Recognition And Measurement Of Assets And Liabilities In Financial Statements

Criteria for Recognizing Assets and Liabilities

Assets are defined to be the resources of economic nature that are a part of the holdings of entity and occurred due to the events in the past. As per the law, if there is a probability that the entities will receive the economic advantages in future, then the same must be recognized in the balance sheet of the entity. Furthermore, there must be a measurement of the assets of the entity in terms of its cost and value for the effective recording of the assets.

In the given case, there is no satisfaction of the criteria mentioned above as related with the original building and the photographs of the founders of the company. Thus, as per the above the photograph cannot be considered as an asset in the financial statements.  

As per the law, Liabilities are defined to be the obligations of the company of present nature that has occurred due to the events in the past. As per the law, if there is a probability that the entities will face an outflow of the economic resources in future, then the same must be recognized in the balance sheet of the entity as liabilities. As per the given case, there is a probability that the case would be lost by the company. Further under the standards of AASB 137, it has been mentioned that the contingent liabilities occur due to the past events that would create a possible obligation for the entity.

In the given case, the loss is probable in nature but has no certainty of its occurrence and thus, the same is not a contingent liability. The same must not be recorded in the balance sheet but must form part of the notes to accounts. 

In the given case, the advice given suggests that there is a probability of the company winning the case. Thus, the same is not a liability as the criteria of recognition and the definition are not met as required by the standards of accounting. Furthermore, there is no possibility of obligation and thus not a contingent liability. Thus, it can be said that there is no requirement of treating the same in the financial statements. 

As per the standards, there has been a provision that if there is an increment in the future economic benefit along with the decrement in the liabilities, then the income will be recognised. Furthermore, there has been a provision that if there is a decrease in the future economic benefit along with the increment in the liabilities, then the expenses will be recognised. As per the conceptual framework, there must be a record of the sale of the obsolete plant and equipments in the financial statements.     

Measurement Methods for Assets

The record of the asset must be done by the crediting of the assets account and by debiting the bank account. There must be recognition of the income in case where the amount arrived after the asset sale increases the asset book value. While, in case where the amount arrived after the asset sale is less than the asset book value, there must be recognition of the expenses.

The Framework and the standards provide that the donation is to be recognised after the type of the donation is known. If such donations have a capital nature, the same must have a record in the statement of the financial position. While, if such donations have a revenue nature, the same must have a record in the statement of income. 

In cases where the fixed assets have a nature of getting classified into separate units that can be identified, the depreciation is done with the component approach. There is a requirement that the useful life and the cost of the unit separated can have a reliable measurement for the effective application of the method. However, in the depreciation in cases of simple methods, the depreciated is calculated over the useful life of the assets.               

In the case, a component approach of depreciation must be followed to identify the various components of the aircraft, the useful lives of the different components. The simple depreciation of the airplane cost over the ten year period will not be reflected with the correct sum of depreciation. Thus, there will be an advantage of using the component approach for the depreciation of the cost of the aircraft.

As per the AASB 116, it is provided that there can be a measurement of the assets by application of the cost or revaluation model after the procedure of recognition. There can be a measurement of the assets as per the cost model that will be at the cost deducted with the accumulated depreciation on the impairment. The model’s implementation procedure and cost is too easy. Further, there must be recognition of the asset at fair value only if there is a reliable measurement possible towards the assets (Henderson et al., 2015).

The main advantage of the model is that the assets always have to be presented at the fair value. In case of aircrafts, if the components of the aircraft are revaluated then the whole range of assets will have to get revaluated for the avoidance of the selected revaluations. Thus, the cost model is the best and most appropriate methods towards the recognition of the aircraft cost..

Measurement Methods for Liabilities

As per the standards under the AASB 116, the method of depreciation must be selected to reflect the future economic benefits that can be derived from the assets of the organization.  Thus, the expected benefits of the assets must be known and analysis for the selection of the depreciation (Deegan, 2013).

The cost of inspecting the body of aircraft must be recognised under expenses and the same is done as it is not involved in the increment of the value of the useful lives of asset. 

$300,000 incurred as expenses toward the annual maintenance of engines must be considered as expenses. Further, $1 million of expenses that are expected towards the up gradation of engine will have to be capitalised. The same will be done as the expenses are involved in the increment of the value of the useful lives of asset (Biondi & Lapsley, 2014).

The cost of replacing the seats must be capitalised and the repair done against the seats torn and the cost of cleaning will have a treatment as expenses. Further, the repairing done towards the electrical equipments and the testing of the equipments must be considered as expenses. However, the cost of up gradation must be capitalised because the same leads to the improvement of the useful life of assets.  

The cost of repairing and maintaining the equipments of preparing food must be regarded as the expenses.

Table 1

(Source: Created by Author)

Table 2

(Source: Created by Author)

Table 3

(Source: Created by Author)  

Table 4

(Source: Created by Author) 

Table 5

(Source: Created by Author) 

The non monetary identifiable assets that do not have a substance of physical nature are referred to as the intangible assets under the standard AASB 138. The intangible assets have an example of brands and thus the brands must be treated with accordance to AASB 138. The standard also states that if there is a probability of the future benefits arising from assets, then the intangible assets must be recognised. Further, the same must be recorded only if the reliable estimation is possible. However, as per the standard the brand name that is generated internally must not be recognized (Benson et al., 2015).

As per the standard the brand name that is generated internally must not be recognized. The same is not recognized as the determination of the internally generated brand name is not possible.  This constitutes the major difficulty for the bodies that sets the standards towards the allowance of the brands to be recognized. 

Recognition and Measurement of Repairs and Maintenance Costs

As per the AASB 137, it has been provided that liabilities arise due to the past events and is a current obligation that will require an outflow of economic resources. However, the obligations that have uncertainty regarding amount and timings will be considered as provisions. The contingent liabilities have a possibility of occurrence after the future events that cannot be controlled by an entity.  After the analysis, it can be seen that there will be requirement of resources for the settlement of the obligations. However, there will be no record of the contingent liabilities as the same cannot be measured in a reliable manner.   

The provisions of the leaves for long services fall under present obligation and there will be outflow of resources to settle the same. Thus, based on the above it can be said that the leave must be considered as provision (Palmer, 2013).

AASB 138 states that the liabilities arise due to the past events and is a current obligation that will require an outflow of economic resources. Thus, the amount payable towards dividend will be a present obligation and the same must be considered as liability. 

The amount that is required to be paid towards the preference shareholders is represented under the preference share capital. It is a present obligation that requires benefits to settle the obligation and the same must be recorded as liability (Rahman, 2013). 

Reference List:

Benson, K., Clarkson, P. M., Smith, T., & Tutticci, I. (2015). A review of accounting research in the Asia Pacific region. Australian Journal of Management, 40(1), 36-88.

Biondi, L., & Lapsley, I. (2014). Accounting, transparency and governance: the heritage assets problem. Qualitative Research in Accounting & Management, 11(2), 146-164.

de Villiers, C., Rinaldi, L., & Unerman, J. (2014). Integrated Reporting: Insights, gaps and an agenda for future research. Accounting, Auditing & Accountability Journal, 27(7), 1042-1067.

Deegan, C. (2013). The accountant will have a central role in saving the planet… really? A reflection on ‘green accounting and green eyeshades twenty years later’. Critical Perspectives on Accounting, 24(6), 448-458.

Downie, J., & Stubbs, W. (2013). Evaluation of Australian companies’ scope 3 greenhouse gas emissions assessments. Journal of Cleaner Production, 56, 156-163.

Gipper, B., Lombardi, B. J., & Skinner, D. J. (2013). The politics of accounting standard-setting: A review of empirical research. Australian Journal of Management, 38(3), 523-551.

Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting. Pearson Higher Education AU.

Jorissen, A., Lybaert, N., Orens, R., & van der Tas, L. (2014). Constituents’ Participation in the IASC/IASB’s due Process of International Accounting Standard Setting: A Longitudinal Analysis. In Accounting and Regulation (pp. 79-110). Springer New York.

Palmer, P. D. (2013). Exploring attitudes to financial reporting in the Australian not?for?profit sector. Accounting & Finance, 53(1), 217-241.

Rahman, A. R. (2013). The Australian Accounting Standards Review Board (RLE Accounting): The Establishment of Its Participative Review Process. Routledge.

Viscarra Rossel, R. A., Webster, R., Bui, E. N., & Baldock, J. A. (2014). Baseline map of organic carbon in Australian soil to support national carbon accounting and monitoring under climate change. Global Change Biology, 20(9), 2953-2970. 

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order