Present accounting is largely

based on this theory:

- dividends
- salaries
- equity accounting
Has a financial view of capital: emphasis on - consolidation accounting
the financial investment of the owners and
Present obligation: - The actual sacrifices are yet to be made
- developed when businesses were smaller changes in owners’ wealth
- Obligation is already present
- a company is separate from its owners - Planned obligation included if to an external party
Proprietorship = net worth of Liabilities defined: A present obligation of the entity
- a company is a legal entity in its own right - Legal enforceability
owners = capital = A - L. Profit as the increase in net worth arising from past events, the settlement of which is
- shareholders rely on managers for information - Settlement of liability in various ways
inadequate as a basis for expected to result in an outflow from the entity of
- no longer so relevant - Equitable and constructive obligations
explaining company accounting resources embodying economic benefits

Proprietary theory: owner is the centre of attention

ensures that only present liabilities are
recorded and not future ones
objective of accounting may be either
proprietary and entity theories are
stewardship or accountability Past transaction
still influential in practice

Issues involved in defining liabilities and kind of past transaction or event that are acceptable:
equity, applying definitions & why definition wholly executory contracts
company is viewed as a separate Proprietary and
entity with its own identity entity theory and recognition criteria important
- Reliance on the law
- Determination of the economic substance of the event
Liability recognition criteria - Ability to measure the value of the liability
- Use of the conservatism principle

IASB Framework
liability should be recognised if:
Entity theory: focuses on the firm as the centre of attention - probable that any future economic benefit associated with the items will flow to or from the entity
- the item has a cost or value that can be measured with reliability
Assets are resources controlled by the entity, Liabilities are
obligations of the entity, Profit increases net assets and
accrues to the entity, The owners only have a residual claim
on the net assets of the entity
Under IFRS, historical cost Liabilities and owner's equity IASB has several projects which will - debt versus equity distinction
is the most common
affect the definition, recognition and - extinguishing debt
Fair value measurement is measurement of liabilities - employee shares (share-based payment)
more commonly being used:
- leases
- financial instruments
- share based payments
- business combinations
Employee benefits – pension
(superannuation) plans: Unfunded Current measurement practices in Challenging issues for
commitments/equitable obligations relation to liabilities and equity standard setters & auditors

The completeness of liabilities recognised on the

Provisions and balance sheet and the note disclosures about
contingencies Owner's equity equity is residual interest in the Issues for auditors
occur where there is a blurring between assets of the entity after contingencies and other obligations are major issues
present and future obligations deduction of its liabilities -> to be claimed for auditors

recognised only when there is a Essential features: Rights of the parties

present obligation, it is probable and it Concept of capital & economic substance of the arrangement
can be reliably measured
- evidence, timing, cut off
Classifications within - concealment and understatement
owners’ equity - going concern
Contingent liabilities do not - overstatement - provisions
meet these criteria: sajikan di - reasonableness of fair values
CaLK saja (notes) The distinction between contributed
and earned capital is useful
Influenced by legal prescriptions
(capital maintenance)

not all transactions fit nicely into

Financial capital: invested categories nth share dividends
money or invested purchasing Physical capital: productive
power capacity of the entity RE