ASSET
CFAS – Chapter 5 – notes
(Valix-Peralta, 2022 Edition)
CONCEPTUAL FRAMEWORK
Elements of financial statements
ELEMENTS OF FINANCIAL STATEMENTS
⮚ Portray the financial effects of
transactions or other events by grouping
them into broad classes according to their
economic characteristics.
⮚ Broad classes > elements of financial
statements
⮚ Quantitative information reported in the
statement of financial position and
income statement.
⮚ Building blocks from which financial
statements are constructed.
⮚ The presentation of these elements in the
SFP and income statement involves a
process of classification and
subclassification.
⮚ Elements directly related to the
measurement of financial position are:
a. Asset
b. Liability
c. Equity
⮚ Financial performance:
a. Income
b. Expenses
⮚ The Conceptual Framework identifies no
elements that are unique to the statement
of changes in equity because such
statement comprises items that appear in
the SFP and income statement.
⮚ Equity – residual interest in the assets of
the entity after deducting all of the
liabilities.
⮚ Under the Revised Conceptual
Framework, it 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.
⮚ New definition: An economic resource
and that the potential economic benefits
no longer need to be expected to flow to
the entity.
Essential characteristics of asset
a. The asset is a present economic resource.
b. The economic resource is a right that has
a potential to produce economic benefits.
c. The economic resource is controlled by
the entity as a result of past events.
Right
Rights that have the potential to produce
economic benefits may take the following forms:
1. Rights that correspond to an obligation of
another entity
a. Right to receive cash
b. Right to receive goods or services
c. Right to exchange economic resources
with another party on favorable terms
d. Right to benefit from an obligation of
another party if a specified uncertain
future event occurs
2. Rights that do not correspond to an
obligation of another entity
a. Right over physical objects, such as
property, plant and equipment or
inventories
b. Right to intellectual property
3. Rights established by contract or
legislation such as owning a debt
instrument or an equity instrument or
owning a registered patent.
Potential to produce economic benefits
⮚ Economic resource – a right that has the
potential to produce economic benefits.
⮚ For the potential to exist, it does not need
to be certain or even likely that the right
will produce economic benefits.
⮚ It is only necessary that the right already
exists.
⮚ A right can meet the definition of an
economic resource even if the probability
that it will produce economic benefit is
low.
⮚ Economic resource – the present right
that contains the potential and not the
future economic benefits that the right
may produce.
⮚ An economic resource could produce
economic benefits if an entity is entitled:
a. To receive contractual cash flows
b. To exchange economic resources with
another party on favorable terms
c. To produce cash inflows or avoid cash
outflows
d. To receive cash by selling the economic
resource
e. 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.
⮚ Control – includes the ability to prevent
others from using such asset and
therefore preventing others from
obtaining the economic benefits from the
asset.
⮚ Control – may arise if an entity enforces
legal rights.
⮚ If there are no legal rights, control can still
exist if an entity has other means of
ensuring that no other party can benefit
from an asset.
LIABILITY
⮚ Under the Revised Conceptual
Framework, it is defined as present
obligation of an entity to transfer an
economic resource as a result of past
events.
⮚ New definition: obligation to transfer an
economic resource and not the ultimate
outflow of economic benefits.
⮚ The outflow of economic benefits no
longer needs to be expected similar to the
definition of an asset.
⮚ The new definition to some extent is
inconsistent with the definition under IAS
37.
⮚ In case of conflict, the IASB stated that the
requirements of a Standard shall always
prevail over the Conceptual Framework.
Essential characteristics of liability
a. The entity has an obligation.
b. The obligation is to transfer an economic
resource.
c. The obligation is a present obligation that
exists as a result of past event.
Obligation
⮚ A duty or responsibility that an entity has
no practical ability to avoid.
⮚ Can either be legal or constructive.
⮚ May be legally enforceable as a
consequence of a binding contract or
statutory requirement.
⮚ Constructive obligations – arise from
normal business practice, custom and a
 desire to maintain good business
relations or act in an equitable manner.
Transfer of an economic resource
Obligations to transfer an economic resource
include:
a. Obligation to pay cash
b. Obligation to deliver goods or noncash
resources
c. Obligation to provide services at some
future time
d. Obligation to exchange economic
resources with another party on
unfavorable terms
e. Obligation to transfer an economic
resource if specified uncertain event
occurs
Past event
An obligation exists as a result of past event if
both of the ff. conditions are satisfied:
a. An entity has already obtained economic
benefits
b. An entity must transfer an economic
resource
Definition of income
⮚ Defined as increases in assets or
decreases in liabilities that result in
increases in equity, other than those
relating to contributions from equity
holders.
⮚ Income encompasses both revenue and
gains.
⮚ Revenue – arises in the course of the
ordinary regular activities and is referred
to by variety of different names including
sales, fees, interest, dividends, royalties
and rent.
⮚ Essence of revenue: regularity
⮚ Gains – other items that meet the
definition of income and do not arise in
the course of the ordinary regular
activities.
⮚ Gains – include gain from disposal of
noncurrent asset, unrealized gain on
trading investment and gain from
expropriation.
Statement of financial performance
⮚ Refers to the income statement and a
statement presenting other
comprehensive income.
⮚ Income statement or statement of
profit or loss – primary source of
information about an entity’s financial
performance.
⮚ All income and expenses are included in
profit or loss.
⮚ In developing accounting standards, there
are some items of income and expenses
that are included in other comprehensive
income and not in profit or loss.
⮚ There are instances that an amount in
other comprehensive income in one
reporting period may be recycled to profit
or loss in another reporting period.
⮚ Recycling is permitted as long as it would
result to relevant and faithfully
represented information about financial
performance.
Definition of expense
⮚ Decreases in assets or increases in
liabilities that result in decreases in
equity, other than those relating to
distributions to equity hoders.
⮚ Expenses – encompass losses and
expenses that arise in the course of the
ordinary regular activities.
⮚ Expenses – arise in the course of
ordinary regular activities include COGS,
wages and depreciation.
⮚ Losses – do not arise in the course of the
ordinary regular activities and include
losses resulting from disasters.