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Qualitative characteristics of financial statements

The Framework describes the qualitative characteristics of financial statements as having

* Understandability
* Relevance
* Reliability
* Comparability and compatibility

Elements of financial statements

The Framework sets out the statement of financial position (balance sheet) as comprising:-
* Assets - resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity
* Liabilities - a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits
* Equity - the residual interest in the assets of the entity after deducting all its liabilities and the statement of comprehensive income (income statement) as comprising:
o Revenue is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or reductions in liabilities.
o Expenses are decreases in such economic benefits.

Recognition of elements of financial statements

An item is recognized in the financial statements when:
* it is probable that a future economic benefit will flow to or from an entity and
* when the item has a cost or value that can be measured with reliability.

Measurement of the Elements of Financial Statements

Measurement is how the responsible accountant determines the monetary values at which items are to be valued in the income statement and balance sheet. The basis of measurement has to be selected by the responsible accountant.Accountants employ different measurement bases to different degrees and in varying combinations. They include, but are not limited to:

* Historical cost
* Current cost
* Realisable (settlement) value
* Present value

Historical cost is the measurement basis chosen by most accountants.

Concepts of Capital and Capital Maintenance

Concepts of Capital

A financial concept of capital, e.g. invested money or invested purchasing power, means capital is the net assets or equity of the entity. A physical concept of capital means capital is the productive capacity of the entity.

Concepts of Capital Maintenance and the Determination of Profit

Accountants can choose to measure financial capital maintenance in either Nominal monetary units or units of constant purchasing power

Physical capital is maintained when productive capacity at the end is greater than at the start of the period.The main difference between the two concepts is the way asset and liability price change effects are treated.Profit is the excess after the capital at the start of the period has been maintained.

When accountants choose nominal monetary units, the profit is the increase in nominal capital. When accountants choose units of constant purchasing power, the profit for the period is the increase in invested purchasing power. Only increases greater than the inflation rate are taken as profit. Increases up to the level of inflation maintain capital and are taken to equity.

Source : Wikipedia