CFAS:

Chapter 5 & 6
CHAPTER 5:
ELEMENTS OF
FINANCIAL
STATEMENTS
● The elements of financial
statements refer to the quantitative
information reported in the
statement of financial position and
income statement.
● These are the building blocks from
which financial statements are
constructed.
The elements directly related to the
measurement of financial position are:

● Asset
● Liability
● Equity
The elements directly related to the
measurement of financial performance
are:
● Income
● Expense
ASSET
- an asset is defined as a present
economic resource controlled by the
entity as a result of past events.
Essential Characteristics of Asset
● The asset is a present economic
resource.
● The economic resource is a right that
has the potential to produce
economic benefits.
● The economic resource is controlled
by the entity as a result of past events.
LIABILITY
— Revised Conceptual Framework;
is defined as present obligation of an
entity to transfer an economic
resource as a result of past events.
Essential Characteristics
a. The entity has an obligation.
b. The obligation is to transfer an
economic resource.
c. The obligation is a present obligation
that exists as a result of past events.
OBLIGATION

— is a duty or responsibility that an

entity has no practical ability to avoid.
Legal Obligations - obligation or duty
that is enforced by a court of law, it can
be a debt and the legal responsibility to
carry out what the law asks.
Constructive Obligations - arises from
normal business practices to maintain
good business relations.
Transfer of an economic resource
a. Obligation to pay cash
b. Obligation to deliver goods or non-
cash resources
c. Obligation to provide services at
some future time
Transfer of an economic resource

a. Obligation to pay cash

b. Obligation to deliver goods or non-cash resources

c. Obligation to provide services at some future time

d. Obligation to exchange economic resources with

another party on unfavorable terms

e. Obligation to transfer an economic resource if

specified uncertain future event occurs
Past Event

Obligation is a result of past events if the

following conditions are satisfied:

a. An entity has already obtained economic

benefits.

b. An entity must transfer an economic resource.

Income – is defined as increases in assets or
decreases in liabilities.
Revenue – arises in the course of the ordinary
regular activities and is referred to by variety of
different names including sales, fees, interest,
dividends, royalties and rent.
Gains – are other items that meet the
definition of income and do not arise in the
course of the ordinary regular activities.
Statement of Financial Performance
— the statement of profit or loss and a
statement representing other
comprehensive income.

As a general rule, all income and expenses

are included in profit or loss.
Expense – decreases in assets or increases in
liabilities.

Expenses that arise in the course of ordinary

regular activities include cost of goods sold,
wages, and depreciation.

Losses – do not arise on regular activities and

include losses resulting from disasters. e.g. loss
from fire, flood, storm surge, tsunami and
hurricane, as well as loss arising from the disposal
of long term assets.
CHAPTER 6:
RECOGNITION
AND
MEASUREMENT
RECOGNITION
- process of capturing for inclusion in the
financial statements of an item that meets the
definition of an asset, liability, equity, income,
or expense.
- links the elements to the statement of financial
position and statement of financial performance.
CARRYING AMOUNT
- amount at which an asset, a liability or equity,
is recognized in the statement of financial
position.
RECOGNITION CRITERIA
To be recognized, an item must meet the
definition of an element provided in the
conceptual framework, and satisfy the following
criteria:
- It is probable that any future economic
benefit associated with the item will flow to or
from the entity; and
- The item’s cost or value can be measured
with reliability.
POINT OF SALE INCOME RECOGNITION

Basic Principle of Income Recognition

"Income shall be recognized when
earned."
When is income considered to be earned?
Companies can recognize income at
point of sale if:

1. Cash is realized or realizable; and

2. It is the date that the buyer takes
immediate ownership of the goods.
Point of Sale Income Recognition

- The basic principle of income

recognition is that income shall be
recognized when earned.
When is the income considered to be earned?
- With the respect to sale of goods in the
ordinary course of business, the point of
sale is unquestionably the point of
income recognition.

- However, under certain conditions,

income may be recognized at the point of
production, during production and at the
point of collection
Expense Recognition
- The basic expense means that
expenses are recognized when
incurred.
- The expense recognition principle is
the application of the matching
principle.
When are expenses incurred?
- The expense recognition principle is
the application of the matching
principle.

- It requires that those costs and

expenses incurred in earning a revenue
shall be reported in the same period.
Three applications of matching
principle:

● Cause and effect association

● Systematic and rational allocation
● Immediate recognition
Cause and Effect Association
- The expense is recognized when the
revenue is already recognized.

- The reason is the presumed direct

association of the expense with specific
items of income; “strict matching
concept”
- Best example is the cost of merchandise
inventory

- Other examples: doubtful accounts,

warranty expense, and sale
commissions.
Systematic and Rational Allocation
- Some cost are being expense by simply
allocation them over the periods
benefited.

- The reason is that the cost incurred will

benefit future periods and that there is
an absence of a direct or clear
association of the expense
Examples include:

- depreciation of property
- plant and equipment
- amortization of intangibles
- allocation of prepaid rent, insurance
and other prepayments.
IMMEDIATE RECOGNITION

- Under this principle, the cost incurred

is expensed outright because of
uncertainty of future economic
benefits or difficulty of reliably
associating certain costs with future
revenue.
An expense is recognized immediately:
a. When expenditure produces no future
economic benefit.
b. When cost incurred does not qualify or
ceases to qualify for recognition of an
asset.

(Ex: Officers' salaries, advertising and most

selling expenses)
DERECOGNITION
- Defined as the removal of all or part of a
recognized asset or liability from the
statement of financial position.

- Occurs when an item no longer meets

the definition of an asset or a liability.
• Derecognition of an asset
• Derecognition of a liability
MEASUREMENT

- Defined as quantifying in monetary

terms the elements in the financial
statements.

- Two Categories:
1. Historical cost
2. Current Value
HISTORICAL COST
• Historical cost of an asset - cost
incurred in acquiring or creating the
asset comprising the consideration paid
plus transaction cost.
• Historical cost of a liability -
consideration received to incur liability
minus transaction cost.
- Simply stated, historical cost is the entry
price or entry value to acquire an asset or
incur a liability.

- An application of the historical cost

measurement is to measure financial
asset and liability at amortized cost.
HISTORICAL COST UPDATED
1. Historical cost of an asset is updated
because of:
• Depreciation and amortization
• Payment received as a result of disposing
part or all of the asset
• Impairment
• Accrual of interest
• Amortized cost measurement of
financial asset
2. Historical cost of a liability is updated
because of:
• Payment made or satisfying an
obligation to deliver goods
• Increase in value of the obligation to
transfer economic resources (liability
becomes onerous)
• Accrual of interest
• Amortized cost measurement of
financial liability