A company's research team develops an internally generated customer relationship that management believes meets Concepts Statement No. 8's definition of an asset — a present right to an economic benefit controlled by the entity as a result of a past transaction or event. However, no market transaction, contract, or reliable valuation model exists to measure that customer relationship with a relevant measurement attribute. Under Concepts Statement No. 8, Chapter 5 (Recognition and Derecognition), should the customer relationship be recognized as an asset on the balance sheet?
- Yes, because meeting the definition of an asset alone is sufficient for recognition, regardless of measurability
- Yes, because management's good-faith belief that value exists satisfies the recognition criteria even without a reliable measurement
- No, because recognition also requires that the item be measurable with a relevant measurement attribute and be capable of faithful representation, and here no reliable basis exists to measure it
- No, because internally generated items can never meet the definition of an asset under any circumstances
Why C? And why not the others?
Correct answer: C. No, because recognition also requires that the item be measurable with a relevant measurement attribute and be capable of faithful representation, and here no reliable basis exists to measure it
Chapter 5 of Concepts Statement No. 8 requires an item to satisfy multiple recognition criteria before it is recognized in the financial statements — meeting the definition of an element is necessary but not sufficient; the item must also be measurable with a relevant measurement attribute and capable of being depicted with faithful representation — so even an item that genuinely meets the definition of an asset is not recognized while no reliable basis exists to measure it, meaning the customer relationship stays unrecognized, though it might still be relevant to disclose qualitatively. The option treating the definition alone as sufficient is wrong because it ignores the separate measurability and faithful-representation criteria Chapter 5 requires in addition to the definitional criterion. The option relying on management's good-faith belief is wrong because subjective conviction that value exists is not the same as a reliable, verifiable measurement basis, and Chapter 5's criteria demand the latter. The option asserting internally generated items can never meet the definition of an asset is wrong because the scenario already establishes the item meets the definition; the reason it is not recognized here is a measurement failure, not a definitional one, and other internally generated items can and do get recognized once they are also reliably measurable.
Source: FASB Concepts Statement No. 8, Chapter 5, Recognition and Derecognition