A company buys land for ₦500 million. Five years later it is worth ₦750 million. Should the statements still show ₦500 million? When should an item appear in the statements at all, and when should it be taken out? And what counts as profit when prices change? These are the questions the second half of the International Accounting Standards Board (IASB) Conceptual Framework for Financial Reporting (the Framework) answers.
This topic covers recognition and derecognition, the measurement bases, the principles of presentation and disclosure, and the two concepts of capital maintenance. It builds on the previous topic, which covered the objective, qualitative characteristics and elements. The next topic covers the statement that applies these ideas, International Accounting Standard (IAS) 1. Recognition and measurement ideas were part of November 2025 Question 5(a) and May 2026 Question 7(c).
In 30 seconds
Recognition means putting an item into the statement of financial position or the statement of profit or loss. An asset or liability is recognised if doing so gives useful information: relevant and a faithful representation. Derecognition means taking it out when control is lost or the obligation ends. Measurement uses either historical cost or current value (fair value, value in use or fulfilment value, or current cost).
Presentation and disclosure communicate the information clearly by classifying, aggregating and explaining items. Profit or loss is the main source of information on performance, and other comprehensive income is used only for specific items. Capital maintenance decides what counts as profit: under financial capital maintenance profit is the increase in net assets in money or purchasing power terms, and under physical capital maintenance profit is the increase in productive capacity.
Key terms in plain English
| Term | What it means |
|---|---|
| Recognition | Including an item in the statements with a money amount |
| Derecognition | Removing an item that was previously included |
| Historical cost | The price paid when the item was acquired or incurred |
| Current value | A value that reflects conditions at the reporting date |
| Fair value | The price to sell an asset or to transfer a liability in an ordinary transaction between market participants |
| Value in use | What the entity expects to earn from using an asset, in present value terms |
| Capital maintenance | Deciding how much must be kept in the business before anything can be called profit |
Syllabus check
This topic completes the Conceptual Framework chapter, which is examinable at this level and listed with Chapter 1 of the syllabus:
- (e) recognition and derecognition criteria;
- (f) measurement bases: historical cost, fair value and present value;
- the presentation and disclosure chapter of the Framework;
- the capital maintenance concepts and the accounting concepts of consistency, aggregation, offsetting and fair presentation.
Syllabus Area B, item 1(a), asks you to evaluate how different bases of measurement and recognition affect reported performance. The comparison table and the examples here prepare you for it.
CAMA 2020 and these ideas
The Companies and Allied Matters Act 2020 (CAMA 2020) sets legal formats and extra statements that sit on top of the Framework.
| Section | What it says | Link to the Framework |
|---|---|---|
| s. 374(1) | The company keeps accounting records that explain its transactions | Recognition depends on having evidence of the item and its amount |
| s. 378 | Statements follow the First Schedule format and International Financial Reporting Standards (IFRS), give a true and fair view, and include a statement of financial position, profit or loss statement, cash flows, changes in equity, notes, a source and application of funds statement, a value added statement and a five-year summary. If the format does not give a true and fair view, the directors add information or depart and explain | Presentation and disclosure: the law asks for more than the Framework’s minimum, and allows a departure only to achieve faithful presentation |
| s. 377 | Directors prepare the statements | They choose measurement bases and policies and answer for them |
Recognition and derecognition
Recognition
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 an element. Under the 2018 Framework an asset or liability is recognised only if recognition gives users:
- relevant information about the asset or liability and about any income, expenses or changes in equity; and
- a faithful representation of the asset or liability and of those changes.
The Framework flags three situations where recognition may not give useful information:
- Uncertainty about existence. It is not clear whether the asset or liability exists.
- Low probability of an inflow or outflow. Recognition might not give relevant information, though the item still exists.
- Measurement uncertainty. The amount is so uncertain that the number would not be a faithful representation. Disclosure may then be better than recognition.
The older Framework asked whether it was probable that benefits would flow and whether the item could be measured reliably. The 2018 Framework treats probability as something that affects relevance and measurement, not a separate hurdle. In everyday practice the result is often the same.
Recognition links the statements. At the start and end of the period, assets minus liabilities equal equity. The change in equity equals income minus expenses, plus contributions from owners, minus distributions to owners.
Derecognition
Derecognition is the removal of all or part of a recognised asset or liability. It normally happens when:
- for an asset, the entity loses control of all or part of it; and
- for a liability, the entity no longer has a present obligation for all or part of it.
The aim is to represent faithfully both what the entity keeps and the change in its assets and liabilities from the transaction. If an entity sells only part of an asset or keeps some exposure, the Framework asks whether to derecognise fully, derecognise with disclosure, or keep recognising the transferred part.
Example. A manufacturer buys a truck for ₦30 million and recognises it. If it sells the truck for ₦20 million when its carrying amount is ₦24 million, it derecognises the truck and records a loss of ₦4 million.
Measurement
Recognising an item needs a number. The Framework describes two broad bases.
| Basis | What it measures | Strengths | Weaknesses |
|---|---|---|---|
| Historical cost | The price of the transaction that created the item, adjusted for use, impairment and interest. It is not updated for changes in value, except for impairment or an onerous liability | Verifiable, simple and cheap | Old figures may not show current worth |
| Current value | A value updated to the reporting date. It includes fair value, value in use or fulfilment value, and current cost | Reflects current conditions, so can be more relevant | More subjective and costly, and may be harder to verify |
The three current value measures
- Fair value. 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. It excludes transaction costs. International Financial Reporting Standard (IFRS) 13 sets the detail.
- Value in use (assets) and fulfilment value (liabilities). The present value of the cash flows the entity expects from using the asset and selling it at the end, or from settling the liability. These are entity-specific, not based on what the market thinks.
- Current cost. What it would cost today to acquire an equivalent asset, including transaction costs, reflecting its current age and condition. For a liability, what would be received today for taking on an equivalent obligation, less transaction costs.
Present value is used for long-term receivables, loans and pension obligations, where discounting future cash flows matters.
Choosing a basis
No basis is always best. The Framework asks the standard-setter, and the preparer, to consider:
- Relevance. How the item contributes to future cash flows and its characteristics. For an asset used with others to produce goods, cost may be as relevant as current value. For an asset held for sale or investment, current value is often more relevant.
- Faithful representation. Whether the measure is free from error and not subject to excessive uncertainty.
- Enhancing characteristics. Comparability, verifiability, timeliness and understandability.
- Cost constraint. Whether the benefit of the information justifies the cost.
Example. A Lagos property company buys land for ₦500 million in 2020. If the standard on that asset allows revaluation and the land is worth ₦750 million now, the company may show ₦750 million, a current value, and not ₦500 million, the historical cost.
Presentation and disclosure
A company communicates information about its assets, liabilities, equity, income and expenses through presentation and disclosure. The Framework sets out these ideas:
- Objectives and principles. Effective communication focuses on the objectives and principles of presentation and disclosure and not just on rules. The information should be placed in the statements or in the notes so that the connection between items is clear.
- Classification. Assets, liabilities, equity, income and expenses are sorted by shared characteristics, such as current and non-current assets.
- Aggregation. Items are combined into groups when they share characteristics, but material items are shown separately. Too much detail hides the picture and too little hides important facts.
- Profit or loss and other comprehensive income. The statement of profit or loss is the primary source of information about performance. Income and expenses go there, except where the Board decides in a standard that an item goes to other comprehensive income to give more relevant or faithful information. Items in other comprehensive income should in principle be reclassified (recycled) to profit or loss when that makes the profit or loss more relevant.
The statements are the statement of financial position, the statement of profit or loss and other comprehensive income, the statement of changes in equity, the statement of cash flows and the notes. For listed Nigerian companies, extra disclosures such as directors’ pay, tax and currency risk also apply.
Capital maintenance concepts
Profit is only what is left after the capital has been kept intact. Two concepts define that capital.
| Concept | Capital is defined as | Profit is |
|---|---|---|
| Financial capital maintenance | Money invested (nominal units), or its purchasing power (constant purchasing power units) | The increase in net assets in money terms. With constant purchasing power, only the part of the increase above general inflation counts as profit. The rest is a capital maintenance adjustment inside equity |
| Physical capital maintenance | Productive capacity, such as the number of trucks or units of output per day | The increase in productive capacity. All price changes affecting assets and liabilities are capital maintenance adjustments in equity, not profit |
The choice of measurement basis and capital maintenance concept decides the accounting model. The Board does not require one model, except in unusual cases such as reporting in the currency of a hyperinflationary economy. Financial capital maintenance is the usual approach in corporate statements. Physical capital maintenance is more natural for asset-heavy businesses such as oil and gas and manufacturing.
Accounting concepts that support the Framework
- Consistency. Present and classify items the same way each year. Change only if a standard requires it or the change gives more relevant and reliable information, and then disclose it.
- Aggregation. Do not combine items of different nature unless immaterial. A bank splits its loan book into performing and non-performing loans, not one total.
- Offsetting. Do not net assets against liabilities, or income against expenses, unless a standard permits it or it reflects the substance. A profit on disposal is shown net: sale price ₦20 million, minus carrying amount ₦15 million, minus selling costs ₦1 million, gives a gain of ₦4 million.
- Fair presentation. Following IFRS is presumed to give fair presentation. In extremely rare cases where compliance would be so misleading that it conflicts with the objective of the statements, an entity may depart, if the law allows, and must disclose why.
The rules in more depth
Why historical cost is still used so much
It is cheap and objective, and it is based on a real transaction. Fair value is more up to date but needs estimates. That is why standards use cost for most property, plant and equipment, and fair value for investment property and many financial instruments.
Fair value and value in use are different
Fair value is what market participants would pay. Value in use is what this entity expects to earn. An asset can be worth more to its owner than to the market. When an impairment test uses the higher of the two, it recognises that.
Measurement uncertainty is not a reason to ignore an item
If an estimate is the best available and the range of outcomes is reasonable, a recognised estimate with disclosure is more useful than leaving the item out. Only when the uncertainty is so large that the number would not be faithful, as with an internally generated brand, is recognition refused.
Profit depends on capital maintenance
The same business can report different profits under different concepts, and all are consistent with the Framework. That is why the statements must say which basis is used.
Worked example: three ways to count profit
Scenario. Eko Haulage Ltd began the year with net assets (equity) of ₦200 million and ended it with ₦290 million, with no new share issues or dividends. General inflation was 12%. The cost of replacing the productive assets needed to keep the same capacity rose by 20% over the year. The figures are illustrative. Calculate profit under each concept.
- Financial capital maintenance, nominal.
Profit = closing equity − opening equity = ₦290m − ₦200m = ₦90 million. - Financial capital maintenance, constant purchasing power.
Opening capital restated for inflation = ₦200m × 1.12 = ₦224m.
Profit = ₦290m − ₦224m = ₦66 million.
The ₦24 million difference is a capital maintenance adjustment, kept in equity. - Physical capital maintenance.
Cost of keeping the same capacity = ₦200m × 1.20 = ₦240m.
Profit = ₦290m − ₦240m = ₦50 million.
The ₦40 million is a capital maintenance adjustment, kept in equity. - Reading the result. The more prices rise, the more profit shrinks once capital is protected. A company that distributes the full ₦90 million in a high-inflation year may be paying out its capital.
How to score full marks
- For recognition: give the two tests (relevant information, faithful representation) and the three trouble spots (existence uncertainty, low probability, measurement uncertainty), then apply them to the facts.
- For measurement: name the basis, say what it measures, then say why it suits the item. Use the land example or the scenario facts.
- For a standard question: link the Framework to the standard. In an inventory question, say that the Framework supports cost less than or equal to net realisable value through faithful representation and prudence.
- For capital maintenance: show the calculation first, then one sentence on what it means.
- For a brand or other intangible: test the definition, then the recognition and measurement uncertainty, then name the standard that decides.
Common mistakes in the exam
- Writing that an item is recognised only if it is probable. The 2018 test is relevance and faithful representation.
- Mixing up fair value and value in use.
- Saying historical cost is never updated. It is updated for impairment and for onerous liabilities.
- Treating all price rises as profit under physical capital maintenance. They are capital maintenance adjustments in equity.
- Forgetting to restate opening capital for inflation in the constant purchasing power calculation.
- Offsetting items without a standard or a substance reason.
- Quoting the old “reliability” criterion instead of faithful representation.
Quick revision
- Recognise if relevant and faithfully represented. Watch existence, low probability and measurement uncertainty.
- Derecognise when control is lost or the obligation ends.
- Measurement: historical cost, or current value (fair value, value in use or fulfilment value, current cost).
- Presentation: classification, aggregation. Profit or loss is primary, other comprehensive income by exception.
- Financial capital maintenance: profit is the increase in net assets (nominal or constant purchasing power). Physical: the increase in productive capacity.
- Concepts: consistency, aggregation, offsetting, fair presentation.
- CAMA 2020: ss. 374(1), 377, 378.
Practice questions
These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.
Recall check: multiple choice
The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.
Question 1. Under the 2018 Conceptual Framework, an asset or liability is recognised if recognition gives users:
- Certainty about future cash
- Relevant information and a faithful representation
- A guarantee of profit
- The lowest possible cost
Show the answer
B. Probability is no longer a separate recognition test.
Question 2. Derecognition of an asset normally happens when the entity:
- Loses control of it
- Buys another asset
- Revalues it upwards
- Pays a dividend
Show the answer
A. For a liability, it happens when there is no longer a present obligation.
Question 3. Which of the following is a current value measure?
- Historical cost
- Fair value
- Cost less depreciation only
- Original invoice price
Show the answer
B. The current value measures are fair value, value in use or fulfilment value, and current cost.
Question 4. Fair value is best described as the price to sell an asset or transfer a liability in:
- A forced sale
- An orderly transaction between market participants
- Any private deal
- A transaction at cost
Show the answer
B. It is an exit price and excludes transaction costs.
Question 5. Value in use is based on:
- The market’s expectations
- The entity’s own expected cash flows, discounted
- Original cost
- Insurance value
Show the answer
B. It is entity-specific.
Question 6. In the statement of profit or loss and other comprehensive income, other comprehensive income is used:
- For all income
- For items a standard specifically directs there
- For dividends
- For all expenses
Show the answer
B. Profit or loss is the primary source of performance information.
Question 7. Under physical capital maintenance, a rise in the replacement cost of productive assets is:
- Profit
- A capital maintenance adjustment in equity
- An expense
- Income
Show the answer
B. Profit is only the increase in productive capacity.
Question 8. An entity starts with equity of ₦100 million and ends with ₦150 million, with no owner transactions. Under financial capital maintenance in nominal units, profit is:
- ₦250 million
- ₦50 million
- ₦100 million
- ₦150 million
Show the answer
B. Closing equity less opening equity.
Question 9. Which of the following is correct about offsetting?
- Assets and liabilities are always netted
- It is generally not allowed unless a standard permits it or substance justifies it
- Income and expenses must always be netted
- It is encouraged
Show the answer
B. A profit on disposal is a permitted net presentation.
Question 10. A company sells equipment for ₦20 million. Its carrying amount is ₦15 million and selling costs are ₦1 million. The gain on disposal is:
- ₦5 million
- ₦4 million
- ₦6 million
- ₦1 million
Show the answer
B. ₦20m − ₦15m − ₦1m = ₦4 million.
Written questions
Question 11 (10 marks). (a) Explain the recognition criteria in the 2018 Conceptual Framework and three situations where recognition may not give useful information. (5 marks) (b) Explain when derecognition occurs and give an example. (3 marks) (c) State how the 2018 approach differs from the older “probable and reliable” approach. (2 marks)
Question 12 (20 marks). (a) Explain historical cost and the three current value measures. (6 marks) (b) State the factors to consider when choosing a measurement basis. (4 marks) (c) Explain the role of profit or loss and other comprehensive income under the Framework. (4 marks) (d) Compare financial and physical capital maintenance. (6 marks)
Question 13 (10 marks). Kano Mills Ltd began the year with equity of ₦400 million and ended with ₦560 million, with no owner transactions. General inflation was 10%, and the cost of replacing its productive assets rose by 15%. (a) Calculate profit under nominal financial capital maintenance, constant purchasing power financial capital maintenance and physical capital maintenance.
(6 marks) (b) Explain which concept suits an asset-heavy manufacturer and the risk of paying dividends equal to nominal profit in a high-inflation year. (4 marks)
Model answers
Show the model answer to Question 11
(a) Recognition (5 marks). An asset or liability is recognised only if recognition gives relevant information and a faithful representation. (2) Recognition may not give useful information where there is uncertainty whether the asset or liability exists, (1) where the probability of an inflow or outflow is low, (1) or where measurement uncertainty is so high that the number would not be faithful. (1)
(b) Derecognition (3 marks). For an asset it occurs when the entity loses control of all or part of it, and for a liability when it no longer has a present obligation. (2) Example: a truck carried at ₦24 million is sold for ₦20 million, so it is derecognised and a ₦4 million loss is recorded. (1)
(c) Difference (2 marks). The older approach required it to be probable that benefits would flow and that cost or value could be measured reliably. (1) The 2018 approach uses relevance and faithful representation, and treats probability as affecting relevance and measurement. (1)
Show the model answer to Question 12
(a) Measurement bases (6 marks). Historical cost uses the price of the transaction that created the item, not updated except for impairment or an onerous liability. (1.5) Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants. (1.5) Value in use or fulfilment value is the present value of the cash flows the entity expects from using the asset or settling the liability.
(1.5) Current cost is the cost today of an equivalent asset including transaction costs, reflecting current age and condition. (1.5)
(b) Choosing a basis (4 marks, 1 each). Relevance, including how the item contributes to future cash flows. Faithful representation. The enhancing characteristics. The cost constraint.
(c) Profit or loss and other comprehensive income (4 marks). Profit or loss is the primary source of information about performance, so income and expenses go there. (2) Other comprehensive income is used only where a standard decides that it gives more relevant or faithful information. Those items should in principle be reclassified to profit or loss when that makes profit or loss more relevant. (2)
(d) Capital maintenance (6 marks). Under financial capital maintenance capital is money invested or its purchasing power. (1) Profit is the increase in net assets, and with constant purchasing power only the increase above general inflation is profit. (1.5) Under physical capital maintenance capital is productive capacity. (1) Profit is the increase in capacity, and all price changes on assets and liabilities are capital maintenance adjustments in equity.
(1.5) Financial capital maintenance is common in corporate statements, and physical is suited to asset-heavy industries. (1)
Show the model answer to Question 13
(a) Profit (6 marks).
- Nominal financial capital maintenance.
₦560m − ₦400m = ₦160 million. (2) - Constant purchasing power.
opening capital restated = ₦400m × 1.10 = ₦440m, so profit = ₦560m − ₦440m = ₦120 million. (2) - Physical.
capital needed to keep capacity = ₦400m × 1.15 = ₦460m, so profit = ₦560m − ₦460m = ₦100 million. (2)
(b) Meaning (4 marks). Physical capital maintenance suits an asset-heavy manufacturer because it needs to replace machines at current prices to keep producing. (2) Paying dividends equal to the nominal profit of ₦160 million would distribute part of the capital needed to keep capacity, since profit after protecting capacity is only ₦100 million. (2)
Pathfinder on recognition, measurement and capital
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
The marking guide gives 2 marks for the recognition criteria, 1 for the measurement concepts behind the lower of cost and net realisable value rule, and 1 for how costs are included. Use the recognition and measurement sections here, and link them to the asset definition in the previous topic.
Revise first: Recognition and derecognition
The solution tests whether an internally generated brand can be recognised. Start with the asset definition, then explain that recognition needs a faithful measure, then name the intangible asset standard. The measurement uncertainty point in the recognition section is the idea behind that answer.
Revise first: Recognition and derecognition
No past question in the two diets asks for the capital maintenance concepts directly, but the syllabus item on measurement bases and performance makes the comparison table and the three-way profit example worth practising.
Revise first: Capital maintenance concepts
Source: ICAN Pathfinder, Strategic Business Reporting. Diets covered: November Diet, 2025 and May Diet, 2026.
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