The Financial Accounting Standards Board (FASB) has issued a new chapter of its Conceptual Framework related to the recognition and derecognition of an item in financial statements.

The Conceptual Framework is a body of interrelated objectives and fundamentals that provides the FASB with a useful tool as it sets standards. A Statement of Financial Accounting Concepts is nonauthoritative and does not establish or change generally accepted accounting principles.

The new chapter becomes Chapter 5 of FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting. The new chapter is similar to the rest of the framework in that it establishes concepts that the Board would consider in developing standards of financial accounting and reporting. It provides the Board with a framework for developing standards that meet the objective of financial reporting and enhance the understandability of information for existing and potential investors, lenders, donors, and other resource providers of a reporting entity.

The new chapter sets forth recognition and derecognition criteria and guidance on when an item should be incorporated into and removed from financial statements. It provides three criteria an item should meet to be recognized in financial statements.

Those criteria are:

  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.
  3. Faithful Representation—The item can be depicted and measured with faithful representation.

The new chapter also sets forth the concept that derecognition—the process of removing an item from financial statements of a reporting entity as an asset, liability, or equity—should occur when an item no longer meets any one of the recognition criteria.

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