2.3 Recognition and Measurement Principles

The definitions of the elements of financial statements identify their essential characteristics，whereas the recognition criteria specify the conditions under which an item which satisfies the definition of an element should be included in financial statements.Measurement is closely related to recognition.How much an element appears in financial statements relies on which measurement basis is used.

2.3.1 Recognition of the Elements of Financial Statements

Recognition is the process of capturing for inclusion in the statement of financial position or the statement of financial performance an item that meets the definition of one of the elements of financial statements—an asset，a liability，equity，income or expenses.[13]

Two recognition criteria set out by IASB are：（1）the item meets the definition of an element-asset，liability or equity，income or expense；and（2）the recognition of that item provides information useful to the users of financial statements.

Recognition of a particular asset or liability is appropriate if it provides not only relevant information，but also a faithful representation of that asset or liability and of any resulting income，expenses or changes in equity. It may be a combination of factors and not any single factor that determines whether an item should be recognized or not.

For example，a receivable owed to an entity is recognized as an asset. The recognition provides relevant information. For a large population of receivables，some degree of non-payment is normally considered；hence an expense representing the expected reduction in economic benefits is recognized. It is also a faithful representation.

To be recognized in financial statements，an item should possesses a cost or value that can be measured.In many cases，cost or value must be estimated；the use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine the usefulness of the information if the estimates are clearly and accurately described and explained. Faithful representation of a recognized asset，liability，equity，income or expenses involves not only recognition of that item，but also its measurement as well as presentation and disclosure of information about it.

2.3.2 Measurement of the Elements of Financial Statements

Measurement is the process of determining the monetary amounts at which the elements are to be recognized and carried in the financial statements.IASB describes two categories of measurement bases：historical cost and current value. Current value includes three factors：fair value；value in use and fulfilment value；and current cost.

1.Historical cost

The historical cost of an asset when it is acquired or created is the value of the costs incurred in acquiring or creating the asset，comprising the consideration paid to acquire or create the asset plus transaction costs.[14]For example，the historical cost of inventory purchased would be the total price plus freight. The historical cost is updated over time to depict：（1）the consumption from depreciation or amortisation；（2）payments received that extinguish part or all of the asset（such as accounts receivables）；（3）the effect of impairment；and（4）accrual of interest to reflect any financing component of the asset（such as interest accrued on bonds investments）；etc.

The historical cost of a liability when it is incurred or taken on is the value of the consideration received to incur or take on the liability minus transaction costs. For example，the historical cost of bonds payable is the price received minus commission fees. The historical cost is updated over time to depict：（1）payment of part or all of the liability；and（2）accrual of interest to reflect any financing component of the liability；etc.

2.Fair value

Fair value is the price that would be received to sell an asset，or paid to transfer a liability，in an orderly transaction between market participants at the measurement date.[15]

The fair value is measured using the same assumptions that market participants would use when pricing the asset or liability if those market participants act in their best economic interest.In some cases，fair value can be determined directly by observing prices in an active market. For example，the market price of a certain company's shares is the best estimate of fair value of investment in those shares. In other cases，it is determined indirectly using measurement techniques，for example，cash-flow-based measurement techniques.

Note that fair value does not reflect the transaction costs because fair value is not derived from the price of the transaction or other event that gave rise to the asset or liability.

3.Value in use and fulfilment value

Value in use for an asset is the present value of the cash flows，or other economic benefits，that an entity expects to derive from the use of an asset and from its ultimate disposal. Fulfilment value for a liability is the present value of the cash，or other economic resources，that an entity expects to be obliged to transfer as it fulfils a liability.[16]

Different from fair value，value in use and fulfilment value reflect entity-specific assumptions rather than assumptions by market participants. In practice，there may sometimes be little difference between the assumptions that market participants would use and those that an entity itself uses.

Value in use and fulfilment value are based on future cash flows，so they do not include transaction costs incurred on acquiring an asset or taking on a liability. However，they include the present value of any transaction costs an entity expects to incur on the ultimate disposal of the asset or on fulfilling the liability.

4.Current cost

The current cost of an asset is the cost of an equivalent asset at the measurement date，comprising the consideration that would be paid at the measurement date plus the transaction costs that would be incurred at that date. The current cost of a liability is the consideration that would be received for an equivalent liability at the measurement date minus the transaction costs that would be incurred at that date.[17]

Current cost，like historical cost，is an entry value：it reflects prices in the market in which the entity would acquire the asset or would incur the liability. Hence，it is different from fair value，value in use and fulfilment value，which are exit values.

Unlike historical cost，current cost reflects conditions at the measurement date. In some cases，current cost cannot be determined directly by observing prices in an active market and must be determined indirectly by other means. For example，if prices are available only for a new fixed asset，the current cost of a used fixed asset might need to be estimated by adjusting the current price of the new one to reflect the current age and condition of the old one held by the entity.

In financial statements，different measurement bases are employed to different degrees and in varying combinations. Historical cost is the most commonly adopted measurement base by entities in preparing their financial statements.However，other measurement bases are also frequently combined with historical cost.For example，an impaired asset is usually carried at the value in use（which is lower than historical cost）；marketable securities may be carried at their fair values；and long-term liabilities may be carried at their fulfilment values.