FREE ESSAY ON REVENUE RECOGNITION

REVENUE RECOGNITION

Chapter 4 - Recognition in financial statements
Having defined the elements of financial statements in Chapter 3, the Statement of
Principles turns next to their recognition. Whilst only items that meet those definitions
should be recognised, not every item that does so should necessarily be recognised.
Recognition is very important. Creative accounting often means recognising as an asset
something which is not an asset.
Definition
Recognition involves depiction of the element both in words and by a monetary amount, and
the inclusion of that amount in the statement totals. Notes to the financial statements
contain important information both about elements that are recognised and about those
that are not. Disclosure in a note, however, cannot be a proper substitute for a failure
to recognise elements that meet the condition for recognition.
The stages of recognition 
The recognition of assets and liabilities falls into three stages:
1. initial recognition (i.e. incorporation of an item into financial statements for the
first time);
2. subsequent remeasurement (i.e. changing the monetary amount at which a previously
recognised item is recorded); 
3. and derecognition (i.e. removal from the financial statements of a previously
recognised item). 
? An element should be recognised if: there is sufficient evidence that the change in
assets or liabilities inherent in the element has occurred (including, where appropriate,
evidence that a future inflow or outflow of benefit will occur); and it can be measured
at a monetary amount with sufficient reliability. 
? A change in the amount at which an asset or liability is recorded should be recognised
if: there is sufficient evidence that the amount of an asset or liability has changed;
and the new amount of the asset or liability can be measured with sufficient reliability.

? An asset or liability should cease to be recognised if there is no longer sufficient
evidence that the entity has access to future economic benefits or an obligation to
transfer economic benefits (including, where appropriate, evidence that a future inflow
or outflow of benefit will occur). 
At any stage in the recognition process, where a change in total assets is not offset by
an equal change in total liabilities or a transaction with owners, a gain or a loss will
arise. Gain and losses should be recognised in one of the two performance statements,
i.e. the profit and loss account and the statement of total recognised gains and losses.
Contribution from owners and distributions to owners should be recognised directly in
ownership interest without being reflected in either performance statement.
SSAP 2 Issued November 1971Amended November 1997Amended December 1998
Disclosure of accounting policies 
It is fundamental to the understanding and interpretation of financial accounts that
those who use them should be aware of the main assumptions on which they are based. The
purpose of SSAP 2 is to assist such understanding by promoting improvement in the quality
of financial information disclosed. It seeks to achieve this by establishing as standard
accounting practice the disclosure in the financial accounts of clear explanations of the
accounting policies followed in so far as these are significant for the purpose of giving
a true and fair view. The statement does not seek to establish accounting standards for
individual items; these are dealt with in separate accounting standards (both Statements
of Standard Accounting Practice and Financial Reporting Standards) issued from time to
time. 
SSAP 2 defines four fundamental accounting concepts: 
a. The 'going concern' concept: the enterprise will continue in operational existence for
the foreseeable future. 
b. The 'accruals' concept: revenue and costs are accrued (i.e. recognised as they are
earned or incurred, not as money is received or paid), matched with one another so far as
their relationship can be established or justifiably assumed, and dealt with in the
profit and loss account of the period to which they relate. Where the accruals concept is
inconsistent with the 'prudence' concept (see (d)), the latter prevails. 
c. The 'consistency' concept: there is consistency of accounting treatment for like items
within each accounting period and from one period to the next. 
d. The concept of 'prudence': revenue and profits are not anticipated, but are recognised
by inclusion in the profit and loss account only when realised in the form either of cash
or of other assets the ultimate cash realisation of which can be expressed with
reasonable certainty. Provision is made for all known liabilities (expenses and losses)
whether the amount is known with reasonable certainty or is a best estimate in the light
of the information available.
SSAP 2 describes how these fundamental accounting concepts are applied in company
accounts through specific accounting bases and policies. 
SSAP 2 is effective for accounting periods starting on or after 1 January 1972. 
Bibliography
SSAP 2 is effective for accounting periods starting on or after 1 January 1972.