What are the Recognition Criteria for Assets in the Balance Sheet?

Definition:

Assets are resources that control by the entity and those resources are expected to have an economic inflow into the entity in the future.

Those assets included cash, account receivables, care, computer equipment, land, building, and other resources the entity controls.

The balance sheet is one of five financial statements that report the entity’s financial position in the context of assets, liabilities, and equity at a reporting date. Assets are not present in the income statement.

The following are the criteria used to recognize assets in the entity’s balance sheet.

Explanation:

Basically, assets include cash, account receivables, cars, computer equipment, land, building, and any other resources. These assets are classed into two main classifications on the balance sheet. Current Assets, and Non-Current Assets.

If entity financial statements are prepared based on IFRS, the recognition of assets in the balance sheet needs to meet the definition provided by the conceptual framework.

Based on the definition provided above, the entity could recognize assets in its balance sheet only if those resources meet these conditions:

  • Assets are the resources that control by the entity
  • Assets are expected to provide economic inflow into the entity in the future.
  • Assets could measure reliably (this applies to all elements in financial statements)

That means that even though the entity controls assets, they are not expected to have future economic inflow, then the entity could not be recognized

Summary Criteria to Recognize Assets:

The following is the summary of criteria that allow assets to be recognized in the balance sheet as per conceptual frameworks:

  • An asset is recognized in the balance sheet when it is probable that future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably.
  • The entity could measure the value of assets reliably. This is really important. If the value could not be measured, then the entity could not have any basis to quantify the value of assets on the balance sheet.
  • An asset is not recognized in the balance sheet when the expenditure has been incurred for which it is considered improbable that economic benefits will flow to the entity beyond the current accounting period. Instead, such a transaction results in recognition of an expense in the income statement. This treatment does not imply that management’s intention in incurring expenditure was other than to generate future economic benefits for the entity or that management was misguided. The only implication is that the degree of certainty that economic benefits will flow to the entity beyond the current accounting period is insufficient to warrant the recognition of an asset.
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We have already discussed the recognition criteria for assets. Now, let us discuss the criteria for when the entity should unrecognize or remove the assets previously recognized in its financial statements.

Derecognition Criteria of Assets:

Before we talk about the recognition criteria, let us talk to discuss what derecognition is.

As defined by IFRS Conceptual Framework, derecognition is the process of removal of all or part of a previously recognized asset from an entity’s statement of financial position.

Those criteria included:

  • The entity no longer possesses the assets and no economic inflow is expected to receive from the assets to the entity.
  • The risks and rewards of the assets are now transferred to other parties.

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