Professional Documents
Culture Documents
• Expenses are decreases in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrences of liabilities that result in decreases in equity,
other than those relating to distributions to equity participants
• Expenses encompass losses as well as expenses which arise in the course of ordinary
activities
• production and sales generate revenue and the using up of goods and services in support of
those functions causes expenses to occur
Expense recognition
• The recognition criteria for expenses are consistent with those of the other accounting
elements
• An expense is recognised if
• it is probable that any future economic benefit associated with the item will flow to
or from the entity; and
• the item has a cost or value that can be measured with reliability
– accrual accounting
Allocation of expenses
• Revenue = accomplishment
• Expenses = effort
• For any given period, matching revenue and expenses yields net accomplishment (periodic
profit)
• Most of the problems of profit determination have to do with expense allocation and
matching
• whether a cost, although incurred and not yet paid, is related to current revenue
and therefore should be accrued
• The matching process involves the simultaneous or combined recognition of revenues and
expenses that result directly and jointly from the same transactions or other events
• In practice, matching is
• very difficult to do
• arbitrary
• immediate recognition
– reasonable observation
Systematic and rational allocation
– the expense is assumed to correlate with the revenue for that period
• depreciation
Immediate recognition
– advertising expenses
– research expenditure
– impairment expenses
Criticisms of allocations
• The doctrine of conservatism means that expenses, losses and liabilities are recognised as
soon possible, even if evidence for them is weak
• The asymmetrical treatment of revenue and expenses may create a conservative bias and
misleading financial statements
• The process has made the balance sheet secondary to the income statement
• additivity
• unambiguity
• defensibility
• a given input provides services in the current and future periods and the cost
allocation pattern reflects the cost of the services received in the given periods
• allocated data serves a useful purpose because readers of accounting reports, which
include allocated data, find them useful
• the patterns of allocation do not exist in the real-world; they exist only in the minds
of accountants
• an input’s individual contribution to the output cannot be known because all the
inputs interact with each other to generate an output
• no allocations
Defence of allocations
• Continue with allocations only if the benefits outweigh the costs of doing so
• The IASB is aware of the allocations problem and is tackling it in its current projects
• The plea is for reasonableness or appropriateness and not for objective evidence
– conservatism
• Auditors face issues surrounding the distinction between expenses and assets, the period in
which expenses are recognised, and appropriate measurement of expenses
– concepts such as matching and conservatism are not helpful if they distort
information and reduce its utility