Define ‘equity’, and explain why the conceptual framework does not prescribe any recognition criteria for equity. (4 marks)
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The conceptual framework defines equity as ‘the residual interest in the assets of the entity after deducting all its liabilities’.
Equity cannot be identified independently of the other elements in the statement of financial position/balance sheet. The characteristics of equity are that equity is a residual, i.e. something left over after the entity has determined its assets and liabilities. In other words: Equity = Assets –Liabilities.
There is no need for recognition criteria for equity as it is a residual, determined after recognition criteria are applied to the other elements. In other words, the recognition of assets and liabilities will lead to recognition of equity.
*Definition of equity – 2 marks
*Explanation of reason for equity recognition – 2 marks