CHAPTER 7

PRESENTATION AND DISCLOSURE

 Can be effective communication tool about the information in financial statements

Effective communication of information in financial statements

 makes the information more RELEVANT and contributes to FAITHFUL REPRESENTATION of an

entity’s assets, liabilities, income and expenses
 enhances UNDERSTANDABILITY and COMPARABILITY of information in the financial statements

DUPLICATION – unnecessary and can make financial statements less understandable

CLASSIFICATION – sorting of assets, liabilities, equity, income and expenses on the basis of shared or
similar characteristics

Classification dissimilar elements can obscure relevant information, reduce understandability and
comparability and may not provide a faithful representation of financial information

CLASSIFICATION OF INCOME AND EXPENSES

 Income and expenses are classified as components of profit loss and components of other
comprehensive income

Revised Conceptual Framework introduced a new term statement of financial performance to refer to
the statement of profit or loss together with the statement presenting other comprehensive income

AGGREGATION – adding together of assets, liabilities, equity, income and expenses that have similar or
shared characteristics and are included in the same classification.

 Makes information useful by summarizing a large volume of detail. However, aggregation may
conceal some of the detail

CAPITAL MAINTENANCE

Financial performance of an entity is determined using two approaches, namely transaction approach
and capital maintenance approach

Transaction approach – traditional preparation of an income statement

Capital maintenance approach – net income occurs only after the capital used from the beginning of the
period is maintained.

Shareholders invest in entity to earn a RETURN ON CAPITAL or an amount in excess of their original
investment

RETURN OF CAPITAL – an erosion of the capital invested in the entity

Conceptual Framework considered two concepts of capital maintenance or well-offness, namely

financial capital and physical capital

FINANCIAL CAPITAL

 Such as invested money or invested purchasing power, capital is synonymous with net assets or
equity of the entity
 It is the monetary amount of the net assets contributed by shareholders and the amount of the
increase in net assets resulting from earnings retained by the entity
 The traditional concept based on historical cost and adopted by most entities

Net Income under financial capital

 Net income occurs “when the nominal amount of the net assets at the end of the year exceeds
the nominal amount of the net assets at the beginning of the period, after excluding
distributions to and contributions by owners during the period.”

PHYSICAL CAPITAL

 The quantitative measure of the physical productive capacity to produce goods and services
 Physical productive capacity may be based on, for example, units of output per day or physical
capacity of productive assets to produce goods and services
 Productive assets must be measured at current cost , rather than historical cost
 Physical capital is equal to the net assets of the entity expressed in terms of current cost

Net Income under physical capital

 Net income occurs “when the physical productive capital of the entity at the end of the year
exceeds the physical productive capital at the beginning of the period, also after excluding
distributions to and contributions from owners during the period.”