Definitions of elements Elements of financial statements

Chapter 2 – The IFRS Framework Page 27  historical cost. Assets are recorded at their original cost. Liabilities are recorded at their original amount received or the cash expected to be paid out to settle them;  current cost. Assets are recorded at the amount that would have to be paid out at the end of the reporting period for an equivalent asset. Liabilities are recorded at the value that they could be settled for at the end of the reporting period;  realisable or settlement value. Assets are recorded at the amount that they could be sold for now and similarly liabilities are recorded at the amount expected to be paid out; and  present value. This measurement basis involves discounting future cash flows to take account of the time value of money. Although the Framework includes an explanation of the different measurement options, IFRS are primarily based on historical cost. 10 Chapter Review This chapter has been concerned with the process by which IFRS are set, thus providing useful background information for understanding the purpose and role of accounting standards. The Framework is an essential element to understanding the chapters in this manual. It deals with the purposes and role of financial reporting. In summary, this chapter has covered:  the International Financial Reporting Standard setting process;  the content of the Preface to international financial reporting standards; and  the content of the Framework for the preparation and presentation of financial statements in particular looking at: o the information needs of different users of financial statements; o the qualitative characteristics of financial information; o the elements of financial statements; and o recognition criteria of the elements in financial statements. Chapter 2 – The IFRS Framework Page 28 11 Self Test Questions Chapter 2 1. Which ONE of the following statements best describes the term liability? A An excess of equity over current assets B Resources to meet financial commitments as they fall due C The residual interest in the assets of the entity after deducting all its liabilities D A present obligation of the entity arising from past events 2. Are the following statements regarding the term profit true or false? 1 Profit is any amount over and above that required to maintain the capital at the beginning of the period. 2 Profit is the residual amount that remains after expenses have been deducted from income. Statement 1 Statement 2 A False False B False True C True False D True True 3. Which ONE of the following statements best describes the term financial position? A The net income and expenses of an entity B The net of financial assets less liabilities of an entity C The potential to contribute to the flow of cash and cash equivalents to the entity D The assets, liabilities and equity of an entity 4. Which ONE of the following statements best describes the term going concern? A When current liabilities of an entity exceed current assets B The ability of the entity to continue in operation for the foreseeable future C The potential to contribute to the flow of cash and cash equivalents to the entity D The expenses of an entity exceed its income