CHAPTER 7 – CONCEPTUAL FRAMEWORK

Presentation and disclosure

Concepts of capital

PRESENTATION AND DISCLOSURE

The presentation and disclosure can be an effective communication tool about the information in
financial statements.

Classification is the sorting of assets, liabilities, equity, income and expenses on the basis of shared or
similar characteristics.

Classification of income and expenses

Income and expenses are classified as components of profit or loss and components of other
comprehensive income

The Revised Conceptual Framework has introduced the term statement of financial performance to
refer to the statement of profit or loss together with the statement presenting other comprehensive
income.

The statement of profit or loss is the primary source of information about an entity's financial
performance for the reporting period

The components of other comprehensive income are subsequently recycled or reclassified to profit or
loss or retained earnings

Aggregation is the adding together of assets, liabilities, equity, income and expenses that have similar or
shared characteristics and are included in the same classification.

CAPITAL MAINTENANCE

The transaction approach is the traditional preparation of an income statement.

The capital maintenance approach means that net income occurs only after the capital used from the
beginning of the period is maintained.

In other words, net income is the amount an entity can distribute to its owners and be as "well -off" at
the end of the year as at the beginning.

The Conceptual Framework considered TWO concepts of capital maintenance or well-offness, namely
financial capital and physical capital.
Financial capital

Under a financial capital concept, such as invested money or invested purchasing power, capital is
synonymous with net assets or equity of the entity

Financial capital is the monetary amount of the net assets contributed by shareholders and the amount
of the increase in net assets resulting from earnings retained by the entity.
It is the traditional concept based on historical cost and adopted by most entities.

Physical capital is the quantitative measure of the physical productive capacity to produce goods and
services.

This concept requires that productive assets be measured at current cost, rather than historical cost

Productive assets include inventories and property, plant and equipment.

Under this concept, net income occurs "when the physical productive capital of the entity at the end of
the year exceeds the physical productive capital at the beginning of the period, also after excluding
distributions to and contributions from owners during the period.”