That may be the case if, for example:
• it is uncertain whether an asset or liability exists (see 8.2.1.A below); or
• an asset or liability exists, but the probability of an inflow or outflow of economic
benefits is low (see 8.2.1.B below). [CF 5.12].
The presence of one or both of the factors described above does not lead automatically to a
conclusion that the information provided by recognition lacks relevance. Moreover, factors
other than these may also affect the conclusion. It may be a combination of factors and not
any single factor that determines whether recognition provides relevant information. [CF 5.13].
8.2.1.A Existence
uncertainty
Sometimes it is uncertain whether an asset or liability exists. In some cases, that
uncertainty, possibly combined with a low probability of inflows or outflows of
economic benefits and an exceptionally wide range of possible outcomes, may mean
that the recognition of an asset or liability, necessarily measured at a single amount,
would not provide relevant information. Whether or not the asset or liability is
recognised, explanatory information about the uncertainties associated with it may
need to be provided in the financial statements. [CF 5.14].
8.2.1.B
Low probability of an inflow or outflow of economic benefits
An asset or liability can exist even if the probability of an inflow or outflow of economic
benefits is low (see 7.2.2 and 7.3.2 above). [CF 5.15].
If the probability of an inflow or outflow of economic benefits is low, the most relevant
information about the asset or liability may be information about the magnitude of the
possible inflows or outflows, their possible timing and the factors affecting the probability
of their occurrence. The typical location for such information is in the notes. [CF 5.16].
Even if the probability of an inflow or outflow of economic benefits is low, recognition of
the asset or liability may provide relevant information beyond the information described
above. Whether that is the case may depend on a variety of factors. For example:
• if an asset is acquired or a liability is incurred in an exchange transaction on market
terms, its cost generally reflects the probability of an inflow or outflow of economic
benefits. Thus, that cost may be relevant information, and is generally readily
available. Furthermore, not recognising the asset or liability would result in the
recognition of expenses or income at the time of the exchange, which might not
be a faithful representation of the transaction (see 8.2.2.B below).
• if an asset or liability arises from an event that is not an exchange transaction,
recognition of the asset or liability typically results in recognition of income or
expenses. If there is only a low probability that the asset or liability will result in an
inflow or outflow of economic benefits, users of financial statements might not
regard the recognition of the asset and income, or the liability and expenses, as
providing relevant information. [CF 5.17].
The IASB’s Conceptual Framework
75
8.2.2 Faithful
representation
Recognition of a particular asset or liability is appropriate if it provides not only relevant
information, but also a faithful representation of that asset or liability and of any
resulting income, expenses or changes in equity. Whether a faithful representation can
be provided may be affected by the level of measurement uncertainty associated with
the asset or liability or by other factors. [CF 5.18].
8.2.2.A Measurement
uncertainty
For an asset or liability to be recognised, it must be measured. In many cases, such
measures must be estimated and are therefore subject to measurement uncertainty. As
noted at 5.1.2 above, the use of reasonable estimates is an essential part of the
preparation of financial information and does not undermine the usefulness of the
information if the estimates are clearly and accurately described and explained. Even a
high level of measurement uncertainty does not necessarily prevent such an estimate
from providing useful information. [CF 5.19].
In some cases, the level of uncertainty involved in estimating a measure of an asset or
liability may be so high that it may be questionable whether the estimate would provide
a sufficiently faithful representation of that asset or liability and of any resulting income,
expenses or changes in equity. The level of measurement uncertainty may be so high if,
for example, the only way of estimating that measure of the asset or liability is by using
cash-flow-based measurement techniques and, in addition, one or more of the following
circumstances exists:
• the range of possible outcomes is exceptionally wide and the probability of each
outcome is exceptionally difficult to estimate;
• the measure is exceptionally sensitive to small changes in estimates of the
probability of different outcomes, for example if the probability of future cash
inflows or outflows occurring is exceptionally low, but the magnitude of those cash
inflows or outflows will be exceptionally high if they occur; or
• measuring the asset or liability requires exceptionally difficult or exceptionally
subjective allocations of cash flows that do not relate solely to the asset or liability
being measured. [CF 5.20].
In some of these cases, the most useful information may be the measure that relies on
the highly uncertain estimate, accompanied by a description of the estimate and an
explanation of the uncertainties that affect it. This is especially likely to be the case if
that measure is the most relevant measure of the asset or liability. In other cases, if that
information would not provide a sufficiently faithful representation of the asset or
liability and of any resulting income, expenses or changes in equity, the most useful
information may be a different measure (accompanied by any necessary descriptions
and explanations) that is slightly less relevant but is subject to lower measurement
uncertainty. [CF 5.21].
In limited circumstances, all relevant measures of an asset or liability that are available
(or can be obtained) may be subject to such high measurement uncertainty that none
would provide useful information about the asset or liability (and any resulting income,
expenses or changes in equity), even if the measure were accompanied by a description
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of the estimates made in producing it and an explanation of the uncertainties that affect
those estimates. In those limited circumstances, the asset or liability would not be
recognised. [CF 5.22].
Whether or not an asset or liability is recognised, a faithful representation of the asset
or liability may need to include explanatory information about the uncertainties
associated with the asset or liability’s existence or measurement, or with its outcome,
that is, the amount or timing of any inflow or outflow of economic benefits that will
ultimately result from it (measurement uncertainty is discussed at 9.3.2 below). [CF 5.23].
8.2.2.B Other
factors
Faithful representation of a recognised asset, liability, equity, income or expense
involves not only recognition of that item, but also its measurement as well as
presentation and disclosure of information about it (measurement is discussed at 9
below; presentation and disclosure is discussed at 10 below). [CF 5.24].
Accordingly, when assessing whether the recognition can provide a faithful
representation of an asset or liability, it is necessary to consider not merely its
description and measurement in the statement of financial position, but also:
• the depiction of resulting income, expenses and changes in equity. For example, if
an entity acquires an asset in exchange for consideration, not recognising the asset
would result in recognising expenses and would reduce the entity’s profit and
equity. In some cases, for example, if the entity does not consume the asset
immediately, that result could provide a misleading representation that the entity’s
financial position has deteriorated;
• whether related assets and liabilities are recognised. If they are not recognised,
recognition may create a recognition inconsistency (accounting mismatch). That
may not provide an understandable or faithful representation of the overall effect
of the transaction or other event giving rise to the asset or liability, even if
explanatory information is provided in the notes; and
• presentation and disclosure of information about the asset or liability, and resulting
income, expenses or changes in equity. A complete depiction includes all
information necessary for a user of financial statements to understand the
economic phenomenon depicted, including all necessary descriptions and
explanations. Hence, presentation and disclosure of related information can enable
a recognised amount to form part of a faithful representation of an asset, a liability,
equity, income or expenses. [CF 5.25].
The IASB’s Conceptual Framework
77
8.3 Derecognition
Derecognition is the removal of all or part of a recognised asset or liability from an
entity’s statement of financial position. Derecognition normally occurs when that item
no longer meets the definition of an asset or of a liability:
• for an asset, derecognition normally occurs when the entity loses control of all or
part of the recognised asset; and
• for a liability, derecognition normally occurs when the entity no longer has a
present obligation for all or part of the recognised liability. [CF 5.26].
Accounting requirements for derecognition aim to represent faithfully both:
• any assets and liabilities retained after the transaction or other event that led to the
derecognition (including any asset or liability acquired, incurred or created as part
of the transaction or other event); and
• the change in the entity’s assets and liabilities as a result of that transaction or other
event. [CF 5.27].
These aims are normally achieved by:
• derecognising any assets or liabilities that have expired or have been consumed,
collected, fulfilled or transferred, and recognising any resulting income and
expenses (transferred component);
• continuing to recognise the assets or liabilities retained (retained component), if
any. That retained component becomes a unit of account separate from the
transferred component. Accordingly, no income or expenses are recognised on the
retained component as a result of the derecognition of the transferred component,
unless the derecognition results in a change in the measurement requirements
applicable to the retained component; and
• applying one or more of the following procedures, if that is necessary to achieve
one or both of those aims:
• presenting any retained component separately in the statement of financial
position;
• presenting separately in the statement(s) of financial performance any income
and expenses recognised as a result of the derecognition of the transferred
component; or
• providing explanatory information. [CF 5.28].
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In some cases, an entity might appear to transfer an asset or liability, but that asset or
liability might nevertheless remain an asset or liability of the entity. For example, as
discussed at 7.2.3 above:
• if an entity has apparently transferred an asset but retains exposure to significant
positive or negative variations in the amount of economic benefits that may be
produced by the asset, this sometimes indicates that the entity might continue to
control that asset; or
• if an entity has transferred an asset to another party that holds the asset as an agent
for the entity, the transferor still controls the asset. [CF 5.29].
In these cases, derecognition of that asset or liability is not appropriate because it would
not achieve a faithful representation of either the retained elements or the change in
assets or liabilities. [CF 5.27, 5.30].
When an entity no longer has a transferred component, derecognition of the transferred
component faithfully represents that fact. However, in some of those cases,
derecognition may not faithfully represent how much a transaction or other event
changed the entity’s assets or liabilities, even when supported by appropriate
presentation and disclosure. In those cases, derecognition of the transferred component
might imply that the entity’s financial position has changed more significantly than it
has. This might occur, for example:
• if an entity has transferred an asset and, at the same time, entered into another
transaction that results in a present right or present obligation to reacquire the
asset. Such present rights or present obligations may arise from, for example, a
forward contract, a written put option, or a purchased call option; or
&
nbsp; • if an entity has retained exposure to significant positive or negative variations in
the amount of economic benefits that may be produced by a transferred
component that the entity no longer controls. [CF 5.31].
If derecognition is not sufficient to achieve a faithful representation of the retained
elements and the change in assets or liabilities (even when supported by
appropriate presentation and disclosure) those two aims might sometimes be
achieved by continuing to recognise the transferred component. This would have
the following consequences:
• no income or expenses are recognised on either the retained component or the
transferred component as a result of the transaction or other event;
• the proceeds received (or paid) upon transfer of the asset (or liability) are treated
as a loan received (or given); and
• separate presentation of the transferred component in the statement of
financial position, or provision of explanatory information, is needed to depict
the fact that the entity no longer has any rights or obligations arising from the
transferred component. Similarly, it may be necessary to provide information
about income or expenses arising from the transferred component after the
transfer. [CF 5.32].
One case in which questions about derecognition arise is when a contract is modified in
a way that reduces or eliminates existing rights or obligations. In deciding how to
The IASB’s Conceptual Framework
79
account for contract modifications, it is necessary to consider which unit of account
provides users of financial statements with the most useful information about the assets
and liabilities retained after the modification, and about how the modification changed
the entity’s assets and liabilities:
• if a contract modification only eliminates existing rights or obligations, the
discussion of derecognition above is considered in deciding whether to
derecognise those rights or obligations;
• if a contract modification only adds new rights or obligations, it is necessary to
decide whether to treat the added rights or obligations as a separate asset or
liability, or as part of the same unit of account as the existing rights and obligations
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 17
