CHAPTER 5

ELEMENTS OF FINANCIAL STATEMENTS

- Quantitative information reported in the statement of financial position and income statement.
- Presentation of these elements involves a process of classification and subclassification

Elements directly related to the measurement of financial position are:

a. Asset
b. Liability
c. Equity

Elements directly related to the measurement of financial performance:

a. Income
b. Expense

Conceptual Framework identifies no elements that are unique to the statement of changes in equity
because such statement comprises items that appear in the statement of financial position and the
income statement

Equity – residual interest in the assets of the entity after deducting all of the liabilities

ASSET

Under Revised Conceptual Framework,

- An asset is a present economic resource controlled by the entity as a result of past events

Economic resource – right that has the potential to produce economic benefits

New definition: an asset is an economic resource and that the potential economic benefits no longer
need to be expected to flow to the entity

Essential characteristics of asset

a. The asset is a present economic resource

b. The Economic resource is a right that has the potential to produce economic benefits
c. The economic resource is controlled by the entity as a result of past events

Right

1. Rights that correspond to an obligation of another entity

a. Right to receive cash
b. Right to receive goods or services
c. Right to exchange economic resources with another party on favorable terms
d. 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, such as property, plant and equipment of inventories
b. Right to intellectual property

3. Rights established by contract or legislation such as owning a debt instrument or an equity

instrument or owning a registered patent.

Potential to produce economic benefits

- For the potential to exist, it does not need to be certain or even likely that the right will produce
economic benefits
- It is only necessary that the right already exists

Economic resource can produce economic benefits if an entity is entitled:

a. To receive contractual cash flows

b. To exchange economic resources with another party on favorable terms
c. To produce cash inflows or avoid cash outflows
d. To receive cash by selling the economic resource
e. To extinguish a liability by transferring an economic resource

CONTROL OF AN ECONOMIC RESOURCE

An entity controls an asset if it has the present others from using such asset and obtain the economic
benefits that flow from it.

Control – ability to prevent others from using such asset and therefore preventing others from obtaining
the economic benefits from the asset.

- May arise if an entity enforces legal rights

LIABILITY

Under the Revised Conceptual Framework,

- A liability is defined as a present obligation of an entity to transfer an economic resource as a

result of past events

New definition: clarifies that a liability is the obligation to transfer an economic resource and not the
ultimate outflow of economic benefits

Essential characteristics of liability

a. Entity has an obligation

- Entity liable must be defined. It is not necessary that the payee or the entity to whom the
obligation is owed be identified
 b. The obligation is to transfer an economic resource.
c. The obligation is a present obligation that exists as a result of past event
- Liability is not recognized until it is incurred

OBLIGATION

- A duty or responsibility that an entity has no practical ability to void. Obligations can either be
legal or constructive

Legally enforceable as a consequence of a binding contract or statutory requirement

Constructive obligations – arise from normal business practice, custom and a desire to maintain
good business relations or act in an equitable manner

TRANSFER OF AN ECONOMIC RESOURCE

Obligations to transfer an economic resource include:

a. Obligation to pay cash

b. Obligation to deliver goods or noncash resources
c. Obligation to provide services at some future time
d. Obligation to exchange economic resources with another party on unfavorable terms
e. Obligation to transfer an economic resource if specified uncertain future event occurs

Past event

- An obligation exists as a result of past event if both are satisfied:

a. An entity has already obtained economic benefits
b. An entity must transfer an economic resource

INCOME

- Increase in assets or decrease in liabilities that result in increases in equity, other than those
relating to contributions from equity holders.

Revenue – arises in the course of the ordinary regular activities and is referred to by variety of
different names including sales, fees, interest, dividends, royalties and rent.

- Essence is regularity

Gains – represent other items that meet the definition of income and do not arise in the course of
the ordinary regular activities

STATEMENT OF FINANCIAL PERFORMANCE

- Refers to the statement of profit or loss and a statement presenting other comprehensive
income
Expenses

- Decrease in asset or increase in liabilities that result in decreases in equity, other than those
relating to distributions to equity holders
- Encompasses losses as well as those expenses that arise in the course of the ordinary regular
activities include cost of goods sold, wages and depreciation

Losses

- Do not arise in the course of the ordinary regular activities and include losses resulting from
disasters