Understandability enables users to comprehend its meanings Research School of

Understandability enables users to comprehend its

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Understandability enables users to comprehend its meanings. Research School of Accounting
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8.3. Elements of financial statements Assets Liabilities Equity Revenue Expenses 44 Statement of Profit and Loss aka The Income Statement Statement of Financial Position aka The Balance Sheet
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Definition of Assets Each of the five elements are defined in the Conceptual Framework (“CF”). Definition of asset : ‘An asset is a present economic resource controlled by the entity as a result of past events’. (CF 4.3) The term “economic resource” is defined as: “… a right that has the potential to produce economic benefits.” (CF 4.4) This definition consists of three key terms: Right Potential to produce economic benefits Control 45
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Rights The Conceptual Framework specifies that the rights, in order to be an asset of the entity, must: both have the potential to produce for the entity economic benefits beyond the economic benefits to all other parties … and be controlled by the entity (CF 4.9) Therefore, rights to access public goods that are available to all parties are typically not assets. A single physical object (such as a machine) or a non-physical object (such as intellectual property) often give rise to multiple rights, e.g., the right to use and right to transfer. Strictly speaking, the “economic resource” is the collection of rights rather than the object itself. However, “describing the set of rights as the physical object will often provide a faithful representation of those rights in the most concise and understandable way.” (CF 4.12) 46
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Potential to Produce Economic Benefits Paragraph 4.14 of the Conceptual Framework states: “An economic resource is a right that has the potential to produce economic benefits. For that potential to exist, it does not need to be certain, or even likely, that the right will produce economic benefits. It is only necessary that the right already exists and that, in at least one circumstance, it would produce for the entity economic benefits beyond those available to all other parties .” Examples of potential economic benefits: receive contractual cash flows; exchange economic resources with another party on favourable terms; produce cash inflows or avoid cash outflows; receive cash or other economic resources by selling the economic resource; extinguish liabilities by transferring the economic resource. (CF 4.17) The “economic resource” is the right to potential economic benefits, not the future economic benefits themselves. (CF 4.17) 47
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Control Paragraph 4.20 defined control as follows: – “An entity controls an economic resource if it has the present ability to direct the use of the economic resource and obtain the economic benefits that may flow from it. Control includes the present ability to prevent other parties from directing the use of the economic resource and from obtaining the economic benefits that may flow from it. It follows that, if one party controls an economic resource, no other party controls that resource .”
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  • Balance Sheet, International Financial Reporting Standards, Research School of Accounting

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