ACCA Applied Skills · Financial Reporting

Recognition and measurement: formula sheet

Full chapter guide

Key formulas

Asset definition: Asset = present economic resource + controlled by the entity + result of past events; All three parts are needed. An economic resource is a right with the potential to produce economic benefits.
Liability definition: Liability = present obligation + to transfer an economic resource + result of past events; A future intention or a planned expense alone is not a present obligation.
Income and expenses: Income = increase in assets or decrease in liabilities that increases equity (excluding equity contributions); Expenses = the reverse (excluding distributions); Dividends paid and share issues are not expenses or income.
Recognition test: Recognise if: meets definition AND recognition gives relevant information AND a faithful representation; Cost constraint also applies. Both qualities must be met.
Derecognition: Asset: derecognise on loss of control. Liability: derecognise when no longer a present obligation; Applies to all or part of the item.
Historical cost (asset): Cost paid + transaction costs, then adjusted for depreciation, amortisation and impairment; Carrying amount = cost less accumulated depreciation and impairment losses.
Fair value (IFRS 13): Price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; Exit price. Market-based, not entity-specific. Transaction costs are not included in the fair value figure.
Value in use: PV of expected future cash flows from continuing use and final disposal of the asset; Entity-specific. Discount at a pre-tax rate in IAS 36.
Fulfilment value: PV of the cash and other resources the entity expects to transfer to meet the liability; Entity-specific. Applies to liabilities only.
Current cost: Cost today of an equivalent asset (price + transaction costs); Entry price. For a liability, consideration receivable today for taking on an equivalent liability, less transaction costs.
Present value: PV = Cash flow ÷ (1 + r)ⁿ; Used for value in use and fulfilment value.
Fundamental qualitative characteristics: Useful information = relevance + faithful representation; These two must both be present. Choose the basis that best serves them, then check the enhancing characteristics.
Enhancing characteristics: Comparability, verifiability, timeliness, understandability; They improve information that is already relevant and faithfully represented. They cannot rescue irrelevant information.
Cost constraint: Benefit of the information ≥ cost of providing it; This is a pervasive limit on reporting. It is not a mathematical test, so argue it in words.
Current value bases: Fair value; value in use (assets) / fulfilment value (liabilities); current cost; Learn these as the current value family. Historical cost is the other main basis.
Factors in the Framework's selection: Relevance (nature of asset and how it produces cash flows) + faithful representation (measurement uncertainty) + effect on both statements; Use this as your answer outline.
Financial capital maintenance (nominal): Profit = Closing equity − Opening equity (before distributions and contributions); Used under historical cost. Any rise in the value of assets counts as profit.
Financial capital maintenance (constant purchasing power): Profit = Closing equity − (Opening equity × closing index ÷ opening index); Opening equity is restated by general inflation. Only the excess is profit.
Physical capital maintenance: Profit = Closing equity − Opening equity restated at the increase in specific prices of the entity's non-monetary operating assets; Use the price index of the entity's own assets, not the general price index. The specific-price restatement applies to the non-monetary assets that maintain capacity. Monetary items and liabilities are not restated by the specific index.
Capital maintenance adjustment: Adjustment = opening net operating assets (capacity-maintaining) × specific price increase (physical), or opening equity × general inflation (CPP); This amount is the price effect that is excluded from profit. It is taken to equity, not to profit. Under physical capital maintenance, the specific price increase applies only to the net operating assets that maintain capacity, not to all opening equity.

Quick revision

An asset is a present economic resource controlled by the entity as a result of past events.
An economic resource is a right that has the potential to produce economic benefits.
A liability is a present obligation to transfer an economic resource as a result of past events.
Income is an increase in assets or decrease in liabilities that increases equity, other than contributions from holders of equity claims.
Expenses are decreases in assets or increases in liabilities that decrease equity, other than distributions to holders of equity claims.
Recognise an item only if it meets an element definition and gives relevant information and a faithful representation.
Historical cost uses the transaction price and is updated for things like depreciation and impairment.
Current value bases include fair value, value in use (for assets), fulfilment value (for liabilities) and current cost.
Fair value is an exit price: what would be received to sell an asset or paid to transfer a liability in an orderly transaction.
Choice of basis depends on relevance, faithful representation, and whether the cost of the information is justified.
Financial capital maintenance: profit arises only if closing net assets exceed opening net assets, after adjusting for owner transactions.
Physical capital maintenance: profit arises only if the entity's physical operating capacity at the end exceeds that at the start.

Common mistakes

Recognising a liability because management plans to spend money in future. Fix: Check for a present obligation arising from a past event. A plan or intention alone does not create one.
Saying an asset needs legal ownership. Fix: The test is control of the economic resource. Ownership helps but is not the only evidence.
Treating fair value as the price the entity would pay to buy the item. Fix: Fair value is an exit price: what you would receive to sell an asset or pay to transfer a liability. The buying price is current cost.
Using value in use for a liability. Fix: Value in use is for assets. The liability equivalent is fulfilment value.
Listing advantages and disadvantages of historical cost without linking them to usefulness. Fix: Tie each point to relevance, faithful representation or cost. For example, say cost is verifiable, so it supports faithful representation.
Saying fair value is always better because it is up to date. Fix: Point out that fair value can be subjective and costly. Relevance depends on how the asset produces cash flows.
Saying physical capital maintenance means keeping the same physical assets, or that it ignores money. Fix: Define it as keeping operating capability (productive capacity). The test is whether the entity can still produce the same output. Value is measured using current replacement prices.
Using the general inflation index for physical capital maintenance. Fix: General index for constant purchasing power. The specific index for the entity's own assets for physical capital.

Exam tips

In objective tests, test the definition before anything else. Many wrong options fail on one part, such as no present obligation or no control.
In written answers, quote the definition parts in your own words and apply them to the scenario facts. Marks are for application, not just recall.
Mention both relevance and faithful representation when asked about recognition criteria. Giving only one loses marks.
Use the word control for assets and present obligation for liabilities. Examiners look for these exact ideas.
When a scenario shows high uncertainty, say whether the item should be recognised, disclosed or ignored, and give a reason.
In objective questions, spot the key phrase first: 'orderly transaction' means fair value, 'expected cash flows from use' means value in use, 'equivalent asset today' means current cost.
If a question asks which bases are entity-specific, the answer is value in use and fulfilment value. Fair value is not.
In a written answer on choosing a basis, name relevance, faithful representation and cost, and give one advantage and one limitation of each basis you discuss.