TECHNICAL KNOWLEDGE

-To identify the elements directly related to the measurement of

financial position and financial performance.

-To understand the concept of asset, liability and equity.

-To understand the concept of income and expenses.

 -refer to the quantitative information reported in the statement of
financial position and income statement

-are the building blocks “from which financial statements are

constructed.”

-the presentation of these elements in the statement of financial

position and the income statement involves a process of classification and
sub-classification.

For example, asset and liabilities may be classified by their nature or function
in the business of the entity in order to display information in a manner most
useful to users for purposes of making economic decisions.
The elements directly related to the
measurement of are:

A. Asset

B. Liability

C. Equity
The elements directly related to the
measurement of are:

A. Income

B. Expense
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 statement of financial position and the income
statement

is the residual interest in the assets of the

entity after deducting all the liabilities.
Under the Revised Conceptual Framework, an asset is
defined as a present economic resources controlled
by the entity as the result of post events.

The new definition clarifies that an asset is an

economic resource and that the potential economic
benefits no longer need to be expected to flow to the
entity.
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

the result of past events.
 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 that do not correspond to 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
An economic resource is a right that has the potential to produce
economic benefits.

For the potential to exist, it does 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.

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 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 also 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 no legal rights, control can still exist if an entity has other
means of ensuring that no other party can benefit from an asset.

For example, an entity has the access to technical know-how

and has the ability to keep this know-how secret.
Under the Revised Conceptual Framework, a liability is defined as the
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 an

economic resources 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 of liability to some extent is inconsistent with the definition
of liability under IAS. In case of conflict, the IASB stated that requirements of
a Standard shall always prevail over the Conceptual Framework
Essential characteristics of liability
A. The entity has an obligation.
-The entity liable must be identified. It is not necessary that the
payee or the entity to who the obligation is owed be identified.

B. The obligation is to transfer an economic resource.

C. The obligation is a present obligation that exists as a result of past

event
-This means that a liability is not recognized until it is incurred.
Obligation
An obligation is a duty or responsibility that an entity has no longer practical
ability to avoid. Obligations can either be legal or constructive.

Obligation may be legally enforceable as a consequence of a binding

contract or statutory requirement.

This is normally the case, for example, with accounts payable for goods and
services received.

Constructive obligations arise from normal business practice, custom and a

desire to maintain good business relations or act in an equitable manner.

For example, an entity decides as a matter of policy to rectify faults in the

faults in the products even when these become apparent after the warranty
period.
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 resource with another

party on unfavorable terms

E. Obligation to transfer an economic resource if specified

uncertain future event occurs
Past event

An obligation exist as a result of past event if both the following

conditions are satisfied:

A. An entity has already obtained economic benefits.

B. An entity must transfer an economic resource

Definition of income
Income is defined as increases in assets or decreases in liabilities that result in
increase in equity, other than those relating to contributions from equity
holders.

Revenue arises in the course of the ordinary regular activities and is referred
to by variety of different names including sales, fee, 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 non-current asset, unrealized gain on

trading investment and gain form expropriation.
Statement of financial performances
The Revised Conceptual Framework introduces the term
statement of financial performance.

This statement refers to the statement of profit or loss and

statement presenting other comprehensive income.

The 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.
Definition of expense
Expense is defined as decreases in assets or increases in the liabilities that result in
decreases in equity, other than those relating to distributions to equity holders.

The definition of expense has changed to reflect the change in the definition of asset
and liability.

Expenses encompass losses as well as those expenses that arise in the course of the
ordinary 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 the ordinary regular activities and include losses
resulting from disaster.

Examples include losses from fire, flood, storm surge, tsunami and hurricane as well as
those arising from disposal of non-current assets.
Prepared by:
Mary Claire Ysug
Shielamae Amar
James Baryl A. Garcelo