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IASB’s Framework (Contd)
Elements of Financial Statements
The transactions and other events are grouped together in broad classes and in this way their financial effects are shown in the financial statements. These broad classes are the elements of financial statements.

The framework lays out these elements as follows.
• Measurement of financial position in the balance sheet:

• Assets
• Liabilities
• Equity

Measurement of performance in the income statement:

• Income
• Expenses

A process of sub-classification then takes place for presentation in the financial statements, e.g. assets are classified by their nature or function in the business to show information in the best way for users to take economic decisions.
Assets:
It is probable that future economic benefits will flow to the entity and the asset has cost or value that can be measured reliably. Assets are usually employed to produce goods or services for customers; customers will then pay for these. Cash itself renders a service to the entity due to its command over other resources. Transactions or events in the past give rise to assets; those expected to occur in the future do not in themselves give rise to assets. For example, an intention to purchase a non-current asset does not, in itself, meet the definition of an asset.
Liabilities:
It is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably. Equity is also a liability. Liabilities must arise from past transactions or events. In the case of, say, recognition of future rebates to customers based on annual purchases, the sale of goods in the past is the transaction that gives rise to the liability.
Is a Provision a liability?
Provision is a present obligation which satisfies the rest of the definition of a liability, even if the amount of the obligation has to be estimated.
Equity:
Equity is defined above as a residual, but it may be sub-classified in the balance sheet. This will indicate legal or other restrictions on the ability of the entity to distribute or otherwise apply its equity. Some reserves are required by statue or other law, e.g. for the future protection of creditors. The amount shown for equity depends on the measurement of assets and liabilities. It has nothing to do with the market value of the entity’s shares.
Income:

An increase in the future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably. Gains include those arising on the disposal of non-current assets. The definition of income also includes unrealized gains, e.g. on revaluation of marketable securities. Both revenue and gains are included in the definition of income. Revenue arises in the course of ordinary activities of an entity.
Expenses:
A decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. As with income, the definition of expenses includes losses as well as those expenses that arise in the course of ordinary activities of an entity. Losses will include those arising on the disposal of non-current assets. The definition of expenses will also include
unrealized losses, e.g. exchange rate effects on borrowings.
ElementsAssetsLiabilitiesResourcesControlled by the entityAs a result of a past eventFrom which future economicbenefits are expected to flow to theentityPresent ObligationOf the entityAs a result of a past eventFrom which future economicbenefits are expected to flow fromthe entityEquityIncomeExpensesAn increase in economic benefitsDuring the accounting periodIn the form of inflow/enhancementof assets orDecrease in liabilitiesResulting in increases in equityOther than contributions from equityparticipantsA decrease in economic benefitsDuring the accounting periodIn the form of outflows/depletionsof assets orIncreases in liabilitiesResulting in decreases in equityOther than distributions to equityparticipantsComponents of a set ofFinancial StatementsBalance SheetStatement ofChanges inEquityIncomeStatementCash FlowStatementNotes to theFinancialStatementsFinancialPosition:Assets,Liabilitiesand EquityMovement ofissued capitaland reservesFinancialPerformance:Income andExpensesCash Generatingability:Cash Movementsanalysed in toOperatingInvesting andFinancingActivitiesBasis ofPreparation,AccountingPoliciesInformation notdisclosed in othercomponents thatneed to bedisclosed

Recognition of the elements of financial statements:
The process of incorporating in the balance sheet or income statement an item that meets the definition of an element and satisfies the following criteria for recognition:
a) It is probable that any future economic benefit associated with the item will flow to or from the entity;
b) The item has a cost or value that can be measured with reliability.
Probability of future economic benefits:
Probability here means the degree of uncertainty that the future economic benefits associated with an item will flow to or from the entity. This must be judged on the basis of the characteristics of the entity’s environment and the evidence available when the financial statements are prepared.
Reliability of measurement:
The cost or value of an item, in many cases, must be estimated. The framework states, however, that the use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability. Where no reasonable estimate can be made, the item should not be recognized, although its existence should be disclosed in the notes, or other explanatory material. Items may still qualify for recognition at a later date due to changes in circumstances or subsequent events.

Measurement of Elements of Financial statements:

• The process of determining the monetary amounts at which the elements of F/S are to be recognized and carried in the B/S and P/L. Following measurement methods are used in different situations.

This involves the selection of a particular basis of measurement. A number of these are used to different degrees and in varying combinations in financial statements.

They include the following:

• Historical cost: Consideration paid (payable) or received (receivable) at the time of recording of transaction (no relation to current costs).
• Current cost: The consideration that would have to be paid if a same or an equivalent asset is acquired. The undisclosed amount of cash or cash equivalents, that would be required to settle an obligation currently.
• Realisable value:The consideration that would be realised by selling an asset in an orderly disposal.
• Settlement value: the undiscounted amounts of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business.
• Present value: A current estimate of the present discounted value of the future net cash flows in the normal course of business.

Historical Cost is the most commonly adopted measurement basis, but this is usually combined with other bases, e.g. inventory is carried at the lower of cost and net realizable value.
Concept of Capital and Capital Maintenance:
Most entities use a financial concept of capital when preparing their financial statements. The selection of the appropriate concept of capital by an enterprise should be based on the needs of the users of its financial statements. Thus a financial concept of capital should be adopted if the users of financial statements are primarily concerned with the maintenance of nominal invented capital or the purchasing power of invested capital. If, however, the main concern of users is with the operating capability of the enterprise, a physical concept of capital should be used. The concept chosen indicates the goal to be attained in the determining profit, even though there may be some measurement difficulties in making the concept operational.
There are two concepts of capital maintenance:
a) Financial Capital Maintenance
b) Physical Capital Maintenance
Financial Capital Maintenance:

• Under this concept the profit is earned only if the financial(or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.

Physical Capital Maintenance:
• Under this concept the profit is earned only if the physical productive capacity (or operating capability) of the enterprise (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.
The concept of capital maintenance is concerned with how an enterprise defines the capital that it seeks to maintain. It provides the linkage between the concepts of capital and the concepts of profit because it provides the point of reference by which profit is measured; it is a prerequisite for distinguishing between an enterprise’s return on capital and its return of capital; only inflows of assets in excess of amounts needed to maintain capital may be regarded as profit and therefore as a return on capital. Hence, profit is the residual amount that remains after expenses The physical capital maintenance concept requires the adoption of the current cost basis of measurement. The financial capital maintenance concept, however, does not require the use of a particular basis of measurement. Selection of the basis under this concept is dependent on the type of financial capital that the enterprise is seeking to maintain. The principal difference between the two concepts of capital maintenance is the treatment of the effects of changes in the prices of assets and liabilities of the enterprise. In general terms, an enterprise has maintained its capital if it has as much capital at the end of the period as it had at the beginning of the period. Any amount over and above that required to maintain the capital at the beginning of the period is profit. Under the concept of financial capital maintenance where capital is defined in terms of nominal monetary units, profit represents the increase in nominal money capital over the period. Thus, increases in the prices of assets held over the period, conventionally referred to as holding gains are, conceptually, profit. They may not be recognized as such, however, until the assets are disposed of in an exchange transaction. When the concept of financial capital maintenance is defined in terms of constant purchasing power units, profit represents the increase in invested purchasing power over the period. Thus, only that part of increase in the prices of assets that exceeds the increase in the general level of prices is regarded as profit. The rest of the increase is treated as a capital maintenance adjustment and, hence, as part of equity. Under the concept of physical capital maintenance when capital is defined in terms of the physical productive capacity, profit represents the increase in that capital over the period. All price changes affecting the assets and liabilities of the enterprise are viewed as changes in the measurement of the physical productive capacity of the enterprise; hence, they are treated as capital maintenance adjustments that are part of equity and not as profit.