Asset Recognition Criteria: When Should An Asset Be Recognized?

Asset recognition criteria: When should an asset be recognized in Accounting? International Financial Reporting Standards  again the Conceptual Framework guides that an asset should be recognized in the Statement of Financial Position (balance sheet) when it is probable that the future economic benefits will flow to the entity and the asset has a cost or other monetary value that can be measured reliably.

Here, the importance is given on the criteria for determining when to record an asset in the accounting records. An asset is recognized only when both the probability and the reliable measurement criteria are satisfied.Without meeting Asset Recognition Criteria, no entity should make entry to its accounting records.

The word “probability” means the degree of certainty that the future economic benefits will flow to the business. The benefits should be more probable rather than less probable. For example, some extension or development costs are not recognized as an asset seeing that it is not “probable” that future economic benefits will flow to the entity.

Even if such probability of future economic benefits is in high degree, recognition of an asset cannot happen unless it is sure that some cost or other value could be reliably measured. Lacking of such a measurement, the qualitative characteristic of “reliability” would not be achieved.

In business practice, reliable measurement of internally generated goodwill is difficult, and as a result such goodwill would not be recognized as asset. Likewise, reliable measurement of an entity’s mineral reserves will be difficult.

It is opined in the Conceptual Framework that assets those cannot be measured reliably may be disclosed in the notes to the financial statements, mainly if knowledge of the item is considered relevant to evaluate the entity’s financial position, performance and cash flows. To know more on asset recognition criteria and IFRS you can visit here.

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