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Contents
2.2 Objective of financial statements.
2.2.1 Extract from FRS102: Section 2.1A-2.3.
2.3 Qualitative characteristics of information in financial statements.
2.3.1 Extract from FRS102: Section 2.4-2.14.
2.4 Definition of an asset and recognition criteria.
2.4.1 Extract from FRS102: Section 2.15(a), Section 2.17-2.19, Section 2.29 and Section 2.37-2.38.
2.4.2.2 When an asset is to be recognised.
2.5 Definition of a liability and recognition criteria.
2.5.2.2 Recognition criteria for a liability.
2.6.1 Extract from FRS102: Section 2.15(c) and Section 2.22.
2.7 Definition and recognition of Income/revenue.
2.7.1 Extract from FRS102: Section 2.23(a), Section 2.25 and Section 2.41.
2.7.2.2 Identifying revenue from other income/gains.
2.7.2.3 Recognition of income.
2.8 Definition and recognition of expenses.
2.8.1 Extract from FRS102: Section 2.23(b), Section 2.26 and Section 2.42.
2.8.2.1 Definition of an expense.
2.8.2.2 Recognition of an expense.
2.8.2.3 Identifying expenses from losses.
2.8 Measurement of assets, liabilities, income and expenses.
2.8.1 Extract from FRS102: Section 2.33-.2.34.
2.9 Pervasive recognition and measurement principles.
2.9.1 Extract from FRS102: Section 2.35.
2.10.1 Extract from FRS102: Section 2.36.
2.11 Recognition in financial statements.
2.11.1 Extract from FRS102: Section 2.43-2.45.
2.12.1 Extract from FRS102: Section 2.52.
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2.5 Definition of a liability and recognition criteria
2.5.1 Extract from FRS102: Section 2.15(b), Section 2.17, Section 2.20-2.21, Section 2.29. Section 2.31-2.32 and Section 2.39-2.40
2.15 The financial position of an entity is the relationship of its assets, liabilities and equity as of a specific date as presented in the statement of financial position. These are defined as follows:
(b) A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
2.16 Some items that meet the definition of an asset or a liability may not be recognised as assets or liabilities in the statement of financial position because they do not satisfy the criteria for recognition in paragraphs 2.27 to 2.32. In particular, the expectation that future economic benefits will flow to or from an entity must be sufficiently certain to meet the probability criterion before an asset or liability is recognised.
2.20 An essential characteristic of a liability is that the entity has a present obligation to act or perform in a particular way. The obligation may be either a legal obligation or a constructive obligation. A legal obligation is legally enforceable as a consequence of a binding contract or statutory requirement. A constructive obligation is an obligation that derives from an entity’s actions when:
(a) by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and
(b) as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities.
2.21 The settlement of a present obligation usually involves the payment of cash, transfer of other assets, provision of services, the replacement of that obligation with another obligation, or conversion of the obligation to equity. An obligation may also be extinguished by other means, such as a creditor waiving or forfeiting its rights.
Recognition criteria
2.39 An entity shall recognise a liability in the statement of financial position when:
(a) the entity has an obligation at the end of the reporting period as a result of a past event;
(b) it is probable that the entity will be required to transfer resources embodying economic benefits in settlement; and
(c) the settlement amount can be measured reliably.
2.40 A contingent liability is either a possible but uncertain obligation or a present obligation that is not recognised because it fails to meet one or both of the conditions
(b) and (c) in paragraph 2.39. An entity shall not recognise a contingent liability as a liability, except for contingent liabilities of an acquiree in a business combination (see Section 19 Business Combinations and Goodwill).
2.29 The concept of probability is used in the first recognition criterion to refer to the degree of uncertainty that the future economic benefits associated with the item will flow to or from the entity. Assessments of the degree of uncertainty attaching to the flow of future economic benefits are made on the basis of the evidence relating to conditions at the end of the reporting period available when the financial statements are prepared. Those assessments are made individually for individually significant items, and for a group for a large population of individually insignificant items.
2.31 An item that fails to meet the recognition criteria may qualify for recognition at a later date as a result of subsequent circumstances or events.
2.32 An item that fails to meet the criteria for recognition may nonetheless warrant disclosure in the notes or explanatory material or in supplementary schedules. This is appropriate when knowledge of the item is relevant to the evaluation of the financial position, performance and changes in financial position of an entity by the users of financial statements.
2.5.2 OmniPro comment
2.5.2.1 Liability defined
The definition of a liability as stated in Section 2.15(b) and 2.39 of FRS 102 is in line with the guidance provided in Section 21 of FRS 102-Provisions. A liability exists where:
- There is a present obligation (which is either constructive or legal) as a result of a past event and it is expected future economic benefits will transfer;
2.5.2.2 Recognition criteria for a liability
A liability will be measured in the balance sheet if it meets the above criteria but also:
- It must be probable (i.e. more likely than not) that future economic benefits will be payable; and
- It can be reliably measured.
Where a liability is possible or it is probable but cannot be reliably measured it treated as a contingent liability as stated in Section 2.39 of FRS 102 and disclosed (as stated in Section 2.32 of FRS 102). See further detail at Section 19 of FRS 102. If it is a contingent liability acquired in business combination then the fair value must be recognised as opposed to disclosed as stated in Section 2.39 of FRS 102. See further details in relation to same in Section 19 of FRS 102 at 19.8.1.2.2.2.2 .
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Examples
Example 1: Turnover/revenue versus other income.
Example 2: Turnover/revenue versus other income.
Example 3: Turnover/revenue versus other income.
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