Conceptual Framework:

Elements of the Financial

Statements
CFAS Course Module 05
Elements of the FS
● Elements of the Financial Statements are the broad classes or groups defined
by their economic characteristics.
● Elements related to the measurement of financial position are the following:
○ Asset
○ Liability
○ Equity
● Elements related to the measurement of financial performance are:
○ Income
○ Expenses
ASSET
● Conceptual Framework Definition: An asset is defined as a present economic
resource controlled by the entity as a result of past events
● Economic Resource - a right that has the potential to produce economic
benefits; but currently economic benefits is not necessary before we classify
an acquisition as an asset.
● Essential Characteristic of an Asset
○ Present Economic Resource
○ The economic resource is a right that has the potential to produce economic benefits
○ The economic resource is controlled by the entity as a result of past events
Right to Economic Benefit
● Rights that correspond to an obligation of another entity
○ Right to receive cash
○ Right to receive goods and services
○ Right to exchange economic resources with another party on favorable terms
○ Right to benefit from an obligation of another party if a specified uncertain future event occurs
● Rights that do not correspond to an obligation of another entity
○ Right over physical objects
○ Rights to intellectual property
● Rights established by contract or legislation such as owning financial
instruments and intangible assets
Potential to Produce Economic Benefits
● Potential need not be certain of even likely; but the right should exist
● Economic resources could produce economic benefits if an entity is entitled:
○ To receive contractual cash flows
○ To exchange economic resources with another party on favorable terms
○ To produce cash inflows or avoid cash outflows
○ To receive cash by selling economic resource
○ To extinguish a liability by transferring an economic resource
Control of an economic resource
● An entity controls an asset if it has the present ability to direct the use of the
asset and obtain the economic benefits that flow from it,
● This is also the ability to prevent others from using the asset through legal
rights
LIABILITY
A liability is defined as a present obligation of an entity to transfer economic
resource as a result of past events

Essential Characteristics of liability

● The entity has an obligation

● The obligation is to transfer an economic resource
● The obligation is a present obligation that exists as a result of past event
Obligation
An obligation is a duty or responsibility that an entity has no practical ability to
avoid

It arises from legal or constructive events

● Legal - a consequence of contract or statutory requirement

● Constructive - arises from normal business practice, custom, and policy
Transfer of economic resource
● Obligation to pay cash
● Obligation to deliver goods or non cash resources
● Obligation to provide services at some future time
● Obligation to exchange economic resources with another party on
unfavorable terms
● Obligation to transfer an economic resource if specified uncertain future evetn
occurs
Past Event
Obligations exists as a result of past event upon the satisfaction of the following:

● An entity has already obtained economic benefits

● An entity must transfer an economic resource
INCOME
Income is defined as increases in assets or decreases in liabilities that result in
increases in equity,other than those relating to contributions from equity holders.

The essence of revenue is regularity of transaction, thus one time gains do not fit
the definition of revenue
Statement of Financial Performance
● Refers to the profit or loss and other item showing other comprehensive
income
● The general rule is that all income and expenses must be included in the
profit or loss,but developing standards has identified other comprehensive
income.
Expenses
Expense is defined as decreases in assets or increases in liabilities that result in
decreases in equity, other than those relating to distributions to equity holders

Expenses include:

● Items that arise in the normal course of business or those that match revenue,
such as cost of goods sold, wages, depreciation
● Losses that do not arise from the regular course of business