Recognition of the elements of financial statements29/08/2022 0 By indiafreenotes
“Recognised” means reported on, or incorporated in amounts reported on, the face of the financial statements of the entity (whether or not further disclosure of the item is made in notes thereto).
Reporting of information about assets, liabilities, equity, revenues and expenses in financial reports may be by way of recognition and/or by disclosure in notes in the financial report. An item may be recognised as an element either singly or in combination with other items. For example, a particular asset may be recognised by incorporation in the carrying amount of a class of assets reported in the statement of financial position. In addition, where assets and liabilities have been set off against each other, or where revenues and expenses have been netted off, in the presentation of those items in financial statements, those elements would nonetheless have been recognised. The manner in which recognised elements should be presented in financial statements, including the circumstances in which they may be set off or netted off, are matters of display which are beyond the scope of this Statement. Inclusion of an element only in notes in the financial report does not constitute recognition.
The main elements of financial statements are as follows:
Assets. These are items of economic benefit that are expected to yield benefits in future periods. Examples are accounts receivable, inventory, and fixed assets.
Criteria for Recognition of Assets 38 39 40 An asset should be recognised in the statement of financial position when and only when:
- It is probable that the future economic benefits embodied in the asset will eventuate.
- The asset possesses a cost or other value that can be measured reliably.
Liabilities. These are legally binding obligations payable to another entity or individual. Examples are accounts payable, taxes payable, and wages payable.
Criteria for Recognition of Liabilities 65 66 67 68 69 A liability should be recognised in the statement of financial position when and only when:
- It is probable that the future sacrifice of economic benefits will be required.
- The amount of the liability can be measured reliably.
Revenue. This is an increase in assets or decrease in liabilities caused by the provision of services or products to customers. It is a quantification of the gross activity generated by a business. Examples are product sales and service sales.
A revenue should be recognised in the operating statement, in the determination of the result for the reporting period, when and only when:
- It is probable that the inflow or other enhancement or saving in outflows of future economic benefits has occurred.
- The inflow or other enhancement or saving in outflows of future economic benefits can be measured reliably.
Equity. This is the amount invested in a business by its owners, plus any remaining retained earnings.
Recognition of Equity Since equity is the residual interest in the assets of an entity and the amount assigned to equity will always correspond to the excess of the amounts assigned to its assets over the amounts assigned to its liabilities, the criteria for the recognition of assets and liabilities provide the criteria for the recognition of equity.
If the aggregate amount assigned to an entity’s liabilities exceeds the aggregate amount assigned to its assets there would be no amount recognised as equity. What would be reported is a deficiency of reported assets compared with reported liabilities. As with the reported amount of equity, the reported amount of any deficiency would depend on the bases on which the entity’s assets and liabilities are recognised and measured. It is possible for the reported liabilities of an entity to exceed its reported assets and for the ownership group or, where there is an absence of an ownership group, some other party or parties with residual rights, to have an interest of some value in the entity. For example, assets may exist but not have been recognised, or a measurement basis may have been adopted which does not report the current value of the reported assets and liabilities. Notwithstanding this, the existence of legal restrictions, for example, may inhibit the ability of an entity that reports a deficiency to make distributions to owners.
Expenses. This is the reduction in value of an asset as it is used to generate revenue. Examples are interest expense, compensation expense, and utilities expense.
An expense should be recognised in the operating statement, in the determination of the result for the reporting period, when and only when:
- It is probable that the consumption or loss of future economic benefits resulting in a reduction in assets and/or an increase in liabilities has occurred.
- The consumption or loss of future economic benefits can be measured reliably.