Lakhasly

its contractual requirements.Units of account which may be used include: a. an individual right or individual obligation; b. all rights, all obligations, or all rights and all obligations, arising from a single source, for example a contract; c. a subgroup of those rights and obligations, for example a subgroup of rights over an item of property, plant and equipment for which the useful life and pattern of consumption differ from those of the other rights over the item; d. a group of rights and/or obligations arising from a portfolio of similar items; e. a group of rights and/or obligations arising from a portfolio of dissimilar items, for example a portfolio of assets and liabilities to be disposed of in a single trans- action; and f. a risk exposure within a portfolio of items--if such a portfolio is subject to a com- mon risk, some aspects of accounting for that portfolio could focus on the aggregate exposure to risk within that portfolio.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 defin- ition of one of the elements of financial statements--an asset, a liability, equity, income or expenses.As already noted, income is defined as increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims.The unit of account is selected to provide useful information, which means that information provided about an asset or liability and any related income and expenses must be relevant and must faithfully represent the substance of the transaction or other event from which they have arisen.Nor- mally, the single inherent assets or liability in an unperformed or equally performed execu- tory contract are not recognised until performance.The legal frameworks applying to such entities may differ from those which govern corporate entities, but the definition of equity for the purposes of the 2018 framework remains the same in all cases.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.The chapter emphasises that the definitions of income and expenses mean that contri- butions from holders of equity claims are not income, and distributions to holders of equity claims are not expenses.The chapter defines the unit of account as the right or the group of rights, the obligation or the group of obligations, or the group of rights and obligations, to which recognition criteria and measurement concepts are applied.Business activities are often undertaken through non-corporate entities such as sole proprietorships, partnerships, trusts or government undertakings.An item so recognised is represented in one of the statements by words and amonetary amount, which may be aggregated with other items, and included in one or more of the totals in that statement.The 2018 framework states that these rights and obligations are interde- pendent and therefore cannot be separated, resulting in a single asset or liability.Similarly, if one party makes a prepayment on a purchase contract, the prepayment creates and asset for the party to obtain the goods and a liability for the other to deliver the goods.On the other hand, if a single contract creates two or more sets of rights and obligations that could have been created through two or more separate contracts, faithful representation may require each set of rights and obligations to be accounted for as though it arose from a separate contract.In determining the appropriate unit of account, it is necessary to consider whether the benefits arising from selecting that unit of account justify the costs of providing and using that information.Meaning that no party to the contract has per- formed (fulfilled their obligations) or both parties have partially performed to an equal extent.Executory contracts establish a combination of rights and obligations to exchange eco- nomic resources.The recognition of executory contracts is dependent on the recognition criteria (chapter 5), the measurement basis (chapter 6) and whether the contract is onerous.The basic principle is that executory contracts are not recognised until one party performed, except if it is onerous.The chapter notes that equity claims are claims on the residual interest in the assets of the entity after deducting all of its liabilities.Therefore, despite income and expenses being defined in terms of changes in assets and liabilities, information about income and expenses is equally important as information about assets and liabilities.An executory contract is defined as a contract, or a portion of a contract, that is equally underperformed.An asset exits when the contract is favourable and a liability when the contract is unfavourable.Performance changes the rights and obligations in executory contracts and therefore triggers recognition.Where a group or series of contracts are put in place to achieve an overall commercial effect, careful analysis will be necessary to identify the appropriate unit of account, depend- ent upon the nature of the overall commercial effect.Equity claims fall into different classes, such as ordinary shares and preference shares, which may confer different rights, for example to the receipt of dividends.Users of financial statements need information about both an entity's financial position and its finan- cial performance.Definitions of income and expenses.5.

its contractual requirements. For example, under an employment contract the entity may be required to pay an employee a salary for services which the employee will provide. No pre- sent obligation to pay the salary arises until the entity has received the employee’s services. Until then, the entity has a combined right and obligation to exchange future salary for future employee services.
Unit of account. The chapter defines the unit of account as the right or the group of rights, the obligation or the group of obligations, or the group of rights and obligations, to which recognition criteria and measurement concepts are applied. The unit of account is selected to provide useful information, which means that information provided about an asset or liability and any related income and expenses must be relevant and must faithfully represent the substance of the transaction or other event from which they have arisen. In determining the appropriate unit of account, it is necessary to consider whether the benefits arising from selecting that unit of account justify the costs of providing and using that information.
Units of account which may be used include:
a. an individual right or individual obligation;
b. all rights, all obligations, or all rights and all obligations, arising from a single source,
for example a contract;
c. a subgroup of those rights and obligations, for example a subgroup of rights over
an item of property, plant and equipment for which the useful life and pattern of
consumption differ from those of the other rights over the item;
d. a group of rights and/or obligations arising from a portfolio of similar items;
e. a group of rights and/or obligations arising from a portfolio of dissimilar items, for example a portfolio of assets and liabilities to be disposed of in a single trans- action; and
f. a risk exposure within a portfolio of items—if such a portfolio is subject to a com- mon risk, some aspects of accounting for that portfolio could focus on the aggregate exposure to risk within that portfolio.
Executory Contracts. An executory contract is defined as a contract, or a portion of a contract, that is equally underperformed. Meaning that no party to the contract has per- formed (fulfilled their obligations) or both parties have partially performed to an equal extent.
Executory contracts establish a combination of rights and obligations to exchange eco- nomic resources. The 2018 framework states that these rights and obligations are interde- pendent and therefore cannot be separated, resulting in a single asset or liability. An asset exits when the contract is favourable and a liability when the contract is unfavourable. Nor- mally, the single inherent assets or liability in an unperformed or equally performed execu- tory contract are not recognised until performance.
The recognition of executory contracts is dependent on the recognition criteria (chapter 5), the measurement basis (chapter 6) and whether the contract is onerous. The basic principle is that executory contracts are not recognised until one party performed, except if it is onerous.
Performance changes the rights and obligations in executory contracts and therefore triggers recognition. For instance, if one party delivers goods, an obligation is created for the other party to pay for the goods. Similarly, if one party makes a prepayment on a purchase contract, the prepayment creates and asset for the party to obtain the goods and a liability
for the other to deliver the goods. If both parties have performed fully, the contract is not executory anymore.
Substance of contractual rights and contractual obligations. Financial statements are required to report the substance of the rights and obligations for an entity which arise from a contract to which it is a party. Often, this substance is clear from the legal form of the terms of the contract, but in some cases, it is necessary to analyse the legal terms further to identify the substance of the obligation.
All terms of the contract—whether explicit or implicit—are considered in this analy- sis, unless the terms have no substance (for example, if they bind neither of the parties, or result in rights which neither party will have the practical ability to exercise under any circumstances).
Where a group or series of contracts are put in place to achieve an overall commercial effect, careful analysis will be necessary to identify the appropriate unit of account, depend- ent upon the nature of the overall commercial effect. For example, it may be necessary to treat the rights and obligations arising from the group or series of contracts as a single unit of account. On the other hand, if a single contract creates two or more sets of rights and obligations that could have been created through two or more separate contracts, faithful representation may require each set of rights and obligations to be accounted for as though it arose from a separate contract.
Definition of equity. The chapter notes that equity claims are claims on the residual interest in the assets of the entity after deducting all of its liabilities. In other words, equity claims do not meet the definition of a liability. Equity claims fall into different classes, such as ordinary shares and preference shares, which may confer different rights, for example to the receipt of dividends. Business activities are often undertaken through non-corporate entities such as sole proprietorships, partnerships, trusts or government undertakings. The legal frameworks applying to such entities may differ from those which govern corporate entities, but the definition of equity for the purposes of the 2018 framework remains the same in all cases.
Definitions of income and expenses. As already noted, income is defined as increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims. 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.
The chapter emphasises that the definitions of income and expenses mean that contri- butions from holders of equity claims are not income, and distributions to holders of equity claims are not expenses. Income and expenses arise from financial performance. Users of financial statements need information about both an entity’s financial position and its finan- cial performance. Therefore, despite income and expenses being defined in terms of changes in assets and liabilities, information about income and expenses is equally important as information about assets and liabilities.
5. Recognition and Derecognition
Recognition. 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 defin- ition of one of the elements of financial statements—an asset, a liability, equity, income or expenses. An item so recognised is represented in one of the statements by words and amonetary amount, which may be aggregated with other items, and included in one or more of the totals in that statement. The amount at which an item is included in the statement of financial position is referred to as its “carrying amount.”
The 2018 framework sets out a recognition process which is based on the linkage between the elements of financial statements, the statement of financial position and the statement(s) of financial performance. This linkage arises from the fact that, in the state- ment of financial position at the beginning and end of the reporting period, total assets minus total liabilities equal total equity, and recognised changes during the reporting period comprise income minus expenses (recognised in the statement(s) of financial performance, and contributions from holders of equity claims minus distributions to holders of equity claims). Recognition of one item (or a change in its carrying amount) requires the recogni- tion or derecognition (or a change in the carrying amount(s)) of one or more other items. For example, income is recognised in connection with the initial recognition of an asset or the derecognition of a liability. An expense is recognised in connection with the initial rec- ognition of a liability or the derecognition of an asset.
To be recognised in the statement of financial position, an asset, liability or equity must meet the relevant definition. Similarly, only items which meet the definitions of income or expenses will be recognised in the statement(s) of financial performance. However, it should be noted that not all items which meet the definitions will necessarily be recognised. Items meeting the definitions are recognised only if such recognition provides users of financial statements with relevant information about the asset or liability and about any income, expenses or changes in equity, a faithful representation of the asset or liability and of any income, expenses or changes in equity, and information which results in benefits which exceed the cost of providing that information.
Certain circumstances are identified in which recognition of an asset or liability may not provide relevant information to the users of the financial statements. For example, it may be uncertain whether an asset exists or whether an inflow of economic benefits will result from that asset. Similarly, it may be uncertain whether a liability exists or whether an outflow of economic benefits will result. However, there is no clear-cut rule as to whether an item should be recognised under these circumstances and a judgement will need to be made. Even if the item is not recognised it may still be necessary to provide an explanation of the uncertainties associated with it.
Even if recognition of an asset or liability would provide relevant information, it may not provide a faithful representation of that asset or liability and any associated income, expenses or changes in equity. This may be the case if the level of measurement uncertainty inherent in an estimate of the value of the asset or liability is particularly high, although it should be noted that even a high level of measurement uncertainty does not necessarily prevent an estimate from providing useful information. Measurement uncertainty may be especially high in situations where the only way of estimating that measure of the asset is by using cash flow-based techniques and the range of outcomes is exceptionally wide and the probability of each outcome exceptionally difficult to estimate, or the measure is exception- ally sensitive to small changes in estimates of the probability of each possible outcome, or measurement of the asset or liability requires exceptionally difficult or subjective allocations of cash flows which do not relate solely to the asset or liability being measured.
Even in such situations, the framework sets out that the most useful information may be provided by recognising the asset or liability at the amount given by the uncertain estimate,