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Elements of Financial Statements

The document outlines the elements of financial statements, including assets, liabilities, equity, income, and expenses, with definitions and criteria for recognition. It details the characteristics of assets and liabilities, emphasizing control, obligations, and the potential for economic benefits. Additionally, it classifies assets and liabilities into current and non-current categories, providing examples and recognition criteria for financial reporting.

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16 views23 pages

Elements of Financial Statements

The document outlines the elements of financial statements, including assets, liabilities, equity, income, and expenses, with definitions and criteria for recognition. It details the characteristics of assets and liabilities, emphasizing control, obligations, and the potential for economic benefits. Additionally, it classifies assets and liabilities into current and non-current categories, providing examples and recognition criteria for financial reporting.

Uploaded by

rosacina.k
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Elements of

Financial
Statements
January 9, 2024
Elements of Financial
1. Assets Statements
2. Liabilities
3. Equity
4. Income
5. Expenses
Definition of an Asset
• An asset is a present economic resource controlled by the entity
as a result of past events. (CF4.3)
• An economic resource is a right that has the potential to
produce economic benefits. (CF4.4)

Three aspects of those definitions:


1. Control
2. Right
3. potential to produce economic benefits
Rights that have the
potential to produce
economic benefits
(a)rights that correspond to an obligation of another
party

(b) rights that do not correspond to an obligation of


another party
Potential to produce economic
benefits
An economic resource could produce economic benefits for
an entity by
entitling or enabling it to do, for example, one or more of
the following:
a) receive contractual cash flows or another economic
resource;
b) exchange economic resources with another party on
favorable terms;
c) produce cash inflows or avoid cash outflows
d) receive cash or other economic resources by selling the
economic resource
e) extinguish liabilities by transferring the economic resource
Control over an economic
a. resource
Helps to identify the economic resource for which the entity
accounts
b. It is the present ability to direct the use of the economic
resource and obtain the economic benefits that may flow from
it.
c. includes the present ability to prevent other parties from doing
the same (a & b)
The following is not considered assets of the entity holding them:
• Rights of access to public roads.
• Debt instruments or equity instruments issued by the
entity and repurchased and held by it.
• Economic resource under the custody of an agent
controlled by the principal.
Give examples of Assets
Definition of a Liability
• A liability is a present obligation of the entity to transfer an
economic resource as a result of past events.
• For a liability to exist, three criteria must all be satisfied:
a.the entity has an obligation
b.the obligation is to transfer an economic resource
c.the obligation is a present obligation that exists as a result of
past events
What is an obligation?
• An obligation is a duty or responsibility that an entity
has no practical ability to avoid.
• It can be legal or constructive

• Legal obligation – established by contract, legislation or


similar means and are legally enforceable by the party to
whom they are owed.
• Constructive obligation – arose of the entity has no
practical ability to act in a manner inconsistent with an
entity’s customary practices, published policies or specific
statements
Not considered liabilities of the entity:
• Cost to overhaul a machine
• An entity has entered into a contract to pay
an employee a salary in exchange for
receiving the employee’s services.
• Share dividends declared but not yet paid.
Equity
• Equity is the residual interest in the assets of the entity
after deducting all its liabilities.

Different terms depending on the form of business organizations


Owner’s Equity – Proprietorship
Partner’s Equity – Partnership
Stockholder’s/Shareholder’s Equity - Corporation
Recognition of the Elements of Financial
Statements
• Recognition - is the process of capturing for inclusion in the
statement of financial position or the statement(s) of financial
performance an item that meets the definition of one of the
elements of financial statements—an asset, a liability, equity,
income or expenses.
• Carrying amount – refers to the amount at which an asset, a
liability or equity is recognized in the statement of financial
position.
Recognition of the Elements of Financial
Statements
Recognition Criteria
• An asset or liability is recognized only if recognition of
that asset or liability and of any resulting income,
expenses or changes in equity provides users of
financial statements with information that is useful, ie
with:
a. relevant information about the asset or liability and about
any resulting income, expenses or changes in equity; and
b. a faithful representation of the asset or liability and of any
resulting income, expenses or changes in equity.
• Recognition is not appropriate if it will not result in relevant
information and faithful representation of the elements.
Classification of Assets

1 CURRENT
ASSETS
2 NON- CURRENT
ASSETS
CURRENT ASSETS (PAS 1, Par. 66)
 Cash or cash equivalent
 Asset primarily for the purpose of
trading
 Realize within 12 months
 Realize the asset, intends to
sell/consume within entity’s normal
operating cycle
NON-CURRENT ASSETS
All other assets non included in current assets

1. Property, Plant and Equipment


- tangible assets held by entity for use of
production and supply expected to use for more than 1
period
- example: land, building, equipment, etc.

2. Long-term investment
NON-CURRENT ASSETS
3. Intangible Assets
- identifiable nonmonetary asset without physical
substance
- example: patent, franchise, copyright, lease right

4. Deferred tax assets

5. Other non-current assets


Classification of Liabilities

1 CURRENT LIABILITIES

2 NON-CURRENT LIABILITIES
CURRENT LIABILITIES
 Settle liability within normal operating
cycle
 Primarily for the purpose of trading
 Liability is due to be settled within 12
months
 Entity does not have the right to defer
settlement of liability for at least 12 months
NON-CURRENT
LIABILITIES
 Non-current portion of long-term debt
 Financial lease liability
 Deferred tax liability
 Long-term obligations to company
officers
 Long-term deferred revenue

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