The main purpose of financial statements is to provide financial information to the users to assist them in their economic decisions. The financial statements basically present the financial information in such form that it is not only understandable but also useable. That is why financial statements present the financial effects of different business events that also includes business transactions.
In order to enhance the quality of information in financial statements, business transactions are grouped in different classes or categories on the basis of their economic characteristics. The broad classes or categories are called elements of financial statements.
In IASB Framework for the Preparation and Presentation of Financial Statements (Framework) there are in total FIVE elements of financial statements mentioned which are as follows:
Framework went on further to explain which combination of elements are used to measure financial position, financial performance and changes in financial position of the entity.
- The elements directly related to the measurement of financial position of the entity are assets, liabilities and equity. These elements are presented in the Statement of Financial Position which was previously known as Balance Sheet.
- The elements directly related to the measurement of financial performance of the entity are income and expense. These elements are presented in the Income Statement.
- The elements directly related to the measurement of changes in financial position involves the elements of both balance sheet and income statement and depends on the circumstances. So, elements that are used to measure the change in financial position cannot be strictly specified.
Statement of changes in equity and Statement of cash flows collectively provide an insight into the changes in financial position of the company. And as we know both of these statements involve mostly all of the above five items and sometimes less therefore, elements are not mentioned in the framework for such measurement.
Another important point to remember is that each element in itself is a group of many transactions and each group can further be broken down to different groups i.e. sub-classification can be done within each element depending on the nature, characteristics, function, time and other factors.
For example, Assets can be further divided into Non-current assets and Current assets. These sub-classes will NOT be treated as separate elements rather sub-classes of a particular element.
How elements are to be combined to measure specific financial aspect is not mentioned in the framework rather it is mentioned in the International Accounting Standards (IASs). IASs provide the instructions regarding formant of presentation, calculations, measurement and other accounting aspects.