CHAPTER 7 However, there are certain items of income and expenses that are

CONCEPTUAL FRAMEWORK presented outside of profit or loss but included in other

Presentation and disclosure comprehensive income.
Concepts of capital
The components of other comprehensive income are subsequently
TECHNICAL KNOWLEDGE recycled or reclassified either to profit or loss or retained earnings.
To know the guideline in the presentation and disclosure of
financial information Aggregation
To define the two concepts of capital
To determine net income under the financial capital and physical Aggregation is the adding together of assets, liabilities, equity,
capital concept income and expenses that have similar or shared characteristics and
are included in the same classification.

PRESENTATION AND DISCLOSURE Aggregation makes information more useful by summarizing a large
volume of detail. However, aggregation may conceal some of the
The presentation and disclosure can be an effective communication detail.
tool about the information in financial statements.
Hence, a balance should be made so that relevant information is not
A reporting entity communicates information about its assets, obscured either by a large amount of insignificant detail or by
liabilities, equity, income and expenses by presenting and disclosing excessive aggregation.
information in the financial statements.
Typically, the statement of financial position and the statement of
Effective communication of information in financial statements financial performance provide summarized or condensed information.
makes the information more relevant and contributes to a faithful
representation of an entity's assets liabilities, income and expenses. More detailed information is provided in the notes to financial
statements.
Effective communication of information in financial statements also
enhances the understandability and comparability of information in CAPITAL MAINTENANCE
the financial statements.
The financial performance of an entity is determined using two
Effective communication in financial statements is supported by not approaches, namely transaction approach and capital maintenance
duplicating information in different parts of the financial statements. approach.

Duplication is usually unnecessary and can make financial The transaction approach is the traditional preparation of an income
statements less understandable. statement.

Classification The capital maintenance approach means that net income occurs
only after the capital used from the beginning of the period is
Classification is the sorting of assets, liabilities, equity, income and maintained.
expenses on the basis of shared or similar characteristics.
In other words, net income is the amount an entity can distribute to
Classifying dissimilar assets, liabilities, equity, income and expenses its owners and be as "well-off” at the end of the year as at the
can obscure relevant information, reduce understandability and beginning.
comparability and may not provide a faithful representation of
financial information. The distinction between return of capital and return on capital is
important to the understanding of net income.
For example, it could be appropriate to classify an asset or a liability
into current and noncurrent. Shareholders invest in entity to earn a return on capital or an amount
in excess of their original investment.
It may be necessary to classify components of equity separately if
such components are subject to legal, regulatory and other Return of capital is an erosion of the capital invested in the entity.
requirements.
The Conceptual Framework considered two concepts of capital
Thus, ordinary share capital, preference share capital, share premium maintenance or well-offness, namely financial capital and physical
and retained earnings should be disclosed separately. capital.

Classification of income and expenses Financial capital

Income and expenses are classified as components of profit loss and Under a financial capital concept, such as invested money or invested
components of other comprehensive income. purchasing power; capital is synonymous with net assets or equity of
the entity.
The Revised Conceptual Framework has introduced the term
statement of financial performance to refer to the income statement Financial capital is the monetary amount of the net assets contributed
together with the statement presenting other comprehensive income. by shareholders and the amount of the increase in net assets resulting
from earnings retained by the entity.
The income statement or statement of profit or loss is the primary
source of information about an entity's financial performance for the Financial capital is the traditional concept based on historical cost
reporting period. and adopted by most entities.

All income and expenses should be appropriately classified and

included in the income statement.
Net income under financial capital
Under the financial capital concept, net income occurs when the
nominal amount of the net assets at the end of the year exceeds the
nominal amount of the net assets at the beginning of the period, after
excluding distributions to and contributions by owners during the
period.

Physical capital

Physical capital is the quantitative measure of the physical

productive capacity to produce goods and services.

The physical productive capacity may be based on, for example,

units of output per day or physical capacity of productive assets to
produce goods and services.

This concept requires that productive assets be measured at current

cost, rather than historical cost.

Productive assets include inventories and property, plant and

equipment.

The current costs for these productive assets must be

maintained in order that physical capital is also maintained.

Accordingly, physical capital is equal to the net assets of the

entity expressed in terms of current cost.

The physical concept of capital should be adopted if the main

concern of users is the operating capability of the entity, meaning,
the resource or fund needed to achieve that operating capability or
capacity.

Under physical capital concept, net income occurs when the physical
productive capital of the entity at the end of the year exceeds the
physical productive capital at the beginning of the period, also after
excluding distributions to and contributions from owners during the
period.