The act of recording or including an accounting item/ transaction/ event in the books (financials) of an entity for the first time. Initial recognition of assets acquired and liabilities assumed generally involves measurement of value (for an asset/ liability, revenue/ expense) at the time of acquisition/ generation/ incurrence (entry value). Typically, this process of recognition takes place based on exchange prices prevailing at the date of initial recognition. For example, once an asset or a liability is recognized (for the first time), it will continue to be measured (subsequent measurement) at the amount initially recognized until the asset or liability or its amount experiences specific changes (caused by a particular event) which meet the recognition criteria. Such an event might be inflows (purchases of assets or incurrences of liabilities) and outflows (sale/ disposal/ loss of assets and settlement/ cancellation of liabilities). Change may also involve amounts of assets/ liabilities currently recognized by an entity- e.g., changes in utility or substance and changes in price.
Examples of initial recognition include: measurement of property, plant and equipment (PPE) initially at its cost, while a financial asset or financial liability is recognized when the reporting entity becomes party to the contractual provisions of the asset/ liability. At initial recognition, an entity measures such assets/ liabilities depending on designation: financial assets held for trading are recognized at fair value, not including the transaction costs or income associated with these assets/ liabilities.
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