Lakhasly

The related definitions are: An asset is defined as a present economic resource controlled by the entity as a result of past events.Many obligations arise from legal commitments (such as contracts or legislative requirements) but an entity may also have obligations (often referred to as "constructive obligations") arising from its customary practices, published policies or specific statements if it has no practical ability to avoid act- ing in accordance with those practices, policies or statements. An obligation will not exist in any case where there is only an intention on the entity's part to make a transfer of an economic resource, or a high probability that such a transfer will take place, rather than a practically unavoidable requirement upon the entity to make the transfer. The obligation must have the potential to require the entity to transfer an economic resource to another party or parties. Such transfers include, for example, the payment of cash, the delivery of goods or provision of services, or the exchange of economic resources on unfavourable terms. There need not be certainty that the transfer will take place, only that the obligation exists and that, in at least one circumstance, the entity would be required to transfer an economic resource. For example, the transfer may only become necessary if some specified uncertain future event occurs. However, if the probability of the transfer of an economic resource is low this may affect decisions as to whether the liability is recog- nised, or simply disclosed, and how it is measured. For a liability to exist, the obligation must be a present obligation which exists as a result of past events. This will only be the case if the entity has already obtained economic benefits or taken an action, and as a consequence the entity may or will have to transfer an economic resource that it would not otherwise have had to transfer. For example, the entity may have obtained goods and services for which it will later have to make payment, or it may be operating a particular business or in a particular market. The enactment of new legislation may lead to a present obligation, but only where an entity has obtained economic benefits or taken action to which the legislation applies and may, or will as a result, have to transfer an economic resource which it would not otherwise have had to transfer--the enactment of the legislation itself does not give rise to an obligation. In addition, present obligations do not arise from executory contracts--those where neither party has yet undertaken any ofits 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 liabilityfor 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."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,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.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.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).The 2018 framework also identifies other changes in resources and claims, being either contributions from, and distributions to, holders of equity claims, or exchanges of assets or liabilities that do not result in increases or decreases in equity (for example, acquiring an asset for cash).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.As with the earlier frameworks, the 2018 framework continues to define income and expenses in terms of changes in assets and liabilities but also notes that important decisions on matters such as recognition and measurement are driven by considering the nature of the resulting information about both financial performance and financial position.o 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.o Expenses are defined as decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.In developing the 2018 framework, the IASB has not addressed the problems which arise in classifying instruments with characteristics of both equity and liabilities.Rights having the potential to produce economic benefits may take many forms, includ- ing those corresponding to an obligation of another party (for example, the right to receive cash, goods or services, or the right to exchange economic resources with another party on favourable terms) and those which do not correspond to an obligation of another party (for example, the right to use property, plant and equipment, or intellectual property).The outcomes of that project will assist the IASB in deciding whether it should add a project on amending standards, the conceptual framework or both to its active agenda.In relation to the definition of an asset, the chapter discusses three fundamen- tal aspects: a. rights; b. the potential to produce economic benefits; and c. control.However, a low probability that economic benefits will be produced may affect the decision on whether to recognise the asset in the financial statements, how it is measured, and what other information is given.Control exists if the entity has the present ability to direct the use of the economic resource and obtain the economic benefits that may flow from it. This includes being able to prevent other parties from directing and obtaining in this way.An expense is recognised in connection with the initial rec- ognition of a liability or the derecognition of an asset.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.o Equity is defined as the residual interest in the assets of the entity after deducting all its liabilities.For control to exist, any future economic benefits from the relevant economic resource must flow directly or indi- rectly to the entity, and not to another party.In relation to the definition of a liability, the chapter notes that three criteria must all be satisfied: a. the entity has an obligation; b. the obligation is to transfer an economic resource; and c. the obligation is a present obligation that exists as a result of past events.For example, income is recognised in connection with the initial recognition of an asset or the derecognition of a liability.Certain circumstances are identified in which recognition of an asset or liability may not provide relevant information to the users of the financial statements.o A liability is defined as a present obligation of the entity to transfer an economic resource as a result of past events.However, not all of an entity's rights are assets of the entity--for an asset to exist, the rights must both have the potential to produce economic benefits to the entity beyond those available to all other parties and be controlled by the entity.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.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.Similarly, it may be uncertain whether a liability exists or whether an outflow of economic benefits will result.If one party controls an economic resource, then no other party does so. Control usually arises from an ability to enforce legal rights, although this is not always the case.However, this does not mean that the entity will be able to ensure that the resource will produce any economic benefits in any circumstances.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.For example, it may be uncertain whether an asset exists or whether an inflow of economic benefits will result from that asset.An economic resource is defined as a right that has the potential to produce economic benefits.It is only necessary that the right already exists and that there is at least one circumstance where it would produce economic benefits for the entity beyond those available to all other parties.Control links an economic resource to an entity.However, it should be noted that not all items which meet the definitions will necessarily be recognised.It is considering these matters in its project on financial instruments with the characteristics of equity.For the potential to produce economic benefits to exist, it need not be certain--or even likely--that the right will produce economic benefits.An obligation is a duty or responsibility that an entity has no practical ability to avoid.An obligation is always owed to another party or parties, but it is not necessary to know the identity of the party or parties to whom the obligation is owed.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.Assets.Control could also arise if one party has information or know-how which is not available to any other party and is capable of being kept secret.Liabilities.

The related definitions are:
An asset is defined as a present economic resource controlled by the entity as a result of past events. An economic resource is defined as a right that has the potential to produce economic benefits.
• A liability is defined as a present obligation of the entity to transfer an economic resource as a result of past events.
• Equity is defined as the residual interest in the assets of the entity after deducting all its liabilities.
• 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 defined as 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 2018 framework also identifies other changes in resources and claims, being either contributions from, and distributions to, holders of equity claims, or exchanges of assets or liabilities that do not result in increases or decreases in equity (for example, acquiring an asset for cash).
As with the earlier frameworks, the 2018 framework continues to define income and expenses in terms of changes in assets and liabilities but also notes that important decisions on matters such as recognition and measurement are driven by considering the nature of the resulting information about both financial performance and financial position.
In developing the 2018 framework, the IASB has not addressed the problems which arise in classifying instruments with characteristics of both equity and liabilities. It is considering these matters in its project on financial instruments with the characteristics of equity. The outcomes of that project will assist the IASB in deciding whether it should add a project on amending standards, the conceptual framework or both to its active agenda.
Assets. In relation to the definition of an asset, the chapter discusses three fundamen- tal aspects:
a. rights;
b. the potential to produce economic benefits; and
c. control.
Rights having the potential to produce economic benefits may take many forms, includ- ing those corresponding to an obligation of another party (for example, the right to receive cash, goods or services, or the right to exchange economic resources with another party on favourable terms) and those which do not correspond to an obligation of another party (for example, the right to use property, plant and equipment, or intellectual property).
However, not all of an entity’s rights are assets of the entity—for an asset to exist, the rights must both have the potential to produce economic benefits to the entity beyond those available to all other parties and be controlled by the entity.
For the potential to produce economic benefits to exist, it need not be certain—or even likely—that the right will produce economic benefits. It is only necessary that the right already exists and that there is at least one circumstance where it would produce economic benefits for the entity beyond those available to all other parties. However, a low probability that economic benefits will be produced may affect the decision on whether to recognise the asset in the financial statements, how it is measured, and what other information is given.
Control links an economic resource to an entity. Control exists if the entity has the present ability to direct the use of the economic resource and obtain the economic benefits that may flow from it. This includes being able to prevent other parties from directing and obtaining in this way. If one party controls an economic resource, then no other party does so. Control usually arises from an ability to enforce legal rights, although this is not always the case. Control could also arise if one party has information or know-how which is not available to any other party and is capable of being kept secret. For control to exist, any future economic benefits from the relevant economic resource must flow directly or indi- rectly to the entity, and not to another party. However, this does not mean that the entity will be able to ensure that the resource will produce any economic benefits in any circumstances.
Liabilities. In relation to the definition of a liability, the chapter notes that three criteria must all be satisfied:
a. the entity has an obligation;
b. the obligation is to transfer an economic resource; and
c. the obligation is a present obligation that exists as a result of past events.
An obligation is a duty or responsibility that an entity has no practical ability to avoid. An obligation is always owed to another party or parties, but it is not necessary to know the identity of the party or parties to whom the obligation is owed. Many obligations arise from legal commitments (such as contracts or legislative requirements) but an entity may also have obligations (often referred to as “constructive obligations”) arising from its customary practices, published policies or specific statements if it has no practical ability to avoid act- ing in accordance with those practices, policies or statements. An obligation will not exist in any case where there is only an intention on the entity’s part to make a transfer of an economic resource, or a high probability that such a transfer will take place, rather than a practically unavoidable requirement upon the entity to make the transfer.
The obligation must have the potential to require the entity to transfer an economic resource to another party or parties. Such transfers include, for example, the payment of cash, the delivery of goods or provision of services, or the exchange of economic resources on unfavourable terms. There need not be certainty that the transfer will take place, only that the obligation exists and that, in at least one circumstance, the entity would be required to transfer an economic resource. For example, the transfer may only become necessary if some specified uncertain future event occurs. However, if the probability of the transfer of an economic resource is low this may affect decisions as to whether the liability is recog- nised, or simply disclosed, and how it is measured.
For a liability to exist, the obligation must be a present obligation which exists as a result of past events. This will only be the case if the entity has already obtained economic benefits or taken an action, and as a consequence the entity may or will have to transfer an economic resource that it would not otherwise have had to transfer. For example, the entity may have obtained goods and services for which it will later have to make payment, or it may be operating a particular business or in a particular market. The enactment of new legislation may lead to a present obligation, but only where an entity has obtained economic benefits or taken action to which the legislation applies and may, or will as a result, have to transfer an economic resource which it would not otherwise have had to transfer—the enactment of the legislation itself does not give rise to an obligation. In addition, present obligations do not arise from executory contracts—those where neither party has yet undertaken any ofits 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 liabilityfor 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,