NB Control is not equivalent to Ownership An entity can control an economic

Nb control is not equivalent to ownership an entity

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NB: Control is not equivalent to Ownership: An entity can control an economic resource but not own it, e.g. a long-term lease. An entity might only own 51% of the voting stock of another entity, but this is sufficient to give it control over 100% of the other entities assets. 48
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Definition of Assets Which of the following meets the definition of an asset? A machine owned by the company. A machine leased (long-term) by the company. Highly experienced employees. Intellectual property protected by a patent. Your education. – The “Google” brand name. 49
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Definition of Liabilities Definition of liability : A liability is a present obligation of the entity to transfer an economic resource as a result of past events. (CF 4.26) For a liability to exist, three criteria must all be satisfied: the entity has an obligation the obligation is to transfer an economic resource; the obligation is a present obligation that exists as a result of past events. (CF 4.27) An obligation is defined as “… a duty or responsibility that an entity has no practical ability to avoid. An obligation is always owed to another party (or parties ).” (CF 4.29) A legal debt is a liability, however not all liabilities are legal debts, e.g., an obligation can also be imposed by customary practices (constructive obligation). (CF 4.31) 50
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Definition of Equity Definition of equity : – ‘ the residual interest in the assets of the entity after deducting all its liabilities ’ (CF 4.63) Equity = Assets Liabilities Represents accounting’s measure of the value of the company to the owners, also known as book value . 51
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Definitions of Income and Expenses Definition of income (aka revenue and gains) : – “Income is increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims .” (CF 4.68) Definition of expenses : – “Expenses are decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.” (CF 4.69) 52
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Recognition of the Five Elements Recognition is the process of capturing for inclusion in the statement of financial position or the statement(s) of financial performance an item that meets the definition of one of the elements of financial statements an asset, a liability, equity, income or expenses. (CF 5.1) Thus, to be recognised, an item must satisfy the definition of one of the five elements. However, not all items that meet the definition of one of the five elements are recognised. 53
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Recognition Criteria An asset or liability is recognised only if recognition of that asset or liability and of any resulting income, expenses or changes in equity provides users of financial statements with information that is useful, i.e. with: relevant information about the asset or liability and about any resulting income, expenses or changes in; and a faithful representation of the asset or liability and of any resulting income, expenses or changes in equity. (CF 5.7) 54
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