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THEME 2: FINANCIAL
STATEMENTS

Objectives

 Define the elements of the financial statements (LO 4)

 Know when the elements can be recognised
 Be able to list types of accounts (LO 5)
 Classify accounts into types of accounts (LO 6)

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Elements of the financial statements

Statement of financial position Statement of profit or loss and

other comprehensive income

Assets Income
Liabilities Expense
Equity

Textbook Chapter 1: pg 10 - 15 (1.5 )

ASSET

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Elements of the financial statements

ASSET:

Elements of the financial statements

ASSET:

“ A present economic resource controlled by the entity as a result of past events”

“ A right that has potential to produce economic benefits”

Textbook Chapter 1: pg 10 (1.5.1 )

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Elements of the financials statements

Asset:

Key aspects:
 Right;
 Potential to produce benefits; AND
 Control

Textbook Chapter 1: pg 10 (1.5.1 )

Elements of the financials statements

1) Right:
“An entity is entitled to something:
Established by contract, legislation or
similar means”

Textbook Chapter 1: pg 11 (1.5.1 )

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Elements of the financials statements

2) Potential to produce economic benefits:

“ Must have the potential (ability), therefore it

does not need to be certain, or even likely.

Typically, this would result in:

• Cash inflows, or avoiding cash outflows
• Receiving cash inflows by selling the resources

Refer to Textbook Chapter 1: pg 11 (1.5.1 ), for full list

Elements of the financials statements

2) Control:
“Ability to direct the use of economic
resources and obtain the economic benefits
from it”

Textbook Chapter 1: pg 11 (1.5.1 )

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Elements of the financials statements

Example:
Scenario
• On 1 February 2019, ABC Limited purchased a new factory for tekkies
which will have the springbok logo and colour on it. The factory was
purchased for R10million.
• The financial year-end of the ABC Limited is 30 June 2019.
Required:
 Discuss, i.t.o the Conceptual Framework for Financial Reporting , how the
factory should be treated in the books of ABC Limited for the year ended
30 June 2019

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Elements of the financials statements

Let's evaluate:
1) Right?
2) Potential to produce economic benefits?
3) Control?

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Elements of the financials statements

Solution:
 An asset is a present economic resource, controlled by the entity as a result of past
events
 Present economic resource
a) Right
 ABC limited is the legal owner of the factory as they have purchased it, therefore they
have a legal right to use it (manufacture tekkies).
b) Potential to produce economic benefits
 The tekkies produced in the factory will be sold and will result in sales income
(cash/trade receivables) – thus, the factory has the potential to produce economic
benefits.

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Elements of the financials statements

Solution(continued):
Controlled by the entity
 The factory can only be used by ABC Limited as they have exclusive rights to the
building, they also have the present ability to direct the use of it.
 Therefore, ABC Limited has full control over the patent.
Past event:
 The past event is the purchasing of the contract (1 Feb 2019).
CONCLUSION:

 The patent meets the definition of an asset and should be accounted for as such.

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LIABILITIES

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Elements of the financials statements

LIABILITY:

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Elements of the financial statements

LIABILITY:

“ A present OBLIGATION of the entity to transfer an economic resources as a result

of past events”

Textbook Chapter 1: pg 12 (1.5.2 )

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Elements of the financials statements

Asset:

Key aspects:
 Obligation;
 To transfer an economic resource; AND
 As a result of past events

Textbook Chapter 1: pg 12 (1.5.2 )

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Elements of the financials statements

1) Obligation:

“A duty or responsibility that an entity has

no practical ability to avoid.”

POTENTIALLY. Does not need to be certain or likely.

Textbook Chapter 1: pg 12 (1.5.2 )

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Elements of the financials statements

2) To transfer an economic resource:

“The potential to require the entity to
transfer economic resources.”
 Pay Cash
 Deliver goods/ provide services
 Transfer assets
 Issue a financial instrument
 Transfer if a specified uncertain event occurs

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Elements of the financials statements

3) As a result of past events

1. Already obtained economic benefits; AND

2. As a consequence, will/ may have to transfer EB.

Example: A loan

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EQUITY

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Elements of the financials statements

Equity:

“Owners interest in the net assets”

ASSETS ( Value
of Economic
Resources)

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Elements of the financials statements

Equity:

1. LIABILITIES 2. Equity

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Elements of the financials statements

Equity:

ASSETS 1. LIABILITIES 2. Equity

BASIC ACCOUNTING EQUATION

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INCOME AND EXPENSES

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Elements of the financials statements

Income

“An INCREASE in assets, DECREASE in

liability, that results in increases in equity”

 Expense

“An DECREASES in assets, INCREASE in

liability, that results in decrease in equity”

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RECOGNITION CRITERIA

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Recognition criteria

Process of recognizing items in the financial statements that meet the definition of
the specific elements.

FAITHFUL
RELEVANT
REPRESENTATION

Relevant:
Can be affected by many factors such as low probability of flow of economic
benefits or uncertainty whether an element exists.

Faithful representation:
Can be affected by many factors such as measurement uncertainty, recognition
inconsistency etc.

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ANY QUESTIONS?

Homework: Discussion question Conceptual

Framework ( Velobi Ltd)

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