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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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2.8 Definition and recognition of expenses
2.8.1 Extract from FRS102: Section 2.23(b), Section 2.26 and Section 2.42
2.23(b) Expenses are decreases in economic benefits during the reporting 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 investors.
2.26 The definition of expenses encompasses losses as well as those expenses that arise in the course of the ordinary activities of the entity.
(a) Expenses that arise in the course of the ordinary activities of the entity include, for example, cost of sales, wages and depreciation. They usually take the form of an outflow or depletion of assets such as cash and cash equivalents, inventory, or property, plant and equipment.
(b) Losses are other items that meet the definition of expenses and may arise in the course of the ordinary activities of the entity. When losses are recognised in the statement of comprehensive income, they are usually presented separately because knowledge of them is useful for making economic decisions.
2.42 The recognition of expenses results directly from the recognition and measurement of assets and liabilities. An entity shall recognise expenses in the statement of comprehensive income (or in the income statement, if presented) when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably.
2.8.2 OmniPro comment
2.8.2.1 Definition of an expense
As per Section 2.23(b) of FRS 102, an expense is anything that causes a decrease in economic benefits during the period in the form of cash/non-cash outflows or depletions/depreciation/amortisation of assets or the incurrence of liabilities. From the above guidance, it is clear that anything that involves distributions to shareholders are not expenses e.g. a dividend paid to a shareholder is not an expense however a salary paid to the director is an expense.
2.8.2.2 Recognition of an expense
As per Section 2.42 of FRS 102 an expense is recognised when a liability is created on the balance sheet (i.e. when it is probable that it will be incurred and it can be reliably measured) or when a decrease in future economic benefits arise (i.e. when assets are depleted/decreased).
2.8.2.3 Identifying expenses from losses
Whether an item is shown as part of normal expenses in the financial statements or instead separately as a loss is driven by what the entity’s main ordinary activities are derived. If an cost is not incurred in the carrying out of its ordinary course of activities then it is not a normal expense but an other loss as stated in Section 2.26 of FRS 102.
2.8 Measurement of assets, liabilities, income and expenses
2.8.1 Extract from FRS102: Section 2.33-.2.34
2.33 Measurement is the process of determining the monetary amounts at which an entity measures assets, liabilities, income and expenses in its financial statements. Measurement involves the selection of a basis of measurement. This FRS specifies which measurement basis an entity shall use for many types of assets, liabilities, income and expenses.
2.34 Two common measurement bases are historical cost and fair value:
(a) For assets, historical cost is the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire the asset at the time of its acquisition.
For liabilities, historical cost is the amount of proceeds of cash or cash equivalents received or the fair value of non-cash assets received in exchange for the obligation at the time the obligation is incurred, or in some circumstances (for example, income tax) the amounts of cash or cash equivalents expected to be paid to settle the liability in the normal course of business.
Amortised historical cost is the historical cost of an asset or liability plus or minus that portion of its historical cost previously recognised as an expense or income.
(b) Fair value is the amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm’s length transaction. In the absence of any specific guidance provided in the relevant section of this FRS, when fair value measurement is permitted or required the guidance in the appendix to this section shall be applied.
2.8.2 OmniPro comment
Section 2.34 of FRS 102 gives the methods for measuring assets and liabilities; namely, historical cost of fair value. Whether the historical cost method or the fair value method is applied depends on the rules in each section of FRS 102. Each of these measurement methods are discussed in great detail in each relevant section of this manual. In general, assets and liabilities are initially measured at historical cost unless there is a specific requirement elsewhere in the FRS to measure them at fair value or historical amortised costs (under section 11 of FRS 102). Subsequent measurement depends on the type of balance and will be based on one of the following:
- Amortised cost (for most basic financial assets and liabilities)
- Fair value (for other financial assets and liabilities, (section 11 of FRS 102 for non-puttable ordinary or preference shares or section 12 of FRS 102 for all others) investments in associates (section 14 of FRS 102) and joint ventures (section 15 of FRS 102) (if chosen), investment properties, (section 16 of FRS 102) and some agricultural assets (section 34 of FRS 102)
- The cost model or revaluation model (for property, plant and equipment (section 17 of FRS 102) and intangible assets (section 18 of FRS 102)
- The lower of cost and selling price less costs to complete and sell (for inventory section 13 of FRS 102)
- The best estimate of the amount that would be required to settle the obligation at the reporting date (for most non-financial liabilities)
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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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