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ELEMENTS OF FINANCIAL STATEMENTS
The Framework describes the elements of financial statements as broad classes of financial effects of transactions and other events. The elements of financial
statements are
• 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 of its liabilities.
• 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.
According to the Framework, an item that meets the definition of an element should be recognized (i.e., incorporated in the financial statements) if
1. It is probable that any future economic benefit associated with the item will flow to or from the entity.
2. The item has a cost or value that can be measured with reliability.
The Framework notes that the most common measurement basis in financial statements is historical cost, but that other measurement bases are also used, such as
current cost, realizable or settlement value, and present value.
CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE
The Framework distinguishes between a financial concept of capital and a physical concept of capital. Most entities use a financial concept of capital, under which
capital is defined in monetary terms as the net assets or equity of the entity. Under a physical concept of capital, capital is instead defined in terms of physical
productive capacity of the entity.
Under the financial capital maintenance concept, a profit is earned if the financial amount of the net assets at the end of the period exceeds the financial amount of
the net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Under the physical capital
maintenance concept, a profit is instead earned if the physical productive capacity (or operating capability) of the entity (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.
FUTURE DEVELOPMENTS
In October 2004 IASB added a project to its agenda to develop a new framework. This project is conducted jointly with the US Financial Accounting Standards
Board (FASB). The objective is to develop a common conceptual framework that brings together and improves upon the existing frameworks of IASB and FASB.
This IASB project is being addressed in the following eight Phases:
Phase A: Objectives and Qualitative Characteristics
Phase B: Elements and Recognition
Phase C: Measurement
Phase D: Reporting Entity
Phase E: Presentation and Disclosure
Phase F: Purpose and Status of Framework
Phase G: Applicability to Not-for-Profit Entities
Phase H: Other issues, if necessary
A brief overview of the status of the various Phases (mentioned previously) is set out below:
Phase A—A Discussion Paper (DP) was issued in 2006 and an Exposure Draft (ED) was issued in May 2008 and the final Phase A chapters of Framework
are expected in third quarter of 2010.
Phase C—Round tables have been held on Phase C in 2007 with a DP and an ED planned for 2011.
Phase D—A DP was issued in 2008 and an ED was issued in March 2010 with Final Phase D chapters planned for the fourth quarter of 2010. Phases B, E, F,
G, H: Timing is not yet determined by the IASB.
Bird’s-Eye View of the Exposure Draft Issued in March 2010
On March 11, 2010, the IASB published an Exposure Draft (ED), “Conceptual Framework for Financial Reporting—The Reporting Entity.” As part of Phase A,
“Objectives and Qualitative Characteristics” of the Conceptual Framework Project, IASB tentatively decided that the objective of the “general-purpose financial
reporting” is to provide financial information about the “reporting entity” that is useful to present and potential stakeholders (investors, lenders, and other creditors).
The ED provides a definition of a “reporting entity” and specifies three features of a reporting entity:
• Economic activities are being conducted, have been conducted, or will be conducted