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Statement of

Financial AccountingConcepts No. 3Note: This Statement has been completely supersededCON3 Status Page

lements of Financial Statementsof !usiness nterprises"ecember #$%&

Financial Accounting Standards !oardof the Financial Accounting Foundation' ())*TT +, P.O. !O- ##/, NO)0A12, CONNCT*CT &/%/4##/

Copyright © 1980 by Financial Accounting Standards Board. All rights reserved. No

part o this publication !ay be reproduced" stored in a retrieval syste!" or trans!itted" inany or! or by any !eans" electronic" !echanical" photocopying" recording" or

other#ise" #ithout the prior #ritten per!ission o the Financial Accounting Standards

Board.$age %

Statement of Financial Accounting Concepts No. 3

Elements of Financial Statements of

Business Enterprises

December 1980CN!EN!S

$aragraph Nu!bers

&ighlights

'ntroduction.................................................................................................................1(1)Scope and Content o State!ent ...................................................................................1(8

*ther $ossible +le!ents o Financial State!ents

o Business +nterprises...........................................................................................,(-

+le!ents and Financial epresentation......................................................................../()*ther Scope and Content atters.....................................................................................8

*bectives" 2ualitative Characteristics" and +le!ents ...............................................9(1,'nterrelation o +le!ents3Articulation ...................................................................1-(1/4einition" ecognition" easure!ent" and 4isplay ...............................................15(1)

4einitions o +le!ents ............................................................................................18(89

Assets ........................................................................................................................19(%)Characteristics o Assets o Business +nterprises ....................................................%0(%-

6ransactions and +vents

6hat Change Assets ..................................................................................................%/(%5

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7aluation Accounts.........................................................................................................%)

iabilities .................................................................................................................%8(,5

Characteristics o iabilities o Business +nterprises ..............................................%9(,,6ransactions and +vents 6hat Change iabilities.....................................................,-(,/

7aluation Accounts.........................................................................................................,5

+ects o ncertainty ...............................................................................................,)(-% Note on ncertainty and Certain ecognition atters ............................................-1(-%

+:uity........................................................................................................................-,(/1

Characteristics o +:uity o Business +nterprises ....................................................--(-)+:uity and iabilities................................................................................................-8(-9

6ransactions and +vents 6hat Change +:uity ........................................................../0(/1

'nvest!ents by and 4istributions to *#ners............................................................/%(//

Characteristics o 'nvest!ents by and 4istributions to *#ners.............................../-(//Co!prehensive 'nco!e ............................................................................................/5(5%

Concepts o Capital aintenance ............................................................................./)(/8

Characteristics" Sources" and Co!ponents o

Co!prehensive 'nco!e o Business +nterprises................................................/9(5%Copyright © 1980" Financial Accounting Standards Board Not or redistribution$age ,

evenues .................................................................................................................5,(5-Characteristics o evenues o Business +nterprises .....................................................5-

+;penses .................................................................................................................5/(55

Characteristics o +;penses o Business +nterprises......................................................55

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e:uired Future Sacriice o Assets .....................................................................1%/(1,0

iabilities and $roceeds ..........................................................................................1,0

*bligation o a $articular +nterprise ....................................................................1,1(1,)*ccurrence o a $ast 6ransaction or +vent...........................................................1,8(1-,

Characteristics o +:uity o Business +nterprises ................................................1--(1-5

esidual or *#nership 'nterest.....................................................................................1-/'nvested and +arned +:uity ..........................................................................................1-5

Characteristics o Co!prehensive 'nco!e and

'ts Co!ponents ...............................................................................................1-)(1/%'nterest in 'nor!ation about Sources o

Co!prehensive 'nco!e ..................................................................................1/1(1/%

+;a!ples to 'llustrate Concepts ...........................................................................1/,(180

4eerred

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transers to it ro! other entities o so!ething o value to obtain or increase o#nership

interests =or e:uity? in it. Assets are !ost co!!only received as invest!ents by o#ners"

but that #hich is received !ay also include services or satisaction or conversion o liabilities o the enterprise.

34istributions to o#ners are decreases in net assets o a particular enterprise resulting ro!

transerring assets" rendering services" or incurring liabilities by the enterprise to o#ners.4istributions to o#ners decrease o#nership interests =or e:uity? in an enterprise.

3Co!prehensive inco!e is the change in e:uity =net assets? o an entity during a period

ro! transactions and other events and circu!stances ro! nono#ner sources. 't includes$age 5Copyright © 1980" Financial Accounting Standards Board Not or redistribution

all changes in e:uity during a period e;cept those resulting ro! invest!ents by o#ners

and distributions to o#ners. 3evenues are inlo#s or other enhance!ents o assets o an entity or settle!ents o its

liabilities =or a co!bination o both? during a period ro! delivering or producing goods"

rendering services" or other activities that constitute the entitys ongoing !aor or central

operations.

3+;penses are outlo#s or other using up o assets or incurrences o liabilities =or aco!bination o both? during a period ro! delivering or producing goods" rendering

services" or carrying out other activities that constitute the entitys ongoing !aor or central operations.

3ing and resolving ne# inancial accounting issues as they arise.

E 6he appendi;es are not part o the deinitions but are intended or readers #ho !ay indthe! useul. 6hey describe the bacground o the State!ent and elaborate on thedescriptions o the essential characteristics o the ele!ents" including so!e discussions and

illustrations o ho# to apply the deinitions and #hat they !ean.

Statements of Financial Accounting Concepts

6his State!ent o Financial Accounting Concepts is one o a series o publications in the

Boards conceptual ra!e#or or inancial accounting and reporting. State!ents in the series

are intended to set orth obectives and unda!entals that #ill be the basis or develop!ent o

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inancial accounting and reporting standards. 6he obectives identiy the goals and purposes o

inancial reporting. 6he unda!entals are the underlying concepts o inancial$age )

Copyright © 1980" Financial Accounting Standards Board Not or redistribution

accounting3concepts that guide the selection o transactions" events" and circu!stances to be

accounted orG their recognition and !easure!entG and the !eans o su!!ari>ing and

co!!unicating the! to interested parties. Concepts o that type are unda!ental in the sensethat other concepts lo# ro! the! and repeated reerence to the! #ill be necessary in

establishing" interpreting" and applying accounting and reporting standards.

6he conceptual ra!e#or is a coherent syste! o interrelated obectives andunda!entals that is e;pected to lead to consistent standards and that prescribes the nature"

unction" and li!its o inancial accounting and reporting. 't is e;pected to serve the public

interest by providing structure and direction to inancial accounting and reporting to acilitate the provision o evenhanded inancial and related inor!ation that helps pro!ote the eicient

allocation o scarce resources in the econo!y and society" including assisting capital and other

!arets to unction eiciently.

+stablish!ent o obectives and identiication o unda!ental concepts #ill not directly

solve inancial accounting and reporting proble!s. ather" obectives give direction andconcepts are tools or solving proble!s.

6he Board itsel is liely to be the !ost direct beneiciary o the guidance provided bythe State!ents in this series. 6hey #ill guide the Board in developing accounting and reporting

standards by providing the Board #ith a co!!on oundation and basic reasoning on #hich to

consider !erits o alternatives.&o#ever" no#ledge o the obectives and concepts the Board #ill use in developing

standards also should enable those #ho are aected by or interested in inancial accounting

standards to understand better the purposes" content" and characteristics o inor!ation provided by inancial accounting and reporting. 6hat no#ledge is e;pected to enhance the useulness o"

and conidence in" inancial accounting and reporting. 6he concepts also !ay provide so!e

guidance in analy>ing ne# or e!erging proble!s o inancial accounting and reporting in theabsence o applicable authoritative pronounce!ents.State!ents o Financial Accounting Concepts do not establish standards prescribing

accounting procedures or disclosure practices or particular ite!s or events" #hich are issued by

the Board as State!ents o Financial Accounting Standards. ather" State!ents in this seriesdescribe concepts and relations that #ill underlie uture inancial accounting standards and

practices and in due course serve as a basis or evaluating e;isting standards and practices.*

6he Board recogni>es that in certain respects current generally accepted accounting principles !ay be inconsistent #ith those that !ay derive ro! the obectives and concepts set

orth in State!ents in this series. &o#ever" a State!ent o Financial Accounting Concepts does

not =a? re:uire a change in e;isting generally accepted accounting principlesG =b? a!end" !odiy"

or interpret State!ents o Financial Accounting Standards" 'nterpretations o the FASB"*pinions o the Accounting $rinciples Board" or Bulletins o the Co!!ittee on Accounting

$rocedure that are in eectG or =c? ustiy either changing e;isting generally accepted accounting

and reporting practices or interpreting the pronounce!ents listed in ite! =b? based on personalinterpretations o the obectives and concepts in the State!ents o Financial Accounting

Concepts.

Since a State!ent o Financial Accounting Concepts does not establish generallyaccepted accounting principles or standards or the disclosure o inancial inor!ation outside o

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$age 8


inancial state!ents in published inancial reports" it is not intended to invoe application o ule %0, or %0- o the ules o Conduct o the Code o $roessional +thics o the A!erican

'nstitute o Certiied $ublic Accountants =or successor rules or arrange!ents o si!ilar scope

and intent?.**

ie other pronounce!ents o the Board" a State!ent o Financial Accounting Concepts!ay be a!ended" superseded" or #ithdra#n by appropriate action under the Boards Rules of

Procedure.

FASB &'B%#CA!#NS N CNCE&!'A% F(A)E*(+

Statements of Financial Accounting Concepts

No. 1" Objectives of Financial Reporting by Business Enterprises =Nove!ber 19)8?

No. %" Qualitative !aracteristics of "ccounting #nformation =ay 1980? No. -" Objectives of Financial Reporting by $onbusiness Organi%ations =4ece!ber 1980?

Discussion )emoran,ums an, #n-itations to Comment "a-ing #ssues Being or /et to Be

Consi,ere, b t2e Boar,

Elements of Financial Statements and &!eir 'easurement =4ece!ber %" 19)5?

Reporting Earnings =Huly ,1" 19)9? Financial Statements and Ot!er 'eans of Financial Reporting =ay 1%" 1980?

Reporting Funds Flo(s) *i+uidity) and Financial Flexibility =4ece!ber 1/" 1980?

t2er &roects in &rocess

Accounting ecognition Criteria$age 9


#N!(D'C!#NScope an, Content of Statement

1. 6his State!ent deines 10 ele!ents o inancial state!ents o business enterprises@ assets"liabilities" e:uity" invest!ents by o#ners" distributions to o#ners" co!prehensive inco!e"1

revenues" e;penses" gains" and losses. 6he State!ent also deines or describes certain other

concepts that underlie or are other#ise related to the 10 ele!ents listed =see Su!!ary 'nde;?. 'tcontains no conclusions about !atters that are intended to be decided in other phases o the

Boards conceptual ra!e#or proect =paragraphs 15 and 1)?.

%. Although this State!ent is entitled Elements of Financial Statements of Business Enterprises" the Board has tried to #ord several o the deinitions so that they could also apply to

organi>ations other than business enterprises. Assets and liabilities are co!!on to all

organi>ations" and the Board sees no reason to deine the! dierently or business and

nonbusiness organi>ations. 6he Board also e;pects the deinitions o e:uity" revenues" e;penses"gains" and losses to it both business and nonbusiness organi>ations. 'n contrast" nonbusiness

organi>ations have no need or ele!ents such as invest!ents by o#ners" distributions to o#ners"

and co!prehensive inco!e but !ay need other ele!ents not needed by business enterprises. 'n

the near uture" the Board e;pects to consider and to solicit vie#s about #hich" i any" o thedeinitions are inappropriate or !ay re:uire !odiication or nonbusiness organi>ations and

#hether other ele!ents are needed or inancial state!ents o nonbusiness organi>ations.t2er &ossible Elements of Financial Statements of Business Enterprises

,. Although the ele!ents deined in this State!ent include basic ele!ents and are probably

those !ost co!!only identiied as ele!ents o inancial state!ents o business enterprises" theyare not the only ele!ents o inancial state!ents. 6he ele!ents deined in this State!ent are a

related group #ith a particular ocus3on assets" liabilities" e:uity" and other ele!ents directly

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related to !easuring peror!ance and status o an enterprise. 'nor!ation about an enterprises

peror!ance and status provided by accrual accounting is the pri!ary ocus o inancial

reporting =FASB Concepts State!ent No. 1" Objectives of Financial Reporting by Business Enterprises" paragraphs -0I-8?. *ther ocuses !ay re:uire other ele!ents.4

-. 7ariations o possible state!ents sho#ing the eects on assets and liabilities o

transactions or other events and circu!stances during a period are al!ost li!itless" and all o the! have classes o ite!s that !ay be called ele!ents o inancial state!ents. For e;a!ple" a

state!ent sho#ing unds lo#s or cash lo#s during a period !ay include categories or unds or

cash provided by =a? operations" =b? borro#ings" =c? issuing e:uity securities" =d? sale o assets"and so orth. *ther phases o the conceptual ra!e#or proect !ay deine additional ele!ents

o inancial state!ents as needed.$age 10


Elements an, Financial (epresentations

/. +le!ents o inancial state!ents are the building blocs #ith #hich inancial state!ents

are constructed3the classes o ite!s that inancial state!ents co!prise. Elements reers to broad classes" such as assets" liabilities" revenues" and e;penses. $articular econo!ic things and

events" such as cash on hand or selling !erchandise" that !ay !eet the deinitions o ele!entsare not ele!ents as the ter! is used in this State!ent. ather" they are called items or other

descriptive na!es. 6his State!ent ocuses on the broad classes and their characteristics insteado deining particular assets" liabilities" or other ite!s. Although notes to inancial state!ents

are described in so!e authoritative pronounce!ents as an integral part o inancial state!ents"

they are not ele!ents. 6hey serve dierent unctions" including a!pliying or co!ple!entinginor!ation about ite!s in inancial state!ents.

5. 6he ite!s that are or!ally incorporated in inancial state!ents are inancial

representations =depictions in #ords and nu!bers? o certain resources o an entity" clai!s tothose resources" and the eects o transactions and other events and circu!stances that result in

changes in those resources and clai!s. 6hat is" sy!bols =#ords and nu!bers? in inancial

state!ents stand or cash in a ban" buildings" #ages due" sales" use o labor" earth:uae da!ageto property" and a host o other econo!ic things and events pertaining to an entity e;isting and

operating in #hat is so!eti!es called the Jreal #orld.J

). 6his State!ent ollo#s the co!!on practice o calling by the sa!e na!es both the

inancial representations in inancial state!ents and the resources" clai!s" transactions" events"or circu!stances that they represent. For e;a!ple" inventory or asset !ay reer either to

!erchandise on the loor o a retail enterprise or to the #ords and nu!bers that represent that

!erchandise in the enterprises inancial state!entsG and sale or revenue !ay reer either to thetransaction by #hich so!e o that !erchandise is transerred to a custo!er or to the #ords and

nu!bers that represent the transaction in the enterprises inancial state!ents.3t2er Scope an, Content )atters

8. Appendi; A to this State!ent contains bacground inor!ation or the State!ent.Appendi; B contains e;planations and e;a!ples pertaining to the characteristics o assets"

liabilities" e:uity" and co!prehensive inco!e and its co!ponents.

becti-es5 6ualitati-e C2aracteristics5 an, Elements

9. 4ecision useulness in invest!ent" credit" and si!ilar decisions is the ocus o both o the

concepts State!ents that precede this one@ FASB Concepts State!ent No. 1" Objectives of

Financial Reporting by Business Enterprises) and FASB Concepts State!ent No. %" Qualitative!aracteristics of "ccounting #nformation. seulness o inancial reporting inor!ation or

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those decisions rests on the cornerstones o relevance and reliability.$age 11


10. 6he deinitions in this State!ent are o econo!ic things and events that are relevant to

invest!ent" credit" and si!ilar decisions and thus are relevant to inancial reporting.7 6hose

decisions involve co!!itting =or continuing to co!!it? resources to a business enterprise. 6he

ele!ents deined are an enterprises resources" the clai!s to or interests in those resources" andthe changes therein ro! transactions and other events and circu!stances involved in its use o

resources to earn a proit. elevance o inor!ation about those ele!ents ste!s ro! the

signiicance o resources and proitability in the activities o business enterprises.11. +cono!ic resources or assets and changes in the! are central to the e;istence and

operations o an individual business enterprise. Business enterprises are in essence resource or

asset processors" and a resources capacity to be e;changed or cash or other resources or to beco!bined #ith other resources to produce e;changeable goods or services gives it utility and

value =uture econo!ic beneit? to an enterprise. Since resources or assets coner their beneits

on an enterprise by being e;changed" used" or other#ise invested" changes in resources or assets

are the purpose" the !eans" and the result o an enterprises operations" and a business enterprise

e;ists pri!arily to ac:uire" use" produce" and distribute resources. 6hrough those activities it both provides goods or services to society and obtains cash and other assets #ith #hich it

co!pensates those #ho provide it #ith resources" including its o#ners.1%. Although the relation bet#een proit o an enterprise and co!pensation received by

o#ners is co!ple; and oten indirect" proit is the basic source o co!pensation to o#ners or

providing e:uity or ris capital to an enterprise. $roitable operations generate resources thatcan be distributed to o#ners or reinvested in the enterprise" and investors e;pectations about

both distributions to o#ners and reinvested proit !ay aect !aret prices o the enterprises

e:uity securities. +;pectations that o#ners #ill be ade:uately co!pensated3that they #illreceive returns on their invest!ents co!!ensurate #ith their riss3are as necessary to attract

e:uity capital to an enterprise as are e;pectations o #ages and salaries to attract e!ployees

services" e;pectations o repay!ents o borro#ing #ith interest to attract borro#ed unds" or e;pectations o pay!ents on account to attract ra# !aterials or !erchandise.1,. epay!ent or co!pensation o lenders" e!ployees" suppliers" and other nono#ners or

resources provided is also related to proit or loss in the sense that proitable enterprises =and

those that brea even? generally are able to repay borro#ing #ith interest" pay ade:uate #agesand salaries" and pay or other goods and services received" #hile unproitable enterprises oten

beco!e less and less able to pay and thus ind it increasingly diicult to obtain the resources

they need to continue operations. 6hus" inor!ation about proit and its co!ponents is o interest to suppliers" e!ployees" lenders" and other providers o resources as #ell as to o#ners.

#nterrelation of ElementsArticulation

1-. +le!ents o inancial state!ents are o t#o dierent inds or classes" #hich are

so!eti!es e;plained as being analogous to photographs and !otion pictures. 6he ele!entsdeined in this State!ent include three o one class and seven o the other. Assets" liabilities"$age 1%


and e:uity describe levels or a!ounts o resources or clai!s to resources at a !o!ent o ti!e.All other ele!ents describe eects o transactions and other events and circu!stances that aect

an enterprise during intervals o ti!e =periods?. 6hey include co!prehensive inco!e and its

co!ponents3revenues" e;penses" gains" and losses3as #ell as invest!ents by o#ners anddistributions to o#ners.:

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1/. 6he t#o classes o ele!ents are related in such a #ay that =a? assets" liabilities" and e:uity

are changed by ele!ents o the other class and at any ti!e are their cu!ulative result and =b? an

increase =decrease? in an asset cannot occur #ithout a corresponding decrease =increase? inanother asset or a corresponding increase =decrease? in a liability or e:uity. 6hose relations are

so!eti!es collectively reerred to as Jarticulation.J 6hey result in inancial state!ents that are

unda!entally interrelated so that state!ents that sho# ele!ents o the second class depend onstate!ents that sho# ele!ents o the irst class and vice versa.;

Definition5 (ecognition5 )easurement5 an, Displa

15. All !atters o recognition" !easure!ent" and display have purposely been separated ro!the deinitions o the ele!ents o inancial state!ents in the Boards conceptual ra!e#or

proect. 6he deinitions in this State!ent are concerned #ith the essential characteristics o

ele!ents o inancial state!ents. *ther phases o the conceptual ra!e#or proect are

concerned #ith :uestions such as #hich inancial state!ents should be providedG #hich ite!sthat :ualiy under the deinitions should be included in those state!entsG #hen particular ite!s

that :ualiy as assets" liabilities" revenues" e;penses" and so orth should be or!ally recogni>ed

in the inancial state!entsG #hich attributes o those ite!s should be !easuredG #hich unit o

!easure should be usedG and ho# the inor!ation included should be classiied and other#isedisplayed.

1). 4einitions o ele!ents o inancial state!ents are a signiicant irst screen in deter!iningthe content o inancial state!ents. An ite!s having the essential characteristics o one o the

ele!ents is a necessary but not a suicient condition or or!ally recogni>ing the ite! in the

entitys inancial state!ents. 6o be included in a particular set o inancial state!ents" an ite!!ust not only :ualiy under the deinition o an ele!ent but also !ust !eet criteria or

recognition and have a relevant attribute =or surrogate or it? that is capable o reasonably

reliable !easure!ent or esti!ate.8 6hus" so!e ite!s that !eet the deinitions !ay have to be

e;cluded ro! or!al incorporation in inancial state!ents because o recognition or !easure!ent considerations =paragraphs ,)I-%?.

DEF#N#!#NS F E%E)EN!S18. All ele!ents are deined in relation to a particular entity" #hich !ay be a businessenterprise" an educational or charitable organi>ation" a govern!ental unit" a natural person" or $age 1,


the lie =paragraph %?. 'te!s that :ualiy under the deinitions are a particular entitys asset"liability" revenue" e;pense" etc. An entity !ay co!prise t#o or !ore ailiated entities and does

not necessarily correspond to #hat is oten described as a Jlegal entity.J 6he deinitions !ay

also reer to Jother entity"J Jother entities"J or Jentities other than the enterprise"J #hich !ayinclude individuals" other business enterprises" nonbusiness organi>ations" and the lie. For

e;a!ple" e!ployees" suppliers" custo!ers" lenders" stocholders" and govern!ents are all Jother

entitiesJ to a particular business enterprise. A subsidiary co!pany that is part o the sa!e entity

as its parent co!pany in consolidated inancial state!ents is an Jother entityJ in the separateinancial state!ents o its parent.

Assets

19. Assets are probable 9 uture econo!ic beneits obtained or controlled by a particular entity as a result o past transactions or events.C2aracteristics of Assets of Business Enterprises

%0. An asset has three essential characteristics@ =a? it e!bodies a probable uture beneit thatinvolves a capacity" singly or in co!bination #ith other assets" to contribute directly or

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indirectly to uture net cash inlo#s" =b? a particular enterprise can obtain the beneit and control

others access to it" and =c? the transaction or other event giving rise to the enterprises right to or

control o the beneit has already occurred. Assets co!!only have other eatures that helpidentiy the!3or e;a!ple" assets !ay be ac:uired at a cost 10 and they !ay be tangible"

e;changeable" or legally enorceable. &o#ever" those eatures are not essential characteristics o

assets. 6heir absence" by itsel" is not suicient to preclude an ite!s :ualiying as an asset.6hat is" assets !ay be ac:uired #ithout cost" they !ay be intangible" and although not

e;changeable they !ay be usable by the enterprise in producing or distributing other goods or

services. Si!ilarly" although the ability o an enterprise to obtain beneit ro! an asset and tocontrol others access to it generally rests on a oundation o legal rights" legal enorceability o a

clai! to the beneit is not a prere:uisite or a beneit to :ualiy as an asset i its receipt by the

enterprise is other#ise probable.

%1. 6he inds o ite!s that :ualiy as assets under the deinition in paragraph 19 are alsoco!!only called econo!ic resources. 6hey are the scarce !eans that are useul or carrying out

econo!ic activities" such as consu!ption" production" and e;change.

%%. 6he co!!on characteristic possessed by all assets and econo!ic resources is Jservice

potentialJ or Juture econo!ic beneit"J the capacity to provide services or beneits to the entitiesthat use the!. 'n a business enterprise" that service potential or uture econo!ic beneit

eventually results in net cash inlo#s to the enterprise. 6hat characteristic is the pri!ary basis o the deinition o assets in this State!ent.

%,. oney =cash" including deposits in bans? is valuable because o #hat it can buy. 't can$age 1-


be e;changed or virtually any good or service that is available or it can be saved and e;changed

or the! in the uture. oneys Jco!!and over resourcesJ3its purchasing po#er3is the basis

o its value and uture econo!ic beneits.11

%-. Assets other than cash beneit a business enterprise by being e;changed or cash or other

goods or services" by being used to produce or other#ise increase the value o other assets" or by

being used to settle liabilities. Services provided by other entities" including personal services"cannot be stored and are received and used si!ultaneously. 6hey can be assets o a businessenterprise only !o!entarily3as the enterprise receives and uses the!3although their use !ay

create or add value to other assets o the enterprise. ights to receive services o other entities

or speciied or deter!inable uture periods can be assets o particular business enterprises.!ransactions an, E-ents !2at C2ange Assets

%/. Assets o a business enterprise are changed both by its transactions and activities and by

events that happen to it. A business enterprise obtains assets ro! other entities and adds valuethrough operations to assets it already has. 't transers assets to other entities and uses assets in

its operations. So!e transactions or other events decrease one asset and increase another. An

enterprises assets or their values are also co!!only increased or decreased by other events and

circu!stances that !ay be partly or entirely beyond the control o the enterprise and its!anage!ent" or e;a!ple" price changes" interest rate changes" technological changes"

i!positions o ta;es and regulations" discovery" gro#th or accretion" shrinage" vandalis!"

thets" e;propriations" #ars" ires" and natural disasters.%5. *nce ac:uired" an asset continues as an asset o the enterprise until the enterprise collects

it" transers it to another entity" or uses it" or so!e other event or circu!stance destroys the uture

beneit or re!oves the enterprises ability to obtain it.

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%). A separate ite! that reduces or increases the carrying a!ount o an asset is so!eti!es

ound in inancial state!ents. For e;a!ple" an esti!ate o uncollectible a!ounts reduces

receivables to the a!ount e;pected to be collected" or a pre!iu! on a bond receivable increasesthe receivable to its cost or present value. 6hose Jvaluation accountsJ are part o the related

assets and are neither assets in their o#n right nor liabilities.14

%iabilities%8. iabilities are probable 13 uture sacriices o econo!ic beneits arising ro! present

obligations 17 o a particular entity to transer assets or provide services to other entities in the

uture as a result o past transactions or events.$age 1/Copyright © 1980" Financial Accounting Standards Board Not or redistribution

C2aracteristics of %iabilities of Business Enterprises

%9. A liability has three essential characteristics@ =a? it e!bodies a present duty or responsibility to one or !ore other entities that entails settle!ent by probable uture transer or

use o assets at a speciied or deter!inable date" on occurrence o a speciied event" or on

de!and" =b? the duty or responsibility obligates a particular enterprise" leaving it little or nodiscretion to avoid the uture sacriice" and =c? the transaction or other event obligating the

enterprise has already happened. iabilities co!!only have other eatures that help identiythe!3or e;a!ple" !ost liabilities re:uire the obligated enterprise to pay cash to one or !ore

identiied other entities and are legally enorceable. &o#ever" those eatures are not essentialcharacteristics o liabilities. 6heir absence" by itsel" is not suicient to preclude an ite!s

:ualiying as a liability. 6hat is" liabilities !ay not re:uire an enterprise to pay cash but to

convey other assets" to provide or stand ready to provide services" or to use assets. And as longas pay!ent or other transer o assets to settle an e;isting obligation is probable" the identity o

the recipient need not be no#n to the obligated enterprise beore the ti!e o settle!ent.

Si!ilarly" although !ost liabilities rest generally on a oundation o legal rights and duties"e;istence o a legally enorceable clai! is not a prere:uisite or an obligation to :ualiy as a

liability i the uture pay!ent o cash or other transer o assets to settle the obligation is

other#ise probable.,0. ost liabilities ste! ro! hu!an inventions3such as inancial instru!ents" contracts"

and la#s3that acilitate the unctioning o a highly developed econo!y and are co!!only

e!bodied in legal obligations and rights =or the e:uivalent? #ith no e;istence apart ro! the!.

iabilities acilitate the unctioning o a highly developed econo!y pri!arily by per!ittingdelay3delay in pay!ent" delay in delivery" and so on.1

,1. +nterprises routinely incur !ost liabilities to ac:uire the unds" goods" and services they

need to operate and ust as routinely settle the liabilities they incur. For e;a!ple" borro#ingcash obligates an enterprise to repay the a!ount borro#ed" usually #ith interestG ac:uiring assets

on credit obligates an enterprise to pay or the!" perhaps #ith interest to co!pensate or the

delay in pay!entG using e!ployees no#ledge" sills" ti!e" and eorts obligates an enterprise to

pay or their use" oten including ringe beneitsG selling products #ith a #arranty or guaranteeobligates an enterprise to pay cash or to repair or replace those that prove deectiveG and

accepting a cash deposit or prepay!ent obligates an enterprise to provide goods or services or to

reund the cash. 'n short" !ost liabilities are incurred in e;change transactions to obtain neededresources or their use" and !ost liabilities incurred in e;change transactions are contractual in

nature3based on #ritten or oral agree!ents to pay cash or to provide goods or services to

speciied or deter!inable entities on de!and" at speciied or deter!inable dates" or onoccurrence o speciied events.

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,%. Although !ost liabilities result ro! agree!ents bet#een entities" so!e obligations are

i!posed on business enterprises by govern!ent or courts or are accepted to avoid i!position by$age 15


govern!ent or courts =or costly eorts related thereto?" and so!e relate to other nonreciprocal

transers ro! a business enterprise to o#ners or to one or !ore other entities. 6hus" ta;es" la#s"

regulations" and other govern!ental actions co!!only re:uire business enterprises to pay cash"convey other assets" or provide services either directly to speciied govern!ental units or to

others or purposes or in #ays speciied by govern!ent. An enterprise !ay also incur liabilities

or cash dividends declared but not paid or or donations pledged to educational or charitableorgani>ations.

,,. Si!ilarly" although !ost liabilities ste! ro! legally enorceable obligations" so!e

liabilities rest on e:uitable or constructive obligations" including so!e that arise in e;changetransactions. iabilities ste!!ing ro! e:uitable or constructive obligations are co!!only paid

in the sa!e #ay as legally binding contracts" but they lac the legal sanction that characteri>es

!ost liabilities and !ay be binding pri!arily because o social or !oral sanctions or custo!. An

e:uitable obligation ste!s ro! ethical or !oral constraints rather than rules o co!!on or

statute la#" that is" ro! a duty to another entity to do that #hich an ordinary conscience andsense o ustice #ould dee! air" ust" and right3to do #hat one ought to do rather than #hat

one is legally re:uired to do. For e;a!ple" an enterprise !ay have an e:uitable obligation toco!plete and deliver a product to a custo!er that has no other source o supply even though its

ailure to deliver #ould legally re:uire only return o the custo!ers deposit. A constructive

obligation is created" inerred" or construed ro! the acts in a particular situation rather thancontracted by agree!ent #ith another entity or i!posed by govern!ent. For e;a!ple" an

enterprise !ay create a constructive obligation to e!ployees or vacation pay or yearIend

bonuses by paying the! every year even though it is not contractually bound to do so and hasnot announced a policy to do so. 6he line bet#een e:uitable or constructive obligations and

obligations that are enorceable in courts o la# is not al#ays clear" and the line bet#een

e:uitable or constructive obligations and no obligations !ay oten be even !ore troubleso!e because to deter!ine #hether an enterprise is actually bound by an obligation to a third party inthe absence o legal enorceability is oten e;tre!ely diicult. 6hus" the concepts o e:uitable

and constructive obligations !ust be applied #ith great care. 6o interpret e:uitable and

constructive obligations too narro#ly #ill tend to e;clude signiicant actual obligations o anenterprise" #hile to interpret the! too broadly #ill eectively nulliy the deinition by including

ite!s that lac an essential characteristic o liabilities.!ransactions an, E-ents !2at C2ange %iabilities

,-. iabilities o a business enterprise are changed both by its transactions and activities and

by events that happen to it. 6he preceding paragraphs note !ost !aor sources o changes in

liabilities. An enterprises liabilities are also so!eti!es aected by price changes" interest rate

changes" or other events and circu!stances that !ay be partly or #holly beyond the control o anenterprise and its !anage!ent.

,/. *nce incurred" a liability continues as a liability o the enterprise until the enterprise

settles it" or another event or circu!stance discharges it or re!oves the enterprises responsibility$age 1)


to settle it.

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ound in inancial state!ents. For e;a!ple" a bond pre!iu! or discount increases or decreases

the ace value o a bond payable to its proceeds or present value. 6hose Jvaluation accountsJ are

part o the related liability and are neither liabilities in their o#n right nor assets.

Effects of 'ncertaint

,). ncertainty about econo!ic and business activities and results is pervasive" and it oten

clouds #hether a particular ite! :ualiies as an asset or a liability o a particular enterprise at theti!e the deinitions are applied. 6he presence or absence o uture econo!ic beneit that can be

obtained and controlled by the enterprise or o the enterprises legal" e:uitable" or constructive

obligation to sacriice assets in the uture can oten be discerned reliably only #ith hindsight. Asa result" so!e ite!s that #ith hindsight actually :ualiied as assets or liabilities o the enterprise

under the deinitions !ay" as a practical !atter" have been recogni>ed as e;penses" losses"

revenues" or gains or re!ained unrecogni>ed in its inancial state!ents because o uncertainty

about #hether they :ualiied as assets or liabilities o the enterprise or because o recognitionand !easure!ent considerations ste!!ing ro! uncertainty at the ti!e o assess!ent.

Conversely" so!e ite!s that #ith hindsight did not :ualiy under the deinitions !ay have been

included as assets or liabilities because o udg!ents !ade in the ace o uncertainty at the ti!e

o assess!ent.,8. An eect o uncertainty is to increase the costs o inancial reporting in general and the

costs o recognition and !easure!ent in particular. So!e ite!s that :ualiy as assets or liabilities under the deinitions !ay thereore be recogni>ed as e;penses" losses" revenues" or

gains or re!ain unrecogni>ed as a result o cost and beneit analyses indicating that their or!al

incorporation in inancial state!ents is not useul enough to ustiy the ti!e and eort needed todo it. 't !ay be possible" or e;a!ple" to !ae the inor!ation !ore reliable in the ace o

uncertainty by e;erting greater eort or by spending !ore !oney" but it also !ay not be #orth

the added cost.

,9. A highly signiicant practical conse:uence o the eatures described in the preceding t#o paragraphs is that the e;istence or a!ount =or both? o !ost assets and !any liabilities can be

probable but not certain.1: 6he deinitions in this State!ent are not intended to re:uire that the

e;istence and a!ounts o ite!s be certain or the! to :ualiy as assets" liabilities" revenues"e;penses" etc." and esti!ates and appro;i!ations #ill oten be re:uired unless inancial

state!ents are to be restricted to reporting only cash transactions.

-0. 6o apply the deinitions o assets and liabilities =and other ele!ents o inancialstate!ents? thus co!!only re:uires assess!ents o probabilities" but degrees o probability are$age 18


not part o the deinitions. 6hat is" the degree o probability o a uture econo!ic beneit =or o auture cash outlay or other sacriice o uture econo!ic beneits? and the degree to #hich its

a!ount can be esti!ated #ith reasonable reliability that are re:uired to recogni>e an ite! as an

asset =or a liability? are !atters o recognition and !easure!ent that are beyond the scope o this

State!ent. 6he distinction needs to be !aintained bet#een the deinitions the!selves and stepsthat !ay be needed to apply the!. atters involving !easure!ent proble!s" eects o

uncertainty" reliability" and nu!erous other actors !ay be signiicant in applying a deinition"

but they are not part o the deinition. $articular ite!s that :ualiy as assets or liabilities under the deinitions !ay need to be e;cluded ro! or!al incorporation in inancial state!ents or

reasons relating to !easure!ent" uncertainty" or unreliability" but they are not e;cluded by the

deinitions. Si!ilarly" the attitude co!!only no#n as conservatis! !ay be appropriate inapplying the deinitions under uncertain conditions" but conservatis! is not part o the

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deinitions. 4einition" recognition" !easure!ent" and display are separate in the Boards

conceptual ra!e#or =paragraphs 15 and 1)?.1;Note on 'ncertaint an, Certain (ecognition )atters

-1. All practical inancial accounting and reporting !odels have li!itations. 6he preceding

paragraphs describe one li!it that !ay aect various !odels3ho# recognition or !easure!ent

considerations ste!!ing ro! uncertainty !ay result in not recogni>ing as assets or liabilitiesso!e ite!s that :ualiy as such under the deinitions or !ay result in postponing recognition o

so!e assets or liabilities until their e;istence beco!es !ore probable or their !easures beco!e

!ore reliable.-%. 6hat propensity to deer recognition o or to not recogni>e assets and liabilities"

particularly assets" !ay create proble!s in recogni>ing losses o uture econo!ic beneits. 6he

situation !ay arise i the events or circu!stances causing the losses have occurred" and therelated uture sacriice o assets has beco!e virtually inevitable" but =a? aected assets either are

not recogni>ed or separately identiied in the inancial state!ents or are recorded at a!ounts

signiicantly less than the cash or other outlays needed to restore the lost uture beneits and =b?

the a!ounts to be spent in the uture to restore the lost beneits are not yet o#ed to anyone. 6orecogni>e those inds o losses" an enterprise !ay need to recogni>e" and display a!ong either

its assets or its liabilities" a Jvaluation accountJ =paragraph %)? that either relates to unrecorded

assets or reduces recorded assets to negative a!ounts.18

E=uit 19

-,. +:uity is the residual interest in the assets o an entity that re!ains ater deducting its

liabilities. 'n a business enterprise" the e:uity is the o#nership interest.C2aracteristics of E=uit of Business Enterprises

--. +:uity in a business enterprise ste!s ro! o#nership rights =or the e:uivalent?.40 't

involves a relation bet#een an enterprise and its o#ners as o(ners rather than as e!ployees"$age 19


suppliers" custo!ers" lenders" or in so!e other nono#ner role.41 Since it rans ater liabilities as

a clai! to or interest in the assets o the enterprise" it is a residual interest@ =a? e:uity is the sa!eas net assets" the dierence bet#een the enterprises assets and its liabilities" and =b? e:uity isenhanced or burdened by increases and decreases in net assets ro! sources other than

invest!ents by o#ners and distributions to o#ners.

-/. +:uity represents the source o distributions by an enterprise to its o#ners" #hether in theor! o cash dividends or other distributions o assets. *#ners and others e;pectations about

distributions to o#ners !ay aect the !aret prices o an enterprises e:uity securities" thereby

indirectly aecting o#ners co!pensation or providing e:uity or ris capital to the enterprise=paragraph 1%?. 6hus" the essential characteristics o e:uity center on the conditions or

transerring enterprise assets to o#ners. +:uity3an e;cess o assets over liabilities3is a

necessary but not suicient conditionG distributions to o#ners are at the discretion and volition

o the o#ners or their representatives ater satisying restrictions i!posed by la#" regulation" or agree!ents #ith other entities.

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o co!!on stoc or preerred stoc? #ith dierent degrees o ris ste!!ing ro! dierent

rights to participate in distributions o enterprise assets or dierent priorities o clai!s on

enterprise assets in the event o li:uidation. 6hat is" so!e classes o o#ners !ay bear relatively!ore o the riss o an enterprises unproitability or !ay beneit relatively !ore ro! its

proitability =or both? than other classes o o#ners. &o#ever" all classes depend at least to so!e

e;tent on enterprise proitability or distributions o enterprise assets" and no class o e:uitycarries an unconditional right to receive uture transers o assets ro! the enterprise e;cept in

li:uidation" and then only ater liabilities have been satisied.

-). +:uity is originally created by o#ners invest!ents in an enterprise and !ay ro! ti!e toti!e be aug!ented by additional invest!ents by o#ners. +:uity is reduced by distributions by

the enterprise to o#ners. &o#ever" the distinguishing characteristic o e:uity is that it inevitably

is aected by the enterprises operations and other events and circu!stances aecting the

enterprise =#hich together constitute co!prehensive inco!e3paragraph /5?.E=uit an, %iabilities

-8. An enterprises assets" liabilities" and e:uity all pertain to the sa!e set o probable uture

econo!ic beneits. Assets are probable uture econo!ic beneits o#ned or controlled by theenterprise. 'ts liabilities and e:uity are !utually e;clusive clai!s to or interests in the

enterprises assets by entities other than the enterprise. 'n a business enterprise" e:uity or the$age %0


o#nership interest is a residual interest" re!aining ater liabilities are deducted ro! assets and

depending signiicantly on the proitability o the enterprise. 4istributions to o#ners are

discretionary" depending on the volition o o#ners or their representatives ater considering theneeds o the enterprise and restrictions i!posed by la#" regulations" or agree!ent. An enterprise

is generally not obligated to transer assets to o#ners e;cept in the event o the enterprises

li:uidation. 'n contrast" liabilities" once incurred" involve nondiscretionary uture sacriices o assets that !ust be satisied on de!and" at a speciied or deter!inable date" or on occurrence o a

speciied event" and they tae precedence over o#nership interests.

-9. Although the line bet#een e:uity and liabilities is clear in concept" it !ay be obscured in practice. Applying the deinitions to particular situations !ay involve practical proble!s

because several inds o securities issued by business enterprises see! to have characteristics o

both liabilities and e:uity in varying degrees or because the na!es given so!e securities !ay

not accurately describe their essential characteristics. For e;a!ple" convertible debt instru!entshave both liability and residual interest characteristics" #hich !ay create proble!s in accounting

or the!. =A$B *pinion No. 1-" "ccounting for onvertible ,ebt and ,ebt #ssued (it! Stoc-

Purc!ase arrants" and A$B *pinion No. 1/" Earnings per S!are" both discuss proble!s o that ind.? $reerred stoc also oten has both debt and e:uity characteristics" and so!e

preerred stocs !ay eectively have !aturity a!ounts and dates at #hich they !ust be

redee!ed or cash. 6o deter!ine #hether speciic securities o the inds illustrated are

liabilities or e:uity presents practical proble!s o applying deinitions rather than proble!s o deter!ining the essential characteristics o those deinitions. Ade:uate deinitions are the

starting point. 6hey provide a basis or assessing" or e;a!ple" the e;tent to #hich a particular

application !eets the :ualitative characteristic o representational aithulness" #hich includesthe notion o reporting econo!ic substance rather than legal or! =Concepts State!ent %"

paragraphs 5,I80 and 150?.!ransactions an, E-ents !2at C2ange E=uit

/0. 6he ollo#ing diagra! 6he diagra! has been deleted in the electronic version o

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Original Pronouncements. ' there is a need to reerence this diagra!" please reer to the printed

version o Original Pronouncements.D sho#s the sources o changes in e:uity =class B? and

distinguishes the! ro! each other and ro! other transactions" events" and circu!stancesaecting an enterprise during a period =classes A and C?. Speciically" the diagra! sho#s that

=a? class B =changes in e:uity? co!prises t#o !utually e;clusive classes o transactions and

other events and circu!stances" B1 and B%" each o #hich also co!prises t#o =or perhaps !ore?signiicant subclasses" and =b? classes B1" B%" and A are the sources o all increases and

decreases in assets and liabilities o an enterpriseG class C includes no changes in assets or

liabilities. Shaded bands rather than clear boundary lines separate classes B1=a? and B1=b? andall #ithin class B1=b? in the diagra! because o display considerations that are beyond the

scope o this State!ent. First" paragraphs 5,I), o this State!ent deine and discuss revenues"

e;penses" gains" and losses as ele!ents o inancial state!ents but do not precisely distinguish

bet#een revenues and gains on the one hand or bet#een e;penses and losses on the other.$age %1


Second" the deinitions o gains and losses include the possibility o other descriptions or so!e

ite!s in that class =paragraphs /) and /8?. Fine distinctions bet#een revenues and gains and

bet#een e;penses and losses as #ell as other distinctions (it!in co!prehensive inco!e are !oreappropriately considered as part o display or reporting.

/1. 6he ull #idth o the diagra!" represented by the t#oIpointed arro# labeled JAlltransactions and other events and circu!stances that aect an enterprise during a period"J

enco!passes all potentially recordable events and circu!stances aecting an enterprise.

oving ro! top to botto! o the diagra!" each level divides the preceding level into classesthat are signiicant or the deinitions and related concepts in this State!ent. =Si>e o classes

does not indicate their relative volu!e or signiicance.?

A. All changes in assets and liabilities not acco!panied by changes in e:uity. 6his classco!prises our inds o e;change transactions that are co!!on in !ost business enterprises

=e;changes that aect e:uity belong in class B rather than class A?.43

1. +;changes o assets or assets" or e;a!ple" purchases o assets or cash or barter e;changes%. +;changes o liabilities or liabilities" or e;a!ple" issues o notes payable to settle

accounts payable or reundings o bonds payable by issuing ne# bonds to holders that

surrender outstanding bonds,. Ac:uisitions o assets by incurring liabilities" or e;a!ple" purchases o assets on

account" borro#ings" or receipts o cash advances or goods or services to be provided

in the uture-. Settle!ents o liabilities by transerring assets" or e;a!ple" repay!ents o borro#ings"

pay!ents to suppliers on account" pay!ents o accrued #ages or salaries" or repairs =or

pay!ents or repairs? re:uired by #arranties.

B. All changes in assets or liabilities acco!panied by changes in e:uity. 6his class is thesubect o this section and co!prises@

1. Co!prehensive inco!e =deined in paragraph /5? #hose co!ponents are@

a. evenues and e;penses =broadly deined and discussed in paragraphs 5,I55? b.

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b. 4istributions by the enterprise to o#ners

C. Changes #ithin e:uity that do not aect assets or liabilities =or e;a!ple" stoc dividends"

conversions o preerred stoc into co!!on stoc" and so!e stoc recapitali>ations?. 6hisclass contains only changes (it!in e:uity and does not aect the deinition o e:uity or its

a!ount.

6he deinitions in paragraphs /5" 5," 5/" 5)" and 58 are those in class B1 and its subclasses =a?$age %%Copyright © 1980" Financial Accounting Standards Board Not or redistribution

and =b?@ co!prehensive inco!e" revenues" e;penses" gains" and losses.

#n-estments b an, Distributions to >ners 47

/%. 'nvest!ents by o#ners are increases in net assets o a particular enterprise resulting ro!

transers to it ro! other entities o so!ething valuable to obtain or increase o#nership interests

=or e:uity? in it. Assets are !ost co!!only received as invest!ents by o#ners" but that #hich isreceived !ay also include services or satisaction or conversion o liabilities o the enterprise.

/,. 4istributions to o#ners are decreases in net assets o a particular enterprise resulting ro!

transerring assets" rendering services" or incurring liabilities by the enterprise to o#ners.

4istributions to o#ners decrease o#nership interest =or e:uity? in an enterprise.

C2aracteristics of #n-estments b an, Distributions to >ners/-. 'nvest!ents by o#ners and distributions to o#ners are transactions bet#een an enterprise

and its o#ners as o(ners. 6hrough invest!ents by o#ners" an enterprise obtains resources itneeds to begin or e;pand operations" to retire debt securities or other liabilities" or or other

business purposesG as a result o investing resources in the enterprise" other entities obtain

o#nership interests in the enterprise or increase o#nership interests they already had. Not allinvest!ents in the e:uity securities o an enterprise by other entities are invest!ents by o#ners

as that concept is deined in this State!ent. 'n an invest!ent by o#ners" the enterprise that

issues the securities ac:uired by an o#ner al#ays receives the proceeds or their beneitsG its netassets increase. ' the purchaser o e:uity securities beco!es an o#ner or increases its

o#nership interest in an enterprise by purchasing those securities ro! another o#ner that is

decreasing or ter!inating its o#nership interest" the transer does not aect the net assets o theenterprise.

//. 4istributions by an enterprise to its o#ners decrease its net assets and decrease or

ter!inate o#nership interests o those that receive the!. eac:uisition by an entity o its o#n

e:uity securities by transerring assets or incurring liabilities to o#ners is a distribution too#ners as that concept is deined in this State!ent. Since o#ners beco!e creditors or a

dividend declared until it is paid" an enterprises incurrence o a liability to transer assets to

o#ners in the uture converts a part o the e:uity or o#nership interest o the enterprise into acreditors clai!G settle!ent o the liability by transer o the assets is a transaction in class A- in

the diagra! in paragraph /0 rather than in class B%=b?. 6hat is" e:uity is reduced by the

incurrence o the liability to o#ners" not by its settle!ent.

Compre2ensi-e #ncome/5. Co!prehensive inco!e is the change in e:uity =net assets? o an entity during a period

ro! transactions and other events and circu!stances ro! nono#ner sources. 't includes all

changes in e:uity during a period e;cept those resulting ro! invest!ents by o#ners and$age %,


distributions to o#ners.Concepts of Capital )aintenance

/). A concept o !aintenance o capital or recovery o cost is a prere:uisite or separating

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return on capital ro! return of capital because only inlo#s in e;cess o the a!ount needed to

!aintain capital are a return on e:uity. 6#o !aor concepts o capital !aintenance e;ist" both o

#hich can be !easured in units o either !oney or constant purchasing po#er@ the inancialcapital concept and the physical capital concept =#hich is oten e;pressed in ter!s o

!aintaining operating capability" that is" !aintaining the capacity o an enterprise to provide a

constant supply o goods or services?. 6he !aor dierence bet#een the! involves the eectso price changes on assets held and liabilities o#ed during a period. nder the inancial capital

concept" i the eects o those price changes are recogni>ed" they are called !olding gains and

losses and are included in return on capital. nder the physical capital concept" those changesare recogni>ed but are called capital maintenance adjustments and are included directly in e:uity

and are not included in return on capital. nder that concept" capital !aintenance adust!ents

are a separate ele!ent rather than being gains and losses.

/8. 6he inancial capital concept is the traditional vie# and is generally the capital!aintenance concept in present pri!ary inancial state!ents. Co!prehensive inco!e as deined

in paragraph /5 is a return on inancial capital. &o#ever" the reason or using compre!ensive

income rather than earnings in this State!ent is that the Board has decided to reserve earnings

or possible use to designate a dierent concept that is a co!ponent part o3that is" is narro#er than or less than3co!prehensive inco!e"4 and earnings" #hen deined" !ay be a return on

physical capital or !ay be a return on inancial capital. 6he Board e!phasi>es that capital!aintenance concepts are the subect o another proect and that the Board has not chosen

bet#een the inancial and physical capital !aintenance concepts or deciding the !eaning and

appropriate display o earnings and thus has not decided #hether capital maintenance

adjustments should be considered to be a separate ele!ent o inancial state!ents.4: For that

reason" gains and losses in the diagra! in paragraph /0 =class B1=b?? and in the discussions in

the re!ainder o this State!ent e;plicitly or i!plicitly include the possibility that so!e ite!s

included in that class !ay !ore appropriately be described by other ter!s" including perhapscapital maintenance adjustments.C2aracteristics5 Sources5 an, Components of Compre2ensi-e #ncome of Business Enterprises

/9. *ver the lie o a business enterprise" its co!prehensive inco!e e:uals the net o its cashreceipts and cash outlays" e;cluding cash invest!ents by o#ners and cash distributions to

o#ners =Concepts State!ent 1" paragraph -5?. 6hat characteristic holds #hether the a!ounts o

cash and co!prehensive inco!e are !easured in no!inal dollars or constant dollars. Althoughthe a!ounts in constant dollars !ay dier ro! those in no!inal dollars" the basic relationship is

not changed because both no!inal and constant dollars e;press the sa!e thing using dierent

!easuring units. atters such as recognition criteria and choice o attributes to be !easured 4;

also do not aect the a!ounts o co!prehensive inco!e and net cash receipts over the lie o an$age %-


enterprise but do aect the ti!e and #ay parts o the total are identiied #ith the periods that

constitute the entire lie. 6i!ing o recognition o revenues" e;penses" gains" and losses is also a!aor dierence bet#een accounting based on cash receipts and outlays and accrual accounting.

Accrual accounting !ay enco!pass various ti!ing possibilities3or e;a!ple" #hen goods or

services are provided" #hen cash is received" or #hen prices change3that are being consideredin the proect on accounting recognition criteria.

50. Co!prehensive inco!e results ro! =a? e;change transactions and other transers bet#een

the enterprise and other entities that are not its o#ners" =b? the enterprises productive eorts"48

and =c? price changes" casualties" and other eects o interactions bet#een the enterprise and the

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econo!ic" legal" social" political" and physical environ!ent o #hich it is part. An enterprises

productive eorts and !ost o its e;change transactions #ith other entities are ongoing !aor

activities that constitute the enterprises central operations by #hich it atte!pts to ulill its basicunction in the econo!y o producing and distributing goods or services at prices that are

suicient to enable it to pay or the goods and services it uses and to provide a satisactory return

to its o#ners. Although those ongoing !aor or central operations are generally intended to bethe pri!ary source o co!prehensive inco!e" they are not the only source. ost enterprises

occasionally engage in activities that are peripheral or incidental to their central activities.

oreover" all enterprises are aected by the econo!ic" legal" social" political" and physicalenviron!ent o #hich they are part" and co!prehensive inco!e o each enterprise is aected by

events and circu!stances that !ay be partly or #holly beyond the control o individual

enterprises and their !anage!ents.49

51. Although cash resulting ro! various sources o co!prehensive inco!e is the sa!e"receipts ro! various sources !ay vary in stability" ris" and predictability. 6hat is"

characteristics o various sources o co!prehensive inco!e !ay dier signiicantly ro! one

another" indicating a need or inor!ation about various co!ponents o co!prehensive inco!e.

6hat need underlies the distinctions bet#een revenues and gains" bet#een e;penses and losses" bet#een various inds o gains and losses" and bet#een !easures ound in present practice such

as inco!e ro! continuing operations and inco!e ater e;traordinary ite!s and cu!ulativeeect o change in accounting principle.

5%. Co!prehensive inco!e co!prises t#o related but distinguishable types o co!ponents.

Co!prehensive inco!e consists o not only its basic co!ponents3revenues" e;penses" gains"and losses3but also various inter!ediate co!ponents or !easures that result ro! co!bining

the basic co!ponents. evenues" e;penses" gains" and losses can be co!bined in various #ays

to obtain several !easures o enterprise peror!ance #ith varying degrees o inclusiveness.

+;a!ples o inter!ediate co!ponents or !easures are gross !argin" contribution !argin"inco!e ro! continuing operations beore ta;es" inco!e ro! continuing operations" and

operating inco!e. 6hose inter!ediate co!ponents or !easures are" in eect" subtotals o

co!prehensive inco!e and oten o one another in the sense that they can be co!bined #itheach other or #ith the basic co!ponents to obtain other inter!ediate !easures o co!prehensive

inco!e.$age %/


(e-enues

5,. evenues are inlo#s or other enhance!ents o assets o an entity or settle!ents o its

liabilities =or a co!bination o both? during a period ro! delivering or producing goods"rendering services" or other activities that constitute the entitys ongoing !aor or central

operations.30C2aracteristics of (e-enues of Business Enterprises

5-. evenues represent actual or e;pected cash inlo#s =or the e:uivalent? that have occurredor #ill eventuate as a result o the enterprises ongoing !aor or central operations during the

period. 6he assets increased by revenues 31 !ay be o various inds3or e;a!ple" cash" clai!s

against custo!ers or clients" other goods or services received" or increased value o a productresulting ro! production. Si!ilarly" the transactions and events ro! #hich revenues arise and

the revenues the!selves are in !any or!s and are called by various na!es3or e;a!ple"

output" deliveries" sales" ees" interest" dividends" royalties" and rent3depending on the inds o operations involved and the #ay revenues are recogni>ed.

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E?penses

5/. +;penses are outlo#s or other using up o assets or incurrences o liabilities =or a

co!bination o both? during a period ro! delivering or producing goods"34 rendering services"or carrying out other activities that constitute the entitys ongoing !aor or central operations.C2aracteristics of E?penses of Business Enterprises

55. +;penses represent actual or e;pected cash outlo#s =or the e:uivalent? that have occurredor #ill eventuate as a result o the enterprises ongoing !aor or central operations during the

period. 6he assets that lo# out or are used or the liabilities that are incurred 33 !ay be o

various inds3or e;a!ple" units o product delivered or produced" ilo#att hours o electricityused to light an oice building" or ta;es on current inco!e. Si!ilarly" the transactions and

events ro! #hich e;penses arise and the e;penses the!selves are in !any or!s and are called

by various na!es3or e;a!ple" cost o goods sold" cost o services provided" depreciation"interest" rent" and salaries and #ages3depending on the inds o operations involved and the

#ay e;penses are recogni>ed.37

$ains an, %osses 3

5).

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)%. evenues and gains are si!ilar" and e;penses and losses are si!ilar" but so!e dierences

are signiicant in conveying inor!ation about an enterprises peror!ance. evenues and

e;penses result ro! an enterprises ongoing !aor or central operations and activities3that is"ro! activities such as producing or delivering goods" rendering services" lending" insuring"

investing" and inancing. 'n contrast" gains and losses result ro! incidental or peripheral

transactions o an enterprise #ith other entities and ro! other events and circu!stancesaecting it. So!e gains and losses !ay be considered JoperatingJ gains and losses and !ay be

closely related to revenues and e;penses. evenues and e;penses are co!!only displayed as

gross inlo#s or outlo#s o net assets" #hile gains and losses are usually displayed as netinlo#s or outlo#s.$age %)


),. 6he deinitions and discussion o revenues" e;penses" gains" and losses in this State!entgive broad guidance but do not distinguish precisely bet#een revenues and gains or bet#een

e;penses and losses. 4istinctions bet#een revenues and gains and bet#een e;penses and losses

in a particular enterprise depend to a signiicant e;tent on the nature o the enterprise" its

operations" and its other activities. 'te!s that are revenues or one ind o enterprise are gains

or another" and ite!s that are e;penses or one ind o enterprise are losses or another. For e;a!ple" invest!ents in securities that !ay be sources o revenues and e;penses or insurance or

invest!ent co!panies !ay be sources o gains and losses in !anuacturing or !erchandisingco!panies. 6echnological changes !ay be sources o gains or losses to !ost inds o

enterprises but !ay be characteristic o the operations o highItechnology or researchIoriented

enterprises. +vents such as co!!odity price changes and oreign e;change rate changes thatoccur #hile assets are being used or produced or liabilities are o#ed !ay directly or indirectly

aect the amounts o revenues or e;penses or !ost enterprises" but they are sources o revenues

or e;penses only or enterprises or #hich trading in oreign e;change or co!!odities is a !aor or central activity. Since a pri!ary purpose o distinguishing gains and losses ro! revenues and

e;penses is to !ae displays o inor!ation about an enterprises sources o co!prehensive

inco!e as useul as possible" ine distinctions bet#een revenues and gains and bet#een e;pensesand losses are principally !atters o display or reporting =paragraphs /0" 1/1" and 1/%?.

Accrual Accounting an, (elate, Concepts

)-. 'te!s that :ualiy under the deinitions o ele!ents o inancial state!ents and that !eet

criteria or recognition and !easure!ent =paragraph 1)? are accounted or and included ininancial state!ents by the use o accrual accounting procedures. Accrual accounting and

related concepts are thereore signiicant not only or deining ele!ents o inancial state!ents

but also or understanding and considering other aspects o the conceptual ra!e#or or inancial accounting and reporting. $aragraphs )/I89 deine or describe several signiicant

inancial accounting and reporting concepts that are used in this State!ent or #ill be needed in

related proects.

!ransactions5 E-ents5 an, Circumstances)/. 6his State!ent co!!only uses Jtransactions and other events and circu!stances aecting

an entityJ to describe the sources or causes o the co!ponents o co!prehensive inco!e and

other changes in assets" liabilities" and e:uity. An event is a happening o conse:uence to anentity. 't !ay be an internal event that occurs #ithin an entity" such as using ra# !aterials or

e:uip!ent in production" or it !ay be an e;ternal event that involves interaction bet#een an

entity and its environ!ent" such as a transaction #ith another entity" a change in price o a goodor service that an entity buys or sells" a lood or earth:uae" or an i!prove!ent in technology by

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a co!petitor.3: any events are co!binations. For e;a!ple" ac:uiring services o e!ployees or

others involves e;change transactions" #hich are e;ternal eventsG using those services" oten

si!ultaneously #ith their ac:uisition" is part o production" #hich involves a series o internalevents =paragraph 5-" ootnote ,1?. An event !ay be initiated by an entity" such as a purchase o $age %8


!erchandise or use o a building" or it !ay be partly or #holly beyond the control o an entityand its !anage!ent" such as an interest rate change" an act o vandalis! or thet" or the

i!position o ta;es.

)5. Circu!stances are a condition or set o conditions that develop ro! an event or a serieso events" #hich !ay occur al!ost i!perceptibly and !ay converge in rando! or une;pected

#ays to create situations that !ight other#ise not have occurred and !ight not have been

anticipated. 6o see the circu!stance !ay be airly easy" but to discern speciically #hen theevent or events that caused it occurred !ay be diicult or i!possible. For e;a!ple" a debtors

going banrupt or a thies stealing gasoline !ay be an event" but a creditors acing the situation

that its debtor is banrupt or a #arehouses acing the act that its tan is e!pty !ay be a

circu!stance.

)). A transaction is a particular ind o e;ternal event" na!ely" an e;ternal event involvingtranser o so!ething o value =uture econo!ic beneit? bet#een t#o =or !ore? entities. 6he

transaction !ay be an e;change in #hich each participant both receives and sacriices value"such as purchases or sales o goods or servicesG or the transaction !ay be a nonreciprocal

transer in #hich an entity incurs a liability or transers an asset to another entity =or receives an

asset or cancellation o a liability? #ithout directly receiving =or giving? value in e;change. Nonreciprocal transers contrast #ith e;changes" #hich are reciprocal transers" and include" or

e;a!ple" invest!ents by o#ners" distributions to o#ners" i!positions o ta;es" gits" charitable

contributions" and thets.3;

)8. 6his State!ent does not use the ter! internal transaction =#hich is essentially

contradictory?. 6ranserring !aterials to production processes" using plant and e:uip!ent #hose

#ear and tear is represented by depreciation" and other events that happen #ithin an entity areinternal events" not internal transactions.Accrual Accounting

)9. JAccrual accounting atte!pts to record the inancial eects on an enterprise o

transactions and other events and circu!stances that have cash conse:uences or the enterprisein the periods in #hich those transactions" events" and circu!stances occur rather than only in

the periods in #hich cash is received or paid by the enterprise. Accrual accounting is concerned

#ith the process by #hich cash e;pended on resources and activities is returned as !ore =or perhaps less? cash to the enterprise" not ust #ith the beginning and end o that process. 't

recogni>es that the buying" producing" selling" and other operations o an enterprise during a

period" as #ell as other events that aect enterprise peror!ance" oten do not coincide #ith the

cash receipts and pay!ents o the periodJ =FASB Concepts State!ent No. 1" Objectives of Financial Reporting by Business Enterprises" paragraph --?.

80. 6hus" accrual accounting is based not only on cash transactions but also on credit

transactions" barter e;changes" changes in prices" changes in or! o assets or liabilities" and$age %9


other transactions" events" and circu!stances that have cash conse:uences or an enterprise butinvolve no concurrent cash !ove!ent. By accounting or noncash assets" liabilities" revenues"

e;penses" gains" and losses" accrual accounting lins an enterprises operations and other

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transactions" events" and circu!stances that aect it #ith its cash receipts and outlays #hose

assess!ent loo!s large in the obectives o inancial reporting by business enterprises =Concepts

State!ent 1" paragraphs ,) and -/?.Accrual an, Deferral #nclu,ing Allocation an, Amorti@ation

81. Accrual accounting atte!pts to recogni>e noncash events and circu!stances as they occur

and involves not only accruals but also deerrals" including allocations and a!orti>ations.Accrual is concerned #ith e;pected uture cash receipts and pay!ents@ it is the accounting

process o recogni>ing assets" liabilities" or co!ponents o co!prehensive inco!e or a!ounts

e;pected to be received or paid" usually cash" in the uture. 4eerral is concerned #ith past cashreceipts and pay!ents3#ith prepay!ents received =oten described as collected in advance? or

paid@ it is the accounting process o recogni>ing a liability resulting ro! a current cash receipt

or an asset resulting ro! a current cash pay!ent #ith deerred recognition o co!ponents o co!prehensive inco!e. Co!!on e;a!ples o accruals include purchases and sales o goods or

services on account" interest" rent =not yet paid?" #ages and salaries" ta;es" and decreases and

increases in !aretable securities accounted or at lo#er o cost and !aret. Co!!on e;a!ples

o deerrals include prepaid insurance and unearned subscriptions.38

8%. Allocation is the accounting process o assigning or distributing an a!ount according to a

plan or a or!ula. 't is broader than and includes a!orti>ation" #hich is the accounting process

o reducing an a!ount by periodic pay!ents or #riteIdo#ns. Speciically" a!orti>ation is the process o reducing a liability recorded as a result o a cash receipt by recogni>ing revenues or

reducing an asset recorded as a result o a cash pay!ent by recogni>ing e;penses or costs o

production. 6hat is" a!orti>ation is an allocation process or accounting or prepay!ents anddeerrals. Co!!on e;a!ples o allocations include assigning !anuacturing costs to production

depart!ents or cost centers and thence to units o product to deter!ine Jproduct cost"J

apportioning the cost o a Jbaset purchaseJ to the individual assets ac:uired on the basis o their relative !aret values" and spreading the cost o an insurance policy or a building to t#o or !ore

accounting periods. Co!!on e;a!ples o a!orti>ations include recogni>ing e;penses or

depreciation" depletion" and insurance and recogni>ing earned subscription revenues.(eali@ation an, (ecognition

8,. eali>ation in the !ost precise sense !eans the process o converting noncash resources

and rights into !oney and is !ost precisely used in accounting and inancial reporting to reer to

sales o assets or cash or clai!s to cash. 6he related ter!s reali%ed and unreali%ed thereore

identiy revenues or gains or losses on assets sold and unsold" respectively. 6hose are the!eanings o reali>ation and related ter!s in the Boards conceptual ra!e#or. ecognition is

the process o or!ally recording or incorporating an ite! in the inancial state!ents o an

entity. 6hus" an asset" liability" revenue" e;pense" gain" or loss !ay be recogni>ed =recorded? or $age ,0Copyright © 1980" Financial Accounting Standards Board Not or redistribution

unrecogni>ed =unrecorded?. Reali%ation and recognition are not used as synony!s" as they

so!eti!es are in accounting and inancial literature.(ecognition5 )atc2ing5 an, Allocation for Business Enterprises8-. A !aor dierence bet#een accrual accounting and accounting based on cash receipts and

outlays is ti!ing o recognition o revenues" e;penses" gains" and losses. 'nvest!ents by anenterprise in goods and services or its operations or other activities co!!only do not all occur

in the sa!e period as revenues or other proceeds ro! selling the resulting products or providing

the resulting services. Several periods !ay elapse bet#een the ti!e cash is invested in ra#!aterials or plant" or e;a!ple" and the ti!e cash is returned by collecting the sales price o

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products ro! custo!ers. A report sho#ing cash receipts and cash outlays o an enterprise or a

short period cannot indicate ho# !uch o the cash received is return of invest!ent and ho#

!uch is return on invest!ent and thus cannot indicate #hether or to #hat e;tent an enterprise issuccessul or unsuccessul. Cash receipts in a particular period !ay largely relect the eects o

activities o the enterprise in earlier periods" #hile !any o the cash outlays !ay relate to

activities and eorts e;pected in uture periods.8/. Accrual accounting uses accrual" deerral" and allocation procedures #hose goal is to

relate revenues" e;penses" gains" and losses to periods to relect an enterprises peror!ance

during a period instead o !erely listing its cash receipts and outlays. 6hus" recognition o revenues" e;penses" gains" and losses and the related incre!ents or decre!ents in assets and

liabilities3including !atching o costs and revenues" allocation" and a!orti>ation3is the

essence o using accrual accounting to !easure peror!ance o business enterprises. 6he goal o

accrual accounting or a business enterprise is to account in the periods in #hich they occur or the eects o transactions and other events and circu!stances" to the e;tent that those inancial

eects are recogni>able and !easurable.

85. atching o costs and revenues is co!bined or si!ultaneous recognition o the revenues

and e;penses that result directly and ointly ro! the sa!e transactions or other events. 'n !ost business enterprises" so!e transactions or events result si!ultaneously in both a revenue and one

or !ore e;penses. 6he revenue and e;pense=s? are directly related to each other and re:uirerecognition at the sa!e ti!e. 'n present practice" or e;a!ple" a sale o product or !erchandise

involves both revenue =sales revenue? or receipt o cash or a receivable and e;pense =cost o

goods sold? or sacriice o the product or !erchandise sold to custo!ers. *ther e;a!ples o e;penses that !ay result ro! the sa!e transaction and be directly related to sales revenues are

transportation to custo!ers" sales co!!issions" and perhaps certain other selling costs.

8). any e;penses" ho#ever" are not related directly to particular revenues but can be related

to a period on the basis o transactions or events occurring in that period or by allocation.ecognition o those e;penses is largely independent o recognition o particular revenues" but

they are deducted ro! particular revenues by being recogni>ed in the sa!e period.39$age ,1


88. So!e costs that cannot be directly related to particular revenues are incurred to obtain

beneits that are e;hausted in the period in #hich the costs are incurred. For e;a!ple" sales!ens

!onthly salaries and electricity used to light an oice building usually it that description andare usually recogni>ed as e;penses in the period in #hich they are incurred. *ther costs are also

recogni>ed as e;penses in the period in #hich they are incurred because the period to #hich they

other#ise relate is indeter!inable or not #orth the eort to deter!ine.89. &o#ever" !any assets yield their beneits to an enterprise over several periods" or

e;a!ple" prepaid insurance" buildings" and various inds o e:uip!ent. +;penses resulting ro!

their use are nor!ally allocated to the periods o their esti!ated useul lives =the periods over

#hich they are e;pected to provide beneits? by a Jsyste!atic and rationalJ allocation procedure"or e;a!ple" by recogni>ing depreciation or other a!orti>ation. Although the purpose o

e;pense allocation is the sa!e as that o other e;pense recognition3to relect the using up o

assets as a result o transactions or other events or circu!stances aecting anenterprise3allocation is applied i causal relations are generally" but not speciically" identiied.

For e;a!ple" #ear and tear ro! use is no#n to be a !aor cause o the e;pense called

depreciation" but the a!ount o depreciation caused by #ear and tear in a period nor!ally cannot be !easured. 6hose e;penses are not related directly to either speciic revenues or particular

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periods. sually no traceable relationship e;ists" and they are recogni>ed by allocating costs to

periods in #hich assets are e;pected to be used and are related only indirectly to the revenues

that are recogni>ed in the sa!e period.&!is Statement (as adopted by t!e unanimous vote of t!e seven members of t!e Financial

"ccounting Standards Board/

4onald H. Kir" !airmanFran +. Bloc

Hohn . arch

obert A. organ4avid osso

obert 6. Sprouse

alph +. alters

Appen,i? A BAC+$('ND #NF()A!#N90. 6he need or a conceptual ra!e#or or inancial accounting and reporting" beginning

#ith consideration o the obectives o inancial reporting" is generally recogni>ed. 6he

Accounting $rinciples Board issued A$B State!ent No. -" Basic oncepts and "ccounting

Principles 0nderlying Financial Statements of Business Enterprises" in 19)0. hen theFinancial Accounting Standards Board ca!e into e;istence" the Study

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9-. 4uring 19)8" the Board divided the subect !atter o the +;posure 4rat. *ne part

beca!e FASB Concepts State!ent No. 1" Objectives of Financial Reporting by Business

Enterprises" #hich #as issued in Nove!ber 19)8. Another part beca!e the basis or the revised+;posure 4rat" Elements of Financial Statements of Business Enterprises" issued 4ece!ber %8"

19)9" on #hich the Board received 9% letters o co!!ent.

9/. Although so!e changes in #ording and organi>ation have been !ade" the Board believesthat the substance o this State!ent is essentially the sa!e as that o the revised +;posure 4rat.$age ,,


Appen,i? B C"A(AC!E(#S!#CS F ASSE!S5 %#AB#%#!#ES5 E6'#!/5

AND C)&(E"ENS#

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=or the enterprise in the past had the ability to obtain or control the uture beneit" but events or

circu!stances have occurred to re!ove that ability?. Si!ilarly" an ite! does not :ualiy as a

liability o an enterprise under the deinition in paragraph %8 i =a? the ite! entails no uturesacriice o assets" =b? the ite! entails uture sacriice o assets" but the enterprise is not obligated

to !ae the sacriice" or =c? the ite! involves a uture sacriice o assets that the enterprise #ill

be obligated to !ae" but the events or circu!stances that obligate the enterprise have not yetoccurred =o

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