This document further elaborates on the Conceptual framework, more specifically the elements of the CF and when they are recognised or derecognised in the financial statements.
CHAPTER 3 - Financial statements and the reporting entity
Financial statements provide (1) info about economic resources of the reporting entity, (2)
claims against the entity, and (3) changes in those resources and claims, that meet the
definitions of the elements of financial statements.
Objective and scope of financial statements (3.2 - 3.3)
• Objective => provide financial information about the reporting entity's assets, liabilities,
equity, income and expenses.
• Useful in assessing prospects for future net cash inflows to the reporting entity and in
assessing management stewardship of entity's economic resources (profitable in future? +
management stewardship).
Information is provided in:
a. Statement of financial position (balance sheet) by recognising: assets, liabilities and equity.
b. Statement of financial performance (statement of comprehensive income) by recognising
income and expenses.
c. Other statements and notes by presenting and disclosing:
i. Recognised assets, liabilities, equity, income and expenses, including info about their nature
and risks arising from the recognised assets and liabilities.
ii. Assets and liabilities that have not been recognised, including nature and risks arising from
them.
iii. Cash flows
iv. Contributions from holders of equity claims and distributions to them
v. The methods, assumptions and judgements used in estimating the amounts presented /
disclosed and changed in those methods, assumptions and judgements.
Reporting Period (3.4 - 3.7)
Financial statements are prepared for a specific time period - 12 months (reporting period)
and provide info about:
a. Assets and liabilities - including unrecognised assets and liabilities - and equity that
existed at the end /during the reporting period; and
b. Income and expenses for the reporting period.
• To help users to identify and assess changes and trends: financial statements
provide comparative info for at least one preceding reporting period.
, • Info about possible future transactions and other possible future events is included
in the financial statements if it:
a. Relates to the entity's assets or liabilities - Including unrecognised assets or liabilities
- or equity that existed at the end / during the reporting period / income / expenses
for the reporting period; and
b. Is useful to users of financial statements.
• Financial statements include info about transactions and other events that have
occurred after the end of the reporting period if providing that info is necessary to
meet objective of financial statements.
Going concern assumption (3.9)
• Financial statements prepared with the assumption that the reporting entity is a
going concern + will continue in operation for foreseeable future.
• It is assumed that the entity has neither the intention nor the need to enter
liquidation or to cease trading. (Expect entity to be solvent and liquid)
• If such intention or need exists = financial statements may have to be prepared on a
different basis.
Reporting entity (3.10)
• A reporting entity is an entity that is required / chooses to prepare financial
statements.
• Can be a single entity / portion of an entity / compromise of more than one entity.
• Not necessarily a legal entity.
• Sometimes one entity (parent) has control over another entity (subsidiary).
• If reporting entity comprises of both the parent and its subsidiaries = reporting entity
is referred to as "consolidated financial statements"
• Parent alone = unconsolidated financial statements
CHAPTER 4: The elements of financial statements
Introduction (4.2)
• Elements of financial statements as defined in the CF are:
a. Assets, liabilities and equity = relate to reporting entity's financial position; and
b. Income and expenses = relate to a reporting entity's financial performance
, • Those elements are linked to economic resources, claims and changes in economic
resources and claims.
Item discussed in Element Definition or description
chapter 1
Economic resource Asset A present economic resource controlled by the
entity as a result of past events.
An economic resource is a right that has the
potential to produce economic benefits.
Claim Liability A present obligation of the entity to transfer an
economic resource as a result of past events.
Equity The residual interest in the assets of the entity
after deducting all its liabilities.
Changes in economic Income Increases in assets, or decreases in liabilities, that
Income result in increases in equity, other than those
resources and claims, relating to contributions from holders of equity
reflecting financial claims.
performance
Expenses
Decreases in assets, or increases in liabilities, that
result in decreases in equity, other than those
relating to distributions to holders of equity claims.
Other changes in Contributions from holders of equity claims, and
economic resources distributions to them.
and claims
Exchanges of assets or liabilities that do not result
in increases or decreases in equity.
Definition of an asset (4.3 4.25)
• An asset is a present economic resource controlled by the entity as a result of past
events.
• An economic resource is a right that has the potential to produce economic benefits.
o Entity cannot have a right to obtain economic benefits from itself.
o Potential to produce economic benefits does not need to be certain or even likely.
o Certainty or likely not required = Potential
o Control = ability to direct the use of economic resource + right to obtain any
economic benefits from resource.
o Prevent others from directing use of economic resource + obtaining benefits.
o Past event = already happened
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