2.2 Elements of the Financial Statements

The elements comprise the building blocks upon which the financial statements are constructed.IASB defines five elements.The elements directly related to the measurement of financial position are assets，liabilities and equity.And those directly related to the measurement of performance are income and expenses.

2.2.1 Financial Position

Assets，liabilities and equity are elements directly related to the measurement of financial position in balance sheet.

1.Assets

An asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.[8]

The definition of asset identifies three essential characteristics.

First，rights. The entity has a right that has the potential to produce economic benefits. Rights may take many forms，such as rights to receive cash，rights to receive goods or services，rights over physical objects（property，plant and equipment or inventories），etc.

Second，potential to produce economic benefits. For example，an economic resource could produce economic benefits for an entity by entitling or enabling it to：receive contractual cash flows；exchange economic resources with another party on favourable terms；receive cash or other economic resources by selling the economic resource；or extinguish liabilities by transferring the economic resource；etc. For that the potential to exist，it does not need to be certain，or even likely，that the right will produce economic benefits.

Third，control. The entity must have control over the future economic benefits such that it is able to enjoy the benefits and deny or regulate the access of others to the benefits. The future economic benefits from that resource must flow to the entity either directly or indirectly rather than to another party.

2.Liabilities

A liability is a present obligation of the entity to transfer an economic resource as a result of past events.[9]The definition of liability also identifies three essential characteristics.

First，obligations. An obligation is a duty or responsibility that an entity has no practical ability to avoid. Obligations are normally established by contract，legislation or similar means and are legally enforceable by the party（or parties）to whom they are owed.

Second，transfer of an economic resource. The obligations must have the potential to require the entity to transfer an economic resource to another party（or parties）. Such as obligations to pay cash，obligations to deliver goods or provide services，obligations to exchange economic resources with another party on unfavourable terms，etc. It does not need to be certain，or even likely，that the entity will be required to transfer an economic resource—the transfer may，for example，be required only if a specified uncertain future event occurs.

Third，present obligations as a result of past events. A present obligation exists as a result of past events only if：（1）the entity has already obtained economic benefits（such as goods or services）or taken an action；and（2）as a consequence，the entity will or may have to transfer an economic resource that it would not otherwise have had to transfer.

3.Equity

Equity is the residual interest in the assets of the entity after deducting all its liabilities.[10]Defining equity as a residual is based on the view that equity cannot be defined independently of the assets and liabilities.Equity ranks after liabilities as a claim to the assets of an entity.Also，equity bears the results of operations and the consequences of other events affecting the entity.

2.2.2 Performance

Performance is the proficiency of a reporting entity in acquiring resources economically and using those resources efficiently in achieving specified objectives.

1.Concepts of Performance

Economists have generally adopted a wealth maintenance concept of performance.Under this concept，performance is the amount that can be consumed during a period and still leave the entity with the same amount of wealth（or capital）at the end of the period as existing at the beginning.Wealth is determined with reference to the current market values of the net assets at the beginning and end of the period.Therefore，this definition of performance would fully incorporate market value changes.

In addition，accountants have generally defined performance by reference to specific events that gives rise to recognizable elements of income and expenses during an accounting period.This approach to measuring performance is called transaction approach，sometimes referred to as matching method.Under this approach，performance，referred to as profit in income statement，is measured as the difference between resource inflows（income）and outflows（expenses）over a period of time.

2.Income

Income is increases in assets，or decreases in liabilities，that result in increases in equity，other than those relating to contributions from holders of equity claims.[11]

Income may result from the receipts or enhancements of various kinds of assets；examples include cash，receivables and goods and services received in exchange for goods and services supplied.Income may also result from the settlement of liabilities.For example，an entity may provide goods and services to a lender in settlement of an obligation to repay an outstanding loan.

Income encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different names including sales，fees，interest，dividends，royalties and rent.Whereas gains represent other items that meet the definition of income and may，or may not，arise in the course of the ordinary activities of an entity.Gains include，for example，those arising on the disposal of non-current assets.The definition of income also includes unrealized gains；for example，those arising on the revaluation of marketable securities and those resulting from increases in the carrying amount of long-term assets.When gains are recognized in the statement of profit or loss，they are usually displayed separately because knowledge of them is useful for the purpose of making economic decisions.Gains are often reported net of related expenses.

3.Expenses

Expenses are decreases in assets，or increases in liabilities，that result in decreases in equity，other than those relating to distributions to holders of equity claims.[12]

Expenses encompass losses as well as those expenses that arise in the course of the ordinary activities of the entity.Expenses include，for example，cost of sales，wages and depreciation.Losses represent other items that meet the definition of expenses and may，or may not，arise in the course of the ordinary activities of the entity.Losses represent decreases in economic benefits and as such they are no different in nature from other expenses.Hence，they are not regarded as a separate element in IASB's Framework.

Losses include those resulting from disasters such as fire and flood，as well as those arising on the disposal of non-current assets.Expenses also includes unrealized losses，for example，those arising from the effects of increases in the exchange rate for a foreign currency in respect of the borrowings of an entity in that currency.Losses are usually displayed separately because knowledge of them is useful for the purpose of making economic decisions.Losses are often reported net of related income.