In order for financial statements to be reliable, they should:
- not include material error or bias;
- be a faithful representation;
- show the substance rather than the legal form of the transaction;
- be neutral;
- be prudent (but not to the extent that reserves become hidden); and
- be complete (within the confines of materiality and cost).
Elements of financial statements
Elements that pertain to the statement of financial position are assets, liabilities and equity, whilst elements that pertain to the statement of profit or loss and other comprehensive income are income and expenses.
The value of a reporting entity lies in the net assets (assets minus liabilities) under its control. It is therefore important to realise that assets can be recognised in the statement of financial position even though the entity may not be the legal owner thereof.
An asset is:
- a present economic resource
- controlled by a reporting entity
- as a result of past events.
A liability is:
- a present obligation of a reporting entity
- to transfer an economic resource
- as a result of past events.
An asset or liability is recognised in the statement of financial position only if that asset or liability, and any resulting income, expenses, or changes in equity, provide the users of the financial statements with useful information. Useful information, in turn, must be relevant and faithfully represented
Equity is the residual interest in the assets of the entity after deducting all the liabilities.
Measurement of the elements of financial statements
“Measurement” means the process of determining the monetary value (amounts) at which the elements of the financial statements are to be recognised and disclosed. Two bases of measurement are listed in the Conceptual Framework, namely
(1) historical costs and
(2) current value.
Property, plant, and equipment are often measured at historical cost less accumulated depreciation and impairment unless entities choose to incorporate a revaluation model that will allow these assets to be revalued to more recent
When are assets regarded as being current and when are liabilities regarded as being current per IAS 1?
An asset is classified as current when it satisfies any of the following criteria:
- It is expected to be realised, or intended for sale or consumption, in the entity’s normal operating cycle.
- It is held primarily for trade.
- It is expected to be realised within 12 months after the statement of financial position date.
- It is cash or a cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least 12 months after the statement of financial position date.
A liability is classified as current when it satisfies any of the following criteria:
- It is expected to be settled in the entity’s normal operating cycle.
- It is held primarily to be traded.
- It is due to be settled within 12 months after the statement of financial position date.