Description
Financial statements portray the financial effects of transactions and other events by grouping them into broad classes according to their economic characteristics.
ELEMENTS OF FINANCIAL STATEMENTS
Financial statements portray the financial effects of transactions and other events by
grouping them into broad classes according to their economic characteristics. These
broad classes are termed the elements of financial statements. The elements directly
related to the measurement of financial position in the balance sheet are assets, liabilities
and equity. The elements directly related to the measurement of performance in the
statement of profit and loss are income and expenses. The cash flow statement usually
reflects elements of statement of profit and loss and changes in balance sheet elements;
accordingly, this Framework identifies no elements that are unique to this statement.
The presentation of these elements in the balance sheet and the statement of profit and
loss involves a process of sub-classification. For example, assets and liabilities may be
classified by their nature or function in the business of the enterprise in order to display
information in the manner most useful to users for purposes of making economic
decisions.
FINANCIAL POSITION
The elements directly related to the measurement of financial position are assets,
liabilities and equity. These are defined as follows:
(a) An asset is a resource controlled by the enterprise as a result of past events from
which future economic benefits are expected to flow to the enterprise.
(b) A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits.
(c) Equity is the residual interest in the assets of the enterprise after deducting all its
liabilities.
The definitions of an asset and a liability identify their essential features but do not
attempt to specify the criteria that need to be met before they are recognized in the
balance sheet. Thus, the definitions embrace items that are not recognized as assets or
liabilities in the balance sheet because they do not satisfy the criteria for recognition.
In particular, the expectation that future economic benefits will flow to or from an
enterprise must be sufficiently certain to meet the probability criterion before an asset or
liability is recognized.
In assessing whether an item meets the definition of an asset, liability or equity,
consideration needs to be given to its underlying substance and economic reality and not
merely its legal form. Thus, for example, in the case of hire purchase, the substance and
economic reality are that the hire purchaser acquires the economic benefits of the use of
the asset in return for entering into an obligation to pay for that right an amount
approximating to the fair value of the asset and the related finance charge. Hence, the hire
purchase gives rise to items that satisfy the definition of an asset and a liability and are
recognized as such in the hire purchaser’s balance sheet.
ASSETS
The future economic benefit embodied in an asset is the potential to contribute, directly
or indirectly, to the flow of cash and cash equivalents to the enterprise. The potential may
be a productive one that is part of the operating activities of the enterprise. It may also
take the form of convertibility into cash or cash equivalents or a capability to reduce cash
outflows, such as when an alternative manufacturing process lowers the costs of
production.
An enterprise usually employs its assets to produce goods or services capable of
satisfying the wants or needs of customers; because these goods or services can satisfy
these wants or needs, customers are prepared to pay for them and hence contribute to the
cash flows of the enterprise. Cash itself renders a service to the enterprise because of its
command over other resources.
The future economic benefits embodied in an asset may flow to the enterprise in a
number of ways. For example, an asset may be:
(a) used singly or in combination with other assets in the production of goods or services
to be sold by the enterprise;
(b) exchanged for other assets;
(c) used to settle a liability; or
(d) distributed to the owners of the enterprise.
Many assets, for example, plant and machinery, have a physical form. However, physical
form is not essential to the existence of an asset; hence patents and copyrights, for
example, are assets if future economic benefits are expected to flow from them and if
they are controlled by the enterprise.
Many assets, for example, receivables and property, are associated with legal rights,
including the right of ownership. In determining the existence of an asset, the right of
ownership is not essential; thus, for example, an item held under a hire purchase is an
asset of the hire purchaser since the hire purchaser controls the benefits which are
expected to flow from the item. Although the capacity of an enterprise to control benefits
is usually the result of legal rights, an item may nonetheless satisfy the definition of an
asset even when there is no legal control. For example, know-how obtained from a
development activity may meet the definition of an asset when, by keeping that know-
how secret, an enterprise controls the benefits that are expected to flow from it.
The assets of an enterprise result from past transactions or other past events. Enterprises
normally obtain assets by purchasing or producing them, but other transactions or events
may also generate assets; examples include land received by an enterprise from
government as part of a programme to encourage economic growth in an area and the
discovery of mineral deposits. Transactions or other events expected to occur in the
future do not in themselves give rise to assets; hence, for example, an intention to
purchase inventory does not, of itself, meet the definition of an asset.
There is a close association between incurring expenditure and obtaining assets but the
two do not necessarily coincide. Hence, when an enterprise incurs expenditure, this may
provide evidence that future economic benefits were sought but is not conclusive proof
that an item satisfying the definition of an asset has been obtained. Similarly, the absence
of a related expenditure does not preclude an item from satisfying the definition of an
asset and thus becoming a candidate for recognition in the balance sheet.
doc_777547916.docx
Financial statements portray the financial effects of transactions and other events by grouping them into broad classes according to their economic characteristics.
ELEMENTS OF FINANCIAL STATEMENTS
Financial statements portray the financial effects of transactions and other events by
grouping them into broad classes according to their economic characteristics. These
broad classes are termed the elements of financial statements. The elements directly
related to the measurement of financial position in the balance sheet are assets, liabilities
and equity. The elements directly related to the measurement of performance in the
statement of profit and loss are income and expenses. The cash flow statement usually
reflects elements of statement of profit and loss and changes in balance sheet elements;
accordingly, this Framework identifies no elements that are unique to this statement.
The presentation of these elements in the balance sheet and the statement of profit and
loss involves a process of sub-classification. For example, assets and liabilities may be
classified by their nature or function in the business of the enterprise in order to display
information in the manner most useful to users for purposes of making economic
decisions.
FINANCIAL POSITION
The elements directly related to the measurement of financial position are assets,
liabilities and equity. These are defined as follows:
(a) An asset is a resource controlled by the enterprise as a result of past events from
which future economic benefits are expected to flow to the enterprise.
(b) A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits.
(c) Equity is the residual interest in the assets of the enterprise after deducting all its
liabilities.
The definitions of an asset and a liability identify their essential features but do not
attempt to specify the criteria that need to be met before they are recognized in the
balance sheet. Thus, the definitions embrace items that are not recognized as assets or
liabilities in the balance sheet because they do not satisfy the criteria for recognition.
In particular, the expectation that future economic benefits will flow to or from an
enterprise must be sufficiently certain to meet the probability criterion before an asset or
liability is recognized.
In assessing whether an item meets the definition of an asset, liability or equity,
consideration needs to be given to its underlying substance and economic reality and not
merely its legal form. Thus, for example, in the case of hire purchase, the substance and
economic reality are that the hire purchaser acquires the economic benefits of the use of
the asset in return for entering into an obligation to pay for that right an amount
approximating to the fair value of the asset and the related finance charge. Hence, the hire
purchase gives rise to items that satisfy the definition of an asset and a liability and are
recognized as such in the hire purchaser’s balance sheet.
ASSETS
The future economic benefit embodied in an asset is the potential to contribute, directly
or indirectly, to the flow of cash and cash equivalents to the enterprise. The potential may
be a productive one that is part of the operating activities of the enterprise. It may also
take the form of convertibility into cash or cash equivalents or a capability to reduce cash
outflows, such as when an alternative manufacturing process lowers the costs of
production.
An enterprise usually employs its assets to produce goods or services capable of
satisfying the wants or needs of customers; because these goods or services can satisfy
these wants or needs, customers are prepared to pay for them and hence contribute to the
cash flows of the enterprise. Cash itself renders a service to the enterprise because of its
command over other resources.
The future economic benefits embodied in an asset may flow to the enterprise in a
number of ways. For example, an asset may be:
(a) used singly or in combination with other assets in the production of goods or services
to be sold by the enterprise;
(b) exchanged for other assets;
(c) used to settle a liability; or
(d) distributed to the owners of the enterprise.
Many assets, for example, plant and machinery, have a physical form. However, physical
form is not essential to the existence of an asset; hence patents and copyrights, for
example, are assets if future economic benefits are expected to flow from them and if
they are controlled by the enterprise.
Many assets, for example, receivables and property, are associated with legal rights,
including the right of ownership. In determining the existence of an asset, the right of
ownership is not essential; thus, for example, an item held under a hire purchase is an
asset of the hire purchaser since the hire purchaser controls the benefits which are
expected to flow from the item. Although the capacity of an enterprise to control benefits
is usually the result of legal rights, an item may nonetheless satisfy the definition of an
asset even when there is no legal control. For example, know-how obtained from a
development activity may meet the definition of an asset when, by keeping that know-
how secret, an enterprise controls the benefits that are expected to flow from it.
The assets of an enterprise result from past transactions or other past events. Enterprises
normally obtain assets by purchasing or producing them, but other transactions or events
may also generate assets; examples include land received by an enterprise from
government as part of a programme to encourage economic growth in an area and the
discovery of mineral deposits. Transactions or other events expected to occur in the
future do not in themselves give rise to assets; hence, for example, an intention to
purchase inventory does not, of itself, meet the definition of an asset.
There is a close association between incurring expenditure and obtaining assets but the
two do not necessarily coincide. Hence, when an enterprise incurs expenditure, this may
provide evidence that future economic benefits were sought but is not conclusive proof
that an item satisfying the definition of an asset has been obtained. Similarly, the absence
of a related expenditure does not preclude an item from satisfying the definition of an
asset and thus becoming a candidate for recognition in the balance sheet.
doc_777547916.docx