The AICPA’s FRF for SMEs exposure document contains documentation beginning with basic descriptions of financial statements and their contents, recognition criteria and measurement principles. In this second blog in a series focusing on this proposed reporting framework for small and medium-size entities, we’ll summarize the framework’s recognition criteria. Future blogs will focus on most sections of the proposed framework.
Recognition, generally, is defined as the process of including items in financial statements classifications, such as inventory or sales. Footnotes to financial statements generally provide additional information about items, recognized or not recognized, in the statements. The professional judgment of the preparer of the statements will determine when items meet the recognition criteria.
Basic recognition criteria from the exposure draft:
- The item has an appropriate measurement basis that can be reasonably estimated.
- It is probable that the events creating items which will obtain or give up future economic benefits (such as receivables and payables) will actually occur.
- The accrual basis of accounting will be used to recognize items in financial statements.
- Revenues are generally recognized when they are earned, or partially earned in the context of contracts in process, and there is reasonable assurance concerning measurement and collectability of the monetary consideration.
- Gains are generally recognized when they are realized.
- Expenses and losses are generally recognized when an expenditure or previously recognized asset does not have future economic benefit (when they are probable and can be estimated).
- Expenses are recorded in a period based on transactions or events occurring in that period or by some allocation method.
- Expenses are recognized in the statement of income on the basis of a direct relationship with the earning and recording of specific income items. This process is commonly referred to as the matching concept, i.e., the matching of costs and revenues.
- When economic benefits are expected to occur over several accounting periods and the relationship with income items can only be broadly or indirectly determined, expenses are recognized on a systematic and rational method of allocation. An example would be depreciation or amortization.
- An expense is recognized in the statement of income when it produces no future economic benefits or when future economic benefits do not qualify for recognition in the balance sheet as an asset.
It is likely this FRF will be beneficial for tens of thousands of small and medium-size entities once it is released by the AICPA. If you work for or provide services for such entities, you will benefit from reading my blog over the next few months as I summarize the important elements of this framework. In 2014, Wiley & Sons will publish my book, Performing Audits, Reviews and Compilations for Entities Using the AICPA’s Financial Reporting Framework for Small and Medium-Size Entities. The contents of this book will be integrated with Wiley & Sons Advantage Audit, providing complete electronic documentation for audits of small and medium-size entities using this and other reporting frameworks. To receive advance information on the progress of my book, you may sign up for my future newsletters at www.cpafirmsupport.com.