What gets on the statement, at what number, under what assumptions

Five elements

Everything on a set of IFRS statements is one of five elements: an asset (a present economic resource controlled by the entity as a result of past events), a liability (a present obligation to transfer an economic resource as a result of past events), equity (the residual — assets minus liabilities), income (increases in assets or decreases in liabilities that increase equity, other than contributions from owners) and expenses (the mirror). Under IFRS, gains sit inside income and losses inside expenses; ASPE names gains and losses as separate elements — a detail L1.7's table carries.

Recognition is not disclosure

An item is recognised when it meets an element's definition and recognising it gives useful information — meaning the fundamentals of L1.5 hold: the item is relevant (existence and the flow of benefits are not too uncertain) and can be faithfully represented (measurement uncertainty is not too great). Recognition means the item appears on the face of a statement, with a number. If it fails the test it may still be disclosed in the notes — described, but not carried. Note disclosure is not recognition, and the midterm will offer you the two as if they were the same.

Worked example — three items, three decisions

Boreal Bikes Ltd. closes its year with three open questions.

1. A lawsuit. A customer is suing over a frame failure. Counsel says a loss is possible but not probable, and no amount can be estimated reliably. The obligation may exist, but the outflow is not probable and the amount is not measurable — disclose, do not recognise. (Module 6 makes this the IAS 37 provisions test.)
2. The factory building. Bought for $2.4 million, controlled, generating benefits, cost known to the dollar — recognise, at historical cost less depreciation. Historical cost is the entrenched base because it is verifiable; its weakness is that relevance fades as years pass.
3. A holding of listed shares. Boreal owns 10,000 shares of a supplier quoted on the TSX at $18.40. A quoted price in an active market is the most reliable current value there is — recognise, at fair value: the price that would be received to sell the asset in an orderly transaction between market participants at the measurement date.

The measurement bases

Recognition settles whether; measurement settles at what number. The Framework names historical cost and a family of current values: fair value (market participants' assumptions, an exit price), value in use for assets and fulfilment value for liabilities (the entity's own discounted cash flows from using the asset or settling the liability — entity-specific, still an exit value), and current cost (what an equivalent asset would cost today — an entry value). Value in use returns in Module 3 as one half of the impairment test. Standards are a hybrid: historical cost is the default, and specific standards require or permit current values where they are more relevant and still faithful.

The underlying assumptions

The e-text tests these as a fixed list of five. Going concern — the entity will continue operating, so assets are not measured at liquidation values. Accrual basis — effects are recorded when they occur, not when cash moves. Economic entity — the business is accounted for separately from its owners. Periodicity — the life of the business is cut into reporting periods, which is why estimates exist at all. Monetary unit — transactions are measured in a stable currency, with no adjustment for changes in purchasing power. Periodicity and going concern are the pair most often swapped in a scenario: cutting the year on 31 December is periodicity; measuring the truck at cost less depreciation rather than at auction value is going concern.