Question

Define "equity" and explain why the conceptual framework does not prescribe any recognition criteria for equity (15marks)

Answer 1

Equity can be defined as the residual interest in the assets of the business after the deduction of all the entity's liabilities. It is computed as assets minus liabilities, thus describing it to be a residual value. The criteria of recognition for assets and criteria of recognition for liabilities are collectively giving the criteria of recognition for equity element of financial statements. Therefore equity cannot be independently identified as of the other elements in the financial position statement. Consequently the conceptual framework has not provided the recognition criteria for equity because equity is a leftover of asset and liability