Section 2 of FRS 102 sets out the objective of financial statements, the qualities that make information useful, the definitions of assets, liabilities, income and expenses, when items are recognised and the measurement bases available. From accounting periods beginning on or after 1 January 2026 it has been rewritten to follow the IASB’s 2018 Conceptual Framework. It is used mainly when no other section deals with a transaction, and any specific section overrides it.

What is Section 2 for, and when does it actually apply?

Paragraph 2.1 says Section 2 describes the objective of financial statements and the concepts and basic principles underlying them. It is not a free standing rulebook. Paragraph 2.2 says that where Section 2 is inconsistent with another section, the other section takes precedence. Paragraph 2.3 explains its practical job: when FRS 102 does not specifically address a transaction, the concepts in Section 2 are applied in developing an accounting policy under paragraphs 10.4 and 10.5.

That hierarchy runs in a fixed order. Paragraph 10.5 tells management to look first at an FRS dealing with similar and related issues, then at any applicable Statement of Recommended Practice, and only then at the definitions, recognition criteria and measurement concepts in Section 2. Paragraph 10.6 allows management also to consider adopted IFRS.

The section was entirely rewritten in the Periodic Review 2024 to align with the IASB’s Conceptual Framework for Financial Reporting issued in 2018. The FRC’s basis for conclusions says the changes are not expected to cause significant changes to existing practice, because the specific sections still take precedence. For a wider introduction to the standard see FRS 102 explained.

What are financial statements meant to achieve?

Paragraph 2.4 states the objective: general purpose financial statements provide financial information that is useful for decision making by a wide range of users who cannot demand reports tailored to their own needs. Paragraph 2.5 says that information covers the entity’s economic resources and claims against it, changes in them, and how efficiently and effectively management has discharged its responsibility for those resources, which the standard calls stewardship. Paragraph 2.6 is candid that accounts cannot provide everything users need; economic conditions and industry outlooks come from elsewhere.

What are the qualitative characteristics of useful information?

Paragraph 2.9 names two fundamental qualitative characteristics, relevance and faithful representation, and says information must have both to be useful. Four enhancing characteristics improve information that already has them.

Characteristic Type What FRS 102 says
Relevance Fundamental Capable of making a difference to users’ decisions (2.10)
Materiality Part of relevance Material if omitting, misstating or obscuring it could reasonably be expected to influence users’ decisions (2.11)
Faithful representation Fundamental Represents substance, and is complete, neutral and free from error (2.14 to 2.18)
Comparability Enhancing Lets users identify similarities and differences between entities and periods (2.20)
Verifiability Enhancing Independent observers could reach consensus that a depiction is faithful (2.21)
Timeliness Enhancing Available in time to influence decisions (2.22)
Understandability Enhancing Clear and concise, without leaving out relevant information because it is complex (2.23)

Three points are worth knowing. First, paragraph 2.13 adds the idea of obscuring: vague language, inappropriate aggregation or burying material information in immaterial detail can be as bad as leaving it out. Second, paragraph 2.17 brings back prudence as support for neutrality, defined as caution when making judgements under uncertainty, so that assets and income are not overstated and liabilities and expenses are not understated. The same paragraph says prudence does not allow understatement of assets or income either. Third, paragraph 2.24 makes cost a pervasive constraint: the cost of reporting must be justified by its benefits.

How are assets, liabilities, income and expenses defined?

Paragraph 2.33 defines an asset as a present economic resource controlled by the entity as a result of past events, and an economic resource as a right that has the potential to produce economic benefits. Paragraph 2.36 says the benefits need not be certain or even likely; the right only has to exist. Control, under paragraph 2.37, means the present ability to direct the use of the resource and obtain the benefits that may flow from it.

Paragraph 2.38 gives three criteria for a liability: the entity has an obligation, the obligation is to transfer an economic resource, and it is a present obligation that exists as a result of past events. Paragraph 2.39 confirms that obligations can be constructive, arising from customary practice, published policies or specific statements that the entity has no practical ability to avoid. Equity is not measured directly: paragraph 2.87 says it is total recognised assets less total recognised liabilities.

There is an important exception. The basis for conclusions (paragraph B2.1) says the previous asset definition is kept for Section 18 Intangible Assets other than Goodwill, and the previous liability definition is kept for Section 21 Provisions and Contingencies and Section 22 Liabilities and Equity. The new definitions should not be used to reopen provisions or intangible assets that those sections govern.

When is an item recognised?

Paragraph 2.50 says only items meeting the definition of an asset, liability or equity go in the statement of financial position, and only items meeting the definitions of income or expenses go in the performance statements. Meeting a definition is not enough on its own. Paragraph 2.51 says an item may still not be recognised if doing so would not provide relevant information, or if the costs outweigh the benefits, and paragraph 2.52 leaves the detailed recognition criteria to the individual sections.

Paragraphs 2.56 to 2.61 explain the factors. Existence uncertainty, a low probability of an inflow or outflow, or very high measurement uncertainty may mean that recognising a single amount would not be useful, although explanatory disclosure may still be needed. Two firm rules follow. Paragraph 2.53 says failing to recognise an item that should be recognised is not cured by disclosure. Paragraph 2.54 forbids recognising items that are not assets or liabilities just to achieve matching of income and costs. Derecognition, under paragraph 2.62, normally occurs when control of an asset is lost or a present obligation no longer exists.

Which measurement bases does FRS 102 recognise?

Paragraph 2.66 says a measurement basis is an identified feature of the item being measured, such as historical cost, fair value or fulfilment value. Section 2 groups them into two families.

  • Historical cost (2.68 to 2.72): the cost of acquiring or creating an asset, including transaction costs, updated for depreciation, impairment, payments and accrued interest. Amortised cost for financial instruments is one form of it.
  • Current value (2.73): fair value; value in use for assets and fulfilment value for liabilities, both based on the present value of expected cash flows; and current cost, the cost of an equivalent asset at the measurement date.

Paragraphs 2.74 to 2.86 list the factors in choosing between them: how the item contributes to cash flows, its sensitivity to market factors, avoiding accounting mismatches, measurement uncertainty, and the effect on comparability and understandability. Paragraph 2.48 requires the accrual basis for everything except cash flow information, and paragraph 2.30 sets the going concern assumption, which the going concern assessment page covers in detail.

What do the presentation principles require?

Paragraph 2.96 prohibits offsetting assets and liabilities, or income and expenses, unless a section requires or permits it, although paragraph 2.97 confirms that measuring assets net of allowances, such as a bad debt provision against receivables, is not offsetting. Paragraph 2.98 says gains or losses on disposing of fixed assets are shown net of carrying amount and selling costs. Paragraphs 2.100 and 2.101 ask for a balance in aggregation, so that relevant information is neither drowned in detail nor hidden by excessive summarising. These ideas carry through to Section 3 on presentation.

How does Section 2 help with an unusual transaction?

Illustration only. A company pays £3,000 for three years of access to an industry data service and asks whether it can treat the full amount as an expense now. The preparer first checks whether a specific section deals with it. If none does, Section 2 helps: the company holds a right to receive services, which it controls and which came from a past payment, so it meets the asset definition in paragraph 2.33. Measured at historical cost, the asset is consumed over the three years, giving an expense of about £1,000 a year, much like the prepayments recorded under the accruals concept.

What mistakes come up with Section 2?

  • Citing Section 2 to override a specific requirement elsewhere in the standard, contrary to paragraph 2.2.
  • Applying the new asset or liability definitions to provisions, intangible assets or the debt and equity split, where the old definitions still apply.
  • Using prudence to build hidden reserves through overstated provisions, which paragraph 2.17 does not allow.
  • Carrying costs forward as assets to match them with later income, contrary to paragraph 2.54.
  • Treating a disclosure note as a substitute for recognising an item that meets the criteria.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.