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Recognition
Expenses should be recognised in the income statement
when a decrease in a future benefit gives rise to
a decrease in an asset, or an increase in a liability
that can be measured reliably [F.94]. Neither the
Framework nor IFRS actually refer to the concept
of probability as a basis for recognising expenses.
Nevertheless, it is inferred in practice and results
from the recognition of liabilities such as provisions
and accruals [IAS37.39].
Most expenses result from the production or sale
of goods and services during the period [F.95].
There is usually little uncertainty that future
benefits have been consumed. However, where resources
such as property, plant and equipment are consumed
over a number of periods, it may be difficult to
be certain about the quantum of benefits consumed
in the current period [F.96] .
Likewise, most expenses can be measured reliably.
Some, however, are subject to estimation, for example
an estimation of doubtful debts, actuarial losses
on defined benefit pension obligations, anticipated
losses from outstanding litigation and the losses
on remeasurement of biological assets and financial
instruments where active markets do not exist [F86-88]. There
is a presumption that management is able to estimate
expenses and losses reliably. Disclosure of the
expense and associated liability should be given
in the notes in the extremely rare cases that a
reliable measurement cannot be made [F.88] [IAS37.29].
Expenses and assets
Whether an outflow qualifies as an expense, or should
be included in the cost of an asset, is not always
clear. The entity should rely on the definition
and recognition criteria of assets and expenses,
and on the guidance provided throughout IFRS to
determine the appropriate accounting treatment [F.53-59]
[F.78-80]. Generally an item of cost may be included
in the cost of, for example property, plant and
equipment if it is directly attributable to bringing
the asset to its working condition [IAS16R.16-18].
IFRS prescribe the capitalisation of certain costs,
subject to the satisfaction of certain criteria.
These include:
| a) |
borrowing costs [IAS23.10-28]; |
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| b) |
losses on financial instruments used to hedge
a firm commitment or a forecasted transaction
that is expected to result in the recognition
of an asset or liability [IAS39R.97,98]; |
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| c) |
the cost of site preparation and the estimated
cost of dismantling and removing an asset and
restoring a site [IAS16R.16(c),17(b)]; and |
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| d) |
installation, delivery, handling (but not
storage) costs and professional fees [IAS16R.17(c),(d),(e)]. |
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Timing
The entity should not use the matching concept to
defer expenses in the balance sheet that do not
meet the definition of an asset [F.95]. Expenses
should be recognised when incurred rather than matched
to income .
The depletion of the benefits of assets such as
property, plant and equipment, is systematically
recognised over a period chosen to match the asset's
expected benefits [F.96].
IFRS occasionally requires the deferral of expenses
over a prescribed period. For example:
| a) |
a lessor should recognise the cost of a lease
incentive over the lease period as a reduction
of the lease revenue [SIC-15.3-6]; |
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| b) |
a loss on a sale and leaseback transaction
classified as a finance lease is deferred and
amortised over the lease term and the asset
tested for impairment
[IAS17R.64]; |
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| c) |
an actuarial loss arising from the measurement
of a defined benefit liability should be recognised
immediately, or amortised over a prescribed
period [IAS19.92-93]; and |
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| d) |
fair value losses on financial instruments
designated as cash flow hedges deferred and
amortised over a period concurrent with earnings
recognition of the hedged item [IAS39R.100].
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Measurement
Expenses should be measured at the fair value of the
amount paid or payable [F.99-101]. Expenses such as
the cost of sales and employee costs can usually be
measured easily by reference to a cash outflow or
an amount due under a purchase agreement. Expenses
that arise from both permanent and periodic depletion
of assets can involve complex and inexact predictions
about the entity's future operating environment .
The standards provide specific guidance to measure
the cost of certain transactions. These include:
| a) |
the cost of a barter transaction [IAS18.12] [SIC-31.5];
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| b) |
the loss on a partial disposal of a subsidiary
; |
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| c) |
the loss on transactions denominated
in a foreign currency [IAS21R.20-32];
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| d) |
the loss arising from the restatement of
financial statements to current purchasing power
[IAS29.27]; and |
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| e) |
interest expense . |
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Presentation
Expenses and losses should usually be recognised
in the income statement as they arise [F.94].
IFRS does however provide specific guidance for
certain types of realised losses. For example:
| a) |
a loss should be offset against a balance
sheet item if, for example, it is a loss on
a financial instrument used to hedge a forecast
asset or liability [IAS39R.97-98]. |
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| b) |
losses that result from the sale,
issuance or cancellation of treasury shares,
should be recognised directly in equity .
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In addition, certain unrealised losses should be
presented in equity (and subsequently recycled to
the income statement when realised). These are:
| a) |
exchange losses on long-term loans, which
form part of the net investment in a foreign
entity [IAS21R.32];
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| b) |
fair value losses on certain financial assets
(available for sale) [IAS39R.55(b)]; |
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| c) |
fair value gains on financial
instruments designated as cash flow hedges [IAS39R.158]; |
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| d) |
foreign exchange translation losses [IAS21R.39(c)]; |
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| e) |
fair value losses on financial instruments
designated as cash flow hedges [IAS39R.95].
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Disclosure
There
are a number of disclosure requirements for various
items, expenses and losses set out in IFRS.
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