The Elements Of Financial Statements |

Present obligation as a result of past event

Obligation: A duty or responsibility to act or perform in a certain way. Obligations may be legally enforceable as a consequence of a binding contract or statutory requirement. Obligations also arise, however, from normal business practice, custom and a desire to maintain good business relations or act in an equitable manner.

It is important to distinguish between a present obligation and a future commitment. A management decision to purchase assets in the future does not, in itself, give rise to a present obligation.

Settlement of a present obligation will involve the entity giving up resources embodying economic benefits in order to satisfy the claim of the other party. This may be done in various ways, not just by payment … Read more

Definitions of income and expenses

Income – Core definition

4.68 Income is 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 – Core definition

4.69 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.

Contributions – No income and Distributions – No expenses

4.70 It follows from these definitions of income and expenses that contributions from holders of equity claims are not income, and distributions to holders of equity claims are not expenses.

Income and expense relate to performance

4.71 Income and expenses are the elements of financial statements that relate to … Read more

Definition of equity

Equity – Core definition

4.63 Equity is the residual interest in the assets of the entity after deducting all its liabilities.

Equity is no liability – Types of shares and Equity instruments

4.64 Equity claims are claims on the residual interest in the assets of the entity after deducting all its liabilities. In other words, they are claims against the entity that do not meet the definition of a liability. Such claims may be established by contract, legislation or similar means, and include, to the extent that they do not meet the definition of a liability:

  1. shares of various types, issued by the entity; and
  2. some obligations of the entity to issue another equity claim.

Equity – Different classes –

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Executory contracts

Executory contracts are contracts under which neither party has performed any of its obligations or both parties have partially performed their obligations to an equal extent. Hence an executory contract contains a combined right and obligation constituting a single asset or liability. The entity has an asset if the terms of the exchange are favorable; otherwise, it has a liability.

Examples of executory contracts (and some common reasons why they might be executory) include:

  • Real estate leases (tenant has to pay rent/landlord has to provide space)
  • Equipment leases (lessee has to pay rent/lessor has to provide equipment)
  • Development contracts (development work required/payment required on milestones), and
  • Licenses to intellectual property (licensee can use only within scope of license/licensor must refrain
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