Recognition, Measurement, and Disclosure Concepts the various elements and underlying assumptions of the financial statements

ADS Recognition, Measurement, and Disclosure Concepts
Now that we have identified the various elements and underlying assumptions of the financial statements, we discuss when the elements should be recognized (recorded) and how they should be measured and disclosed.For example, an asset was previously defined as a probable future economic benefit obtained or controlled by a company as a result of past transactions or events. But when should the asset be recorded, at what amount, and what other important information about the asset should be provided in the financial statements? SFAC 5 addresses these issues. Recognition refers to the process of admitting information into the financial statements. Measurement is the process of associating numerical amounts with the elements. Disclosure refers to the process of including additional pertinent informationin the financial statements and accompanying notes.

Recognition
GENERAL RECOGNITION CRITERIA.
According to SFAC 5, an item should be recognized in the basic financial statements when it meets the following four criteria, subject to a cost effectiveness constraint and materiality threshold:
1. Definition. The item meets the definition of an element of financial statements.
2. Measurability. The item has a relevant attribute measurable with sufficient reliability.
3. Relevance. The information about it is capable of making a difference in user decisions.
4. Reliability. The information is representationally faithful, verifiable, and neutral.

REVENUE RECOGNITION: REALIZATION.
 Revenues are inflows of assets resulting from providing a product or service to a customer. An income statement should report the results of these activities only for the time period specified in the financial statements. Therefore, the timing of revenue recognition is a key element of earnings measurement. Not adhering to revenue recognition criteria could result in overstating revenue and hence net income in one reporting period and, consequently, understating revenue and net income in another period

The realization principle requires that two criteria be satisfied before revenue can be recognized:
1. The earnings process is judged to be complete or virtually complete.
2. There is reasonable certainty as to the collectibility of the asset to be received (usually cash).

These criteria help ensure that a company doesn’t record revenue until it has performed all or most of its earnings activities for a financially capable buyer. Notice that these criteria allow for the implementation of the accrual accounting model. Revenue should be recognized in the period it is earned, not necessarily in the period in which cash is received. The timing of revenue recognition also affects the timing of asset recognition. When revenue is recognized by crediting a revenue account, the corresponding debit typically increases some asset, usually cash or an account receivable ADS