On August 30, the Financial Accounting Standards Board (FASB) issued Chapter 5, Recognition and Derecognition, of Concepts Statement No. 8—Conceptual Framework for Financial Reporting. Unlike the FASB Accounting Standards Codification, Concepts are not authoritative but establish a framework that FASB uses to develop financial accounting and reporting standards.
Chapter 5 of Concepts Statement 8 (CS8) addresses when an item should be included in or removed from financial statements. The changes explicitly address derecognition—which had been missing from the conceptual framework—and align Chapter 5 with the text in Chapter 3 of CS8 that describes the qualitative characteristics of useful financial information.
Chapter 5 supersedes Concepts Statement 5 and under the new chapter, in addition to cost constraints and materiality considerations, items are included in financial statements when they meet three criteria:
- The item meets the definition of an element of financial statements (Chapter 4 of CS8)
- The item is measurable and has a relevant measurement attribute (Chapter 3 of CS8)
- The item can be depicted and measured with faithful representation (Chapter 3 of CS8)
A recognized item is depicted in both words and numbers, with the amount included in financial statement totals. Disclosure of an amount by other means is not considered recognition. Derecognition occurs when an item fails to meet any one of the three criteria.