COMMERCE PAPER No. : 4 Accounting Theory and Practice MODULE No. : 22 Recognition and Measurement
Subject COMMERCE
Paper No and Title 4. Accounting Theory and Practice Module No and Title 22. Recognition and Measurement
Module Tag COM_P4_M22
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COMMERCE PAPER No. : 4 Accounting Theory and Practice MODULE No. : 22 Recognition and Measurement
TABLE OF CONTENTS
1. Learning Outcomes
2. Introduction and Concept of Recognition and Measurement 3. Accounting assumptions and Principles
3.1 Accounting Assumptions
3.2 Accounting Principles
4. Indian Accounting Standard
5. Summary
COMMERCE PAPER No. : 4 Accounting Theory and Practice MODULE No. : 22 Recognition and Measurement
1. Learning
After studying this module, you shall be able to
Know the concept of Recognition and Measurement.
Learn the different assumptions and principles of Recognition and Measurement.
Identify how to measure different financial statement elements.
Understand the role of International Financial Reporting Standards.
Analyse .etc.
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COMMERCE PAPER No. : 4 Accounting Theory and Practice MODULE No. : 22 Recognition and Measurement
2. Introduction
Concept of Recognition and Measurement
There are various fundamentals of financial statements. We should be acknowledged (recorded) and measured them. SFAC 5 addresses these issues. Recognition refers to the procedure of disclosing information into financial statements. Measurement is the procedure of associating mathematical amounts to the elements. For example, revenue was formerly defined as an entry of assets from retailing a good or providing a service.
2.1 Recognition
According to SFAC 5, an item should be acknowledged in the basic financial statements when it happens the following four principles, subject to a cost effectiveness restraint and materiality inception:
1. Definition: The element meets the explanation of an element of financial statements.
2. Measurability: The element has a relevant point measurable with adequate reliability.
3. Relevance: The information about it is capable of making a difference in user decisions.
4. Reliability . The information is representationally faithful, confirmable, and neutral.
These obviously are very general guidelines. The concept statement does not address specific recognition issues.
2.2 Measurement
The question of measurement includes two varieties: (1) the optimal of a unit of measurement, and (2) the optimal of an aspect to be measured. SFAC 5 essentially confirmed existing practice in both of these areas. The measurement scale used in financial statements is insignificant units of money without any modification for changes in purchasing authority. In addition, the board approved that different traits such as historical cost, net realizable value, current (replacement) cost, current market price and present price of future cash flows are currently used to extent different financial statement fundamentals, and that they expect that exercise to continue.
COMMERCE PAPER No. : 4 Accounting Theory and Practice MODULE No. : 22 Recognition and Measurement
Present value capacities have long been related with accounting valuation. However, because of its increased importance, present value is the attention of a recent FASB concept statement that offers a framework for using future cash flows as the base for accounting amount and also declares that the objective in valuing an asset or liability using present value is to approximate the fair value of that asset or liability. Answers to the acknowledgement and measurement questions are imbedded in generally accepted accounting principles.
SFAC 5confirmed some of the more important of these principles used in present practice. GAAP consist of broad principles and specific standards. The accrual accounting model is an example of a broad principle.
3. Accounting Assumptions and Principles
3.1 Accounting Assumptions
Before addressing extra key broad principles, we look at some important expectations that motivate that fundamental principle. The four elementary assumptions essentials of GAAP are:
(1) The economic entity assumption: The economic entity assumption presumes that economic measures can be identified specifically with an economic entity.
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COMMERCE PAPER No. : 4 Accounting Theory and Practice MODULE No. : 22 Recognition and Measurement
(2) The going concern assumption: Financial statements of a company assume the business is a going concern.
(3) The periodicity assumption: The periodicity assumption permits the life expectancy of a company to be distributed into artificial time phases to provide suitable information.
(4) The monetary unit assumption: The monetary unit statement situations that financial report basics should be measured in terms of the dollar.
3.2 Accounting Principles
The four significant broad accounting principles are here which contract with the serious issues of recognition and measurement. The accrual accounting model is embodied in each of the principles. These principles provide significant guidance for accounting practice.
(1) Historical Cost Principle: It states that assets and liability quantities should be bases on the amount received in the give-and-take transaction. Historical cost measurement provides applicable cash flow information and also is highly confirmable. A withdrawal from historical cost estimation sometimes is appropriate.
(2) The Realization Principle ( known by the revenue recognition principle): Revenue should be identified when the remuneration process is almost complete and collection is assured. Both revenue recognition criteria’s are come across at the point-of- sale. Revenue is identified when earned irrespectively of when cash actually is received
COMMERCE PAPER No. : 4 Accounting Theory and Practice MODULE No. : 22 Recognition and Measurement
Related revenues as two types of accounts:
Accrued Revenue: Revenue is acknowledged before cash is received.
Deferred Revenue: Revenue is acknowledged after cash is received.
Accruals and Deferrals: Timing of Recognition vs. Cash Flow
Two types of matching accounts exist to avoid pretended profits and losses. These influence occur when cash is not paid out in the similar accounting period in which expenses are acknowledged. According to matching principle in accrual accounting expenses are acknowledged when obligations are acquired – regardless of when cash is paid out. In contrast to acknowledgment is disclosure. An item is revealed when it is not included in the financial statements, but appears in the records of the financial statements. Cash can be rewarded in an earlier or later period than the period in which responsibilities are acquired. Related expenses effect in the following two types of accounts:
Accrued Expenses: Expense is acknowledged before cash is paid out.
Deferred Expenses: Expense is acknowledged after cash is paid out.
Accrued expenses are an obligation with an indefinite timing; the improbability is not significant adequate to qualify it’s a endowment. One example would be a responsibility to pay for goods or services expected from a corresponding item, while cash is paid out in a far along accounting period- when its amount is taken from accrued expenses. Accrued expenses shares features with deferred revenue. One difference is that cash expected from a complement is a liability to be enclosed later; goods or services are delivered later- when such income item is received, the associated revenue article is recognized, and the like amount is take away from deferred revenues.
Deferred expenses, or prepaid expenses or prepayment, are an asset. These expenses are contain cash paid out to a complement for goods or services to be received in a later accounting period- when fulfilling the promise to pay is actually acknowledged, the related expenses item is recognized, and the same amount is deducted from prepayments. Deferred revenue expenses
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COMMERCE PAPER No. : 4 Accounting Theory and Practice MODULE No. : 22 Recognition and Measurement
share characteristics with accrued revenue. One difference is
that proceeds from a delivery of goods or services are an asset to be covered later, when the income item is earned and the associated revenue item is recognized; cash for the items is received in a later period- when its amount is deducted from accrued revenues.
(3) The Matching Principle: Expenses are acknowledged in the same reporting period as the related revenues. There is a direct correlation between some expenses and revenues. Some expenses are related indirectly with revenues of a specific period. Some expenses are allotted to specific time periods. Some expenditures are recognized in the period acquired, without regard to related revenues. In accounting recognition of revenues and expenses is based on the matching principle.
Key Points
Accrued Revenue: Revenue is acknowledged before cash is received.
Deferred Revenue: Revenue is acknowledged after cash received.
Accrued Expenses: Expense is acknowledged before cash is paid out.
Deferred Expenses: Expense is acknowledged after cash is paid out.
The matching principle is a conclusion of accrual accounting and revenue recognition principle.
Both decide the accounting period, in which revenues and expenditures are acknowledged.
According to the principle, expenses are acknowledged when obligations are:
Incurred (generally when goods are transmitted or services rendered- e.g. sold).
Offset against recognized revenues, which were creäte from those expenditures (related on the cause- and – effect basis), irrespective of when cash is paid out. In cash accounting, on the other hand, expenses are acknowledged when cash is paid out, irrespective of when obligations are acquired through transfer of goods or interpretation of services.
If no cause and effect correlation exists (e.g., a sale is unmanageable), cost are acknowledged as expenses in the accounting period they terminated- when have been used up. Prepaid expenses are not familiar as expenses, but as assets until one of the qualifying conditions is met consequentially in recognition as expenses. If no connection with revenues can be recognized, costs are known immediately as expenses (e.g., general administrative and research and development costs).
Prepaid expenses, such as workers’ wages, are not acknowledged as expenses (cost of goods sold), but as assets (deferred expenses), till the actual products are retailed.
COMMERCE PAPER No. : 4 Accounting Theory and Practice MODULE No. : 22 Recognition and Measurement
between when costs are acquired and when revenue is recognized. Keep in mind that recent standards have moved away from matching expenses and revenues all for “balance sheet”
model of reporting.
(4) The Full-Disclosure Principle: Any information useful to decision makers should be only if in the financial statements, subject to the cost value constraint.
4. Indian Accounting Standards
Indian Accounting Standards, (abbreviated as India AS) are a set of accounting standards notified by the Ministry of Corporate Affairs which are converged with International Financial Reporting Standards (IFRS). These accounting standards are expressed by Accounting Standards Board of Institute of Chartered Accountants of India. Now India will have two arrangements of accounting standards viz. prevailing accounting standards under Companies (Accounting Standard) Rules, 2006 and IFRS converged Indian Accounting Standards (Ind AS). The Ind AS are named and numbered in the same way as the consistent IFRS. NACAS recommend these standards to the Ministry of Corporate Affairs. The Ministry of Corporate Affairs has to spell out the accounting standards applicable for companies in India. As on date the Ministry of Corporate Affairs notified 35 Indian Accounting Standards (Ind AS). But it has not notified the date of implementation of the same.
OBJECTIVE
The elementary objective of Accounting Standards is to eliminate variations in the action of more than a few accounting traits and to carry about standardization in management. They intent to correspond the diverse accounting policies keep an eye on in the research and management of financial proclamations by different reporting enterprises so as to enable intra-firm and inter-firm comparison.
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COMMERCE PAPER No. : 4 Accounting Theory and Practice MODULE No. : 22 Recognition and Measurement
List of Indian Accounting Standards (Currently Applicable)
The total 32 AS are the compulsory Accounting Standards (AS) as on July 1, 2012 as listed on the site of The
Institute of Chartered Accountants of India(ICAI).
Accounting Standards (AS) 30 Financial Instruments: Recognition and Measurement allotted by the committee of the Institute OF Chartered Accountants of India, comes into assumption regarding accounting periods commencement on or after 1-4-2009 and will be recommendatory in nature for a primary period of two years. This Accounting Standard will develop important regarding accounting periods beginning on or after 1-4- 2011 for all commercial, industrial and business objects except to a Small and Medium- sized Individual, as defined.
5. International Financial Reporting Standards (IFRS)
IFRS commenced as an effort to complement accounting through the European Union but the value of coordination rapidly complete the concept smart around the world. From time to time they still termed by the original name of International Accounting Standards (IAS). IAS were allotted between 1973 and 2001 by the Board of the International Accounting Standards committee (IASC). On 1 April 2001, the new International Accounting Standards Board (IASB) procured over from the IASC the accountability for setting International Accounting Standards. All through its first meeting the new Board adopted existing IAS and
COMMERCE PAPER No. : 4 Accounting Theory and Practice MODULE No. : 22 Recognition and Measurement
Reporting Standards.
According to the list of IFRS, Recognition and Measurement is also an accounting standard called as IAS 39 Financial Instruments. It summaries the necessities for the recognition and measurement of financial assets, financial liabilities, and some agreements to buy or sell non- financial items. Financial appliances are familiar when an entity turn out to be a party to the contractual requirements of the instrument, and are categorized into various categories depending upon the kind of instrument, which then regulates the consequent measurement of the instrument (typically amortized cost or fair value).
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COMMERCE PAPER No. : 4 Accounting Theory and Practice MODULE No. : 22 Recognition and Measurement
5. Summary
Recognition refers to the process of acknowledging information into the basic financial statements.
Measurement is the procedure of associating numerical amounts to the elements. For example, revenue before defined as an inflow of assets from selling a good or providing a service.
Accounting Standards (AS) 30 Financial Instruments: Recognition and Measurement distributed by the assembly of the Institute OF Chartered Accountants of India.
The elementary objective of Accounting Standards is to remove differences in the management of several accounting aspects and to bring about regularization in presentation.
IFRS are considered as a common global semantic for business matters so that company accounts are reasonable and comparable across international boundaries.
According to the list of IFRS, Recognition and Measurement is also an accounting standard called as IAS 39 Financial Instruments.
. IFRS began as an effort to harmonize accounting through the European Union but the value of organization quickly made the perception smart around the world. From time to time they still called by the original name of International Accounting Standards (IAS).
IAS 39 was reissued in December 2003, put on to annual periods beginning on or after 1 January 2005, and will be outdated by IFRS 39 Financial Instruments once a compulsory application date of that standard is determined.
