The FASB has issued a proposed fifth chapter of its Concepts Statement No. 8, Conceptual Framework for Financial Reporting, entitled “Recognition And Derecognition.” This chapter seeks to establish criteria and guidance on when an item should be incorporated into and removed from financial statements.

The Exposure Draft outlines the following three recognition criteria that must be met in order for an item to be included in the financial statements:

1. Definitions — The item meets the definition of an element of financial statements.
2. Measurability — The item is measurable and has a relevant measurement attribute.
3. Faithful Representation — The item can be depicted and measured with faithful representation.

Similarly, the Exposure Draft discusses that an item should be derecognized when an item no longer meets any one of the above criteria.

The FASB Concepts Statements are not authoritative and the FASB acknowledges that the proposed Concepts Statement is not meant to override authoritative standards. However, if a transaction is not specified in authoritative GAAP, an entity must first consider accounting principles for similar transactions or events within authoritative GAAP and then consider nonauthoritative guidance from other sources such as the Concepts Statements.

The FASB is seeking responses from individuals and organizations regarding this Exposure Draft as well as seeking responses to four questions specifically identified in the text of the Exposure Draft. Any comments or responses are due by February 21, 2023.

The full text of the Exposure Draft can be found here.

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