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Recognition of Property, Plant, and Equipment

According to paragraph 7 AASB116-Property, Plant and Equipment, “The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:

  1. It is probable that future economic benefits associated with the item will flow to the entity; and
  2. The cost of the item can be measured reliably.” (Board S. o., Property, Plant and Equipment, 2015)

The photographs of the company’s founders and original buildings are of no economic value to the company. Such items cannot be recognised as assets in the books of the company according to the accounting standards. Hence, no accounts will get affected by such property.

According to paragraph 10 AASB137-Provisions, Contingent Liability and Contingent Assets, “A provision is a liability of uncertain timing or amount.

A liability 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 benefits”. (Board S. o., Provisions, Contingent Liabilities and Contingent Assets, 2015)

Thus, as per the legal advice a provision should be recognised by an appropriation to the Profit and Loss account.

AASB137 further says that “A contingent asset is a possible event that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity”. (Board S. o., Provisions, Contingent Liabilities and Contingent Assets, 2015)

Thus, when the company is expected to win the impending case which means the inflow of economic benefit is probable then it should recognise it as contingent asset by way of notes to financial statement. Hence, no accounts will be affected.

According to paragraph 67 AASB116-Propery, Plant and Equipment, “The carrying amount of an item of property, plant and equipment shall be derecognised:

  1. On disposal; or
  2. When no future economic benefits are expected from its use or disposal.”(Board S. o., Property, Plant and Equipment, 2015)

The obsolete plant and machinery which is not capable of generating any income in future has been retired from the business therefore, its residual book value should be credited by debiting the profit and loss account for the year. The Accounts affected will “Plant and Machinery A/c” and “Profit and Loss A/c”.

The donation of $20000 should be recognised as revenue over the period under consideration according to AASB118-Revenue. Therefore, a separate account in the name of “Donations” should be opened and credited with “Cash” or “Bank” Account accordingly.

Reference List:

Board, S. o. (2015). Property, Plant and Equipment. Retrieved May 24, 2017, from Compiled AASB Standard:

https://www.aasb.gov.au/admin/file/content105/c9/AASB116_08-15_COMPoct15_01-18.pdf

Board, S. o. (2015). Provisions, Contingent Liabilities and Contingent Assets. Retrieved May 24, 2017, from AASB Standard:

https://www.aasb.gov.au/admin/file/content105/c9/AASB137_08-15.pdf

Board, S. o. (2014). Revenue. Retrieved May 24, 2017, from Compiled AASB Standard:

Recognition of Provisions, Contingent Liabilities and Contingent Assets

https://www.aasb.gov.au/admin/file/content105/c9/AASB118_07-04_COMPdec13_01-14.pdf

  1. The components approach calls for depreciation on the basis of particular components of a whole asset. While in the straight line method of depreciation, the whole value of the plant or equipment is depreciated over the useful life of the asset. The advantage of components methods is that it gives consideration to each component. The total depreciation does not need to be assumed on the ratio of the value of components but is actually measured for each separate component. Hence, the profit calculation is more accurate and the asset is treated better.
  2. The acquired aeroplane consists of a number of components having different useful lives and which need different up gradations and disposal so that the economic value of the whole aeroplane can be maintained. The initial recognition at cost will make the assets available at book value. It will include the initial costs of purchasing he assets including the installation charges and any other charge directly attributable in bringing the asset to its present location and condition so that it becomes workable for the business. Other direct charges may include octroi charges, travelling and transportation charge, purchase taxes, storage charge etc. The actual problem comes in the selection of Cost Model or Revaluation Model. The Cost Model calls for recognition of an asset at its cost less accumulated depreciation over the useful life of the asset and testing of impairment at the end of each financial year. Revaluation Model calls for recognition of an asset at it fair value. Therefore, the assets need to be revalue at each financial year and it determined fair value should be taken into consideration. The accounting standard for property, plant and equipments calls for selection of model on the basis of the pattern of flow of economic benefits. In the given situation, the economic flow is constant and somehow depends on the working conditions of the assets. Further, the assets are needed to change over short durations after which they have no usable values. Thus usage of cost model will be best in the case because of ease of the test of impairment for each component. However, revaluation model cannot be applied because of non availability of fair value of components.
  3. The basis for selecting method of depreciation is the pattern of flow of economic benefits as per AASB116-compiled for Property, Plant & Equipment.

Aircraft body – The aircraft body should be treated as a separate component and depreciated over its useful life and having a residual value of $0.9 million. The entries per year will be:-

Depreciation A/c                                             $210000

Aircraft body A/c                                             $210000

Profit & Loss A/c                                              $210000

Depreciation A/c                                              $210000

Engines- The engines are replaceable after every 4 years and should be separately depreciated accordingly:-

Depreciation A/c                                             $1000000

Engines A/c                                                     $1000000

Profit & Loss A/c                                             $1000000

Depreciation A/c                                             $1000000

Fittings- Seats have a different useful life in comparison to all other fittings and equipments. Therefore, depreciation will be accounted as follows:-

Depreciation A/c                                             $683333

Seats A/c                                                         $333333

Aircraft Fittings & Equipments A/c                 $350000         

Profit & Loss A/c                                             $683333

Depreciation A/c                                             $683333

Food preparation equipment- It has useful live of 5 years which will be accounted with Aircraft Fittings & Equipment A/c as follows:-

Depreciation A/c                                             $50000

Aircraft Fittings $ Equipment A/c                    $50000

Profit & Loss A/c                                              $50000

Depreciation A/c                                              $50000

Recognition of Intangible Assets and Brands

Aircraft body- No expenses for the financial year.

Engines- Maintenance Expenses for $300000.

Fittings- Seat Repair Expenses for $115000. Carpet Cleaning cost for $10000. Electrical Equipment Testing cost of $250000.

Food preparation equipment- Repair and maintenance cost of $20000.

Total costs for the year comes to $695000.

Reference List:

Board, S. o. (2015). Property, Plant and Equipment. Retrieved May 24, 2017, from Compiled AASB Standard: https://www.aasb.gov.au/admin/file/content105/c9/AASB116_08-15_COMPoct15_01-18.pdf

3. According to AASB138-Intangible Assets, Brands and other Intangible Assets are categorised into two parts. First are the Brands which acquired through direct purchase or Business combinations and second are the internally generated brands. The accounting for acquired Brands is done using the cost basis i.e. the value paid for acquiring the particular brand. A separate account for the Brand is created and debited by that value while passing the business acquisition entry. But in the case of internally generated Brands, the accounting treatment is diversified on the basis of generation of the brand value. The generation of Brand Value is divided into Research Phase and Development Phase. The research expenditure is revenue nature expenditure which is directly debited to profit & loss account while the cost of development activities is the actual cost of the brand.

The problems faced by standards setters in recognition of all types of Brands are due to their varied valued at different period of time especially the internally generated brands. Therefore, the decision is taken to recognise acquired brands only.

Paragraph 63 AASB138-Intangilbe assets say, “Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognised as intangible assets”.

Reference List:

Board, S. o. (2015). Intangible Assets. Retrieved May 24, 2017, from Compiled AASB Standard:

https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf

The major difference between a provision and a contingent liability is that a provision is recognised when it is probable that a liability will be occurred embodying the outflow of economic benefit and a reliable estimate can be made about the outflow while a contingent liability is a possible liability that may arise due to some past or present events depending upon the occurrence or non-occurrence of some future uncertain events. That is why, provisions are recognised in the financial statements because provisions are more realistic and exact as compared to a contingent liability which is just a probabilistic measurement of some future liability.

Provision for Long-service-leave:

Long-service-leave is an important employment benefit given to the Australian companies in which the employees get some minimum leave benefits. It should be recognised in the financial statement according to AASB119. Recognition is required for current as well as non-current liability, service cost, interest costs and re-measurements, if any.

Dividends Payable:

Dividends payable is the dividend which is declared by the company but is due for payment. According to the general definition of liabilities, any amount which is outstanding for payment should be recognised as a liability in the books of the company. Hence, if any dividend is declared within the financial year but is not paid till the end of that financial year, that declared amount will be recognised as short-term liability to the company.

Preference Shares:

Preference Shareholders are the stakeholders who invested their money into the company. But the fixed dividend payable to them can be said to be a liability. However, where in a particular year the company did not earned any profits such dividends could not be taken as a liability unless the preference shares are cumulative. Therefore, liability for preference shares depends on the nature of the shareholding.

Reference List:

Accurium. (2014, October). Financial Reporting for long service leave. Retrieved May 24, 2017, from Accurium: https://www.accurium.com.au/-/media/Accurium/Consulting/Long-service-leave/Long-service-leave-information-note.ashx

Bragg, S. (2013, April 07). Dividends Payable. Retrieved May 24, 2017, from Accounting tools:

https://www.accountingtools.com/articles/what-are-dividends-payable.html

Cite This Work

To export a reference to this article please select a referencing stye below:

My Assignment Help. (2022). Accounting Standards For Property, Plant And Equipment, Provisions, Intangible Assets, And Liabilities Are Crucial For Financial Reporting.. Retrieved from https://myassignmenthelp.com/free-samples/acc510-financial-reporting/property-plant-and-equipment-file-A8BE3C.html.

"Accounting Standards For Property, Plant And Equipment, Provisions, Intangible Assets, And Liabilities Are Crucial For Financial Reporting.." My Assignment Help, 2022, https://myassignmenthelp.com/free-samples/acc510-financial-reporting/property-plant-and-equipment-file-A8BE3C.html.

My Assignment Help (2022) Accounting Standards For Property, Plant And Equipment, Provisions, Intangible Assets, And Liabilities Are Crucial For Financial Reporting. [Online]. Available from: https://myassignmenthelp.com/free-samples/acc510-financial-reporting/property-plant-and-equipment-file-A8BE3C.html
[Accessed 28 March 2024].

My Assignment Help. 'Accounting Standards For Property, Plant And Equipment, Provisions, Intangible Assets, And Liabilities Are Crucial For Financial Reporting.' (My Assignment Help, 2022) <https://myassignmenthelp.com/free-samples/acc510-financial-reporting/property-plant-and-equipment-file-A8BE3C.html> accessed 28 March 2024.

My Assignment Help. Accounting Standards For Property, Plant And Equipment, Provisions, Intangible Assets, And Liabilities Are Crucial For Financial Reporting. [Internet]. My Assignment Help. 2022 [cited 28 March 2024]. Available from: https://myassignmenthelp.com/free-samples/acc510-financial-reporting/property-plant-and-equipment-file-A8BE3C.html.

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