Recognition and derecognition of elements of financial statements

Question 1

What are the criteria for recognising assets?

Answer 1

The criteria for recognising assets are mentioned in:

• IAS 2 (Inventories),
• IAS 16 (Property, Plant and Equipment),
• IAS 38 (Intangible Assets),
• IAS 32 (Financial Instruments: Presentation) and
• IFRS 9 (Financial Instruments)

Question 2

How are assets recognised?

Answer 2

An asset is a present economic resource controlled by the entity as a result of past events. An economic resource is further defined as a right that has the potential to produce future economic benefits.

For an economic resource to be an asset, it must possess both of the following inherent characteristics:

1. a present economic resource with potential to produce future economic benefits
2. its access or use is presently controlled by the entity.

For example, the workforce of an entity certainly represents future economic benefits, but the entity does not hold any control over these employees as they may leave the organisation at any point in time and seek employment with a rival firm. Therefore, employees do not qualify as assets.

Recognition of an element as an asset is neither dependent upon its physical form nor its legal form. The key is substantial control over such element. An accounting concept popularly termed as ‘substance over form’.

Question 3

What do we mean by De-recognition?

Answer 3

Derecognition

The Conceptual Framework provides new guidance on derecognition that discusses criteria on when to remove or
derecognise assets and liabilities in financial statements.

Derecognition is the removal of all or part of a recognised asset
or liability from an entity’s statement of financial position.

1. Asset: derecognition of an asset occurs when the entity loses control of all or part of the recognised asset.
2. Liability: derecognition of a liability occurs when the entity no longer has a present obligation for all or part of the
   recognised liability.