Expense recognition and matching

Under the IASB's Conceptual Framework for Financial Reporting (2018), expenses are decreases in assets, or increases in liabilities, that result in decreases in equity — other than distributions to equity holders. That definition drives recognition: an expense is recognised when an asset is used up or lost, or a liability is incurred. Cash timing is irrelevant.

Three patterns follow:

1. Costs directly related to revenue are recognised in the same period as the revenue. When inventory is sold, its carrying amount becomes cost of sales in the period the revenue is recognised (IAS 2.34). The expected cost of an assurance-type warranty is provided for when the goods are sold (IAS 37). Incremental costs of obtaining a contract, such as a sales commission, are capitalised and amortised as the related goods or services transfer (IFRS 15.91–99), with a practical expedient to expense them when the amortisation period would be one year or less (IFRS 15.94).
2. Costs that benefit several periods are allocated systematically. Equipment is depreciated over its useful life; a 12-month insurance premium is a prepayment that expires month by month.
3. Costs with no future benefit are expensed immediately. Research, staff training, most start-up costs and advertising are expensed — advertising when the entity receives the services or has the right to access the goods, not when the advertisement runs or when sales follow (IAS 38.69). Paying in advance for services not yet received creates a prepayment (IAS 38.70).

What about "matching"? Older textbooks teach a matching principle: put costs in the same period as the revenue they help earn. The Conceptual Framework acknowledges that recognising income and related expenses together is sometimes described as matching, but it is a consequence of recognising assets and liabilities, not a principle in its own right. Matching cannot be used to carry forward a cost that doesn't meet the definition of an asset, or to recognise a "liability" that doesn't meet the definition, just to smooth profit. A big advertising campaign that is expected to drive next year's sales is still this year's expense.

US GAAP reaches the same results in practice through the specific standards (for example ASC 340-40 for contract costs and ASC 720 for advertising), although its conceptual statements describe the relationship between costs and revenue more explicitly.