CONCEPTUAL FRAMEWORK

ELEMENTS OF FINANCIAL
STATEMENTS
 Refer to the quantitative
information reported in the
statement of financial position and
income statement.
 “Building Blocks” from which
financial statements are constructed.
 Asset
 (under the revised Conceptual Framework) a present
economic resource controlled by the entity as a result
of past events.
 Liability
 (under the revised Conceptual Framework) present
obligation of an entity to transfer an economic
resource as a result of past events
 Equity
 is the residual interest in the assets of the entity
deducting all liabilities.
 Asset is an economic resource and that the
potential economic benefits no longer need to
be expected to flow to the entity.

Characteristics of assets
 It is a 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.
1. RIGHT
i. Rights to correspond to an obligation
of another entity
ii. Rights that do not correspond to an
obligation of another entity
iii. Rights established by contract or
legislation
2. POTENTIAL TO PRODUCE
ECONOMIC BENEFITS
- it does not need to be certain or even
likely that the right will produce economic
benefits.
- economic resources 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:
i. To receive contractual cash flows
ii. To exchange economic resources with another
party on favorable terms
iii. To produce cash inflows or avoid cash
outflows
iv. To receive cash by selling the economic
resources
v. To extinguish a liability by transferring an
economic resource.
3. CONTROL OF AN ECONOMIC
RESOURCES
- 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.
- 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 is no legal rights, control can exist but
should ensure that no other party can benefit from
asset.
 Liability is an obligation to transfer an economic
resource and not the ultimate outflow of
economic benefits.
 Economic benefits no longer needs to be
expected.
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 events
1. OBLIGATION
- a duty or responsibility that an entity has no
practical ability to avoid.
- it may be legal or constructive
 Legal obligation
– consequence of a binding contract or
statutory requirement.
 Constructive obligation
-arise from normal business practice, custom
and a desire to maintain good business relations or
act in an equitable manner.
2. TRANSFER OF AN ECONOMIC
RESOURCE
i. Obligation to pay cash
ii. Obligation to deliver goods or noncash resources
iii. Obligation to provide services at some future
time
iv. Obligation to exchange economic resources with
another party or unfavorable terms
v. Obligation to transfer an economic resource if
specified uncertain future event occurs
3. PAST EVENTS

i. An entity has already obtained economic

benefits.
ii. An entity must transfer an economic
resource.
 Refers to the statement of profit or loss
 Primary source of information about
entity’s financial performance.

 Presenting other comprehensive income.

 Presentation would provide more relevant
and faithfully represented information
about financial performance.
 Income
– increases in assets or decreases in
liabilities that result in increases in equity, other
than relating to contributions from equity
holders
 Expense
- decreases in assets or increases in
liabilities that result in decreases in equity, other
than relating to contributions from equity
holders
 Income encompasses both revenue and gains.
 Revenue- arises in the course of the ordinary
regular activities (sales, fees, interest, dividends,
royalties and rent). The essence of this is
regularity.
 Gains- represent other items that meet the
definition of income and do not arise in the
course of the ordinary regular activities (disposal
of noncurrent asset, unrealized gain on trading
investment and gain from expropriation).
 Expenses encompasses losses as well as
those expenses that arise in the ordinary
course of business (cost of goods sold,
wages and depreciation).
 Losses do not arise in the course of the
ordinary regular activities and include
losses resulting from disasters.
 Conceptual Frameworks 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 income
statement.
CONCEPTUAL FRAMEWORK
ELEMENTS OF FINANCIAL
STATEMENTS