Elements of

Financial Statements
FAR 101 – Conceptual Framework and Accounting Standards
Ross Catherine P. Lero, CPA
Financial statements
portray the financial
effects of transactions
and other events by
grouping them into
classes called elements.
 Elements of Financial
Statements
❑ The quantitative information reported in the statement of financial
position and income statements.
❑ “building blocks” from which financial statements are constructed.
Elements of Financial Statements
❑ Measurement of financial position:
▪ Assets
▪ Liabilities
▪ Equity
❑ Measurement of financial performance:
▪ Income
▪ Expenses
❑ No element is unique to the statement of changes in equity
ASSETS
● Present economic resource controlled by the entity as a result of past events.
This economic resource is a right that has the potential to produce economic
benefits.

ESSENTIAL CHARACTERISTICS:
➢ It is present economic resource;
➢ The economic resources is a right that has the potential to produce economic
benefits;
➢ The economic resource is controlled by the entity as a result of past events.
ASSETS – Rights
1) Rights that correspond to an obligation of another entity
a) Right to receive cash, goods or services
b) Right to exchange economic resources with another party on
favorable term
c) Right to benefit from an obligation of another party if a specified
uncertain future event occurs
2) Rights that do not correspond to an obligation of another entity
a) Right over physical objects (PPE, inventories, etc.)
b) Right to intellectual properties (copyrights, patents, trademarks, etc.)
3) Rights established by contract or legislation such as owning a debt
instrument or an equity instrument, or owning a registered patent.
ASSETS – Potential to produce economic benefits
❑ For potential to exist, it does not need to be certain or even likely
that economic benefits are produced. Only its existence is
necessary.
❑ A right can meet the definition of an economic resource even if the
probability of producing economic benefits is low.
❑ An economic resource could produce economic benefits if the
entity is entitled to:
a) receive contractual cash flows
b) Exchange economic resources with another party on favorable terms
c) Produce cash inflows or avoid cash outflows
d) Receive cash by selling the economic resource
e) Extinguish a liability by transferring an economic resource.
ASSETS – Control of an economic resource
❑ An entity controls an asset if it has the present ability to direct the
use of the asset and obtain the economic benefits that flow from it.
❑ If it can prevent others from benefiting from the asset
❑ If there are no legal rights, control can still exist if an entity has
other means of ensuring that no other party can benefit from an
asset.
LIABILITY
● Present obligation of an entity to transfer an economic resource as a result of
past events.

ESSENTIAL CHARACTERISTICS:
➢ The entity has an obligation
The liable entity must be identified
➢ The obligation is to transfer an economic resource
➢ The obligation is a present obligation that exists as a result of past events
A liability is not recognized until it is incurred.
LIABILITY
❑ Transfer of an economic resource
▪ Obligation to pay cash
▪ Obligation to deliver goods and noncash resources
▪ Obligation to provide services at some future time
▪ Obligation to exchange economic resource with another party on
unfavorable terms
▪ Obligation to transfer an economic resource if specified uncertain
future event occurs
❑ Past events
▪ An entity has already obtained economic benefits
▪ An entity must transfer an economic resource
EQUITY
● Residual interest in the assets of an entity after all liabilities are
deducted.
INCOME
● Increases in assets or decreases in liabilities that result in increases in equity,
other than those relating to contributions from equity holders.

➢ REVENUE
Income that arise from the course of ordinary regular activities. (Sales,
fees, interest, dividends, royalties, and rent)

➢ GAINS
items that meet the definition of income but do not arise from the course
of ordinary regular activities. (Gain on asset disposals, unrealized gain on trading
investments and gain from appropriation)
EXPENSE
● Decreases in assets or increases in liabilities that result in decreases in equity,
other than those relating to distributions to equity holders.

➢ EXPENSES
Expenses that arise from the course of ordinary regular activities. (Cost
of goods sold, salaries and wages, depreciation)

➢ LOSSES
do not arise in the course of ordinary regular activities. (Casualty losses
and disposal losses)
Statement of Financial Performance
❑ This statement refers to the statement of profit or loss (income
statement/ statement of comprehensive income) and a statement
presenting other comprehensive income.
Recognition and
Measurement
FAR 101 – Conceptual Framework and Accounting Standards
Ross Catherine P. Lero, CPA
 Recognition
❑ The process of capturing for inclusion in the financial statements an
item that meets the definition of an asset, liability, equity, income or
expense.
Recognition
❑ Carrying amount – the amount at which an asset, liability or equity
is recognized in the statement of financial position
❑ The statements are linked by because the recognition of an item in
one statement requires the recognition of the same item in another
statement.
Recognition Criteria
Only items that meet the definition of an asset, a liability or equity are
recognized in the statement of financial position.

Similarly, only items that meet the definition of an income or expense are
recognized in the statement of financial performance.
Income Recognition
Income is recognized when it is earned.

❑ Sale of goods in the ordinary course of business – recognize income at

point of sale when legal title passes from seller to buyer.
❑ On some conditions, income may be recognized at the point of production,
during production, and at the point of collection.
Expense Recognition
Expense is recognized when it is incurred.

❑ Application of the matching principle (costs and expenses incurred in earning

a revenue shall be reported in the same period)

✓ Cause and effect association – expense is recognized when revenue is

already recognized. (Ex. Cost of Goods Sold, Bad Debts, Sales
Commissions, etc.)
✓ Systematic and rational allocation – some costs are expensed by simply
allocating them over the periods benefited (Ex. Depreciation,
Amortization, Consumption of prepaid assets)
✓ Immediate recognition – the expense has no future benefit; ceases to
qualify as an asset (Ex. Administrative expenses, and losses)
Derecognition
❑ The removal of all or part of a recognized asset or liability from the
statement of financial position
❑ Normally occurs when an item no longer meets the definition of an
asset (entity loses control over the asset) or liability (entity no
longer has an obligation to fulfill the liability)
 Measurement
❑ Quantifying in monetary terms the elements of the financial
statements
Historical Cost
● Historical cost of an asset – acquisition cost; consideration paid plus
transaction cost
● Historical cost of a liability – consideration received to incur a liability minus
transaction cost
● Historical cost is updated because:
Assets Liabilities
o Depreciation and amortization o Payments to satisfy obligation
o payments from asset disposal o Increase in value of an
o Impairment obligation
o Accrual of interest o Accrual of interest
o Amortized cost measurement o Amortized cost measurement
Current Value
❑ FAIR VALUE
▪ Fair value of an asset – price received to sell an asset in an
orderly transaction between market participants at
measurement date.
▪ Fair value of a liability – price paid to transfer a liability in an
orderly transaction between market participants at
measurement date.
▪ Can be observed directly using the market price in an active
market. Otherwise, the present value of cash flows is used.
▪ Transaction cost is not included (this cost relates to the
transaction and not to the asset/liability)
Current Value
❑ VALUE IN USE
▪ Present value of cash flows expected to be derived from the
use of an asset and its disposal
▪ Transaction cost on acquisition is not included but transaction
cost on disposal is included.
❑ FULFILLMENT VALUE
▪ Present value of cash flows expected to be transferred in
settling a liability
▪ Transaction cost on incurring the liability is not included but
transaction cost on fulfilling the liability is included.
Current Value
❑ CURRENT COST
▪ Current cost of an asset – cost of an equivalent asset at the
measurement date comprising the consideration paid and
transaction cost
▪ Current cost of a liability – consideration received less any
transaction cost at measurement date
Selecting a Measurement Basis
● Consider the nature of the information that will result to a relevant and
faithfully represented information useful to the users.
● The IASB did not mandate a single measurement basis because different
measurement bases could produce useful information under different
circumstances.
Presentation and
Disclosure
Concepts of Capital
FAR 101 – Conceptual Framework and Accounting Standards
Ross Catherine P. Lero, CPA
The presentation and
disclosure can be an
effective communication
tool about the
information in financial
statements.
❑ Relevance and faithful representation
❑ Understandability and comparability
Presentation and Disclosure
❑ CLASSIFICATION – Sorting assets, liabilities, equity, income and expenses
on the basis of shared or similar characteristics
• Asset & Liability – current and noncurrent
• Equity – Ordinary & Preferred Share capital, Share premium and
retained earnings
• Income and expense – profit or loss; other comprehensive income
❑ AGGREGATION – adding together assets, liabilities, equity, income and
expense that have similar or shared characteristics and are classified the
same.
• Statement of financial position and financial performance contain
summarized information. Detailed information is provided in the
notes to the financial statements.
 Capital Maintenance
Financial performance is determined by two approaches
❑ Transaction approach – traditional income statement preparation
❑ Capital maintenance approach – net income occurs only after the
capital used from the beginning of the period is maintained.
➢ Return on capital – amount in excess of investment
➢ Return of capital – return of the invested capital
Capital Maintenance
❑ Financial capital – monetary amount of net assets contributed by
shareholders and the amount of increase in net assets from
earnings retained by the entity

Computation of Net Income:

Net assets, ending xx
Add: Dividends paid xx
Total xx
Less: Net assets, beginning xx
Additional investments xx xx
Net income xx
Capital Maintenance
❑ Physical capital – quantitative measure of the physical productive
capacity to produce goods and services

Computation of Net Income:

Net assets, ending xx
Add: Dividends paid xx
Total xx
Less: Net assets, beginning at current cost xx
Additional investments xx xx
Net income xx
 Thanks! Do you have any questions?
Email me at: [email protected]
Consultation hours:
4:30PM – 5:30PM MWF
1:30PM – 3:00PM TTh

Please keep this slide for attribution

CREDITS: This presentation template was created by Slidesgo, and includes icons
by Flaticon, and infographics & images by Freepik