Conceptual framework

The Conceptual Framework of Accounting is a set of principles and

guidelines that form the foundation for the preparation and presentation of
financial statements. Issued by the International Accounting Standards Board
(IASB), it provides an underpinning theoretical structure for developing
accounting standards and resolving accounting issues not specifically
addressed by existing standards.

It defines key elements such as assets, liabilities, equity, income, and

expenses, and outlines the qualitative characteristics of useful financial
information, such as relevance and faithful representation. The framework
also sets out the objectives of financial reporting, which is to provide
financial information useful to investors, lenders, and other stakeholders for
decision-making. Although the framework is not a standard itself, it supports
consistent and logical accounting practices and enhances the comparability,
reliability, and transparency of financial statements. It serves as a reference
point for standard setters, preparers, and auditors in the financial reporting
process.

Purposes of Conceptual framework of Accounting

1) To assist the Board in the development of future IFRSs and in its
review of existing IFRSs.
2) To assist the Board in promoting harmonization of regulations,
accounting standards and procedures relating to the presentation of
financial statements by providing a basis for reducing the number of
alternative accounting treatments permitted by IFRSs.
3) To assist national standard-setting bodies in developing national
standards.
4) To assist preparers of financial statements in applying IFRSs and in
dealing with topics that has yet to form the subject of an IFRS.
 5) To assist auditors in forming an opinion as to whether financial
statements comply with IFRSs.
6) To assist users of financial statements in interpreting the information
contained in financial statements prepared in compliance with IFRSs.
7) To provide those who are interested in the work of the IASB with
information about its approach to the formulation of IFRSs.

The Conceptual Framework is not an IFRS and so does not overrule any
individual IFRS. In the (rare) case of conflict between an IFRS and the
Conceptual Framework, the IFRS will prevail.

Why do we need to have conceptual framework still having IAS

and IFRS?

There are a variety of arguments for having a conceptual

framework.
 It enables accounting standards and generally accepted
accounting practice (GAAP) to be developed in accordance
with agreed principles.
 It avoids ‘fire-fighting’, whereby accounting standards are
developed in a piecemeal way in response to specific
problems or abuses. Fire-fighting can lead to inconsistencies
between different accounting standards, and between
accounting standards and legislation.
 Lack of a conceptual framework may mean that certain
critical issues are not addressed, e.g. until recently there was
no definition of basic terms such as ‘asset’ or ‘liability’ in any
accounting standard.
 As transactions become more complex and businesses become
more sophisticated it helps preparers and auditors of financial
 statements to deal with transactions which are not the subject
of an accounting standard.
 Accounting standards based on principles are thought to be
harder to circumvent.
 A conceptual framework strengthens the credibility of
financial reporting and the accounting profession.
 It makes it less likely that the standard-setting process can be
influenced by ‘vested interests’ (e.g. large companies/business
sectors).

Approaches of conceptual framework

Principles-based and rules-based framework

Principles-based framework:

1. based upon a conceptual framework such as the International

Accounting Standards Board's (the Board's) Framework
2. Accounting standards are created using the conceptual framework as a
basis.

Rules-based framework:

1. cookbook’ approach
2. Accounting standards are a set of rules which companies must follow.

Conceptual framework for financial reporting (2018)

The historical development of the Conceptual Framework of Accounting
began in the 1970s when the FASB in the U.S. initiated efforts to create a
structured foundation for accounting standards. Later, the IASC developed
its own framework in 1989, focusing on international financial reporting. In
2010, the IASB and FASB jointly worked on a converged framework, aiming
for global consistency. The IASB released a revised framework in 2018,
refining definitions of assets, liabilities, and enhancing guidance on
recognition, measurement, and presentation. Over time, the framework has
evolved to improve transparency, comparability, and relevance in financial
reporting across global markets.

The Conceptual Framework for financial reporting is organized into the

following eight chapters:

Chapter 1: The objective of general purpose financial reporting

Chapter 2: Qualitative characteristics of useful financial information

Chapter 3: Financial statements and the reporting entity

Chapter 4: The elements of financial statements

Chapter 5: Recognition and derecognition

Chapter 6: Measurement

Chapter 7: Presentation and disclosure

Chapter 8: Concepts of capital and capital maintenance.

Chapter 1: The objective of general purpose financial reporting

The objective of general purpose financial reporting is to provide
financial information about the reporting entity that is useful to
existing and potential investors, lenders and other creditors in
making decisions relating to providing resources to the entity.
Existing and potential investors, lenders and other creditors are
identified as the primary users of the financial statements. General
purpose financial statements are directed at satisfying the
information needs of the primary users. However, the Conceptual
Framework acknowledges that other users (such as regulators and
members of the public) may also find general purpose financial
statements useful, even though they are not primarily directed to
these other groups.
We can identify the following users of financial statements and
their information needs.
1. Existing and potential investors:
Make decisions about buying, selling or holding equity and debt instruments
and how to exercise their right to vote, therefore need information on:

 Risk and return on investment.

 Ability of the entity to pay dividends.
 How effectively management are using the resources of the entity and
how it may affect future cash flows.
 Whether the company’s policies and practices, including those relating
to climate change and sustainability, are in keeping with the investors’
expectations.

2. Lenders:
 Assess how efficiently management uses the entity’s resources to
service any existing or proposed debt and the related interest.
 Assess security for amounts loaned to the entity.
3. Other creditors
 Assess the likelihood of being paid when due; and
 Assess whether any claims against the entity may affect its ability to
service any credit extended to them.

4. Employees

 Assess their employer’s stability and profitability.

 Assess their employer’s ability to provide remuneration, employment
opportunities and retirement and other benefits.
 Assess their employer’s ability to manage the risks associated with
climate change.

5. Customers
 Assess whether the entity will continue in existence – important where
customers have a long-term involvement with, or are dependent on,
the entity eg, where there are product warranties or where continuity
of supply of specialist parts may be needed.
 Assess whether the entity’s operating practices, such as its commitment
to reducing its carbon footprint, are in line with their expectations.

6. Governments and their agencies

 Assess allocation of resources and, therefore, activities of entities.
 Assist in regulating activities.
 Assess taxation and determine taxation policies.
 Provide a basis for national statistics.
7. The public
 Assess trends and recent developments in the entity’s prosperity and its
activities – important where the entity makes a substantial
contribution to a local economy e.g., by providing local employment
and using local suppliers.

8. Analysts
 Assess the performance and position of a company to inform
decisions, often relating to investments.
 Compare different companies to advise their clients which to invest in.

Types of information provided by General Purpose Financial

Report:
General purpose financial reports provide information about the financial
position of a reporting entity, which is information about the entity’s
economic resources and the claims against the reporting entity. Financial
reports also provide information about the effects of transactions and other
events that change a reporting entity’s economic resources and claims. Both
types of information provide useful input for decisions relating to providing
resources to an entity. Types of information provided by general purpose
financial reports as follows:

Economic resources and claims

Information about the nature and amounts of economic resources and

claims can help users to:

 identify the financial strengths and weaknesses of a reporting entity;

 to assess a reporting entity’s liquidity and solvency and its needs for
additional financing;
Information about priorities and payment requirements of existing claims
helps users to predict how future cash flows will be distributed among those
with a claim against the reporting entity.

Changes in economic resources and claims- Financial Performance.

Importance of information about a reporting entity’s financial performance:

 It helps users to understand the return generated from its economic

resources. This in turn provides an indication of how well
management has discharged its responsibilities to make efficient and
effective use of these resources.
 It shows the capacity of a reporting entity to generate net cash inflows
through its operations rather than by obtaining additional resources
directly from investors and creditors.
 It gives an indication of the extent to which events such as changes in
market prices or interest rates affect its ability to generate net cash
inflows.
 Information about the variability and components of return is also
important, especially in assessing the uncertainty of future cash flows.
 Information about past financial performance is helpful in predicting
the entity’s future returns on its economic resources.

Financial performance reflected by accrual accounting

 Accrual accounting depicts the effects of transactions and other events

and circumstances on a reporting entity’s economic resources and
claims in the periods in which those effects occur, even if the resulting
cash receipts and payments occur in a different period. This is
important because information about a reporting entity’s economic
resources and claims and changes in its economic resources and claims
during a period provides a better basis for assessing the entity’s past
 and future performance than information solely about cash receipts
and payments during that period.

Financial performance reflected by past cash flows

 Information about a reporting entity’s cash flows during a period also

helps users to assess the entity’s ability to generate future net cash
inflows and to assess management’s stewardship of the entity’s
economic resources. That information indicates how the reporting
entity obtains and spends cash, including information about its
borrowing and repayment of debt, cash dividends or other cash
distributions to investors, and other factors that may affect the entity’s
liquidity or solvency. Information about cash flows helps users
understand a reporting entity’s operations, evaluate its financing and
investing activities, assess its liquidity or solvency and interpret other
information about financial performance.

Changes in economic resources and claims not resulting from financial

performance;

 A reporting entity’s economic resources and claims may also change

for reasons other than financial performance, such as issuing debt or
equity instruments. Information about this type of change is necessary
to give users a complete understanding of why the reporting entity’s
economic resources and claims changed and the implications of those
changes for its future financial performance.

Information about use of the entity’s economic resources:

Information about how efficiently and effectively the reporting entity’s

management have discharged its responsibilities to use the entity’s economic
resources helps users to assess management’s stewardship of those resources.
Such information is also useful for predicting how efficiently and effectively
management will use the entity’s economic resources in future periods.
Hence, it can be useful for assessing the entity’s prospects for future net cash
inflows.

Examples of management’s responsibilities to use the entity’s economic

resources include protecting those resources from unfavourable effects of
economic factors, such as price and technological changes, and ensuring that
the entity complies with applicable laws, regulations and contractual
provisions.

Chapter 2: Qualitative characteristics of useful financial

information.

The qualitative characteristics of useful financial information

identify the types of information that are likely to be most useful
to the existing and potential investors, lenders and other creditors
for making decisions about the reporting entity on the basis of
information in its financial report. The qualitative characteristics of
useful financial information apply to financial information
provided in financial statements, as well as to financial information
provided in other ways.
If financial information is to be useful, it must be relevant and
faithfully represent what it aims to represent. The usefulness of
financial information is enhanced if it is comparable, verifiable,
timely and understandable.
Fundamental qualitative characteristics
The fundamental qualitative characteristics are relevance and faithful
representation.
Relevance

Information must be relevant to the decision-making process of users.

Information is relevant if it can be used for predictive and/or confirmatory
purposes.

 It has predictive value if it helps users to predict what might happen in

the future.
 It has confirmatory value if it helps users to confirm the assessments
and predictions they have made in the past.

The relevance of information is affected by its materiality.

Information is material if omitting it or misstating it could influence decisions

that users make on the basis of financial information about a specific
reporting entity.

 Materiality is an entity-specific aspect of relevance based on the nature

or magnitude (or both) of the items to which the information relates
in the context of an individual entity’s financial report.

Faithful representation

Financial reports represent economic phenomena (economic resources,

claims against the reporting entity and the effects of transactions and other
events and conditions that change those resources and claims) by depicting
them merely in words and numbers.

To be useful, financial information must not only represent relevant

phenomena, but it must also faithfully represent the phenomena that it
purports to represent.

A perfectly faithful representation would have three characteristics. It would

be:
  complete – the depiction includes all information necessary for a user
to understand the phenomenon being depicted, including all necessary
descriptions and explanations.
 neutral – the depiction is without bias in the selection or presentation
of financial information; and
 free from error – where there are no errors or omissions in the
description of the phenomenon, and the process used to produce the
reported information has been selected and applied with no errors in
the process.

Enhancing qualitative characteristics

Comparability

Comparability is the qualitative characteristic that enables users to identify

and understand similarities in, and differences among, items. Information
about a reporting entity is more useful if it can be compared with similar
information about other entities and with similar information about the
same entity for another period or another date.

Consistency is related to comparability but is not the same. Consistency

refers to the use of the same methods for the same items, either from period
to period within a reporting entity or in a single period across entities.
Consistency helps to achieve the goal of comparability.

Verifiability

This quality helps assure users that information faithfully represents the
economic phenomena it purports to represent.

 Verifiability means that different knowledgeable and independent

observers could reach consensus that a particular depiction is a faithful
representation.
  Quantified information need not be a single point estimate to be
verifiable. A range of possible amounts and the related probabilities
can also be verified.

Timeliness

This means having information available to decision-makers in time to be

capable of influencing their decisions.

Understandability

Information is made understandable by classifying, characterizing and

presenting it in a clear and concise manner. Financial reports are prepared
for users who have a reasonable knowledge of business and economic
activities and who review and analyse the information diligently.

Chapter 3: Financial statements and the reporting entity.

Financial statement:

Financial statements provide information about economic

resources of the reporting entity, claims against the entity, and
changes in those resources and claims that meet the information
needs of its users. The objective of financial statements is to
provide financial information about the reporting entity’s assets,
liabilities, equity, income and expenses that is useful to users of
financial statements in assessing the prospects for future net cash
inflows to the reporting entity and in assessing management’s
stewardship of the entity’s economic resources.
Categories of information provided in financial statements:
(a) in the statement of financial position, by recognising assets,
liabilities and equity;
(b) in the statement(s) of financial performance, by recognising
income and expenses; and

(c) in other statements and notes, by presenting and disclosing

information about:

I. recognised assets, liabilities, equity, income and

expenses, including information about their nature and
about the risks arising from those recognised assets and
liabilities;
II. assets and liabilities that have not been recognised
including information about their nature and about the
risks arising from them;
III. cash flows;
IV. contributions from holders of equity claims and
distributions to them; and
V. the methods, assumptions and judgments used in
estimating the amounts presented or disclosed, and
changes in those methods, assumptions and judgments.

Reporting Period

Financial statements are prepared for a specified period of time

(reporting period) and provide information about:
  Assets and liabilities—including unrecognized assets
and liabilities—and equity that existed at the end
of the reporting period (at a particular date).
 Income and expenses for the reporting period.
To help users of financial statements to identify and assess changes
and trends, financial statements also provide comparative
information for at least one preceding reporting period.

Financial statements include information about transactions and

other events that have occurred after the end of the reporting
period if providing that information is necessary to meet the
objective of financial statements.

Perspective adopted in financial statements

Financial statements provide information about transactions and
other events viewed from the perspective of the reporting entity as
a whole, not from the perspective of any particular group of the
entity’s existing or potential investors, lenders or other creditors.
Going concern assumption

Financial statements are normally prepared on the assumption that

the reporting entity is a going concern and will continue in
operation for the foreseeable future. Hence, it is assumed that the
entity has neither the intention nor the need to enter liquidation
or to cease trading. If such an intention or need exists, the financial
statements may have to be prepared on a different basis. If so, the
financial statements describe the basis used.
The reporting entity:
A reporting entity is an entity that is required, or chooses, to
prepare financial statements. A reporting entity can be a single
entity or a portion of an entity or can comprise more than one
entity. A reporting entity is not necessarily a legal entity.

Sometimes one entity (parent) has control over another entity

(subsidiary). If a reporting entity comprises both the parent and its
subsidiaries, the reporting entity’s financial statements are referred
to as ‘consolidated financial statements’. If a reporting entity is the
parent alone, the reporting entity’s financial statements are
referred to as ‘unconsolidated financial statements’. If a reporting
entity comprises two or more entities that are not all linked by a
parent-subsidiary relationship, the reporting entity’s financial
statements are referred to as ‘combined financial statements’.

Chapter 4: The elements of financial statements

The elements of financial statements defined in the Conceptual

Framework are:
(a) assets, liabilities and equity, which relate to a
reporting entity’s financial position; and
(b) income and expenses, which relate to a
reporting entity’s financial performance.
The elements of financial statements

Item discussed Element Definition or description

in Chapter 1
Economic Asset  A present economic
resource 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.

Liability  A present obligation of

the entity to transfer an
economic resource as a
result of past events.
Claim
Equity  The residual interest in the
assets of the entity after
deducting all its liabilities.

Increases in assets, or
decreases in liabilities, that
result in increases in equity,
Income other than those relating to
Changes in contributions from holders of
economic equity claims.
resources and Expenses Decreases in assets, or
claims, increases in liabilities, that
 reflecting result in decreases in equity,
financial other than those relating to
performance distributions to holders of
equity claims.
Contributions from holders
Other changes of equity claims, and
in economic distributions to them.
resources and
claims
Exchanges of assets or
liabilities that do not result in
increases or decreases in
equity.

Definition of an asset:
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.
This section discusses three aspects of those definitions:

(a) Right;
(b) Potential to produce economic benefits; and
(c) Control

Definition of a liability:
A liability is a present obligation of the entity to transfer an
economic resource as a result of past events.
For a liability to exist, three criteria must all be satisfied:
(a) The entity has an obligation
(b) The obligation is to transfer an economic resource
(c) The obligation is a present obligation that exists as a result
of past events.

Definition of equity:

Equity is the residual interest in the assets of the entity after

deducting all its liabilities.
Equity claims are claims on the residual interest in the assets of the
entity after deducting all its liabilities. In other words, they are
claims against the entity that do not meet the definition of a
liability. Such claims may be established by contract, legislation or
similar means, and include, to the extent that they do not meet the
definition of a liability:

(a) Shares of various types, issued by the entity; and

(b) Some obligations of the entity to issue another equity
claim.

Definitions of 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. The income elements are the elements of
financial statements that relate to an entity’s financial performance.
Income includes both revenue and gains:
 (a) Revenue is income arising in the course of the ordinary
activities of the entity. It includes sales revenue, fee
income, royaltie’s income, rental income and income from
investments (interest and dividends).
(b) Gains include gains on the disposal of non-current assets.
Realized gains are often reported in the financial
statements net of related expenses. They might arise in the
normal course of business activities. Gains might also be
unrealized. Unrealized gains occur whenever an asset is
revalued upwards, but is not disposed of. For example, an
unrealized gain occurs when marketable securities owned
by the entity are revalued upwards.

Definitions of 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. Expenses are the elements of financial
statements that relate to an entity’s financial performance.
(a) Expenses arising in the normal course of activities, such as
the cost of sales and other operating costs, including
depreciation of non-current assets. Expenses result in the
outflow of assets (such as cash or finished goods inventory)
or the depletion of assets (for example, the depreciation of
noncurrent assets).
(b) Losses include for example, the loss on disposal of a non-
current asset, and losses arising from damage due to fire or
 flooding. Losses are usually reported as net of related
income.

Chapter 5—Recognition and Derecognition:

The IASB Framework states that an element (asset, liability, equity,
income or expense) should be recognised in the statement of
financial position or in profit and loss (the statement of profit or
loss) when it:

 meets the definition of an element, and also

 satisfies certain criteria for recognition.
Items that fail to meet the criteria for recognition should not be
included in the financial statements. However, some if these items
may have to be disclosed as additional details in a note to the
financial statements. The criteria for recognition are as follows:

 It must be probable that the future economic benefit

associated with the item will flow either into or out of the
entity.
 The item should have a cost or value that can be measured
reliably.

Recognition of assets

An asset is recognised in the statement of financial position when

there is an increase in future economic benefits relating to an
increase in an asset (or a reduction in a liability) which can be
measured reliably.
An asset should not be recognised when expenses have been
incurred but it is unlikely that any future economic benefits will
flow to the entity. Instead, the item should be treated as an
expense, and the cost of the asset should be ‘written off’.

Recognition of liabilities
A liability is recognised when it is probable that an outflow of
resources that embody economic benefits will result from the
settlement of a present obligation, and the amount of the
obligation can be measured reliably.

Recognition of income
Income is recognised in the statement of profit when an increase in
future economic benefit arises from an increase in an asset (or a
reduction in a liability) and this can be measured reliably.

Recognition of expenses
Expenses are recognised in the statement of profit or loss when a
decrease in future economic benefit arises from a decrease in an
asset or an increase in a liability, which can be measured reliably.

Note that an expense is recognised at the same time as an increase

in a liability (for example, trade payables) or a reduction in an
asset (for example, cash).
Derecognition:
Derecognition is the removal of all or part of a recognised asset or
liability from an entity’s statement of financial position.
Derecognition normally occurs when that item no longer meets
the definition of an asset or of a liability:

(a) for an asset, derecognition normally occurs when the

entity loses control of all or part of the recognised asset;
and
(b) for a liability, derecognition normally occurs when the
entity no longer has a present obligation for all or part of
the recognised liability.
Accounting for derecognition should faithfully represent the
changes in an entity’s net assets, as well as any assets or liabilities
retained. This is achieved by:
(a) derecognising any transferred, expired or consumed
component, and
(b) recognising a gain or loss on the above, and
(c) recognising any retained component.
Sometimes an entity might appear to have transferred an asset or
liability. However, derecognition would not be appropriate if
exposure to variations in the element’s economic benefits is
retained.

For example:
An entity sells a building for $2 million and retains the right to buy
it back for $3 million in five years’ time. At the date of sale, the
building had a fair value of $7 million. Property prices are
expected to rise.
The entity does not derecognize the building from its statement of
financial position. The entity has not lost control over the building
because its ability to buy the building back for substantially less
than fair value enables it to benefit from future price rises.

The cash received would be recognised as a loan liability.

Chapter 6: Measurement
The IASB Framework states that several measurement bases are
used for the elements in financial statements. These include:

 Historical cost. Assets are measured at the amount of cash

paid, or at the fair value of the consideration given to acquire
them. Liabilities are measured at:
 The amount of proceeds received in exchange for the
obligation (for example, bank loan or a bank overdraft), or
the amount of cash that will be paid to satisfy the liability.
 Current cost or current value is the basis used in current value
accounting/current cost accounting. Assets are measured at
the amount that would be paid to purchase the same or a
similar asset currently. Liabilities are measured at the amount
that would be required to settle the obligation currently.
 Realisable value (or settlement value). This method of
measurement is relevant when an entity is not a going
concern, and is faced with liquidation (and a forced sale of its
assets). Assets are measured at the amount that could be
 obtained by selling them. Liabilities are measured at the
amount that would be required to settle them currently.
 Present value. Assets might be measured at the value of the
future net cash inflows that the item is expected to generate,
discounted to a present value. Similarly, a liability might be
measured at the discounted present value of the expected
cash outflows that will be made to settle the liability.

Historical cost is the most commonly used measurement basis.

However, the other bases of measurement are often used to
modify historical cost. For example, inventories are measured at
the lower of cost and net realizable value. Deferred income is
measured at present value. Some non-current assets may be valued
at current value. The Framework does not favour one
measurement base over the others.

Chapter 7—Presentation and Disclosure

A reporting entity communicates information about its assets,

liabilities, equity, income and expenses by presenting and
disclosing information in its financial statements.
Classification is the sorting of assets, liabilities, equity, income or
expenses on the basis of shared characteristics for presentation and
disclosure purposes. Such characteristics include the nature of the
item, its role (or function) within the business activities conducted
by the entity, and how it is measured.
Classification of assets and liabilities
Classification is applied to the unit of account selected for an asset
or liability. However, it may sometimes be appropriate to separate
an asset or liability into components that have different
characteristics and to classify those components separately. That
would be appropriate when classifying those components
separately would enhance the usefulness of the resulting financial
information. For example, it could be appropriate to separate an
asset or liability into current and non-current components and to
classify those components separately.

Offsetting
Offsetting occurs when an entity recognises and measures both an
asset and liability as separate units of account, but groups them
into a single net amount in the statement of financial position.
Offsetting classifies dissimilar items together and therefore is
generally not appropriate.
Offsetting assets and liabilities differs from treating a set of rights
and obligations as a single unit of account.

Classification of equity
To provide useful information, it may be necessary to classify
equity claims separately if those equity claims have different
characteristics.
Classification of income and expenses
Income and expenses are classified and included either:
(a) in the statement of profit or loss; or
(b) Outside the statement of profit or loss, in other
comprehensive income.

Aggregation

Aggregation is the adding together of assets, liabilities, equity,

income or expenses that have shared characteristics and are
included in the same classification.

Chapter 8—Concepts of Capital and Capital Maintenance

Concepts of capital
 financial concept of capita
 physical concept of capital

Concepts of capital maintenance and the determination of profit

 Financial capital maintenance. Under this concept a profit is
earned only if the financial (or money) amount of the net
assets at the end of the period exceeds the financial (or
money) amount of net assets at the beginning of the period,
after excluding any distributions to, and contributions from,
owners during the period. Financial capital maintenance can
 be measured in either nominal monetary units or units of
constant purchasing power.

 Physical capital maintenance. Under this concept a profit is

earned only if the physical productive capacity (or operating
capability) of the entity (or the resources or funds needed to
achieve that capacity) at the end of the period exceeds the
physical productive capacity at the beginning of the period,
after excluding any distributions to, and contributions from,
owners during the period.