FASB publishes conceptual framework Chapter 5 on recognition and derecognition
The FASB on Aug. 30, 2023, published new conceptual framework Chapter 5, which the board will use as a guide to determine when a company should incorporate into or remove an item from its financial statements.
The board issued Statement of Financial Accounting Concepts (CON) No. 8, Conceptual Framework for Financial Reporting Chapter 5, Recognition and Derecognition to update old recognition and derecognition concepts that have been around since 1984.
The guidance builds on the foundation described in other concepts chapters, bringing those concepts together to apply them to recognition and derecognition issues, according to text of the provisions.
Chapter 5 provides three criteria that an item should meet to be recognized in financial statements: 1) definitions—the item meets the definition of an element of financial statements; 2) measurability — the item is measurable and has a relevant measurement attribute; and 3) faithful representation—the item can be depicted and measured with faithful representation.
The guidance also sets forth the concept that derecognition should occur when an item no longer meets any one of the recognition criteria. Derecognition is “the process of removing an item from financial statements of a reporting entity as an asset, liability or equity, a text states.
Botosan dissents
The chapter was not published with the support of the full board: New FASB member Joyce Joseph abstained; and FASB member and academic Christine Botosan dissented over portions of the chapter.
Specifically, Botosan, among concerns, said that a chapter on the concept of measurement has not yet been completed and thus the concept of what is a “relevant” measurement attribute remains unaddressed within the framework. This “omission will significantly challenge the practical application of the recognition concepts,” she explained. Furthermore, Botosan “is concerned that the omission undermines the ability of the Conceptual Framework to act as “a coherent system of interrelated objectives and fundamental concepts.”
Similarly, because recognition depends on having a relevant measurement attribute, Botosan “believes that there is an equally pressing need for the Conceptual Framework to address what constitutes such an attribute.”
Framework close to being completed
The conceptual framework is a document of Chapters 1-8, which provide the foundational concepts that the FASB uses to determine the way items like assets, liabilities, revenues and expenses get recorded in financial statements filed with the SEC. The framework is used by the board as a foundation to build accounting standards and related disclosures so that they are cohesive and comprehensive. The concepts are not authoritative, which means they are not generally accepted accounting principles (GAAP).
The FASB issued its first Concepts Statement in 1978 and issued six more by 2000.
Discussions on the conceptual framework started in 2004, which resulted in Chapter 1, The Objective of General Purpose Financial Reporting, and Chapter 3, Qualitative Characteristics of Useful Financial Information, of CON 8. In 2021, the FASB added two chapters: Chapter 4, Elements of Financial Statements, and Chapter 7, Presentation, of Conceptual Framework (CON) 8.
Recently, the board completed Chapter 2: The Reporting Entity. To be completed, the conceptual framework still needs one more chapter: measurement. A proposal is expected to be issued on measurement during this year’s third quarter.
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