Elements of Financial Statements - Ind AS - Indian Accounting Standards - Companies Law

Elements of Financial Statements It is important to discuss elements of financial statements in order to understand the IndASs and their linkage recognition in financials such as assets, liabilities, income expenses. Asset- An asset is a present economic resource controlled by the entity as a result of past events. Legal ownership of a physical objects may give rise to several rights, including: The right to use the object The right to sell rights over the object; The right to pledge rights over the object; and Other rights Potential to produce economic benefits An asset could produce economic benefits for an entity by way of receipt of contractual cash flows or other resources, exchange of resources in favourable terms, producing goods or services, leasing, selling the resources etc. and this economic resources should present on the balance sheet date. Control An entity controls an asset if it has the present ability to direct the use of the asset and obtain the economic benefits that may flow from it. Control includes the present ability to prevent other parties from directing the use of asset and from obtaining economic benefits that may flow from it. It follows that, if one party controls an economic resource, no other party controls that resource. Liability A liability is a present obligation of the entity to transfer an economic resources as a result of past events. For a liability to exist three criteria must all be satisfied The entity has an obligation The obligation is to transfer economic resources; and The obligation is a present obligation that exist as a result of past events. Obligation Obligations are Contractual Legal Customary practices, published polices, public statements made. Duty or responsibility which cannot be avoid. Exist on the balance sheet date. Transfer of economic resources To satisfy this criterion, the obligation must have the potential to require the entity to transfer an economic resources to another party. For that potential to exist, it does not need to certain, or even likely, that the entity will require to transfer an economic resource the transfer may, for example, be required only if a specified uncertain future events. It is only necessary that the obligation already exists and that, in at least one circumstance, it would require the entity to transfer an economic resource. Present Obligations as result of Past events A present obligations exists as a result of past events only if The entity has already obtained economic benefits or taken an action; and] As a consequence, the entity will or may have to transfer an economic resources that it would not otherwise have had to transfer. Equity Equity is the owner s interest in the company determined by deducting liabilities from the net assets of the company, Equity is residual interest where the entity has no obligation to pay and it is the amount left with the entity therefore Equity is not a liability. Income Income is increase in economic benefits during the accounting period in the form of inflows or enhancement of assets or decrease of liabilities that result in increase in equity, other than those relating to contributions from equity participants Gains include realised gains and unrealised gains. Gains are usually displayed separately because knowledge of them is useful for the making economic decisions. Expenses Expenses are decrease in economic benefits during the accounting period in the form of outflow or depletion of assets or incurrence of liabilities that result in decrease in equity, other than those relating to distributions to equity participants this is nothing but a matching concept i.e., If income is recorded in a particular year i.e., 2022, expenditure related to such income should be recorded in the same year i.e., 2018. Notes :- Only items that meet the definition of an asset, a liability or equity are recognised in the balance sheet. similarly, only items that meet the definition of income or expenses in the statement of profit or loss. However, not all items that meet the definition of one of those elements are recognised. Do not recognise the asset, liability, equity, income and expense when it satisfies the definition partly; If the probability of an inflow or outflow of economic benefits is low, the most relevant information abount the asset or liability may be information about the magnitude of the possible inflows or outflows, their possible timing and the factors affecting the probability of their occurenece. the typical location for such information is in the notes. The use of reasonable estimates is an essential part of the preparation of financial information and does not undermine the usefulness of the information if the estimates are clearly and accurately described and explained.