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Recognition in Financial Statements

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Having defined the elements of financial statements in Chapter 3, the Statement of Principles turns next to their recognition. Whilst only items that meet those definitions should be recognised, not every item that does so should necessarily be recognised. Recognition is very important. Creative accounting often means recognising as an asset something which is not an asset.

Recognition involves depiction of the element both in words and by a monetary amount, and the inclusion of that amount in the statement totals. Notes to the financial statements contain important information both about elements that are recognised and about those that are not.

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Disclosure in a note, however, cannot be a proper substitute for a failure to recognise elements that meet the condition for recognition.

The recognition of assets and liabilities falls into three stages:

1.initial recognition (i.e. incorporation of an item into financial statements for the first time);

2.subsequent remeasurement (i.e. changing the monetary amount at which a previously recognised item is recorded);

3.and derecognition (i.e. removal from the financial statements of a previously recognised item).

ØAn element should be recognised if: there is sufficient evidence that the change in assets or liabilities inherent in the element has occurred (including, where appropriate, evidence that a future inflow or outflow of benefit will occur); and it can be measured at a monetary amount with sufficient reliability.

ØA change in the amount at which an asset or liability is recorded should be recognised if: there is sufficient evidence that the amount of an asset or liability has changed; and the new amount of the asset or liability can be measured with sufficient reliability.

ØAn asset or liability should cease to be recognised if there is no longer sufficient evidence that the entity has access to future economic benefits or an obligation to transfer economic benefits (including, where appropriate, evidence that a future inflow or outflow of benefit will occur).

At any stage in the recognition process, where a change in total assets is not offset by an equal change in total liabilities or a transaction with owners, a gain or a loss will arise. Gain and losses should be recognised in one of the two performance statements, i.e. the profit and loss account and the statement of total recognised gains and losses. Contribution from owners and distributions to owners should be recognised directly in ownership interest without being reflected in either performance statement.

SSAP 2Issued November 1971Amended November 1997Amended December 1998

It is fundamental to the understanding and interpretation of financial accounts that those who use them should be aware of the main assumptions on which they are based. The purpose of SSAP 2 is to assist such understanding by promoting improvement in the quality of financial information disclosed. It seeks to achieve this by establishing as standard accounting practice the disclosure in the financial accounts of clear explanations of the accounting policies followed in so far as these are significant for the purpose of giving a true and fair view. The statement does not seek to establish accounting standards for individual items; these are dealt with in separate accounting standards (both Statements of Standard Accounting Practice and Financial Reporting Standards) issued from time to time.

SSAP 2 defines four fundamental accounting concepts:

a.The ‘going concern’ concept: the enterprise will continue in operational existence for the foreseeable future.

b.The ‘accruals’ concept: revenue and costs are accrued (i.e. recognised as they are earned or incurred, not as money is received or paid), matched with one another so far as their relationship can be established or justifiably assumed, and dealt with in the profit and loss account of the period to which they relate. Where the accruals concept is inconsistent with the ‘prudence’ concept (see (d)), the latter prevails.

c.The ‘consistency’ concept: there is consistency of accounting treatment for like items within each accounting period and from one period to the next.

d.The concept of ‘prudence’: revenue and profits are not anticipated, but are recognised by inclusion in the profit and loss account only when realised in the form either of cash or of other assets the ultimate cash realisation of which can be expressed with reasonable certainty. Provision is made for all known liabilities (expenses and losses) whether the amount is known with reasonable certainty or is a best estimate in the light of the information available.

SSAP 2 describes how these fundamental accounting concepts are applied in company accounts through specific accounting bases and policies.

SSAP 2 is effective for accounting periods starting on or after 1 January 1972.

SSAP 2 is effective for accounting periods starting on or after 1 January 1972.

Cite this Recognition in Financial Statements

Recognition in Financial Statements. (2018, Jul 08). Retrieved from https://graduateway.com/recognition-in-financial-statements/

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