Describe the following concepts: (1) going concern, (2) recognition and realization, and (3) relevance and reliability,
GOING CONCERN
The presumption is that a firm will remain in operation long enough to carry out its current plans. A firm that is a going concern will, in the normal course of its operations, realize changes in the fair values of its assets either by using those assets or selling them.
RECOGNITION AND REALIZATION
The distinction between recognition and realization is essential to accrual accounting,
hence the importance accorded to recognition criteria. Firms recognize items that qualify for inclusion in the financial statements when they enter the financial statements, regardless of when those items are realized by conversion to cash. In the case of value decreases, the firm recognizes the decreases as impairment expenses when the decreases occur before it
realizes the collection of the reduced cash flows. In the case of value increases, U.S.
GAAP precludes the recognition of unrealized gains from increases in the fair value of some nonfinancial assets. The firm can realize the fair value increase by selling the appreciated asset. IFRS permits, but does not require, firms to recognize unrealized increases in the fair values of some nonfinancial assets on their balance sheets; that is, IFRS permits firms to revalue certain nonfinancial assets to fair values that exceed carrying values.
RELEVANCE AND RELIABILITY
The third criterion for asset recognition is that the future benefit has a relevant measurement attribute that the firm can measure with sufficient reliability. Relevance means that the information is pertinent to the decisions of users of financial reports, in the sense that
the information can make a difference in those decisions. Relevant financial accounting information helps users form predictions or correct their expectations. Often, more than one measurement attribute exists for an asset, and standard setters must choose which of those attributes provides the most relevant measurement, subject to reliability considerations.
Reliability means that the information presented is reasonably free from error and bias and faithfully represents what it purports to represent. Standard setters view acquisition cost measurements as providing reliable information, in the sense of faithfully representing the economic value sacrificed to acquire an asset. Reliability also encompasses the ability to verify the measured amount. Acquisition cost is reliable in the sense that different accountants will likely agree on the same amount because each of them can verify the acquisition cost by reference to contracts and invoices. As previously discussed, fair value measurements can be reliable, for example, if the asset being measured trades in an active market. Because many assets do not trade in active markets, some accountants view acquisition costs as more reliable than fair values.
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