The Financial Accounting Standards Board released another chapter Wednesday of its conceptual framework related to the recognition and derecognition of an item in financial statements.
Chapter 5 of FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting, describes the recognition and derecognition criteria and guidance for when an item should be incorporated into and removed from financial statements. It includes three criteria an item should meet to be recognized in financial statements:
- Definitions: The item meets the definition of an element of financial statements.
- Measurability: The item is measurable and has a relevant measurement attribute.
- Faithful representation: The item can be depicted and measured with faithful representation.
The new chapter also explains the concept that derecognition — the process of removing an item from financial statements of a reporting entity as an asset, liability or equity — should happen when an item no longer meets any one of the recognition criteria.
Courtesy of GASB
The conceptual framework contains a set of interrelated objectives and fundamentals for FASB as it sets standards. However, a Statement of Financial Accounting Concepts is nonauthoritative and doesn’t establish or change U.S. GAAP. The new chapter resembles the rest of the framework by describing concepts that FASB would consider when developing new standards to meet the goal of improving the understandability of financial information for investors, lenders, donors and other resource providers.
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