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Conceptual Framework - Assignment Example

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Conceptual Framework

The IASB want to ensure that equity has first priority to common stock insolvency or liquidation. This is because in business, liability is the duty of an entity that emerge from past or previous events or transactions, the settlement that may lead to the use or transfer of assets, service provision or any other yielding profits or benefits in the future. It is also significant to note that liability differs from equity in the sense that any kind of borrowing from banks or individuals for enhancing a personal income or business, which is payable during both the long and short-term period (Klemstine 2009, 41-43). IASB understands that liability entails a responsibility or use to others that involve settlement by future use or transfer of assets, service provision and any transaction connected with producing economic profits or benefits at a determined time or specified time on either demand or occurrence of a certain event. While on the other hand, it recognizes that equity is the remaining interest or claim of the junior investors in a company’s assets following the pay out of all liabilities. However, IASB wants it to be clear that in case a liability is more than an asset, it results to a negative equity. In addition, owners’ equity comprises of the total assets of the entire entity. This makes the equity to appear on the balance sheet because net assets would be attained via division of the total assets and all liabilities (Walther 2011, 97). Conceptual framework identifies a notable difference between the quantity of liabilities and assets (equity) exist in terms of interest rates reorganized in a given range of time. The international finance books wants a bank with a similar amount of liabilities as the assets in a given period means that the changes in its interest rates will not change the net interest margin. Such a bank thus has a balanced gap position. On the other hand, if the amount in assets re-price is higher than the liability re-price, then such a bank is an asset sensitive one. In contrast, a bank with less amount of asset re-pricing that liability re-price, then it is liability sensitive (Walter & Janich 2011, 78). In the current conceptual framework, uncertain may seem to play a significant role in the definition of liabilities and assets. The conceptual framework holds that the current definitions of liabilities and assets incorporate the idea that the future or forthcoming economic benefits must be anticipated. In addition, the current recognition criteria give details that a liability or an asset is identified if it is possible that any forthcoming economic benefit connected with the product will flow to or from the unit or entity. Additionally, the conceptual framework recognizes that in some rare situations, it is not clear whether a unit or an entity has a liability or an asset exists. The common example applied to determine the existence of uncertainty in the economy is litigation which shows whether an entity committed certain act and if it did so, obliges the entity or body to pay fines or damages. Liabilities involves various sorts of debts such as car loans, mortgages, or credit card debts and packaging them as bonds, collateralized mortgage obligations, or as pass-through securities. ...Show more

Summary

Difference between equity and liabilities Institution The international accounting standards Board proposed changes that aimed at fixing the problems of conceptual framework in the financial world. The problems that IASB identified in the financial sector were the inability for banks and people to fail to distinguish between equity and liability…
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Conceptual Framework essay example
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