Recognition in financial statements
Three stages are used for recognition if assets and liabilities.
- Initial recognition
- Subsequent re measurement
- De recognition
Measurement of financial statements
For this, with its emphasis on current values, is fairly radical and controversial. The following approach is taken.
- Initially, when an asset is purchased or liability incurred, the asset/liability is recorded at the transaction cost, that is historical cost, which at that time is equal to current replacement cost.
- An asset/liability may subsequently be “remeasured”. In a historical cost system, this can involve writing down an asset to its recoverable amount. For a liability, the corresponding treatment would be amendment of the monetary amount to the amount ultimately expected to be paid.
- Such re-measurements will, however, only be recognized if there is sufficient evidence that the monetary amount of the asset/liability has changed and the new amount can be reliably measured.