Answer:
As per principles of Corporation Act, 2001 and according to normally practiced accounting procedures, anything which cannot be measured in monetary terms will not become the part of financial accounting books. As per situation under consideration, the sentimental values things like photographs of both the founder and the building of the company cannot be measurable in monetary terms in present or in future and hence it will not be the part of financial books of the company and not recorded in any general ledger of the books (AASB, 2014)
According AASB 137, which is framed as per the Conceptual Framework of accounting defines the contingent liability as an event which will occur in future and there is possibility of payment in this future event. Normally in case of law suit the liability occurs only if any only after the settlement but on the reporting date the management will record its estimated liability with the help of external expert. In the situation of Zero Ltd, the lawyer of the company has confirmed that there is chance of losing the case of negligence and the company is liable to pay the amount to Zero Limited. Also, the lawyer has not clarified the company how much the company has to pay till now and hence only disclosure of Contingent Liability is requires to mention in the Financial Books of Accounts (AASB, 2010)
Similarly, as per Part 2 above, Contingent Asset is formed for any company when the benefit or chances of receipt of payment depends on future event and the probability of occurrence the event is very high. Contingent Asset are recorded or disclosed in Books of account only after the 100% confirmation of the benefit that has to be received by the company. In the situation with Badger Limited, as per external professional advice the chances of occurrence of the future benefit to the company in law suit are high and but chances of confirmation along with amount is not yet 100%, therefore it’s not a contingent asset and will not recorded in Financial Books of Accounts (AASB, 2010).
The non usage of old plant and machinery makes it obsolete with the new technologies and time. In the case, the TMD Ltd is retiring old Plant and Machinery on 30th June 2016 and recording of the same it be done in the Financial Books as Sale of Old Plant And Machinery. Accordingly, the Bank and Cash general ledger is debited along with the Accumulated Depreciated charged during the life of Plant and Machinery and Plant and Machinery general ledger is credited by the cost of the Plant and machinery. Any different in the sale price and carrying amount, then the same may be profit or loss on retirement of old plant and machinery and will form the part of total profits or loss earned by the company (IFRS, 2012).
According to the Principles of recognition of Income, Income is recognised in any business when it is earned or received by the company. In the given case, TMD Ltd is manufacturing company and has received the donation of $ 20,000. Although it is the not the business operation revenue of the company but it is non operating income and is required to required by credited the donation received account under Income Head and debiting the Cash Ledger.
a) Depreciation is charged with Component Method of Depreciation on each component of Asset separately considering each component as different asset for Depreciation. The benefits of component approach over simple depreciation includes that in component approach price or cost of asset is bifurcated as per the useful life of the each component and in simple approach depreciation keeps on changing very fast as it charged all the items as single item. The impact on profits of the company is also a positive impact under component approach as total depreciation will not become the part of expenses in one year. The reputation of the company will also enhances if the company is using component approach as accounting policy and estimates are formed on the basis of each part and creates more reliance of stakeholders on the management of the company (Starova and Cerkamova, 2010).
b) Cost model of is applied and considered as most appropriate to the aeroplane as a whole is charging the impairment as AASB 116. The benefit of Cost Model is that the value in this method remains constant and does not fluctuate as per the market forces like in Revaluation Model. Also, the cost model is easy to apply and does not require specialised knowledge of external experts in determining the impairment value. Since, the management with an estimate or accounting policies apply the cost model then the hiring cost of new expertise also reduces over a period of time (HKAS, 2016).
c) According to Accounting Standard on Property, Plant & Equipment 116 component approach of depreciation is most appropriate for application in the case of Aeroplane. This approach is selected considering the two important points. First, that the individual parts of aeroplane have its own significance and cost which has its own identity can be shown separately to provide correct position of the company. Other point is Replacement costs are very high in the case of Aeroplane components which should be capitalised and will not affect the operating profits of company (Marton, 2012)
Aircraft body
The original and starting cost of $ 30, 00,000 will be considered as cost of the Aircraft Body in Tangible Fixed Asset of the company and the cost occurred after capitalisation which are of routine nature will be accounted in Income Statement as an expense like expense of $ 1,00,000 of inspection charged and recorded in Income Statement of company (IATA, 2016).
Engines
The starting cost of $ 40, 00, 000 of purchase of engines will be considered as Cost of Engines and capitalise as different Tangible fixed asset in Balance Sheet. Also, since each component is recorded separately as asset then the replacement cost which will incurred in 2020 of $ 4.5 million and in 2024 of $ 6 million will added to cost of engines and capitalised in Balance Sheet (AASB, 2016).
Fittings
The starting cost of seats of $ 10, 00,000 and of carpets of $ 50, 000 shall be treated as Cost of Fittings under Tangible Fixed Assets. The Replacement cost in future relating to Seats and Carpets of $ 1.2 million in 2019, $ 65, 000 in 2022 and $ 1.5 million in 2025 shall be treated as a part of cost and considered as tangible Fixed Assets. Also, the replacement of $ 2, 00, 000 along with $ 15,00,000 in relation to cockpit will be regarded as cost of asset (AASB, 2016).
Food preparation equipment
The amount of $ 2, 50, 000 shall be treated as cost of Food Preparation Equipment under the Tangible Fixed Assets (AASB, 2016).
Aircraft body
No expense is recorded or recognised for the period under consideration ended on 30.06.2017 (AASB, 2016).
Engines
The amount of $ 300,000 relating of engines and its maintenance is treated as expense for the current year (AASB, 2016).
Fittings
The cost of $ 1, 00,000 for seats repairs and $ 10,000 for seats clean up are recorded or recognised as expenses for fitting during current year (AASB, 2016)
Food preparation equipment
The amount $ 20,000 as expense for maintenance of food preparation equipment is considered as expense for current year (AASB, 2016)
Total Expenses
The amount $ 4, 30,000 as expense for all the components of aeroplane is considered as expense for current year (AASB, 2016)
Reference List:
Brands are categorized in two categories as per the principles and policies governing Brands. According to AASB 138, brands which taken from other persons in the event of business amalgamations are only recorded in books of accounts. The accounting treatments for the Brands are same for Accounting of Goodwill or Licenses. The price paid for brands under amalgamation agreement is considered as a cost and treated as Intangible Fixed Asset in Balance Sheet and consider in determination of Financial Position of Business. The depreciation is charged on the amount of cost according to the benefitted life of brand in the Profit and Loss Account and impairment of the same is considered by the company on regular intervals (AASB, 2015).
The recognition and recording of all brands are not allowed in Financial Accounts by the accounting policies maker. The one important reason is that it is difficult to find out the true cost of the brand which has been internally produced. It is very difficult to find out which expense will incur to form the brands internally in the company even with the help of experts as it is impossible to identify the daily expense and their portions which help in brand production. Brands are formed over a period of time and it is impossible to maintain the record for each particular period which helps in brand creation (Paugam L, 2015)
Provisions and Contingent Liabilities are the part of the financial statements of every company but its presentation and the necessary disclosure depends on the guidelines mentioned in the Accounting standard relating to Provisions and Contingent Liabilities. The difference in their presentation is mainly due to the following reasons:
The provision represents the amount which the company is required to pay at the end of the particular reporting period and there is the likely chance that the same will be payable. In case of contingent liability the amount will be determined on the basis of the happening or non happening of certain future event. Thus, it cannot be quantified on the face of the financial statements rather are mentioned in the notes to the accounts forming part of the financial statements.
As per the matching concept the expenses shall be accounted for in the books for the revenue generated or earned from the particular source. If the matching concept is not followed then the financial statements will not represents the true and fair view. Through matching concept, the provision for the expenses is required to be maintained as the income has already earned but the contingent liability depends on the future event and thus not presented on the face of the financial statements. (IFRS, 2012)
Provision for Long Service Leave – The provision shall be recorded as the liability as the same will be required to be paid to the employees in regard to the accounting standard on Employee Benefits. (AASB, 2011)
Dividend Payable- The dividend becomes payable when it is declared by the company and thus are recorded as the liability in the financial statements as these are in actual will be paid by the company to their shareholders.
Preference Shares – These shares are issued to the shareholders for cash and thus shall be recorded as the liability as it generates the moment the company issues the preference shares.
Reference List:
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 05/06/2017
AASB Official Website, (2011), “Employees Benefits”, available at https://www.aasb.gov.au/admin/file/content105/c9/AASB119_09-11.pdf accessed on 05/06/2017
AASB Official Website, (2014) “Conceptual Framework”, available at https://www.aasb.gov.au/Pronouncements/Conceptual-framework.aspx accessed at 05/06/2017
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 05/06/2017
IFRS Official Website, (2012) “Property, Plant & Equipments”, available at https://www.ifrs.org/Documents/IAS16.pdf accessed at 05/06/2017
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 05/06/2017
IATA, (2016), “Aircraft Acquisition Cost and Depreciation”, available on https://www.iata.org/publications/Documents/Airline-Disclosure-Guide-aircraft-acquisition.pdf accessed on 05/06/2017
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 05/06/2017
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 05/06/2017.
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 05/06/2017
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 05/06/2017
