CHAPTER 2: QUALITATIVE ENHANCING QUALITATIVE  The objective of financial statements is

CHARACTERISTICS OF USEFUL FINACIAL CHARACTERISTICS to provide financial Information about

INFORMATION the reporting entity's assets, liabilities,
ENHANCING:
equity, income and expenses that Is
 Verifiability – direct | FR useful to users of financial statements
 IT IS SUB-DIVIDED IN TO TWO PARTS  Comparability – consistent |R in assessing the prospects for:
WHICH IS THE FUNDAMETAL  Understandability – should be easily  future net cash inflows to the
QUALITATIVE CHARACTERISTICS & understand | R reporting entity
ENHANCING QUALITATIVE  Timeliness – availability of the  assessing management's
CHARACTERISTICS information | R stewardship of the entity's
economic resources
FUNDAMENTAL QUALITATIVE
CHARECTERISTICS
THE COST CONSTRAINT ON USEFUL PERSPECTIVE ADOPTED IN FINANCIAL
 Where in the basic qualitative FINANCIAL REPORTING STATEMENTS
characteristics that information should
 Cost is a pervasive constraint on the  Financial statements provide
posses and they are known as the
information that can be provided by information about transactions and
Relevance and Faithful
financial reporting. other events viewed from the
Representation.
 The benefit should exceed the cost perspective of the reporting entity as
RELEVANCE: a whole, not from the perspective of
___________________________________
 Relevant financial information is any particular group of the entity's
CHAPTER 3: FINANCIAL STATEMENTS AND existing potential investors, lenders or
capable of making a difference in the
REPORTIONG ENTITY other creditors.
decisions made by users.
 Predictive value FINANCIAL STATEMENT
 Confirmatory value
 Materiality  Financial statements provide GOING CONCERN ASSUMPTION
information about economic resources
FAITFUL REPRESENTATION: of the reporting entity, claims against  It is assumed that the entity will
the entity, and changes in those continue in operation for the
 Completeness foreseeable future and has neither the
resources and claims, that meet the
 Neutrality intention nor the need to enter
definitions of the elements of financial
 Freedom from error liquidation or to cease trading.
statements.
 If such on intention or need exists, the UNCONSOLIDATED FINANCIAL  An economic resource is a right that
financial statements may have to be STATEMENTS has the potential to produce economic
prepared on a different basis. benefits.
(Parent)
RIGHT
 Are designed to provide information
REPORTING ENTITY about the parent’s assets, liabilities, Rights that have the potential to produce
equity, income and expenses and not economic benefits take many forms,
 A reporting entity is an entity that is
about those subsidiaries. including:
required, or chooses, to prepare
financial statements. COMBINED FINANCIAL STATEMENTS Rights that correspond to an obligation of
 A reporting entity can be a single another party
 Are financial statement on which the
entity or a portion of an entity or can
reporting entity compromises two or  rights to receive cash.
comprise more than one entity.
more entities that are not all linked by  rights to receive goods or services.
 A reporting entity is not necessarily a
a parent-subsidiary relationship.  rights to exchange economic resources
legal entity.
with another party on favourable
___________________________________
terms.
CHAPTER 4: ELEMENTS OF FINANCIAL  rights to benefit from an obligation of
TYPE OF FINANCIAL STATEMENT
STATEMENT another party to transfer an economic
(Parent Subsidiary Relationship) resource if a specified uncertain future
Five elements are;
event occurs.
CONSILATED FINANCIAL STATEMENTS
o Asset
Rights that do not correspond to an
(Parent + Subsidiary) o Liabilities
obligation of another party
o Equity
 Provide information about the assets,
o Income  rights over physical objects, such as
liabilities, equity, income and
o Expenses property, plant and equipment or
expenses of both the parent and its
inventories. Examples of such rights
subsidiaries as a single reporting ASSET are a right to use a physical object or a
entity.
 An asset is a present economic right to benefit from the residual value
resource controlled by the entity as a of a leased object.
result of past events.  rights to use intellectual property.
RIGHT uncertainty is resolved—for example, by a 4 - receive cash or other economic
court ruling—it is uncertain whether the resources by selling the economic
4.8 - An entity’s right to obtain the
entity has a right and, consequently, resource
economic benefits produced by such
whether an asset exists.
goods or services exists momentarily until 5 - extinguish liabilities by transferring the
the entity consumes the goods or services. economic resource.

POTENTIAL TO PRODUCE ECONOMIC

BENEFITS
4.9 - Not all of an entity’s rights are assets CONTROL
of that entity  An economic resource is a right that
o Assessing whether control exists helps
has the potential to produce economic
to identify the economic resource for
benefits.
which the entity accounts.
4.10 - An entity cannot have a right to  A right can meet the definition of an
o An entity controls an economic
obtain economic benefits from itself. economic resource, and hence can be
an asset, even if the probability that it resource if it has the present ability to
will produce economic benefits is low. direct the use of the economic
resource and obtain the economic
4.11 - In principle, each of an entity’s
benefits that may flow from it.
rights is a separate asset. However, for
o For an entity to control an economic
accounting purposes, related rights are An economic resource could produce
resource, the future economic
often treated as a single unit of account economic benefits for an entity by entitling
benefits from that resource must flow
that is a single asset or enabling it to do, for example, one or
to the entity either directly or
more of the following:
indirectly rather than to another
1 - receive contractual cash flows or party.
4.12 - In many cases, the set of rights another economic resource o Control of an economic resource
arising from legal ownership of a physical
usually arises from an ability to
object is accounted for as a single asset. 2 - exchange economic resources with
enforce legal rights.
Conceptually, the economic resource is another party on favourable terms
o Having exposure to significant
the set of rights, not the physical object.
3 - produce cash inflows or avoid cash variations in the amount of the
outflows economic benefits produced by an
economic resource may indicate that
4.13 - In some cases, it is uncertain the entity controls the resource.
whether a right exists. Until that existence
o A principal engages another party (an recognise an asset or measure it at the entity to transfer an economic
agent) to act on behalf of, and for the same amount. resource to another party (or parties).
benefit of, the principal. If an agent  An obligation can meet the definition
TYPES OF OBLIGATIONS
has custody of an economic resource of a liability even if the probability of a
controlled by the principal, that  LEGAL OBLIGATIONS – may transfer of an economic resource is
economic resource is not an asset of obligations are established by low.
the agent. contract, legislation or similar means  Obligations to transfer an economic
and are legally enforceable by the resource include:
party (or parties) to whom they are  obligations to pay cash.
LIABILITIES
owed.  obligations to deliver goods or
 A liability is a present obligation of the  CONSTRUCTIVE OBLIGATIONS – provide services.
entity to transfer an economic obligations from an entity’s customary  obligations to exchange economic
resource as a result of past events. practices, published polices or specific resources with another party on
 For a liability to exist, three criteria statements if the entity has no unfavourable terms.
must all be satisfied: practical ability to act in a manner  obligations to transfer an
a. the entity has an obligation inconsistent with those practices, economic resource if a specified
b. the obligation is to transfer an policies or statements. uncertain future event occurs.
economic resource  obligations to issue a financial
c. the obligation is a present instrument if that financial
obligation that exists as a  In some situations, an entity’s duty or instrument will oblige the entity to
result of past events. responsibility to transfer an economic transfer an economic resource.
resource is conditional on a particular
future action that the entity itself may
OBLIGATION
take.  Instead of fulfilling an obligation to
 An obligation is a duty or responsibility  In some cases, it is uncertain whether transfer an economic resource to
that an entity has no practical ability an obligation exists. the party that has a right to
to avoid. receive that resource, entities
 A requirement for one party to sometimes decide to, for example:
recognise a liability and measure it at a TRANSFER OF AN ECONOMIC RESOURCE o settle the obligation by
specified amount does not imply that negotiating a release from
 To satisfy this criterion, the obligation the obligation
the other party (or parties) must
must have the potential to require the
 o transfer the obligation to a o The unit of account is the right or single source, for example,
third party the group of rights, the obligation a contract
o replace that obligation to or the group of obligations, or the  a subgroup of those rights
transfer an economic group of rights and obligations, to and/or obligations
resource with another which recognition criteria and  a group of rights and/or
obligation by entering into measurement concepts are obligations arising from a
a new transaction. applied. portfolio of similar items
o A unit of account is selected to  a group of rights and/or
PRESENT OBLIGATION AS A RESULT OF obligations arising from a
provide useful information, which
PAST EVENTS portfolio of dissimilar
implies that:
 A present obligation exists as a  the information provided about items
result of past events only if: the asset or liability and about any  a risk exposure within a
o the entity has already related income and expenses must portfolio of items—if a
obtained economic benefits or be relevant. portfolio of items is
taken an action  the information provided about subject to a common risk
o as a consequence, the entity the asset or liability and about any
will or may have to transfer an related income and expenses must
EXCUTORY CONTRACT
economic resource that it faithfully represent the substance
would not otherwise have had of the transaction or other event  An executory contract is a contract, or
to transfer. from which they have arisen. a portion of a contract, that is equally
 The enactment of legislation is not unperformed—neither party has
in itself sufficient to give an entity o Treating a set of rights and fulfilled any of its obligations, or both
a present obligation. obligations as a single unit of parties have partially fulfilled their
 A present obligation can exist even account differs from offsetting obligations to an equal extent.
if a transfer of economic resources assets and liabilities  An executory contract establishes a
cannot be enforced until some o Possible units of account include: combined right and obligation to
point in the future.  an individual right or exchange economic resources.
individual obligation  To the extent that either party fulfils
 all rights, all obligations, or its obligations under the contract, the
UNIT OF ACCOUNT all rights and all contract is no longer executory.
obligations, arising from a
EQUITY relating to contributions from holders  Recognition links the elements, the
of equity claims. statement of financial position and the
 Equity is the residual interest in the
statement(s) of financial performance.
assets of the entity after deducting all
its liabilities.
EXPENSES
 Equity claims are claims on the
RECOGNITION CRITERIA
residual interest in the assets of the  are decreases in assets, or increases in
entity after deducting all its liabilities. liabilities, that result in decreases in  Only items that meet the definition of
 shares of various types, issued equity, other than those relating to an asset, a liability or equity are
by the entity distributions to holders of equity recognised in the statement of
 some obligations of the entity claims. financial position.
to issue another equity claim.  only items that meet the definition of
 Different classes of equity claims, such ___________________________________
income or expenses are recognised in
as ordinary shares and preference CHAPTER 5: RECOGNITION AND the statement(s) of financial
shares, may confer on their holders DERECOGNITION performance.
different rights, for example, rights to  An asset or liability is recognised only
receive some or all of the following RECOGNITION
if recognition of that asset or liability
from the entity:  Recognition is the process of capturing and of any resulting income, expenses
 dividends, if the entity decides for inclusion in the statement of or changes in equity provides users of
to pay dividends to eligible financial position or the statement(s) financial statements with information
holders of financial performance an item that that is useful
 the proceeds from satisfying meets the definition of one of the
the equity claims, either in full elements of financial statements—an
on liquidation, or in part at asset, a liability, equity, income or UNCERTAINTY
other times expenses.
 other equity claims.  Existence uncertainty - it is uncertain
 Involves depicting the item in one of
whether anasset or liability exists.
those statements—either alone or in
 Measurement uncertainty - For an
aggregation with other items—in
INCOME asset or liability to be recognised, it
words and by a monetary amount, and
must be measured. In many cases,
 Income is increases in assets, or including that amount in one or more
such measures must be estimated and
decreases in liabilities, that result in totals in that statement.
increases in equity, other than those
 are therefore subject to measurement or liability acquired, incurred or
uncertainty. created as part of the transaction
or other event)
o the change in the entity’s assets
and liabilities as a result of that
transaction or other event.

DERECOGNITION

 Derecognition is the removal of all or

part of a recognised asset or liability
from an entity’s statement of financial
position.
 Derecognition normally occurs when
that item no longer meets the
definition of an asset or of a liability:
o for an asset, derecognition
normally occurs when the entity
loses control of all or part of the
recognised asset
o for a liability, derecognition
normally occurs when the entity
no longer has a present obligation
for all or part of the recognized
liability.
 Accounting requirements for
derecognition aim to faithfully
represent both:
o any assets and liabilities retained
after the transaction or other
event that led to the
derecognition (including any asset