Status and Purpose of the Conceptual  Other users (PEGC) (Please Enter

Framework God Church)

o Employees (stability, and
 Also known as the Conceptual
ability to pay wages)
Framework for Financial Reporting
o Customers (long-term
 Describes the objectives and
continuance aka suki)
concepts of financial reporting
o Government (compliance and
 Specific purposes are (SCIence)
regulation)
o Assist IASB in standard
o Public (assessment of local
development
economy on the basis of
o Assist FS preparers to
trends)
develop consistency in
 Different decisions (CRI)
dealing with unaddressed
o buying/selling equity or debt
accounting issues in
instruments (invest)
standards
o providing loans (credit)
o Assist users and preparers to
o exercise rights on entity’s
understand and interpret
resources (rights)
standard
 Financial reports do not show the
 Not a standard, and does not
entity’s value, instead they allow
supersede any standard
primary users to estimate its value
 IASB may stray from the standard to
for most information are based on
meet the purpose of financial
estimates and judgments
reporting more faithfully
 Management relies on internal info,
 May be revised
not on financial reports
 Provides standard foundations that
(TAE): Economic resources and claims
o Allow for transparency in
 Information on this allows for
financial info
assessment of entity’s financial
o Strengthen accountability
strengths and weaknesses.
o Allow for economic
 Assess solvency and liquidity
efficiency
o S – short-term
Chapter 1: Objective of Gen. Purpose o L – long-term
Financial Reporting  Allows prediction of how future cash
flows will be distributed to owners
 To provide financial information
about the entity that is useful to
primary users in making economic
decisions.
 Primary users (IC)
o Existing and potential
investors
 Can you pay
dividends?
o Lenders and creditors
 Can you settle loans?
Changes in economic resources and  Faithful representation –
claims information must faithfully represent
economic phenomena in words
 Result from (PI)
and numbers.
o Financial performance
o Completeness
 Accrual accounting
 Relevant information
 Past cash flows
should be presented
o Issuance of debt/equity
understandably and
securities
with avoidance of
 Assess return produced on resources
erroneous
and stewardship of management
implications.
Information about entity’s resource  Inclusion of all
usage descriptions and
explanations needed
 Assess management stewardship  Standard of
 Future cash inflow assessment on Adequate
the basis of how efficient and Disclosure
effective management is o Free from error
Chapter 2: Qualitative Characteristics of  No errors or
Useful Financial Information omissions in
description of
 Useful to primary users for making phenomena.
decisions based on financial reports  does not mean perfect
 Cost constraint applies to financial accuracy for most of
information reporting (benefits must accounting is reliant
exceed costs) on estimations.
Fundamental Qualitative Characteristics  Measurement
(Relevance and Faithful Representation) uncertainty is the
inability to directly
 Relevance – capable of making a observe monetary
difference in decision making amounts in FS.
o Predictive value – can be Hence, the need for
used as input to predict future estimation.
outcomes
o Confirmatory value –
provides feedback about
previous evaluations.
o Materiality (entity-specific) –
information is material if its
omission or misstatement
influences decisions. Based
on nature and magnitude
and requires professional
judgment.
 o Neutrality
 Non-biased
preparation in
preparing and
selecting financial
information.
 Freedom from
alteration to increase
a probability of a(n)
(un)favorable reaction
from its users.
 Linked to prudence,
or the exercise of
caution in situations
of uncertainty so as to
avoid misstatement
o Other concepts
 Substance over form
- for faithful
representation to take
place, transactions
must be accounted for
in accordance with
Enhancing
their substance/reality
(VCUT)
and not merely their
legal form.
 Conservatism – information and what it represents.
linked to prudence, if
alternatives exists,
that which has the
least effect on equity
is chosen. US>OS for
NI and Assets. Loss >
gain if in doubt. In
case of contingent
loss/gain, disclose
only if gain, and
provide for in loss.
How does one apply the fundamental
qualitative characteristics?
(1) Identify economic phenomenon
capable of being of use to users of
FS;
(2) Identify type of information that would
be of most relevance to such
phenomenon
(3) Determine if information will faithfully
represent such phenomenon
Phenomenon
Information
Will this
information
faithfully
represent the
phenomenon?
Qualitative Characteristics
 Enhance the usefulness of
 Comparability – ability to bring
together to compare and contrast.
o Horizontal Comparability /
Intracomparability – within
the entity only, compares info
from different period
o Dimensional Comparability
/ Intercomparability –
between and across entities
o Not necessarily uniformity
 Other concept: Consistency –
usage of the same method from
period to period in 1 period, or across
entities. This helps us achieve
comparability.
 Verifiability – different
knowledgeable and independent
 observers much reach a consensus. of future cash flow assessment
This helps us assure that the and management stewardship
information represents what it needs assessment.
to represent.  Information is provided for in:
o Direct verification – via o Statement of financial
direct observation (e.g. cash performance (A, L, E)
count) o Statement of financial
o Indirect verification – position (Income and
checking inputs to a model, expense)
subsequent calculation with o Other statements and notes
same method  With information re:
 Timeliness – having information recognized ALE and
available to decision-makers in time other info on risk, etc.
to make decisions. Old age =  ALE not recognized
usefulness. and other info on risk,
 Understandability – clear and etc.
concise presentation information.  Cash flows
Complex transactions are hard to  Statement of changes
present in a simple way, and in equity
therefore warrants knowledge of  Methods and
users on: assumptions used in
o Future economic benefit estimations, etc.
o Accounting process
Reporting Period Assumption
o FS terms
 Financial statements are prepared for
An FS is useless, if users cannot
a specific period of time
understand it.
 May also involve comparative
 No prescribed steps to application, information on previous periods
for it is an iterative process.  Information on possible future
transactions and events may also be
Cost constraint
included
 A pervasive constraint, inherent in  Events and transaction that occur at
financial reporting. period-end may be included if such
 Information gathering imposes costs, information is needed to effectively
therefore such costs must not meet the objective of financial
outweigh the benefits of the reporting
information provided.
Going concern assumption
Chapter 3: Financial Statements and the
 Financial statements are prepared on
Reporting Entity
the assumption that the entity is
 Objective of financial statements is to continuing in operations, unless
provide financial information about an otherwise stated
entity’s assets, liabilities, equity,  FS are based on the assumption
income and expenses for the purpose above
  Also known as the continuity
assumption
 Foundation of cost principle
 Opposite of going concern is known
as discontinuing operations
Consolidated and unconsolidated
financial statements
 Consolidated FS provide info on ALE
and IE of both parent and its
subsidiaries
o 50%+1 ownership
 Consolidated do not provide separate
info of any subsidiary. The
subsidiary’s own FS will provide for
such.
 Unconsolidated FS provide info on
ALE and IE of parent only.
 Parent-related info may also be
provided for in consolidated FS via
notes.
 When consolidated FS is required,
unconsolidated FS may not serve as
a substitute.
Chapter 4: The Elements of Financial
Statements
oEquity – residual interest of
the entity’s assets after the
deduction of liabilities
 Changes in economic resources
and claims, reflecting financial
performance
o Income – increases in
assets or decreases in
liabilities which result in an
increase in equity, other
than contributions from
owners
o Expenses – decreases in
assets or increases in
liabilities which result in a
decrease in equity, other
than distributions to owners
 Other changes in economic
resources and claims
o Contributions and
distributions to holders of
equity claims
o Exchange in assets and
liabilities that do not
increase/decrease equity
Assets

 Assets, liabilities, and equity relating  Present economic resource

to financial position controlled as a result of past events
 Income and expenses relating to where such resource has the
financial performance potential to produce economic
 Economic resource = asset benefits
o Present economic resource  Right
controlled as a result of past o May correspond to an
events obligation of another party
o Economic resource is a right  Right to receive cash
that has potential to produce  Right to receive G&S
economic benefits  Right to exchange
 Claim economic resources
o Liability – present obligation on favorable terms
to transfer an economic  Right to benefit from
resource as a result of past an obligation of
events another party to
transfer an economic
 resource should a
condition occur.
o May not correspond to an
obligation of another party
 Right over physical
objects (e.g. PPE)
Potential to produce economic benefits
 Right to use
intellectual property
 Right established via contract,
legislation, and the like (e.g. rights
arising from lease, equity/debt
instrument)
 Rights acquired by other means
o Acquiring/creating know-how
that is not in the public domain
o Obligation that arises from the
inconsistency of one party in
its customs and practices
 Some G&S are received and
consumed immediately, such
economic benefits from such G&S
still exist until the entity consumes the
G&S (e.g. employee services)
 An entity cannot have a right to
obtain economic benefits from
itself
o Treasury shares (for they are
mere repurchases of stock)
o In the case of a reporting
entity comprising more than
one legal entity, debt/equity
instruments issued by one
legal entity, is not an
economic resource of
another.
 Each right is a separate asset, in
principle. For accounting purposes,
related rights are often treated as a
single asset/unit of account (e.g.
ownership that gives rise to several
rights)
 Set of rights from ownership of a
physical object is accounted for as a
single asset (most cases)
 When there is uncertainty as to the
existence of a right, it is uncertain
whether the entity has an asset, until
such existence uncertainty is
resolved
 Potential to produce economic
benefits need not be certain, the
mere existence of the right and the
actual production of economic
benefits beyond those available to
the parties shall suffice.
 As long as a right meets the definition
of an economic resource, it is an
asset regardless of probability that it
will produce economic benefits.
 Economic resources produce
economic benefits by allowing:
o Receipt of contractual cash
flows or other resource
o Exchange of resource on
favorable terms
o Produce cash inflows/avoid
cash outflows by
 Using the resource to
produce G&S
 Using the resource to
enhance the value of
other resources
 Leasing the resource
o Receipt of cash/other
resource by selling the
resource
o Extinguishment of liability
through the transfer of
resource
o Absence of related
expenditure does not
preclude an item from
meeting the definition of an
asset (e.g. govt grant)
o When an entity incurs
expenditure, this does not
 provide conclusive evidence
that the entity has sought
future economic benefits, and
therefore, an asset.
Control
 Links an economic resource to an
entity. Assessing whether control
exists helps to identify the economic
resource the entity is accounting for.
 Control over a resource exists when
it has the ability to use and
Transfer of an economic resource
consume the benefits that flow from
such asset.
 Control is the ability to prevent
other parties from using the
resource and obtaining the
benefits that arise from it
 Control arises from the ability to
enforce legal rights over the asset
or other means of ensuring that no
other party may use the asset and
obtain benefits.
 If person A tasks person B to take
custody of A’s economic resource, B
cannot consider such resource as
his asset.
Liabilities
 Present obligation of the entity to
transfer an economic resource due to
past events
 Criteria for an item to be a liability
o Entity has an obligation
o The obligation is to transfer
an economic resource
o Obligation is a present
obligation due to past events
Obligation
 Unavoidable duty/responsibility owed
to another party.
 If party A has an obligation to transfer
a resource, party B must have a right
to receive such resource.
Measurement need not be a mirror
image of the other.
 Obligations are established by
contract, legislation, or other means.
Obligations may also arise from an
entity’s customary practices.
 Uncertainty as to the existence of an
obligation also gives rise to the
uncertainty of the existence of a
liability
 To satisfy this criterion, the obligation
must have to potential to require the
entity to transfer a resource to
another party. Such potential need
not be certain (e.g. in the case of
conditions)
 Obligations to transfer an economic
resource include:
o Payment of cash
o Delivery of goods and
services
o Exchange economic
resources on unfavorable
terms
o Transfer economic resource
based on a condition
o Issuance of financial
instrument if such FI obliged
entity to transfer a resource
 Instead of fulfillment, a party may opt
to:
o Settle via negotiating a
release from obligation
o Transfer the obligation to a
third party
o Replace the obligation with
another
Present obligation due to past events
 Exists only if:
o The entity has already
obtained the economic
benefits or taken an action
o By consequence
 A present obligation can exist even if
the transfer of resources cannot be
enforced until the future or at a due
date
 There is no present obligation if the
entity has not yet obtained economic
benefits or taken an action that
could/would require a transfer that it
otherwise would not have needed to
do.
Assets and liabilities
 Unit of account – right/group of
rights/obligation/group of obligations
to which recognition and
measurement concepts are applied.
 If an entity transfers a part of an
asset/liability, the unit of account may
change, so that a part may be
transferred into another unit of
account
 Provides useful information which
implies:
o Relevance of the ALE IE item
Equity
o Treating a group of
rights/obligations as one may
provide more useful
information than treating them
as individual units of account
 Unit of account selection also implies
weighing in costs and benefits
 In the case of inseparable rights and
obligations, a single unit of account
may be used. Note that the use of
single units of account of assets
and liabilities does not imply
offsetting.
Executory contracts
 A contract or a portion of which that is
equally unperformed (similar to
reciprocal obligation)
 Establishes a combined right and
obligation to exchange economic
resources. Such right and obligations
are inseparable.
 If the reporting entity fulfills his part
first in the contract, the performance
is the event that changes the
obligation to exchange into a right
to receive an economic resource
and therefore is an asset.
Otherwise, if the other party fulfills
their part first, it is a liability.
Substance of contractual rights and
contractual obligations
 All contract terms are to be
considered unless they are of no
substance. Note that implicit terms
are also considered.
 Terms that have no substance are
also disregarded. A term is of no
substance if:
o It binds neither party
o It contains rights that are not
practically exercisable
 Residual interest in assets after
deducting liabilities
 Equity claims are claims against the
entity that do not meet the definition
of a liability and are established via
contract, legislation, etc.
 Different classes of equity claims
confer different rights on their
holders. Examples of rights are:
o Right to receive dividends in
case of declaration
 o Right to receive share in  Sales, fees, interest,
assets after liquidation (note dividends, royalties,
that in case of liquidation, it is and rent
the creditors that are first o Gains
paid, not equity claimants)  Do not arise from
 Legal and regulatory requirements ordinary business act.
affect equity components (e.g. the  Note that the normal point of
ability to declare dividends only if income recognition is point of
there is a positive retained earnings sale.
figure) o Exceptions are:
 Corporate entities have different legal  Installment method
and regulatory frameworks from that  Cost recovery/sunk
of sole proprietorships, partnerships, cost method
etc.  Cash method
 Percentage of
Income and Expenses
completion method
 Income – increase in  Production method
assets/decrease in liabilities that  To recognize revenue from the
result in increase in equity (except rendering of services,
additional investments) o Its must measurable reliably
 Expense – decrease in o It must be probably that the
assets/increase in liabilities that benefits associated with the
result to decrease in equity (except transaction will flow to the
distributions to owners that are not entity
expenses) o Stage of completion of
 Relate to financial performance transaction can be measured
reliably
Chapter 5: Recognition and o Transaction costs and costs
Derecognition to complete can be measured
The Recognition Process reliably
 Revenue from interest, royalties,
 Recognition is the process of and dividends
capturing for inclusion in financial o Interest shall be recognized
statements an item that meets the on a time proportion basis
definition of: o Royalties shall be recognized
o Asset on an accrual basis
o Liability o Dividends shall be recognized
o Equity at date of declaration
o Income  Other criteria for recognition of
o Expense income:
 Income o Installation fees are
o Revenue recognized as revenue over
 Ordinary regular the period of installation
activities
 o Subscription revenue shall be items may presented individually or
recognized on a straight line aggregated in groups.
basis  Amounts usually found in line items
o Admission fees are are aggregates (e.g. ‘cash and cash
recognized when the actual equivalents’ is a total of cash, cash
event takes place equivalents, petty cash fund, etc.)
o Tuition fees are recognized  Recognition links the elements,
over which the tuition is SOFP and IS
provided. o SOFP at beginning and
 Expenses period-end, A-L=E; and
o Decrease in economic o Recognized equity changes
benefits comprising
o Recognized when there it is  Inc-Exp recognized in
probable that there will indeed IS
be a decrease and if it can be  Additional
measured reliably contributions minus
o Losses and regular ordinary distributions from
expenses owners
 Expense recognition is application of  The link is created due to the double-
matching principle entry system whereby when one
o Cause and effect association item is recognized, another is
 Recognition of recognized/derecognized.
expense when the  Income recognition the same time as
revenue is recognized o Initial recognition of an asset,
already (sales and or an increase in its carrying
cogs) amount
o Systematic and rational o Derecognition of a liability, or
allocation a decrease in its carrying
 Costs are expensed amount
by allocation over  Expense recognition occurs the
periods where it is same time as
benefited (e.g. o Initial recognition of a liability,
depreciation and or an increase in its carrying
amortization) amount
o Immediate recognition o Derecognition of an asset, or
 Outright expense of a decrease in its carrying
cost incurred amount
(salaries, etc.) not
Recognition criteria
directly related to
specific revenue  Items that meet the definition and
 Carrying amount is the amount at criteria of an ALE may be recognized
which an ALE is reported in the in the SOFP.
statement of financial position. Such  Items that meet the definition of IE
may be recognized in the IS.
 Not all items that satisfy meeting the
definition are recognized
 Assets, liabilities and their resulting
changes in equity are only
recognized if it provides relevant and
faithfully represented information
for users.
 Recognition also entrails costs.
Obtaining a relevant measure entails
costs therefore one must justify the
recognition of such item if its benefits
outweigh the costs. However, this
may not be avoided.
 Even if an item does not meet the
criteria for recognition, if needed, the
reporting entity may provide
information re: the item in the
notes.
Relevance
 Information on ALEIE is normally
relevant to users of FS. However,
recognition may prove irrelevant if:
o There is uncertainty in the
existence of an AL
o AL exists, but the probability
of inflow/outflow is low
 Note that presence of one/both
factors above does not automatically
lead to irrelevant recognition, for
opting not to recognize is a matter of
professional judgment for other factor
must be considered.
Existence uncertainty
 Uncertainty along with low probability
of inflow/outflow may mean that a
recognition of an AL would not
provide relevant information.
Low probability of inflow/outflow of
economic benefits
 Note that an AL may still exist even if
an inflow/outflow probability is low
 In case of low inflow/outflow
probability, the most relevant
information about the item may be
information about in the notes are:
o Possible inflows and
outflows
o Possible timing
o Factors affecting
occurrence
Faithful representation
 Recognition is appropriate if it
provides a faithful representation of
that AL and resulting IE item.
 Faithful representation is affected by
the item’s measurement uncertainty
Measurement uncertainty
 Measures must be estimated in some
cases, and are therefore, subject to
measurement uncertainty.
 So long as the estimates are
measured reasonably, the
usefulness of the information is not
undermined. Even highly uncertain
measurement does not necessarily
equate to useless information.
 Uncertainty level may be too high in
some cases and therefore it is
questionable if it would provide
sufficiently faith representation of
the item. This occurs normally when:
o Cash-flow based
measurement technique is
used
o Range is wide and probability
is difficult to estimate
o There is high sensitivity in
changes in estimates
o There is exceptional difficulty
and subjectivity in the
allocation of cash flows
 If the preceding facts are the most
useful type of information possible, a
 description of the estimate with
explanation may be needed. If there
is still a lack of faithful
representation, one may opt to
choose a measurement basis that
is less relevant but is subject to
lower measurement uncertainty.
 If there is no other way, opting not to
recognize is appropriate.
Derecognition
 The remove of all/part of a once
recognized asset or liability from the
SOFP. This normally occurs when the
item does no longer meets the
definition of an asset or a liability:
o For assets, upon loss of
control of part/all of the once
recognized asset
o For liabilities, upon
extinguishment of a present
obligation for all/part of the
once recognized liability
 Previous provisions are normally
achieved by:
o Derecognition of expired
assets and fulfilled liabilities
o Only recognizing retained
component of assets
 If an entity transfers and asset to an
agent, the transferor still controls the
asset
Chapter 6: Measurement
 FS elements are quantified in
monetary terms, and therefore need
a measurement basis.
Measurement bases – Historical cost
 Based on transaction price or other
event that gave rise to the ALE, IE.
This does not reflect value
changes except those arising from
impairment and onerous liabilities.
 HC of asset upon acquisition or
creation is the cost incurred in
creating and acquiring the asset.
 HC of liability is the value of the
consideration received to take on
the liability minus transaction
costs.
 HC of ASSET is updated to depict:
o Consumption of part of asset
(depn and amort)
o Payments received which
extinguish part or all of an
asset
o Events that updated
recoverable value of asset
(impairment)
o Accrual of interest to reflect
financing component of asset
(loans receivable)
 HC of LIABILITY is updated to
depict:
o Fulfilment of part/all of a
liability
o Effects that increase the
value of the obligation to
resources needed to fulfill the
liability to which it reaches an
extent of it being onerous
o Accrual of interest in a
financial component of a
liability
 Amortized cost may also be used,
which is updated via interest
accrual, impairment, and
receipts/payments.
 Cost on initial recognition
 At subsequent measurement,
o Amortized cost/carrying
amount
o Realizable value
Measurement bases – current value
fulfilment value
 Uses information updated to reflect
conditions at the measurement
date. Due to updates, current values
reflect changes from previous
measurement date
 Measurement bases are
o Fair value
o Value in use
o Current cost
 Current value is not derived from
transaction price that gives rise to
A/L.
Measurement bases – fair value
 Price that would be received to sell
an asset or to transfer a liability, in
Measurement bases – current cost
an orderly transaction between
market participants at
measurement date
 Reflective of market participants’
perspective (e.g. a market for PC
parts normally sells brand X part for
150PHP)
 May be determined directly by
observing prices in an active market,
but may also be determined with
Choosing a measurement basis – factors
cash-flow measurement giving
to consider
consideration to:
o Future cash flow estimates
o Variation of future cash flow
o Time value of money
o Price for bearing uncertainty
(risk premium/discount)
o Liquidity and other factors of
participants
 Not increased by acquisition
transaction costs for assets and
decreased by TC for liability
incurrence except for measurement
bases such as FVTOCI, FVLCOD,
etc.
Measurement bases – value in use and
 Provides information about an
asset’s present value of future cash
flows and disposal. Has predictive
value and can be used for future
cash inflow assessment (VIU)
 Provides information about the
present value of future cash flows
needed to fulfil a liability. Also has
predictive value if the liability will be
fulfilled or transferred (fulfilment
value)
 Updates yield confirmatory value as
they provide feedback on previous
estimates.
 For assets, is the cost of an
equivalent asset at measurement
date which is the payment + TC
 For liabilities, is the consideration
received – TC at measurement date
 Based on entry price/entry value
but reflects market conditions upon
measurement.
 It is necessary to consider the
nature of the information that the
measurement basis will produce.
 No single factor will determine which
basis is of most use and must be
based on facts and circumstances.
 Note that historical cost is the most
commonly adopted, for it is simpler
and less costly than using current
value methods. However, relevance
and faithful representation must still
be considered. Cost constraint and
other enhancing qualitative
 characteristics must also be relevant and faithfully represented
considered. information.
 Note that equity is not measured  For assets,
directly, for it is the difference o Current asset – expected to
between total assets and total be useful within a year or
liabilities. operating cycle (e.g. cash)
o Non-current asset –
Chapter 7: Presentation and Disclosure
expected to be useful for
Presentation and disclosure as more than a year (e.g. PPE)
communication tools  For liabilities,
o Current liability – expected
 Effective communication tool about to be paid within a year (note
information found in financial that AP is always current)
statements o Noncurrent liability –
 Allows for more relevant and faithful expected to be paid beyond
representation of ALEIE. Also one year (NP is classified as
enhances understandability and NCL or CL depending on
comparability. term)
 Also subject to cost constraint  Offsetting – recognition of both an
Presentation and disclosure objectives asset and liability of separate units of
and principles account and grouping them into a
separate net account. Generally
 In standards, balance is needed inappropriate when classifying
between: dissimilar items, but is permitted on
o Allowing entities to provide some occasions.
relevant and faithfully  Based on different characteristics,
represented information those subject to legal, regulatory and
o Allowing for comparable other requirements may be
information separated.
 Effective communication is also o Ordinary shares (Without
supported by the following principles: preferential rights)
o Boilerplate or entity-specific o Preference shares (with
information than standardized preferential rights)
descriptions  For income and expenses,
o Discouragement of o Either in profit or loss
duplication in financial statement
statements o Other comprehensive income
Classification  PL statement is the primary source of
information on entity’s financial
 Sorting of ALE IE based on performance for a period.
shared/similar characteristics.  Items outside PL are in OCI.
 Classifying dissimilar assets reduces  Income and expenses arising from
understandability and change of current value in asset or
comparability and may not provide liability may be included in OCI if
 doing so would result to relevant and
faithfully represented financial
information.
 Components of OCI may be
o Recycled when appropriate
o Reclassified when
appropriate
o Transferred to retained
earnings when appropriate
Aggregation
 Adding together of ALE IE that have
similar or shared characteristics
and are included in the same
classification.
 Summarizes a large volume of detail,
but a more expanded version may be
found in the notes to financial
statements.
Chapter 8: Concepts of Capital and
Capital Maintenance
 Financial performance is determined
using
o Transaction approach
o Capital maintenance
approach
 Transaction approach is the
preparation of income statement
 Under financial capital, it is the net
assets or equity of the entity
 Under physical capital, it is the
operating capability or the productive
capacity of the entity
 Financial capital is the monetary
amount of the net assets. It is based
on historical cost and is adopted
by most entities.
 Net income under financial capital
o NET ASSETS - END
o DIVIDENDS PAID
o TOTAL
o (NET ASSETS – BEG)
o ADDITIONAL
INVESTMENTS
o NET INCOME
 Physical capital is the quantitative
measure of the physical productive
capacity to produce G and S.
 Measured at current cost.
 Include PPE, Inventory (productive
assets)
 Should be adopted if the main
concern of users is the operating
capability of the entity
 Income is when physical productive
capital at year end exceeds that of
the beginning of the period after
excluding distributions to owners and
contributions from owners.
o NET ASSETS – DEC AT
CURRENT COST
o DIVIDENDS PAID
o TOTAL
o (NET ASSETS AT CURRENT
COST JAN1)
o ADDTL INVESTMENTS
o NET INCOME
 Capital maintenance is how an entity
defines the capital it wishes to
maintain
 Principal difference between two
concepts of capital maintenance is
treatment of effects of changes in
prices of assets and liabilities
 Return of capital – erosion or
withering of the capital invested in the
entity
 Return on capital – what
shareholders want from their
investment (amount in excess of orig.
investment)