Question

Which of the following correctly defines ‘equity’ according to the IASB's Conceptual Framework for Financial Reporting?
Select one:
a. Equity is the residual interest in the assets of the entity after deducting all its liabilities.
b. Equity is a resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity.
c. Equity is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities.
d. Equity is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefit.

Answer 1

Answer:

The correct definition of 'equity' according to the IASB's Conceptual Framework for Financial Reporting is that equity is the interest in the assets of an entity after deducting all its liabilities.

Explanation:

Equity represents the ownership interest in the assets of an entity. It is calculated by subtracting all the liabilities of the entity from its total assets. In other words, equity is what remains for the owners or shareholders of the entity after satisfying all the obligations to creditors and other external parties.

The Conceptual Framework defines liabilities as present obligations of the entity arising from past events and assets as resources controlled by the entity as a result of past events from which future economic benefits are expected to flow. Therefore, equity can be understood as the residual claim on assets once all liabilities have been settled.

Option (b) is not the correct definition of equity as it describes an asset rather than equity itself. Option (c) describes revenues or gains, and option (d) defines liabilities. Thus, the correct definition is an option (a) - equity is the residual interest in the assets of the entity after deducting all its liabilities.

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