The IASB’s Conceptual Framework for Financial Reporting and IFRS Standards discuss both recognised assets and liabilities and unrecognised assets and liabilities. A question that sometimes comes up whether there exists a corresponding notion of unrecognised income and expenses.
Unrecognised assets and unrecognised liabilities
The Conceptual Framework acknowledges that not all assets and liabilities are not recognised in the statement of financial position. Said, differently, some assets and liabilities are unrecognised. The Conceptual Framework and some individual IFRS Standards discuss unrecognised assets and unrecognised liabilities, mainly in discussing whether financial statements should disclose information about them.
Income and expenses
The Conceptual Framework defines income and expenses as changes in assets and liabilities (full definition in paragraphs 4.68 and 4.69). Nevertheless, the drafting of the Conceptual Framework does not reflect any notion of ‘unrecognised income’ or ‘unrecognised expense’.
The reason for that is simple. The concept of an unrecognised asset or unrealised liability is simple and easy to apply. It is any asset or liability that exists but is not recognised.
In contrast, any notion of unrecognised income or unrecognised expense would be too diffuse and nebulous to be of any practical help, particularly in developing and drafting disclosure requirements. I discus that problem below.
Could ‘unrecognised’ income or expenses be identified?
Basing a disclosure requirement on a notion of ‘unrecognised’ income or expense would be difficult. Any drafting might have to consider 3 different cases. Those cases are income (or expense) that would have arisen if an entity had:
- recognised an asset (or liability);
- derecognised a liability (or asset); or
- measured a recognised asset (or recognised liability) differently.
The 1st of those cases relies simply on the same binary distinction underlying the distinction between recognised and unrecognised assets and liabilities.
The 2nd of those cases might already be a little more difficult. There would need to be a decision about what ‘unrecognised’ income or expense corresponds to. To all recognised assets or liabilities? Or to only some subset of recognised assets and liabilities?
For example, would it be useful to talk about ‘unrecognised’ expense that an entity would have reported if had derecognised all its recognised cash? And further complications might arise if it were necessary to consider income or expense that would have arisen on a hypothetical partial derecognition.
Hypothetical use of a different measurement basis
The 3rd of those cases would cause even more difficulties. There might be more than one set of different measurements to consider. For example, suppose an asset were carried at historical cost. One set of ‘unrecognised’ income or expense might arise from considering a measurement at fair value, and a different set might arise from considering value in use. Should we regard both of those sets of hypothetical income or expense as ‘unrealised’? If so, should there be disclosure about one or both of them? And should any different measurement bases be considered? If yes, which ones?
How the drafting works
Because of those complications, the drafting of the Conceptual Framework and of IFRS Standards assumes that the definition of income and expenses is shorthand for changes in the carrying amount of assets and liabilities.
Reading the definitions in that way, there is no need to discuss hypothetical income or expense that would have arisen if assets or liabilities had been recognised, derecognised or measured differently. By definition, all income and expenses are recognised, and reflect changes in the carrying amounts of recognised assets or recognised liabilities.
For simplicity, in this post I describe all (reported) income and expense as recognised, even if it is presented in other comprehensive income, rather than in profit or loss.
Drafting in the Conceptual Framework and in IFRS Standards works slightly differently for assets and liabilities than it does for income and expenses:
- recognised assets and recognised liabilities are a subset of assets and liabilities. Unless otherwise specified, references to assets or liabilities are generally to all assets and liabilities, both recognised and unrecognised.
- income and expenses are changes in the carrying amounts of recognised assets and recognised liabilities. There is no subset of income and expenses that are ‘unrecognised’.