Financial reporting terminology

Standards use ordinary words with technical meanings. Using them loosely in an exam, an audit file or an interview signals inexperience; using them precisely makes your reasoning checkable.

Four verbs that structure every standard - Recognise — put an item into the statements (a line item with an amount). - Measure — decide the amount (cost, fair value, present value…). - Present — decide where and how it appears (which statement, which line, current or non-current). - Disclose — explain it in the notes. Disclosure doesn't fix a recognition error.

Elements (Conceptual Framework, 2018, in our words). An asset is a present economic resource controlled by the entity as a result of past events — a right with the potential to produce economic benefits. A liability is a present obligation to transfer an economic resource as a result of past events. Equity is the residual. Income and expenses are increases and decreases in assets or liabilities that change equity, other than transactions with owners.

Measurement terms - Carrying amount — the amount at which an item is recognised, after deducting accumulated depreciation, amortisation and impairment. - Fair value (IFRS 13) — 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: an exit price, independent of the entity's intentions. - Net realisable value (IAS 2) — estimated selling price in the ordinary course of business less estimated costs of completion and costs to sell. It's entity-specific, unlike fair value. - Value in use (IAS 36) — the present value of future cash flows expected from an asset or cash-generating unit. - Recoverable amount (IAS 36) — the higher of fair value less costs of disposal and value in use.

Judgement terms - Material — information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions primary users make on the basis of the statements. - Probable (IAS 37) — more likely than not. Possible is less than probable; remote is very unlikely. Virtually certain is close to certain. - Contingent liability — a possible obligation (or one not recognised because an outflow isn't probable or can't be measured reliably): disclosed unless remote, never recognised. - Other comprehensive income (OCI) — income and expenses that standards require or permit outside profit or loss, such as revaluation surpluses and translation differences on foreign operations. - Retrospective application restates prior periods as if the new policy had always applied (changes in accounting policy, material prior-period errors). Prospective application affects the current and future periods only (changes in accounting estimates).