Definition and Recognition of the Elements of Financial ...

1 Statement of Accounting ConceptsSAC 4(3/95) Definition andRecognition of theElements of FinancialStatementsPrepared by the Public Sector Accounting Standards Board ofthe Australian Accounting Research Foundation and by theAustralian Accounting Standards BoardIssued by the Australian Accounting Research Foundation on behalfof The Institute of Chartered Accountants in Australia and theAustralian Society of Certified Practising Accountants and by theAustralian Accounting Standards BoardThe Australian Accounting Research Foundation was established by TheInstitute of Chartered Accountants in Australia and the Australian Society ofCertified Practising Accountants and undertakes a range of technical andresearch activities on behalf of the accounting profession as a whole. Amajor responsibility of the Foundation is the development of Statements ofAccounting Concepts and Accounting Standards.

2 The Public SectorAccounting Standards Board is one of the boards of the Australian Accounting Standards Board was established by section 224of the Australian Securities Commission Act 1989. It has responsibility forthe development of accounting standards for application by companies, andfor the development of Statements of Accounting Concepts. When issuing aStatement of Accounting Concepts, the Board carries out one of its functionsunder section 226 of that of this Statement are available for purchase from the offices of theAustralian Accounting Research Foundation, 211 Hawthorn Road,Caulfield, Victoria 3162, 1995 Australian Accounting Research Foundation. The copying of thisStatement is only permitted in certain circumstances. Enquiries should bedirected to the offices of the Australian Accounting Research 1035-3631- 3 -INTRODUCTORY NOTEThis Introductory Note explains the purpose of this Statement andsummarises the primary concepts set out therein, to assist those who wish toobtain an overview of those concepts.

3 It is important to note that a fullappreciation of the concepts and their implications can be obtained onlywhen the concepts are read in the context of the related commentary. Thebackground to the development of this Statement and the basis for theconclusions reflected therein are outlined in the attachment to the Conceptual FrameworkThe Statement forms part of the conceptual framework for general purposefinancial reporting in the private and public sectors which is beingdeveloped by the Australian Accounting Standards Board (AASB) and bythe Public Sector Accounting Standards Board (PSASB) of the AustralianAccounting Research Foundation. The framework will comprise a series ofStatements of Accounting Concepts which set out the concepts which havebeen adopted by the AASB and PSASB in respect of the nature, subject,purpose and broad content of general purpose Financial reporting.

4 Thepolicy of the Boards regarding the nature and purpose of Statements ofAccounting Concepts is set out in Policy Statement 5 "The Nature andPurpose of Statements of Accounting Concepts".Purpose of this StatementThe purpose of this Statement is to establish definitions of the Elements offinancial statements (namely assets, liabilities, equity, revenues andexpenses) and to specify criteria for their Recognition in Financial of ConceptsDefinition of Assets"Assets" are future economic benefits controlled by the entity as a result ofpast transactions or other past for Recognition of AssetsAn asset should be recognised in the statement of Financial position whenand only when:(a)it is probable that the future economic benefits embodied inthe asset will eventuate; and- 4 -(b)the asset possesses a cost or other value that can be of Liabilities"Liabilities" are the future sacrifices of economic benefits that the entity ispresently obliged to make to other entities as a result of past transactions orother past for Recognition of LiabilitiesA liability should be recognised in the statement of Financial position whenand only when:(a)it is probable that the future sacrifice of economic benefits willbe required.

5 And(b)the amount of the liability can be measured of Equity"Equity" is the residual interest in the assets of the entity after deduction ofits of Revenues"Revenues" are inflows or other enhancements, or savings in outflows, offuture economic benefits in the form of increases in assets or reductions inliabilities of the entity, other than those relating to contributions by owners,that result in an increase in equity during the reporting for Recognition of RevenuesA revenue should be recognised in the operating statement, in thedetermination of the result for the reporting period, when and only when:(a)it is probable that the inflow or other enhancement or savingin outflows of future economic benefits has occurred; and(b)the inflow or other enhancement or saving in outflows offuture economic benefits can be measured 5 - Definition of Expenses"Expenses" are consumptions or losses of future economic benefits in theform of reductions in assets or increases in liabilities of the entity, other thanthose relating to distributions to owners, that result in a decrease in equityduring the reporting for Recognition of ExpensesAn expense should be recognised in the operating statement, in thedetermination of the result for the reporting period, when and only when:(a)it is probable that the consumption or loss of future economicbenefits resulting in a reduction in assets and/or an increase inliabilities has occurred; and(b)the consumption or loss of future economic benefits can bemeasured 6 -CONTENTSP aragraphsGENERALR eissued Statement.

6 1 Accounting Concepts and and Purpose of Statements of Accounting of Statements of Accounting of this and Recognition of "Recognised".. where the Recognition Criteria are not Characteristics of economic by a particular entity ..24-28 Occurrence of past transaction or other Characteristics of at a for Recognition of future economic where the Recognition criteria arenot ..48 Essential Characteristics of Liabilities ..49-50- 7 -Existence of a present obligation ..51-60 ParagraphsObligation involves settlement in the future:sacrifice of economic benefits ..61-64 Criteria for Recognition of Liabilities ..65 Probability of future sacrifice of economicbenefits being where the Recognition criteria arenot Recognition of Assets and criteriaProbable future benefit or probablefuture Equally Proportionately ..78 Nature of of of in Not-for-Profit of and and non-reciprocal of reciprocal and non-reciprocal and of of in outflows of future economic of of and Expenses.

7 Essential- 8 -Characteristic of Changes in for Recognition of inflow or other enhancement or savingin outflows of future economic of the measurement model models for for Recognition of consumption or loss of futureeconomic of Revenues and CHANGES IN by Owners and Distributions to of Contributions by Owners and Distributionsto WITH IASC, NEW ZEALAND ANDOTHER OVERSEAS FRAMEWORKSBACKGROUND AND BASIS FOR CONCLUSIONSDISSENTING VIEW- 9 -STATEMENT OF ACCOUNTING CONCEPTSSAC 4 " Definition AND Recognition OF THEELEMENTS OF Financial STATEMENTS"GENERALR eissued Statement1 This Statement supersedes Statement of Accounting Concepts SAC 4" Definition and Recognition of the Elements of FinancialStatements" as issued in March Concepts and Commentary2 The accounting concepts set out in this Statement are shown in boldprint. Commentary to those concepts is shown in normal printimmediately after the accounting concepts to which it relates, as anaid to the interpretation of those and Purpose of Statements of Accounting Concepts3 The nature and purpose of Statements of Accounting Concepts are setout in Policy Statement 5 "The Nature and Purpose of Statements ofAccounting Concepts", prepared by the Australian AccountingStandards Board (AASB) and the Public Sector AccountingStandards Board (PSASB) and issued in March 1995.

8 PolicyStatement 5 states that Statements of Accounting Concepts set out theconcepts which have been adopted by the Boards in respect of thenature, subject, purpose and broad content of general purposefinancial with the role of Statements of Accounting Conceptsenunciated in Policy Statement 5, the primary purpose of thisStatement is as a guide to the AASB and PSASB in developing andreviewing Accounting Standards and other authoritative addition, this Statement may also provide guidance in analysingnew or emerging issues in the absence of applicable 10 -Status of Statements of Accounting Concepts5 The concepts in this Statement are not set out as requirements for thepurpose of preparing general purpose Financial reports. This isconsistent with the purpose of Statements of Accounting Concepts setout in Policy Statement 5, and the non-mandatory status ofStatements of Accounting Concepts under Professional StatementAPS 1 "Conformity with Accounting Standards" and theCorporations Law.

9 Policy Statement 5 also notes that someStatements of Accounting Concepts have been given legislativebacking in respect of some reporting entities in the public and privatesectors through requirements specified in legislation, ministerialdirectives or other government authority. The level of authoritygiven to Statements of Accounting Concepts by governments andother authorities is a matter for those authorities to of Accounting Concepts SAC 2 "Objective of GeneralPurpose Financial Reporting" identifies the objective of generalpurpose Financial reporting as the provision of information which isuseful to users for making and evaluating decisions about theallocation of scarce resources and which assists in discharging theaccountability of the entity's management or governing body. Suchdecision making is likely to involve users of the entity's generalpurpose Financial reports assessing its performance, financialposition, financing and investing, and compliance.

10 Informationabout the entity's assets, liabilities, equity, revenues and expenses (theelements of Financial statements) is relevant to users in assessingthese of this Statement7 This Statement establishes definitions of the Elements of financialstatements and specifies criteria for their Recognition that areconsistent with the objective of general purpose Financial reportingset out in SAC 2. These definitions and Recognition criteria are alsoconsistent with the qualitative characteristics set out in Statement ofAccounting Concepts SAC 3 "Qualitative Characteristics of FinancialInformation".8 This Statement does not address in detail the measurement or displayof the Elements of Financial statements or concepts of capital and- 11 -profit. These issues will be the subject of separate Statements ofAccounting 12 -Definitions and Recognition Criteria9 The definitions of the Elements of Financial statements set out in thisStatement identify the essential characteristics of those Recognition criteria set out in this Statement specify theconditions under which an item which satisfies the Definition of anelement should be recognised (or included) in Financial the Definition of an element is a necessary but notsufficient condition for an item to be recognised in financialstatements.