The FASB has issued a fifth chapter of its Concepts Statement No. 8, Conceptual Framework for Financial Reporting, entitled “Recognition and Derecognition.” This chapter seeks to establish criteria and guidance on when an item should be incorporated into and removed from financial statements, subject to the pervasive cost restraint and materiality considerations.

The chapter outlines the following three recognition criteria that must be met in order for an item to be included in the financial statements:

1. Definitions — The item meets the definition of an element of financial statements, as defined in Chapter 4, Elements of Financial Statements, of Concepts Statement No. 8.
2. Measurability — The item is measurable and has a relevant measurement attribute. Relevance should be evaluated in the context of providing financial information about a reporting entity that is useful to existing and potential investors, lenders, and other resource providers in making decisions about providing resources to the entity.
3. Faithful Representation — The item can be depicted and measured with faithful representation. Financial information is faithfully represented when it is complete, neutral, and free from error.

Similarly, the chapter discusses that an item should be derecognized when an item no longer meets any one of the above criteria.

The FASB Concepts Statements are not authoritative and the FASB acknowledges that the Concepts Statement is not meant to override authoritative standards. However, if a transaction is not specified in authoritative GAAP, an entity must first consider accounting principles for similar transactions or events within authoritative GAAP and then consider nonauthoritative guidance from other sources such as the Concepts Statements.

Published: 10/01/2023

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