Accounting Standards And Principles: Definition And Recognition Of Elements Of Financial Statements

Question 1

In accordance with the definition of asset as given in Section 14 of accounting standards number 4 of “Definition and Recognition of Elements of the Financial Statements”, the photographs of the persons who have founded the company and the photographs of the original buildings and sculptures thereof are not liable to be recorded in the accounting books of the company as they are not in any sense represents the goodwill of the company or does not have the ability to generate the benefits in the future in economic terms. Therefore, no general ledger accounts are required to be debited and credited.  (AASB, 2014)

As per the Section 12 of accounting standard on the Provisions and the Contingent Liabilities, the provision is required to be made in case there is more probability that the event may occur. In the given case the suit filed by Zero Limited against the negligence of the company will result the loss to the company and there is high probability of occurrence of the same event. Therefore, the provision is required to be made. And also as per the prudential norms, an entity shall provide for all losses. The general ledger of Payable to Zero Limited under the head Current Liabilities will be created and correspondingly the Expense account needs to be debited (AASB, 2010).

As per the prudential norms the company shall account for all the losses and expenses and shall not provide in any manner for gains or incomes. In the given case, the suit filed by the Badegr Limited against the company has created the chances of getting the case won by the company. In this case there is the high possibility of having the contingent Asset but the company is not liable to record as per the prudential norms. Therefore, no ledger account will be credited or debited (AASB, 2010).

Two cases arise and accordingly the company is required to debit and credit the respective account. The cases are as follows:

• Where no sale proceeds is received from selling the asset then the accumulated depreciation account will be debited and the asset account – Plant and Machinery will be credited.
• Where sales proceed is received then the Cash Account will be debited, accumulated depreciation account will be debited and the Asset Account – plant and machinery will be credited. The loss and gain arising from the transaction will be either debited or credited respectively (IFRS, 2012).

The donation received is the income and hence credited as income in Profit and Loss statement and the corresponding source cash or bank will be debited.

a) In accordance with the component method of depreciation, each individual asset is charged with depreciation on an individual basis. It is not like simple depreciation method where the depreciation is charged in lump sum to the assets. The firs advantage of using the component method of depreciation is that the cost of an asset is spread over the useful life of an asset whereas in simple method the depreciation is charged collectively and that too keeps on fluctuating. The second advantage is that the income statement is not affected adversely in this method as compared to simple depreciation. (Starova and Cerkamova, 2010).

Part 1

b) There are two models – revaluation and cost. The first advantage of applying the cost model is that the value will be arrived at the uniform basis as opposed to the model of revaluation where the value of the asset is either increased or decreased depending upon the market conditions. Another advantage is that the application of cost model will be cost effective and cheap as compared to the revaluation model where it involves the high cost of experts and professionals. Thus, the most appropriate model will be the cost. (HKAS, 2016).

c)  In accordance with Section 37 of AASB 116, the component method of depreciation has been selected. The method is allowed as per the provisions of the relevant accounting standard and helps in giving the true and fair position of the value of the fixed assets by giving the importance to individual assets. The other major reason for selecting this method is that the income statement will not be affected by the cost of replacement in case where the replacement is done.  (Marton, 2012)

The initial cost of purchase of the aircraft of thirty lacs dollar shall be accounted for as the asset under the head Fixed Assets of the Company. Thereafter the inspection cost of one lacs dollar shall be accounted for as expense and charged to the statement of profit and loss. This has been done according to the provision of IAS16 (IATA, 2016). 

The initial cost of purchase of the engines of forty lacs dollar shall be accounted for as the asset under the head Fixed Assets of the Company. As the component method of depreciation have been selected, the cost of replacement shall be accounted for as an asset of the company amounting to dollar 4.5 million and dollar 6 million in the respective years for 2020 and 2024. (AASB, 2016).  

The initial cost of purchase of the seats of ten lacs dollar and carpets of fifty thousand dollar shall be accounted for as the asset under the head Fixed Assets of the Company. As the component method of depreciation have been selected, the cost of replacement shall be accounted for as an asset of the company amounting to dollar 1.2 million and dollar 1.5 million in the respective years for 2019 and 2025 and dollar sixty five thousand for 2022.

Again the cost of two lacs dollar shall be accounted for as asset and similar will happen to Cockpit of fifteen lacs dollar (AASB, 2016).

Part 2

The initial cost of purchase two lacs and fifty thousand dollar shall be accounted for as the asset under the head Fixed Assets of the Company. (AASB, 2016).

Expense will not be recognized during the period ending 30^th June 2017. (AASB, 2016).

The expense amounting to three lacs dollar shall be accounted for as expense (AASB, 2016).

The amount of one lac dollar shall be accounted for as expense for repair of seats. Similarly amount of dollar ten thousand shall be accounted for as expense for cleaning of seats.

(AASB, 2016)

The amount of dollar twenty thousand shall be accounted for as expense. (AASB, 2016)

Accounting to AASB 138, Brands are of two types. One which is self constructed by the company through its operations and other is purchased or acquired by the company from other entity in the agreement of merger and acquisitions. The accounting treatments in case of self generated brands are nil shows that these brands does not recognised in the books of accounts of an entity. The other type of brand called acquired brands are recognised in the books of accounts at a price which has been paid by the company of acquisition under the head Intangible Assets and amortise according to its useful life considered as per accounting estimates (AASB, 2015).

Accounting Standard and accounting principles are framed and imposed by the accounting standard board. While framing AASB 138, the AASB members have not allowed the accounting for self generated brands. The following are reasons for not considering all the brands for recognition:-

1. The cost of self generated brands are not possible to determine by the company and it is difficult for standard preparers for identifying which expenses can be the part of costs of the brand.

The prudence concept says that all the expenses should to ascertained and provision for future expenses should be made but income for future cannot ascertained in the current period or cannot be predicted in current period. In brands which are self generated the company can predict the amount for future incomes and hence it is difficult for preparer to allow the recognition of these brands (Paugam L, 2015)

According to Accounting Standard, Provisions and Contingent Liabilities will become the part of Financial Statements of the company but provisions are recognised and disclosed whereas contingent liabilities are only disclosed in the financial statements. The following factors are result of this difference:-

1. Provisions can quantify in monetary terms whereas the payment for contingent liability is not ascertainable on reporting date. Provisions can be measured in monetary terms so they will become the part of the financial data
2. The chances of payments and obligation in Provisions are confirmed on the reporting date whereas the chances of payments is certain but it contains some amount of chances that the payment will not made by the entity
3. The provisions are actual expenses which has incurred for earning the revenue from current year whereas the contingent liability is an expenses for future events and for future period. To ascertain the accurate profits provisions needs to be recognised in the current year before determining the profits (IFRS, 2012)

1. Provision for Long Service Leave – This item is recognised as Liability in the financial statements of the company on the reporting date. According to the AASB 119 on Employee Benefits, Long term service leave provision is the obligation of the company which is to be paid in actual by the company against the revenue earned by the services of the employee in the current year (AASB, 2011)
2. Dividend Payables- This item is classified as Liability in the financial reports of the company for the current year. The liability is recognised when the confirmation for the same has been obtained by the company on or before the closure of financial statements and it is an adjusting event.
3. Preference Shares – This item is not classified as Liability for the company in the current year. Preference shares are the part of the share capital of the company which are divided into preference shares and these preference shareholders have upper right on the dividend payment and on payment of capital in the event of winding up of the company.

Reference List:

AASB Official Website, (2014) “Conceptual Framework”, available at https://www.aasb.gov.au/Pronouncements/Conceptual-framework.aspx accessed at 31/05/2017

AASB Official Website, (2010) “Provisions, Contingent Liabilities and Contingent Assets”, available at https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf accessed at 31/05/2017

IFRS Official Website, (2012) “Property, Plant & Equipments”, available at https://www.ifrs.org/Documents/IAS16.pdf accessed at 31/05/2017

AASB, (2016), “Property Plant and Equipment” available on https://www.aasb.gov.au/admin/file/content102/c3/AASB116_07-04_ERDRjun10_07-09.pdf  accessed at 31/05/2017.

IATA, (2016), “Aircraft Acquisition Cost and Depreciation”, available on https://www.iata.org/publications/Documents/Airline-Disclosure-Guide-aircraft-acquisition.pdf   accessed on 31/05/2017.

HKAS, (2016), “The cost and revaluation model under Property Plant and Equipment”, available on https://www.hkiaat.org/images/uploads/articles/AAT_Paper_7_Cost_Model_Full.pdf   accessed on 31/05/2017.

Marton J, (2012), “Component Depreciation in Airlines” available on https://gupea.ub.gu.se/bitstream/2077/29351/1/gupea_2077_29351_1.pdf  accessed on 31/05/2017.

Starova M and Cermakova H, (2010), “Method of Component depreciation of Fixed Assets and its comparison with Traditional Methods”, Agris, On line Papers in Economics, Vol II(3), pp 4-12

AASB Official Website, (2015), “Intangible Assets”, available at https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf accessed on 31/05/2017

Paugam L, (2015), “ Brand Valuation” , available at https://books.google.co.in/books?id=HicRDAAAQBAJ&pg=PT26&lpg=PT26&dq=standard+setter+difficulty+in+brands&source=bl&ots=yeDA7ym9gX&sig=HVptPCSeCFT_BKaX06NcHpPbnR4&hl=en&sa=X&ved=0ahUKEwjVgL_L-oDUAhUMI8AKHeEIBssQ6AEIKTAB#v=onepage&q=standard%20setter%20difficulty%20in%20brands&f=false accessed on 31/05/2017

IFRS Official Website, (2012), “IAS 37- Provisions, Contingent Liabilities and Contingent Assets” available at https://www.ifrs.org/IFRSs/Documents/English%20IAS%20and%20IFRS%20PDFs%202012/IAS%2037.pdf accessed on 31/05/2017

AASB Official Website, (2011), “Employees Benefits”, available at https://www.aasb.gov.au/admin/file/content105/c9/AASB119_09-11.pdf accessed on 31/05/2017

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