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The International Accounting Standards Board’s Conceptual Framework for Financial
Reporting defines recognition as the process of incorporating within the financial statements
an item which meets the definition of an element and satisfies certain criteria.
Which of the following elements should be recognised in the financial statements of an
entity in the manner described?
A As a non?current liability: a provision for possible hurricane damage to property for an
entity located in an area which experiences a high incidence of hurricanes.
B In equity: irredeemable preference shares.
C As a trade receivable: an amount of $10,000 due from a customer which has been sold
(factored) to a finance company with no recourse to the seller.
D In revenue: the whole of the proceeds from the sale of an item of manufactured plant
which has to be maintained by the seller for three years as part of the sale agreement.Correct answer is B, can you explain why other options are incorrect? i dont understand
A – says it is possible and not probable, plus it is a future obligation and not a present obligation
C – sold without recourse (i.e. will not have the receivables sent back to us if not collected) so no control and no asset recognised.
D – this would be a loan and not revenue as we still have to maintain the asset and so have control of it, so will not derecognise it but need to recognise the other side of the entry to the cash proceeds
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