Ch 4 Flashcards
What is the title of chapter 4?
The Elements of Financial Statements
The elements of financial statements defined in the Conceptual Framework are:
- assets, liabilities and equity, which relate to a reporting entity’s
financial position - income and expenses, which relate to a reporting entity’s financial
performance.
-in chapter 1 it is defined as Economic resource
-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.
Asset
-in chapter 1 they are referred to as Claim
- -A present obligation of the entity to transfer an economic resource as a result of past events.
- The residual interest in the assets of the entity after deducting all its liabilities.
Liability
Equity
- In chapter 1 they are known as Changes in economic resources and claims, reflecting financial
performance
1 - Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims.
2 - Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.
Income
Expenses
These are:
– Contributions from holders of equity claims, and distributions to them.
– Exchanges of assets or liabilities that do not result in increases or decreases in equity.
Other changes in economic resources and claims
An asset’s definition hs three aspects of those:
- right
- the potential to produce economic benefit
- control
Rights that have the potential to produce economic benefits take many forms, including:
(a) rights that correspond to an obligation of another party
(b) rights that do not correspond to an obligation of another party
these are examples of what rights
(i) rights to receive cash.
(ii) rights to receive goods or services.
(iii) rights to exchange economic resources with another party on favourable terms. Such rights include, for example, a forward contract to buy an economic resource on terms that are currently favourable or an option to buy an economic resource.
(iv) rights to benefit from an obligation of another party to transfer an economic resource if a specified uncertain future event occurs (see paragraph 4.37).
(a) rights that correspond to an obligation of another party
these are examples of what rights:
(i) rights over physical objects, such as property, plant and equipment or inventories. Examples of such rights are a right to use a physical object or a right to benefit from the residual value of a leased object.
(ii) rights to use intellectual property.
(b) rights that do not correspond to an obligation of another party
Many rights are established by ________, _______ or _________. For example, an entity might obtain rights from owning or leasing a physical object, from owning a debt instrument or an equity instrument, or from owning a registered patent.
contract, legislation, or similar means
However, an entity might also obtain rights in other ways, for example:
(a) by acquiring or creating know-how that is not in the public domain
(see paragraph 4.22); or
(b) through an obligation of another party that arises because that other
party has no practical ability to act in a manner inconsistent with its customary practices, published policies or specific statements (see paragraph 4.31).
Some goods or services—for example, employee services—are received and
immediately consumed. An entity’s right to obtain the economic benefits
produced by such goods or services exists _______________________
momentarily until the entity
consumes the goods or services.
Not all of an entity’s rights are assets of that entity—to be assets of the entity,
the rights must both have the:
- potential to produce for the entity economic benefits beyond the economic benefits available to all other parties
- and be controlled by the entity
For example, rights available to all parties without significant cost
—for instance, rights of access to public goods, such as public rights of way
over land, or know-how that is in the public domain—are typically not assets
for the entities that hold them.
An entity cannot have a right to obtain economic benefits from itself. Hence:
(a) debt instruments or equity instruments issued by the entity and
repurchased and held by it—for example, treasury shares—are not
economic resources of that entity; and
(b) if a reporting entity comprises more than one legal entity, debt instruments or equity instruments issued by one of those legal entities and held by another of those legal entities are not economic resources of the reporting entity.
In principle, each of an entity’s rights is a __________ . However, for accounting purposes, related rights are often treated as a single unit of account that is a _________ (see paragraphs 4.48–4.55).
For example, legal ownership of a physical object may give rise to several rights, including:
(a) the right to use the object;
(b) the right to sell rights over the object;
(c) the right to pledge rights over the object; and
(d) other rights not listed in (a)–(c).
separate asset
single asset
In many cases, the set of rights arising from legal ownership of a physical
object is accounted for as a ________.
single asset
Conceptually, the economic resource
is the set of rights, not the physical object. Nevertheless, describing the set of rights as the physical object will often provide a faithful representation of
those rights in the most concise and understandable way.
true or false
true
In some cases, it is _______ whether a right exists. For example, an entity
and another party might dispute whether the entity has a right to receive an economic resource from that other party. Until that existence uncertainty is
resolved—for example, by a court ruling—it is _________ whether the entity has a right and, consequently, whether an asset exists.
uncertain
An economic resource is a right that has the potential to produce economic benefits. For that potential to exist, it does not need to be _______, or even
likely, that the right will produce economic benefits.
It is only necessary that the right _________ and that, in at least one circumstance, it would produce for the entity economic benefits beyond those available to all other parties.
certain
already exists
A right can meet the definition of an economic resource, and hence can be an asset, even if the probability that it will produce economic benefits is low.
Nevertheless, that low probability might affect ___________ and how to provide that information, including decisions about whether the asset is recognised (see paragraphs 5.15–5.17) and how it is measured.
decisions about what information to provide about the asset
(important to read the sentence)
An economic resource could produce economic benefits for an entity by
_____________ , for example, one or more of the following:
(a) receive contractual cash flows or another economic resource;
(b) exchange economic resources with another party on favourable terms;
(c) produce cash inflows or avoid cash outflows by, for example:
(i) using the economic resource either individually or in
combination with other economic resources to produce goods
or provide services;
(ii) using the economic resource to enhance the value of other
economic resources; or
(iii) leasing the economic resource to another party;
(d) receive cash or other economic resources by selling the economic
resource; or
(e) extinguish liabilities by transferring the economic resource.
entitling or enabling it to do
Although an economic resource derives its value from its ________ potential to
produce future economic benefits, the economic resource is the present right
that contains that potential, not the future economic benefits that the right
may produce.
For example, a purchased option derives its value from its potential to produce economic benefits through exercise of the option at a future date. However, the economic resource is the present right—the right to exercise the option at a future date. The economic resource is not the future economic benefits that the holder will receive if the option is exercised.
present
(intindihin nalng sentence din)
There is a close association between __________& __________, but the two do not necessarily coincide.
incurring expenditure and acquiring
assets
