Gregorius Achilles Gunawan

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Weekly Summary Financial Accounting Theory – Week 6
Asset
Defined: an asset is a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity
- Controlled by entity: An entity’s right to use or control an asset is never absolute
- Past event: Event can be interpreted in different ways  executory contracts
- Future economic benefits:
Recognition:
- the future economic benefits must be probable
- the asset must be capable of being measured reliably
Measurement:
- Tangible:
a. Traditional approach  historical cost
b. IASB  Fair value – exit value or value in use
- Intangible:
a. cost (less accumulated amortisation and impairment) is commonly used
b. fair values from an active market
c. internally generated intangibles cannot be recognised
Liabilities
Defined: A present obligation of the entity arising from past events, the settlement of which is expected to result
in an outflow from the entity of resources embodying economic benefits - IASB Framework
Recognition:
- Reliance on the law - legal enforceability
- Determination of the economic substance of the event - ‘real’ obligation
- Ability to measure the value of the liability  normally the nominal amount & if period longer than 12-
months, based on the present value of expected future cash flows
- Use of the conservatism principle  at what point is the entity too conservative
Measurement:
- Under IFRS  Historical cost
- Fair Value Measurement  Leases, Financial Instrument, Share Based Payments, Business
Combination
Owner’s Equity
Defined: the residual interest in the assets of the entity after deduction of its liabilities  residual claim
Concept of capital:
- Influenced by legal prescriptions - capital maintenance
- Financial capital  invested money or invested purchasing power
- Physical capital  the productive capacity of the entity
- Capital can be measured on either a nominal dollar or purchasing power (‘real’) scale
Classification:
- Retained Earnings
- Share dividends