ACCOUNTING CONCEPTUAL FRAMEWOKR AND ACCOUNTING STANDARDS
Chapter 5: 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.
ELEMENTS OF FINANCIAL STATEMENTS
• The broad classes
• Quantitative information reported in the statement
of financial position and income statement.
• Building blocks from which FS are constructed.
Financial Position
a. Asset
b. Liability
c. Equity
Assets – Liabilities = Equity
Financial Performance
a. Income
b. Expense
Income – Expenses = Profit
Recognition – the process of incorporating an item that meets
the definition of an element and satisfies the recognition
criteria, into the statement of financial position or statement
of profit or loss and other comprehensive income.
ASSETS
• 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.
• Thus, it is that the potential economic benefits no
longer need to be expected to flow to the entity.
Essential Characteristics of an Asset
a) The asset is a present economic resource
b) The economic resource is a right that has the
potential to produce economic benefits
c) The economic resource is controlled by the entity
as a result of past events
Asset Measurement
▪ Cash transaction – Cash payment
▪ Noncash or exchange transaction
o Fair value of the asset given
o Fair value of the asset received
o Carrying amount of the asset given
Rights that have the potential to produce economic benefits:
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
a. Owning a debt instrument or an equity
instrument or owning a registered
patent.
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.
- The economic resource is 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 flow
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 is the ability to prevent others from using such
asset and therefore preventing others from obtaining
the economic benefits from the assets. Thus, it may
arise if an entity enforces legal rights.
ACCOUNTING CONCEPTUAL FRAMEWOKR AND ACCOUNTING STANDARDS
LIABILITY
• Present obligation of an entity to transfer an
economic resource as a result of past events.
• The new definition clarifies that a liability is the
obligation to transfer economic resource and not the
ultimate outflow of economic benefits.
Essential Characteristics of a Liability
- The entity has an obligation
- The entity liable must be identified.
However, it is not necessary that the
payee or the entity to whom the
obligation is owed be identified.
- The obligation if to transfer an economic resource
- The obligation is a present obligation that exists
as a result of past events
- Means that liability is not recognized
unless incurred.
Obligation – is a duty or responsibility that an entity has no
practical ability to avoid. Obligations can either be legal or
constructive.
a. Legal Obligation – obligations may be legally
enforceable as a consequence of a binding contract or
statutory requirement.
b. Constructive Obligations – arise from normal
business practice, custom and 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 future event occurs
Past Event – an obligation exists as a result
of past event if both of the following conditions are
satisfied:
a. An entity has already obtained economic
benefits
b. An entity must transfer an economic
resource
EQUITY
• residual interest in the assets of the entity after
deducting all liabilities.
INCOME
• Increases in assets or decreases in liabilities that
result in increases in equity, OTHER THAN those
relating to contributions from equity holders.
• Income is increases in economic benefits during the
accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that
result in increases in equity, other than those relating
to contributions from equity participants.
• 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.
The essence of revenue is regularity.
Gains – represent 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
exportation.
Point of Sale – Recognition of Income
STATEMENT OF FINANCIAL PERFORMANCE
• Refers to the income statement and a statement
presenting other comprehensive income.
Income Statement / Statement of Profit or Loss
- is the primary source of information about an
entity’s financial performance. As a general rule,
all income and expenses are included in profit or
loss.
- However, 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 if such presentation
provide more relevant and faithfully represented
information about financial information.
EXPENSE
• Decreases in assets or increases in liabilities that
result in decreases in equity, OTHER THAN those
relating to distributions to equity holders.
• Decreases in economic benefits during the
accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that
result in decreases in equity, other than those relating
to distributions to equity participants.
ACCOUNTING CONCEPTUAL FRAMEWOKR AND ACCOUNTING STANDARDS

The definition of expense has changed to reflect the

change in the definition of asset and liability.
• Expenses encompasses losses as well as those
expenses that arise in the course of regular
activities.
• Expenses that arise in the course of ordinary
regular activities include cost of goods sold,
wages and depreciation.
• Losses do not arise in the course of ordinary
regular activities and include losses resulting
from disasters.

Expense Recognition Principle

1. Direct association or matching
2. Systematic and rational allocation
3. Immediate recognition

Measurement – the process of determining the

monetary amounts at which the elements of the
financial statements are to be recognized and carried
in the statement of financial position and statement
of comprehensive income.
ACCOUNTING CONCEPTUAL FRAMEWOKR AND ACCOUNTING STANDARDS
Chapter 6: RERCOGNITION AND MEASUREMENT
RECOGNITION
• As the process of capturing for inclusion in the
financial statements an item that meets the
DEFINITION of an ASSET, LIABILITY, EQUITY, INCOME
OR EXPENSE.
• The amount at which an asset, a liability or equity is
recognized in the statement of financial position is
reported as carrying amount.
• Recognition links the elements to the financial
statement of financial position and statement of
financial performance.
• For example, the recognition of income happens
simultaneously with the recognition of an increase in
asset and decrease in liability.
Recognition Criteria:
➢ Only items that meet the definition of an asset,
liability or equity are recognized in the statement
of financial position.
➢ Only items that meet the definition of an income
or expense are recognized in the statement of
financial performance.
➢ Items are recognized only when their recognition
provides users of FS with information that is
both relevant and faithfully represented.
➢ Recognition does not focus anymore on how
probable economic benefits will flow to or from
the entity and that the cost can be measured
reliably.
➢ An asset or liability and any corresponding
income or expense can exist even if the
probability of inflow or outflow of the benefits is
low.
INCOME RECOGNITION
Basic Principle: INCOME shall be recognized when EARNED.
When is Income Considered to be Earned?
• In the sale of goods in the ordinary course of
business, the point of sale is the point of income
recognition.
• Stated differently, legal title to the goods passes to
the buyer at the point of sale.
• However, in certain condition, income may be
recognized at the point of production, during
production and at the point of collection.
EXPENSE RECOGNITION
Expense Recognition Principle:
EXPENSES are recognized when incurred.
When are Expenses Incurred?
• MATCHING PRINCIPLE – generation of revenue is
not without any cost. There has got to be some
cost in earning a revenue. It requires that those
costs and expense incurred in earning a revenue
shall be reported in the same period.
Matching Principle Application:
1. Cause and Effect Association
- expense is recognized when the
revenue is already recognized.
- The reason is presumed direct
association of the expense with specific
income.
- Strict Matching Principle
2. Systematic and Rational Allocation
- some costs are expensed by simply
allocating them over the periods
benefited.
- The reason for this principle is that the
cost incurred will benefit future periods
and that there is an absence of a direct
or clear association of the expense with
specific revenue.
- When economic benefits are expected
to arise over several accounting periods
and the association with income can
only be broadly or indirectly
determined, expenses are recognized
on the basis of systematic and
allocation procedures.
3. Immediate Recognition
- the cost incurred is expensed
OUTRIGHT because of uncertainty of
future economic benefits or difficulty of
reliably associating certain costs with
future revenue.
- An expense is recognized immediately:
a. When an expenditure
produces no future economic
benefit.
b. When cost incurred does not
qualify or ceases to qualify for
recognition as an asset.
ACCOUNTING CONCEPTUAL FRAMEWOKR AND ACCOUNTING STANDARDS

DERECOGNITION 2. Historical cost of a liability is updated

• The removal of all or part of a recognized asset because of
or liability from the statement of financial a. Payment made or satisfying an
position. obligation to deliver goods
• It occurs normally when an item no longer meets b. Increase in value of the obligation to
the definition of an asset or a liability. transfer economic resources such that
the liability becomes onerous
Derecognition of an Asset – entity loses control c. Accrual of interest to reflect any
of all or part of the asset financing component of the liability
Derecognition of a Liability – entity no longer has d. Amortized cost measurement of
a present obligation for all or part of the liability. financial liability

MEASUREMENT 2. CURRENT VALUE

- Defined as quantifying in monetary terms the a) Fair Value
elements in the financial statements. - Fair value of an asset is the price
that would be received to sell an
Categories: asset in an orderly transaction
between market participants at
1. HISTORICAL COST measurement date.
- Historical cost of an asset or original - Fair value of liability is the price
acquisition cost of an asset is the cost that would paid to transfer a
incurred in acquiring or creating the asset liability in an orderly transaction
comprising the consideration paid plus between market participants at
transaction cost. the measurement date
- Historical cost of a liability is the - Fair value is an exit price or exit
consideration received to incur the liability value.
minus transaction costs. - Fair value can be observed
- Historical cost is the entry price or entry directly using market price of the
value to acquire an asset or to incur a asset or liability in an active
liability. market. In cases where fair value
- An application of the historical cost cannot be directly measured, an
measurement is to measure financial asset entity can use present value of
and financial liability at amortized cost. cash flows.
- Amortized cost reflects the estimate of - Fair value is not adjusted for
future cash flows discounted at a rate transaction cost. The reason is
determined at initial recognition. that such cost is a characteristic
of the transaction and not of the
Historical Cost Updated asset or liability.
b) Value in Use for Asset
1. Historical cost of an asset is updated - The present value of the cash
because of flows that an entity expects to
a. Depreciation and amortization derive from the use of an asset
b. Payment received as a result of and from the ultimate disposal.
disposing part or all of the asset - Does not include transaction
c. Impairment cost on acquiring the asset but
d. Accrual of interest to reflect any includes transaction cost on
financing component of the asset the disposal of the asset.
e. Amortized cost measurement of - Value in use is an exit price or
financial asset exit value.
ACCOUNTING CONCEPTUAL FRAMEWOKR AND ACCOUNTING STANDARDS
c) Fulfillment for Liability
- Present value of cash that an
entity expects to transfer in
paying or settling a liability.
- Fulfillment value is the present
value of cash that an entity
expects to transfer in paying or
settling a liability.
- Fulfillment value does not
include transaction cost on
incurring a liability but includes
transaction cost on fulfillment
of a liability.
- Fulfillment value is an exit
price or exit value.
d) Current Cost
- Current cost of an asset is the
cost of an equivalent asset at
the measurement date
comprising the consideration
paid and transaction cost.
- Current cost of a liability is the
consideration that would be
received less any transaction
cost at measurement date.
- Similar to historical cost,
current cost is also based on
the entry price or entry value
but reflects market conditions
on measurement date.
Selecting a Measurement Basis
➢ In selecting a measurement basis for an asset or a
liability and for the related income and expense, it is
necessary to consider the nature of the information
that the measurement basis will produce.
➢ In most cases, no single factor will determine which
measurement basis should be selected.
➢ The relative importance of each factor will depend on
facts and circumstances.
➢ The information produced by the measurement basis
must be useful to the users of financial statements.
➢ To achieve this, the information must be both
relevant and faithfully represented.
➢ Historical cost is the measurement basis most
commonly adopted in preparing financial statements.
In many situations, it is simpler and less costly to
measure historical cost than it is to measure a current
value.
➢ In addition, historical cost is generally well
understood and verifiable.
➢ The IASB did not mandate a single measurement basis
because the different measurement bases could
produce useful information under different
circumstances.
BASIC PRINCIPLES
Objectivity Principle
• States that all business transactions that will be
entered in the accounting records must be duly
supported by verifiable evidence.
Historical Cost
• Means that all properties and services acquired by the
business must be recorded at its original acquisition
cost.
Revenue Recognition Principle
• States that income is recognized in the accounting
period when the goods are delivered or services are
performed.
Expense Recognition Principle
• Expenses should be recognized in the accounting
period in which goods and services are used up to
produce revenue and not when the entity pays for
those goods and services.
Adequate Disclosure
• Requires that all relevant information that would
affect the user’s understanding and assessment of
the accounting entity be disclosed in the FS.
Consistency Principle
• Use the same accounting method from period to
period to achieve comparability over time within a
single enterprise.
Accrual Basis
• The effects of transactions and other events are
recognized when they occur and not as cash or its
equivalent is received or paid. This means that the
accountant records revenues as they are earned and
expenses as they are incurred.
ACCOUNTING CONCEPTUAL FRAMEWOKR AND ACCOUNTING STANDARDS

a. Components of profit or loss

All income and expenses should be appropriately
classified in the statement of profit or loss.
b. Components of other comprehensive income
Other items of income and expenses that are
presented outside of profit or loss.

Aggregation
• Adding together of assets, liabilities, equity, income
and expenses that have similar or shared
characteristics and are included in the same
classification.

CAPITAL MAINTENANCE

a. Financial Capital
- The monetary amount of the net asset
contributed by shareholders and the amount
of the increase in net assets from earnings
retained by the equity.
- Net income occurs when the nominal
account of the assets at the end of the year
exceeds nominal amount of the assets at the
beginning of the period, after excluding
distributions to and contributions by owners
during the period.
b. Physical Capital
- The quantitative measure of the physical
productive capacity to produce goods and
services. It requires that productive assets to
be measured at CURRENT COST rather than
historical cost.
- Net income occurs when the physical
productive capital of the entity at the end of
Chapter 7: PRESENTATION AND DISCLOSURE CONCEPTS the years exceeds the physical productive
OF CAPITAL capital at the beginning of the period, also
after excluding distributions to and
PRESENTATION AND DISCLOSURE contributions from owners during the
• An effective communication tool about the period.
information in financial statements.
o Makes the information more relevant and
contributes to a faithful representation of an
entity’s assets, liabilities and expenses.

Classification
• Sorting of an assets, liabilities, equity, income and
expenses on the basis of shared or similar
characteristics.

Classification of Income and Expenses