CONCEPTUAL FRAMEWORKS 4

ELEMENTS OF FINANCIAL STATEMENTS

Financial statements portray financial effects of transactions and other events by grouping
them into broad classes according to their economic characteristics.
These broad classes are termed the elements of financial statements. The elements of
financial statements refer to the quantitative information reported in the statement of financial
position and income statement.
The elements of financial statements are the “building blocks” from which financial
statements are constructed. The presentation of these elements in the statement of financial
position and income statements involves subclassification.
The elements directly related to the measurement of financial position are:
1. Asset
2. Liability
3. Equity
The elements directly related to the measurement of financial performance are:
1. Income
2. Expense
Equity is the residual interest in the assets of the entity after deducting all of the liabilities.
ASSETS
Under the Revised Conceptual Framework, an asset is defined as a present economic
resource controlled by the entity as a result of past events.
An economic resource is a right that has the potential to produce economic benefits.
The new definition clarifies that an asset is an economic resource and that the potential
economic benefits no longer need to be expected to the flow to the entity.
Essential characteristics of asset
1. The asset is a present economic resource.
2. The economic resource is a right that has the potential to produce economic benefits.
3. The economic resource is controlled by the entity as a result of past events.
Right
• Rights that have correspond to an obligation of another entity
1. Rights to receive cash
2. Rights to receive goods and service
3. Rights to exchange economic resources with another party on favorable term
 4. Rights to benefit from an obligation of another party if a specified uncertain future
event occurs.
• Rights that do not corresponds to an obligation of another entity
1. Right over physical objects, such as property, plant and equipment or inventories
2. Right to intellectual property
• Rights established by contract or legislation such as owning a debt instrument or an equity
instrument or an equity instrument or owning a registered patent.
Potential to produce economic benefits
An economic resource is a right that has the potential to produce economic benefits.
For the potential to exist, it does not need to be certain or even likely that the right will
produce economic benefits. It is only necessary that rights exist.
The economic resource is the present right that contains the potential and not the future
economic benefits that the rights may produce.
An economic resource could produce economic benefits if an entity is entitled:
1. To receive contractual cash flow
2. To exchange economic resources with another party on favorable terms
3. To produce cash inflows or avoid cash outflows
4. To receive cash by selling the economic resources
5. To extinguish a liability by transferring an economic resource
Control of an economic resources
An entity controls an asset if it has present ability to direct the use of asset and obtain
economic benefits that flows from it. Controls also includes the ability to prevent others from using
such as asset and therefore precenting others from obtaining economic benefits from the asset.
Control may arise if an entity enforces legal rights. If there are no legal rights, control can
still exist if an entity has other means of ensuring that no other party benefit from an asset. For
example, an entity has access to technical know-how and has the ability to keep this know how
secret.
LIABILITY
Under the Revised Conceptual Framework, a liability is defined as a present obligation of
an entity to transfer an economic resource as a result of past events.
The new definition clarifies that a liability is the obligation to transfer an economic
resource and not the ultimate outflow of economic benefits. The outflow of economic benefits no
longer needs to be expected similar to the definition of an asset.
The new definition of liability to some extent is inconsistent with the new definition of
liability under IAS 37.
Essential Characteristics of Liability
1. Entity has obligation – The entity liable must be identified. It is not necessary that the payee
is identified.
2. The obligation is to transfer economic resources
3. The obligation is a present obligation that exist as a result of past events – This means that
the liability is not recognized until it is incurred.
Obligation
An obligation is a duty or responsibility that an entity has no practical ability to avoid.
Obligations can either be legal or constructive.
Obligations may be legally enforceable as a consequence of a binding contract or statutory
requirement. Constructive obligations arise from normal business practice, custom, and a desire to
maintain good business relations or act in an equitable manner.
Transfer of economic resources
1. Obligation to pay cash
2. Obligation to deliver goods or noncash resources
3. Obligation to provide services at some future time
4. Obligation to exchange economic resources with another party on unfavorable terms
5. Obligation to transfer an economic resource if specified uncertain event occurs
Past Events
An obligation exists as a result of past event if both of the following condition is satisfied:
a) An entity has already obtained economic benefits
b) An entity must transfer an economic resources
Statement of Financial performance
This statement refers to the statement of profit or loss and a statement presenting other
comprehensive income. The statement of profit or loss is the primary source of information about
an entity’s financial performance. As a general rule, all income and expenses are included in profit
or loss.
However, in developing accounting standards, there are some items of income and
expenses that are included in other comprehensive income and not in profit or loss if such
presentation would provide more relevant and faithfully presented information about financial
performance.
There are instances that an amount in other comprehensive income in one reporting period
may be recycled to profit or loss in another reporting period if it would result to relevant and
faithful and relevant reporting.
Income
Income is defined as increases in assets or decreases in liabilities that result in increases in
equity, other than those relating to contributions from equity holders.
The definition encompasses both revenue or gains. Revenues arises in the course of
ordinary regular activities while Gains are those that are not in the course of ordinary regular
activities.
Expenses
Expenses is defined as decreases in assets or increases in liabilities that results in decreases
in equity, other than those relating to distributions to equity holders.
Expenses are termed to those that arise in the course of ordinary regular activities, while
Losses are for those that are not in the course of ordinary regular activities.