COLLEGE OF ACCOUNTANCY

C-AE14 Conceptual Framework and Accounting Standards

First Semester | AY 2020-2021

MODULE 10
A. Course Code – Title : C-AE14 – Conceptual Framework and Accounting Standards
B. Module No – Title : MO 10 Recognition and Derecognition
C. Time Frame : 1 weeks – 3 hours
D. Materials : Syllabus or course outline, writing materials

1. Overview
This module takes on the general concepts for recognition and derecognition. You will
repeatedly encounter these terms in the different financial reporting standards that you will study
in higher accounting courses.

Be sure to read and understand Chapter 5 of the Conceptual Framework. This module only
discusses the salient points and not every paragraph in the chapter. If you have questions
pertaining to some items in Chapter 5, feel free to ask them during the online sessions or through
the Google Classroom or any other previously agreed upon means.

2. Desired Learning Outcomes

Our goal is that, upon completing this module, you will be able to accomplish the following
learning outcomes:
 “I can define recognition and derecognition.”
 “I can cite examples on recognizing and derecognizing elements of the financial
statements”

3. Content/Discussion

In the previous module, you were acquainted with the elements of financial statements by
means of the definitions provided in the Conceptual Framework for Financial Reporting. In this
module, we will take about the general concepts of when these elements are to be included, and
subsequently excluded in the financial statements. In your basic accounting courses, you have
already applied these concepts, perhaps without you knowing that these are already about the
RECOGNITION and DERECOGNITION.

Lesson 1 – Recognition

Recognition is defined as the process of capturing for inclusion in the statement of financial
position or the statement(s) of financial performance an item that meets the definition of one of the
elements of financial statements. This involves depicting the item in one of those statements:
a. either alone or in aggregation with other items;
b. in words and by a monetary amount; and,
c. including that amount in one or more totals in that statement

Question: What term do we use for the amount at which an asset, liability or equity is recognized in
the statement?

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 COLLEGE OF ACCOUNTANCY
C-AE14 Conceptual Framework and Accounting Standards
First Semester | AY 2020-2021

Answer: Carrying amount

Recognition links the elements, the statement of financial position and the statement(s) of
financial performance as follows:

SFPos, CHEC- SFPos,

SFPer
beg DHEC end

Changes in equity
Where:

SFPOs, beg = Statement of financial position at beginning of reporting period

(assets minus liability equal equity)

SFPer = Statement of financial performance (income minus expenses)

CHEC = Contributions from holders of equity claims

DHEC = Distributions to holders of equity claims

SFPOs, end = Statement of financial position at end of reporting period

(assets minus liability equal equity)

This interrelatedness of financial statements is due to the recognition of one item (or a change in its
carrying amount) requires the recognition or derecognition of one or more other items (or changes
in the carrying amount of one or more other items).

In your fundamental accounting course, you have learned that each recordable transaction affects
at least two accounts.

1. If an accountant will recognize income, this will occur at the same time as the initial
recognition of an asset or an increase in the carrying amount of an asset, or a derecognition
of a liability or a decrease in the carrying amount of a liability.

2. If an accountant will recognize expenses, this will occur at the same time as the initial
recognition of a liability, or an increase in the carrying amount of a liability, or a
derecognition of an asset, or a decrease in the carrying amount of an asset.

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 COLLEGE OF ACCOUNTANCY
C-AE14 Conceptual Framework and Accounting Standards
First Semester | AY 2020-2021

Paragraph 5.5 also provides that the initial recognition of assets or liabilities may result in the
simultaneous recognition of both income and related expenses.

Can you give an example of such a transaction?

In case you are a merchandiser, and you were able to sell your goods or products. What effects
would this transaction have in your company’s accounting equation?

For the sale of goods, there is an increase in assets (cash or receivables) and increase in equity
(sales, which is an income)

There is also a corresponding decrease in assets (derecognition of inventories) which will be

transferred to an expense (cost of goods sold).

This is what is meant by “simultaneous recognition of both income and related expenses”.

RECOGNITION

The paragraphs about recognition provide the following important points:

 Only items that meet the definition of an asset, liability or equity are recognized in the
statement of financial position.

 Only items that meet the definition of income or expenses are recognized in the statement
of financial performance.

 Not all items that meet the definition of one of those elements are recognized.
- This means that even if the definition has been met, an item may still not be recognized
in the aforementioned financial statements. Can you think of a reason why this is so?

 An asset or liability is recognized only if recognition of that asset or liability and any
resulting income, expenses, or changes in equity provides users of financial statements with
information that is useful.
- There might be some instances wherein even if the items are recognized in the financial
statements, would not provide useful information.

 An asset or liability is recognized if the benefits of the information provided to users of

financial statements by recognition are likely to justify the costs of providing and using that
information.
- What is useful to users depends on the item and the facts and circumstances.

 Consider information that would be given if an asset or liability were not recognized.
- If this expenditure is not an asset, what is it?

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C-AE14 Conceptual Framework and Accounting Standards
First Semester | AY 2020-2021

 Even if an item meeting the definition of an asset or liability is not recognized, an entity may
need to provide information about it in the notes.

 Recognition of a particular asset or liability and any resulting income, expense or changes in
equity may not always provide relevant information. For example:
- It is uncertain whether an asset or liability exists. ---- Existence uncertainty
o Whether or not the asset or liability is recognized, explanatory information
about the uncertainties associated with it may need to be provided in the
financial statements.

- An asset or liability exists, but the probability of an inflow or outflow of economic

benefits is low.
o If this is the case, the most relevant information about the asset or liability may
be the information about the magnitude of the possible inflows or outflows,
their possible timing and the factors affecting the probability of their
occurrence. The typical location for such information is in the __________________.

 For an asset or liability to be recognized, it must be MEASURED. This may be subject to

measurement uncertainty (in case estimates are used).
- Even a high degree of measurement uncertainty does not necessarily prevent such
estimate from providing useful information.

 In some cases, the level of uncertainty involved in estimating a measure of an asset or

liability may be so high that it may be questionable whether the estimate would provide a
faithful representation of that asset or liability and any resulting income, expenses or
changes in equity.
- Example, if the only way of estimating is by using cash-flow based measurement
technique and in addition, one or more of the following circumstances exists:
o The range of possible outcomes is exceptionally wide and the probability of each
outcome is exceptionally difficult to estimate.
o The measure is exceptionally sensitive to small changes in estimates of
probability of different outcomes (if probability of occurring is exceptionally
low, but the magnitude will be exceptionally high if they occur).
o Measurement requires exceptionally difficult or exceptionally subjective
allocations of cash flows that do not relate solely to the asset or liability being
measured.

 Relevance and faithful representation are primary considerations in recognizing an element

of financial statement.

- Even if the measure were accompanied by a description of the estimates made in

producing it and an explanation of the uncertainties that affect those estimates, if the
information is not useful in the first place, then the asset or liability (would, would not)
be recognized.

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 COLLEGE OF ACCOUNTANCY
C-AE14 Conceptual Framework and Accounting Standards
First Semester | AY 2020-2021

- Faithful representation of a recognized asset, liability, equity, income or expenses

involves not only RECOGNITION of that item, but also its MEASUREMENT as well as
PRESENTATION and DISCLOSURE of information about it. Hence, it is necessary to
consider not merely its description and measurement in the statement of financial
position, but also:

o The depiction of resulting income, expenses and changes in equity.

o Whether related assets and liabilities are recognized.
o Presentation and disclosure of information about the asset or liability and
resulting income, expenses or changes in equity.

Lesson 2 – Derecognition

Derecognition is the removal of all or part of a recognized asset or liability from an entity’s
statement of financial position. Derecognition normally occurs when that item no longer meets the
definition of an asset or of a liability:

a. For an asset, derecognition normally occurs when the entity loses control of all or
part of the recognized asset, and
b. For a liability, derecognition normally occurs when the entity no longer has a
present obligation for all or part of the recognized liability.

DERECOGNITION

The paragraphs pertaining to derecognition provide the following salient points:

 Accounting requirements for derecognition aim to faithfully represent both:

a. Any assets and liabilities retained after the transaction or other even that led to the
derecognition, and
b. The change in the entity’s assets and liabilities as a result of that transaction or
other event.

 The aims described above are achieved by:

a. Derecognizing any asset or liability that have expired or have been consumed,
collected, fulfilled or transferred, and recognizing any resulting income and
expenses.
b. Continuing to recognize the assets or liabilities retained. The retained component
becomes a separate unit of account.
c. Applying one or more of the following procedures, if necessary:
o Presenting any retained component separately in the statement of financial
position;
o Presenting separately in the statement(s) of financial performance any income
and expenses recognized as a result of derecognition of the transferred
component.; or
o Providing explanatory information.

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 COLLEGE OF ACCOUNTANCY
C-AE14 Conceptual Framework and Accounting Standards
First Semester | AY 2020-2021

 In some cases, an entity might appear to transfer an asset or liability, but that asset or
liability might nevertheless remain an asset or liability of the entity. Derecognition is not
appropriate because it would not achieve either of the aims described above. Example:

a. If an entity has apparently transferred an asset but retains exposure to significant

positive or negative variations in the amount of the economic benefits by the asset.
b. If an entity has transferred an asset to another party that holds the asset as an agent for
the entity, the transferor still controls the asset

Remember: Before derecognizing an asset, check if the entity might continue to control
that asset. If this is the case, then the item remains to be an asset of the entity.

 Before derecognizing, check the substance of the transaction. In some cases, even when an
entity no longer has a transferred component and this has already been derecognized
thereby representing such fact, but other changes have occurred because of such
transaction, then there is a need to analyze how significant these changes are.

o Case 1

If an entity has transferred an asset, and at the same time, entered into another
transaction that results in a present right or present obligation to reacquire the
asset, then there is a need to determine what assets or liabilities should be
recognized or derecognized. Such present rights or present obligations may arise
from forward contracts, a written put option or a purchased call option.

o Case 2

If an entity has retained exposure to significant positive or negative variations in the

amount of economic benefits that may be produced by a transferred component that
the entity no longer controls.

 If derecognition is not sufficient to achieve both aims, even when supported by one or more
of the procedures described above, those two aims might sometimes be achieved by
continuing to recognize the transferred component. The following are the consequences:

a. No income or expenses are recognized on either the retained component or the

transferred component as a result of the transaction or other event;
b. The proceeds received or paid upon transfer of the asset or liability are treated as a loan
received or given; an
c. Separate presentation of the transferred component in the statement of financial
position, or provision of explanatory information, is needed to depict the fact that the
entity has any rights or obligations arising from the transferred component. Similarly, it
may be necessary to provide information about income or expenses arising from the
transferred component after the transfer.

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 COLLEGE OF ACCOUNTANCY
C-AE14 Conceptual Framework and Accounting Standards
First Semester | AY 2020-2021

 When a contract is modified in a way that reduces or eliminates existing rights or

obligations, it is necessary to consider which unit of account provides users of financial
statements with the most useful information about the assets and liabilities retained after
the modification, and about how the modification changed the entity’s assets and liabilities:

Case 1

If a contract modification only eliminates existing rights or obligations = the preceding

discussion about derecognition is considered.(Conceptual Framework, paragraphs 5.26 -
5.32)

Case 2

If a contract modification only adds new rights or obligations = decide whether to treat the
added rights or obligations as a separate asset or liability, or as part of the same unit of
account as the existing rights and obligations (see paragraphs 4.48-4.55); and,

Case 3

If a contract modification both eliminates existing rights or obligations and adds new rights
or obligations = consider both the separate and the combined effect of those modifications.
It may be that the contract has been modified to an extent that, in substance, the
modification replaces the old asset or liability with a new asset or liability. Thus, the entity
may need to derecognize the original asset or liability, and recognize the new asset or
liability.

4. Progress Check:
1) Define the following
a. Recognition

b. Derecognition

2) Provide an example of when an item should be recognized or derecognized:

Recognized Derecognized
Asset
Example: Supplies Bought office supplies for future use Used the supplies
1.

Liability
2.

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 COLLEGE OF ACCOUNTANCY
C-AE14 Conceptual Framework and Accounting Standards
First Semester | AY 2020-2021

Recognized Derecognized
Equity
3. -----

Income
4. -----

Expense
5. -----

Let’s check your progress:

 “I can define recognition and derecognition.”

 “I can cite examples on recognizing and derecognizing elements of the financial
statements”

5. Evaluation – to be uploaded as a separate Google Form

E. References
Cabrera, M. E., Ocampo, R. R., & Cabrera, G. A. (2018). Conceptual Framework and Accounting
Standards. Manila, Philippines: GIC Enterprises & Co., Inc.

Empleo, P. M., & Robles, N. S. (2019). The Philippine Financial Reporting Conceptual
Framework and Accounting Standards. Mandaluyong City, Philippines: Millennium Books,
Inc.

IFRS Foundation. (2017). ifrs.org. Retrieved June 11, 2020, from https://www.ifrs.org/use-
around-the-world/use-of-ifrs-standards-by-jurisdiction/philippines/#participant

International Accounting Standards Board. (2018, March). Conceptual Framework for

Financial Reporting. London, United Kingdom.

Millan, Z. V. (2019). Conceptual Framework and Accounting Standards. Baguio City,

Philippines: Bandolin Enterprise Publishing and Printing.

Valix, C. T., Peralta, J. F., & Valix, C. A. (2019). Conceptual Framework and Accounting
Standards. Manila, Philippines: GIC Enterprises & Co., Inc.

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