4.1. General Principles

In general, a company recognizes expenses in the period that it consumes (i.e., uses up) the economic benefits associated with the expenditure, or loses some previously recognized economic benefit.28

A general principle of expense recognition is the matching principle. Strictly speaking, IFRS do not refer to a “matching principle” but rather to a “matching concept” or to a process resulting in “matching of costs with revenues.”29 The distinction is relevant in certain standard setting deliberations. Under matching, a company recognizes some expenses (e.g., cost of goods sold) when associated revenues are recognized and thus, expenses and revenues are matched. Associated revenues and expenses are those that result directly and jointly from the same transactions or events. Unlike the simple scenario in which a company purchases inventory and sells all of the inventory within the same accounting period, in practice, it is more likely that some of the current period’s sales are made from inventory purchased in a previous period or previous periods. It is also likely that some of the inventory purchased in the current period will remain unsold at the end of the current period and so will be sold in a following period. Matching requires that a company recognizes cost of goods sold in the same period as revenues from the sale of the goods.

Period costs, expenditures that less directly match revenues, are reflected in the period when a company makes the expenditure or incurs the liability to pay. Administrative expenses are an example of period costs. Other expenditures that also less directly match revenues relate more directly to future expected benefits; in this case, the expenditures are allocated systematically with the passage of time. An example is depreciation expense.

Examples 7 and 8 demonstrate matching applied to inventory and cost of goods sold.