The Elements of Financial Statements

CHAPTER 4—THE ELEMENTS OF FINANCIAL STATEMENTS INTRODUCTION 4.1 DEFINITION OF AN ASSET 4.3 Right 4.6 Potential to produce economic benefits 4.14 Control 4.19 DEFINITION OF A LIABILITY 4.26 Obligation 4.28 Transfer of an economic resource 4.36 Present obligation as a result of past events 4.42 ASSETS AND LIABILITIES 4.48 Unit of account 4.48 Executory contracts 4.56 Substance of contractual rights and contractual obligations 4.59 DEFINITION OF EQUITY 4.63 DEFINITIONS OF INCOME AND EXPENSES 4.68 CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING—MARCH 2018 󶂢 IFRS Foundation 26Introduction 4.1 The elements of financial statements defined in the Conceptual Framework are: (a) assets, liabilities and equity, which relate to a reporting entity’s financial position; and (b) income and expenses, which relate to a reporting entity’s financial performance. 4.2 Those elements are linked to the economic resources, claims and changes in economic resources and claims discussed in Chapter 1, and are defined in Table 4.1. Table 4.1—The elements of financial statements Item discussed in Chapter 1 Element Definition or description Economic resource Asset 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. Claim Liability A present obligation of the entity to transfer an economic resource as a result of past events. Equity The residual interest in the assets of the entity after deducting all its liabilities. Changes in economic resources and claims, reflecting financial performance Income Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims. Expenses Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims. Other changes in economic resources and claims – 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. CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING 27 󶂢 IFRS FoundationC ONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING—MARCH 2018 Definition of an asset 4.3 An asset is a present economic resource controlled by the entity as a result of past events. 4.4 An economic resource is a right that has the potential to produce economic benefits. 4.5 This section discusses three aspects of those definitions: (a) right (see paragraphs 4.6–4.13); (b) potential to produce economic benefits (see paragraphs 4.14–4.18); and (c) control (see paragraphs 4.19–4.25). Right 4.6 Rights that have the potential to produce economic benefits take many forms, including: (a) rights that correspond to an obligation of another party (see paragraph 4.39), for example: (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). (b) rights that do not correspond to an obligation of another party, for example: (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. 4.7 Many rights are established by contract, legislation or similar means. 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. 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 CHAPTER 4—THE ELEMENTS OF FINANCIAL STATEMENTS INTRODUCTION 4.1 DEFINITION OF AN ASSET 4.3 Right 4.6 Potential to produce economic benefits 4.14 Control 4.19 DEFINITION OF A LIABILITY 4.26 Obligation 4.28 Transfer of an economic resource 4.36 Present obligation as a result of past events 4.42 ASSETS AND LIABILITIES 4.48 Unit of account 4.48 Executory contracts 4.56 Substance of contractual rights and contractual obligations 4.59 DEFINITION OF EQUITY 4.63 DEFINITIONS OF INCOME AND EXPENSES 4.68 CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING—MARCH 2018 󶂢 IFRS Foundation 26Introduction 4.1 The elements of financial statements defined in the Conceptual Framework are: (a) assets, liabilities and equity, which relate to a reporting entity’s financial position; and (b) income and expenses, which relate to a reporting entity’s financial performance. 4.2 Those elements are linked to the economic resources, claims and changes in economic resources and claims discussed in Chapter 1, and are defined in Table 4.1. Table 4.1—The elements of financial statements Item discussed in Chapter 1 Element Definition or description Economic resource Asset 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. Claim Liability A present obligation of the entity to transfer an economic resource as a result of past events. Equity The residual interest in the assets of the entity after deducting all its liabilities. Changes in economic resources and claims, reflecting financial performance Income Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims. Expenses Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims. Other changes in economic resources and claims – 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. CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING 27 󶂢 IFRS FoundationC ONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING—MARCH 2018 Definition of an asset 4.3 An asset is a present economic resource controlled by the entity as a result of past events. 4.4 An economic resource is a right that has the potential to produce economic benefits. 4.5 This section discusses three aspects of those definitions: (a) right (see paragraphs 4.6–4.13); (b) potential to produce economic benefits (see paragraphs 4.14–4.18); and (c) control (see paragraphs 4.19–4.25). Right 4.6 Rights that have the potential to produce economic benefits take many forms, including: (a) rights that correspond to an obligation of another party (see paragraph 4.39), for example: (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). (b) rights that do not correspond to an obligation of another party, for example: (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. 4.7 Many rights are established by contract, legislation or similar means. 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. 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 CHAPTER 4—THE ELEMENTS OF FINANCIAL STATEMENTS INTRODUCTION 4.1 DEFINITION OF AN ASSET 4.3 Right 4.6 Potential to produce economic benefits 4.14 Control 4.19 DEFINITION OF A LIABILITY 4.26 Obligation 4.28 Transfer of an economic resource 4.36 Present obligation as a result of past events 4.42 ASSETS AND LIABILITIES 4.48 Unit of account 4.48 Executory contracts 4.56 Substance of contractual rights and contractual obligations 4.59 DEFINITION OF EQUITY 4.63 DEFINITIONS OF INCOME AND EXPENSES 4.68 CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING—MARCH 2018 󶂢 IFRS Foundation 26Introduction 4.1 The elements of financial statements defined in the Conceptual Framework are: (a) assets, liabilities and equity, which relate to a reporting entity’s financial position; and (b) income and expenses, which relate to a reporting entity’s financial performance. 4.2 Those elements are linked to the economic resources, claims and changes in economic resources and claims discussed in Chapter 1, and are defined in Table 4.1. Table 4.1—The elements of financial statements Item discussed in Chapter 1 Element Definition or description Economic resource Asset 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. Claim Liability A present obligation of the entity to transfer an economic resource as a result of past events. Equity The residual interest in the assets of the entity after deducting all its liabilities. Changes in economic resources and claims, reflecting financial performance Income Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims. Expenses Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims. Other changes in economic resources and claims – 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. CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING 27 󶂢 IFRS FoundationC ONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING—MARCH 2018 Definition of an asset 4.3 An asset is a present economic resource controlled by the entity as a result of past events. 4.4 An economic resource is a right that has the potential to produce economic benefits. 4.5 This section discusses three aspects of those definitions: (a) right (see paragraphs 4.6–4.13); (b) potential to produce economic benefits (see paragraphs 4.14–4.18); and (c) control (see paragraphs 4.19–4.25). Right 4.6 Rights that have the potential to produce economic benefits take many forms, including: (a) rights that correspond to an obligation of another party (see paragraph 4.39), for example: (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). (b) rights that do not correspond to an obligation of another party, for example: (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. 4.7 Many rights are established by contract, legislation or similar means. 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. 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