Financial Statements and the Reporting Entity (Hand-out)

• Objective: The Elements of Financial Statements

The objective of general purpose financial statements is to
Characteristic Element Definition
provide information about the financial position, financial performance,
(Entity’s) A present economic resource controlled
and cash flows of an entity that is useful to a wide range of users in
Economic by the entity as a result of past events
making economic decisions.
Resource
• To meet that objective, financial statements provide information about Asset
An economic resource is a right that has
an entity's:
the
a) Assets
potential to produce economic benefits.
b) Liabilities
Claim A present obligation of the entity to
c) Equity
(of Creditors & transfer an
d) Income and Expenses; Gains and Losses Liability
Owners from the economic resource as a result of past
e) Contributions by and Distribution to owners (in their capacity as
business/entity) events.
owners)
The residual interest in the assets of the
f) Cash Flows
Equity entity
• Complete Set of Financial Statements:
after deducting all its liabilities.
a) a statement of financial position (balance sheet) at the end of the
Changes in Increases in assets, or decreases in
period
Economic liabilities, that result in increases in
b) a statement of profit or loss and other comprehensive income for
Resources and Income equity, other than those relating to
the period (presented as a single statement, or by presenting the
Claims, reflecting contributions from holders of equity
profit or loss section in a separate statement of profit or loss,
financial claims.
immediately followed by a statement presenting comprehensive
performance Decreases in assets, or increases in
income beginning with profit or loss)
liabilities, that result in decreases in
c) a statement of changes in equity for the period Expenses
equity, other than those relating to
d) a statement of cash flows for the period
distributions to holders of equity claims.
e) notes, comprising a summary of significant accounting policies
Other changes in - Contributions from holders of equity
and other explanatory notes
Economic claims, and distributions to them.
f) comparative information prescribed by the standard
resources and - Exchanges of assets or liabilities that do
• An entity may use titles for the statements other than those stated
claims not result in increases or decreases in
above. All financial statements are required to be presented with equal
equity.
prominence. [IAS 1.10]
Definition of an Asset 3. Control
Control links an economic resource to an entity. Assessing
An asset is a present economic resource controlled by the entity as a
whether control exists helps to identify the economic resource for which
result of past events. An economic resource is a right that has the potential to
the entity accounts.
produce economic benefits.
Definition of a Liability
Three Aspects of the Definition of an Asset:
A liability is a present obligation of the entity to transfer an economic
1. Right resource as a result of past events.
Rights that have the potential to produce economic benefits take
For a liability to exist, three criteria must all be satisfied:
many forms, including:
a) Rights that correspond to an obligation of another party 1. Obligation – the entity has an obligation
Examples: An obligation is a duty or responsibility that an entity has no
i. Rights to receive cash practical ability to avoid. An obligation is always owed to another party
ii. Rights to receive goods or services (or parties). The other party (or parties) could be a person or another
iii. Rights to exchange economic resources with another entity, a group of people or other entities, or society at large. It is not
party on favorable terms. Such rights include, for example, necessary to know the identity of the party (or parties) to whom the
a forward contract to buy an economic resource on terms obligation is owed.
that are currently favorable or an option to buy an 2. Transfer of an Economic Resource – The obligation is to transfer an
economic resource economic resource
iv. rights to benefit from an obligation of another party to To satisfy this criterion, the obligation must have the potential to
transfer an economic resource if a specified uncertain require the entity to transfer an economic resource to another party (or
future event occurs parties). For that potential to exist, it does not need to be certain, or even
b) Rights that do not correspond to an obligation of another party likely, that the entity will be required to transfer an economic resource—
i. Rights over physical objects, such as property, plant and the transfer may, for example, be required only if a specified uncertain
equipment or inventories. Examples of such rights are a future event occurs. It is only necessary that the obligation already exists
right to use a physical object or a right to benefit from the and that, in at least one circumstance, it would require the entity to
residual value of a leased object. transfer an economic resource.
ii. Rights to use intellectual property. 3. Present Obligation as a result of Past Events – the obligation is a
2. Potential to Produce Economic Benefits present obligation that exists as a result of past events
An economic resource is a right that has the potential to produce A present obligation exists as a result of past events only if:
economic a) the entity has already obtained economic benefits or taken an
benefits. For that potential to exist, it does not need to be certain, or even action
likely, that the right will produce economic benefits. It is only necessary The economic benefits obtained could include, for
that the right already exists and that, in at least one circumstance, it example, goods or services. The action taken could include, for
would produce for the entity economic benefits beyond those available example, operating a particular business or operating in a
to all other parties. particular market. If economic benefits are obtained, or an action
 is taken, over time, the resulting present obligation may
accumulate over that time.
b) as a consequence, the entity will or may have to transfer an
economic resource that it would not otherwise have had to
transfer.
Definition of Equity
Equity is the residual interest in the assets of the entity after deducting
all its liabilities.
Definition of Income and Expenses
Income – is increases in assets, or decreases in liabilities, that result in
increases in equity, other than those relating to contributions from holders of
equity claims.
Expenses – are decreases in assets, or increases in liabilities, that result in
decreases in equity, other than those relating to distributions to holders of
equity claims.
It follows from these definitions of income and expenses that
contributions from holders of equity claims are not income, and distributions to
holders of equity claims are not expenses.
Income and expenses are the elements of financial statements that
relate to an entity’s financial performance. Users of financial statements need
information about both an entity’s financial position and its financial
performance. Hence, although income and expenses are defined in terms of
changes in assets and liabilities, information about income and expenses is
just as important as information about assets and liabilities.
Going Concern Assumption
it is the assumption that the entity will continue in operation for the
foreseeable future. Financial statements are normally prepared using this
assumption. It the entity is not a going concern, then the Financial Statements
must be prepared on another basis. (i.e. Liquidation Basis)