Financial Accounting and Reporting: Recognition, Measurement, and the Framework
Start with the conceptual framework
Assets are present economic resources controlled by the entity as a result of past events; liabilities are present obligations to transfer resources. Recognition requires that the item meets the definition and that recognition provides relevant and faithful information. Measurement bases include historical cost, fair value, value in use, and current cost. Questions frequently test whether an item meets the definition before asking how to measure it.
High-yield standards
- Revenue (IFRS 15-style five steps): identify the contract → identify performance obligations → determine transaction price → allocate price to obligations → recognise when (or as) each obligation is satisfied. Variable consideration is estimated and constrained.
- Leases: lessee recognises a right-of-use asset and a lease liability at the present value of lease payments. Short-term and low-value leases are expensed.
- Impairment: compare carrying amount with recoverable amount (higher of fair value less costs of disposal and value in use). Impairment loss is recognised immediately in profit or loss unless a revaluation surplus exists.
- Provisions vs. contingent liabilities: a provision is recognised when there is a present obligation, probable outflow, and reliable estimate; a contingent liability is only disclosed.
Traps
- Confusing capital vs. revenue expenditure; subsequent costs that restore condition are expensed.
- Forgetting that depreciation starts when the asset is available for use, not when purchased.
- Treating a change in accounting estimate as a prior-period error - estimates are adjusted prospectively.
Worked example
A machine costs 120,000, residual value 20,000, useful life 5 years, straight-line. Annual depreciation = (120,000 − 20,000) ÷ 5 = 20,000. After 3 years, carrying amount = 120,000 − 60,000 = 60,000. If recoverable amount is 45,000, recognise an impairment of 15,000.