Elements of Financial Statements and Measurement

Based on the provided text from the Conceptual Framework for Financial Reporting, the elements of financial statements and the concept of measurement are discussed.

Elements of Financial Statements:

The text defines the elements directly related to the measurement of financial position and financial performance.

• Elements of financial position:

  • Assets: "An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity."
  • Liabilities: "A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits."
  • Equity: "Equity is the residual interest in the assets of the entity after deducting all its liabilities."

• Elements of financial performance:

  • Income: "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."
  • Expenses: "Expenses are 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."

Recognition
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The interconnection between 3 statements. So the financial position for begining and ending period : asset - liabilities = equity
Since , income - expense = effect on balance sheet : asset and liabilities -> add the income - expense
And equity : contribution from holders - distribution (equity)

Recognition criteria:
Existence uncertainty : uncertain whether company has right of an asset/liability, until it resolved by court (mention in chapter 1 : economic resource characteristic : has right ownership)

Low probability of flow of economic benefit: asset or liability with market trade is low -> inflow or outflow of economic benefit

Measurement uncertainty : economic resources must be measured -> prepare FS -> high uncertainty, affect faithful representation

Accounting mismatch: not recognize asset and liability => inconsistency in reporting

Presentation and disclosure: info necessary for a user to understand economic term , description, explanation of liability, income, asset, expense, equity

Vd : Cleopatra restaurant purchase an oven with useful life 5 years, 18,000 USD
Asset - economic resource generating income, past events and control by entity

Definition + criteria = Assets

1. Economic resource : potential to generate income
2. Control by entity : present ability to direct the use
3. Result of past event : purchase of past event

Recognition criteria

• Relevant information: oven exists, the probability for inflow is not low, and if it acquired on market term -> relevant info
• Faithful representative : the oven cost is buy in the market term, and the price is not causing any misunderstanding on measurement
  Measurement:

The text discusses measurement bases used in financial statements.

"Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the balance sheet and income statement. This involves the selection of a particular basis of measurement."

The text mentions several measurement bases:

• Historical Cost: "Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition, include transaction cost
• Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business."
• Current Cost: "Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle an obligation currently."

• Fair value : the expectation of asset (exit value) presented in cash flow from the future to today, disposal value and net transaction cost on disposal
• Current value : exit value to sell/buy and transfer the asset at settlement, at measurement date

• Realisable (Settlement) Value: "Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal. Liabilities are carried at their settlement values; that is, the undiscounted amounts of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business."
• Present Value: "Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business. Liabilities are carried at the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business."