SFAC

1
SFAC 6

• Elements of Financial Statements

2
Assets

• Probable future economic benefits
• Obtained or controlled by a particular entity
• Result of past transactions or events.

3
Liabilities

• Probable future sacrifices of economic benefits
• Arising from present obligations to transfer
  assets or provide services to other entities in
  the future
• Result of past transactions or events.

4
Equity

• A.k.a. net assets
• Residual interest in assets of an entity after
  deducting its liabilities.
• In a business enterprise, the equity is the
  ownership interest.
• In a not-for-profit organization, divided into
  three classes based on the presence or absence of
  donor-imposed restrictions
• permanently restricted
• temporarily restricted
• unrestricted net assets.

5
Investments by owners

• Increases in equity resulting from transfers to
  it from other entities of something valuable to
  obtain or increase ownership interests (or
  equity) in it.
• Assets are most commonly received as investments
• May also include services
• May include satisfaction or conversion of
  liabilities.

6
Distributions to owners

• Decreases in equity resulting from transferring
  assets, rendering services, or incurring
  liabilities to owners.
• Distributions to owners decrease ownership
  interest (or equity) in an enterprise.

7
Comprehensive income

• Change in equity of a business enterprise during
  a period from transactions and other events and
  circumstances from nonowner sources.
• All changes in equity except those resulting from
  investments by owners and distributions to
  owners.

8
Comprehensive Income Results From

• exchange transactions and other transfers between
  the enterprise and other entities that are not
  its owners
• enterprise's productive efforts
• price changes, casualties, and other effects of
  interactions between the enterprise and the
  economic, legal, social, political, and physical
  environment of which it is part.

9
Earnings

• Not defined in this Statement.
• FASB Concepts Statement 5 has now described
  earnings for a period as excluding certain
  cumulative accounting adjustments and other
  nonowner changes in equity that are included in
  comprehensive income for a period.

10
Revenues

• Inflows or other enhancements of assets of an
  entity or settlements of its liabilities (or a
  combination of both)
• Comes from delivering or producing goods,
  rendering services, or other activities that
  constitute the entity's ongoing major or central
  operations.

11
Expenses

• Outflows or other using up of assets or
  incurrences of liabilities (or a combination of
  both) from delivering or producing goods,
  rendering services, or carrying out other
  activities that constitute the entity's ongoing
  major or central operations.

12
Gains

• Increases in equity (net assets) from peripheral
  or incidental transactions of an entity
• From all other transactions and other events and
  circumstances affecting the entity except those
  that result from revenues or investments by
  owners.

13
Losses

• Decreases in equity (net assets) from peripheral
  or incidental transactions of an entity
• From all other transactions and other events and
  circumstances affecting the entity except those
  that result from expenses or distributions to
  owners.

14
SFAC 6 versus SFAC 3

• This Statement replaces FASB Concepts Statement
  No. 3, Elements of Financial
• Statements of Business Enterprises
• Extends that 3s definitions to not-for-profit
  organizations.

15
Pacioli Anyone?

• Resources or assets are the lifeblood of a
  not-for-profit organization
• An organization cannot long continue to achieve
  its operating objectives unless it can obtain at
  least enough resources to provide goods or
  services at levels and of a quality that are
  satisfactory to resource providers.
• Organizations that do not provide adequate goods
  or services often find it increasingly difficult
  to obtain the resources they need to continue
  operations.

16
Types of Elements

• Two different types, which are sometimes
  explained as being analogous to photographs and
  motion pictures.
• The elements defined in this Statement include
  three of one type and seven of the other.
• Guesses Anyone?

17
Effects of Uncertainty

• Uncertainty about economic and business
  activities and results is pervasive
• Often clouds whether a particular item qualifies
  as an asset or a liability at the time
• Effect of uncertainty is to increase the costs of
  financial reporting
• Definitions in this Statement are not intended to
  require that the existence and amounts of items
  be certain
• Estimates and approximations will often be
  required unless financial statements are to be
  restricted to reporting only cash transactions

18
Transactions, Events, and Circumstances

• Transaction is an external event involving
  transfer of something of value (future economic
  benefit) between two (or more) entities.
• Event is a happening of consequence to an entity.
  
• internal event that occurs within an entity, such
  as using raw materials or equipment in production
• external event
• Circumstances are a set of conditions that
  develop from a series of events

19
Accrual Accounting

• Attempts to record the financial effects in the
  periods in which those transactions, events, and
  circumstances occur
• Rather than only in the periods in which cash is
  received or paid by the entity.
• Based on
• cash transactions
• credit transactions
• barter exchanges
• nonreciprocal transfers of goods or services
• changes in prices
• changes in form of assets or liabilities
• other transactions, events, and circumstances

20
Realization and Recognition

• Realization means the process of converting
  noncash resources and rights into money
• Related terms realized and unrealized therefore
  identify revenues or gains or losses on assets
  sold and unsold
• Recognition is the process of formally recording
  or incorporating an item in the financial
  statements
• Realization and recognition are not used as
  synonyms