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The Framework for Preparation and Presentation of Financial Statements

Describe about the Financial Accounting for Financial Framework Assistant.

1. The Framework for Preparation and Presentation of Financial Statements assists the preparer in applying the Accounting Standards on preparation of financial statement. The Para 5, states that the different element of the financial statement is defined in the Framework. It also deals with the measurement and recognition of various items of financial statement (Macve 2015). In the given case the treatments of various items in the financial statement of Queenslander Ltd is discussed based on the AASB conceptual Framework.

a) The Para 60, of the Framework states that the present obligation is an important characteristic of liability. The obligation is defined as a duty or liability that is enforceable by law. The Para 61, of the Framework states that it is required to make a distinction between the obligation and commitment. In the Para 91 of the Framework it is provided that the liability should be recognized when it is certain that the outflow of economic resources will be necessary in settling the present obligation (Henderson et al. 2015). Therefore, commitment should not be recognized as liability as there is no present obligation. In the given case, Queenslander ltd has provided guarantee for bank loan on behalf of an employee and it is expected that the employee will make default in payment of loan. As the employee has not yet defaulted in making payment so, it is still a commitment and no present obligation has arisen. Therefore, it can be concluded that it is not required to be recognized in the financial statement of the Queenslanders Ltd. However within the meaning of contingent liability as provided in Para 10 of the AASB 137 the possible obligation should be disclosed in the financial statement in the form of note as provided in the Para 86 of the same standard.

b) In the Para 53 of the Framework it is stated that an assets provides future economic benefit that flows to the enterprise. In Para 59 of the Framework it is stated that there is a close relationship between generating assets and incurring but they do not generally coincidences. Therefore, in the absence of expenditure an item should be recognized as an asset if it fulfills the definition of the assets. In the Para 89 of the Framework it is stated that if it is probable that the future economic benefit will flow to the eEnterprise then it should be recognized as assets (Weil et al. 2013). In the given case Queenslanders has received a gift of 500 shares from the customer and as the shares can be sold at market price, so economic benefit is probable to the enterprise. Therefore, it can be concluded that shares should be recognized as assets in the financial statement at the current market price.

Recognition Criteria for Liabilities

c) The Para 99 of the Framework states that the process of determining the monetary amount for the items to be recognized in the financial statement is known as measurement. The Para 100 of the Framework provides the basis on which the items of financial statements are measured and this are Historical costs, current cost, realizable value and the present value. Therefore, it implies that if an item cannot be measured in any of the basis stated in Para 100 then the item cannot be recognized in the financial statement (Zhang and Andrew 2014). In the given case, the company director’s view that certain view attracts customers is a non-financial item and cannot be recognized in the financial statement.2. The AASB 116 is applicable for the accounting of plant, equipments and property as per Para 2 of the standard. The Para 6, of the standard states that Property, Plant and Equipments include all the tangible assets that are held by the entity for using it for more than one year. The recognition criteria is provided in Para 7 of the standard. If a Property, Plant and Equipment is qualifies for recording as an asset then the assets should be calculated at cost as per Para 15 of the standard. After the asset is initially recognized then as per Para, 29 of the standard the entity can follow the cost model or revaluation model as the accounting policy (Rahman 2013). In the Para 31 of the standard it is stated that if reliably the fair value of the asset is measureable then after recognition an asset can be carried at amount that is revalued. The amount with which the assets is to be carried is calculated after reducing the accumulated depreciation form the revalued amount of the asset (Brown et al. 2014). It is provided in the Para 50 of the standard that the depreciable amount of the asset is to be distributed over the useful life of the assets on a systematic basis. It is clearly provided in Para 52 of the AASB 116 that depreciation should be provided even though the fair value is more than the amount with which the asset is carried. The same Para also states that if the carrying amount of the assets is less than the residual then there is no requirement to recognize depreciation.  

In the given case Many ltd has decided to adopt the revaluation model for measuring its machinery. It was found the during the current period the value of the machinery has increased so it was argued by the directors not to provide depreciation on machinery. On the basis of the above analysis of AASB 116 it can be concluded that as per Para 52 of the standard the company is required to recognize depreciation. Therefore, the board should not adopt the director’s advice of not recognizing depreciation.

Recognition Criteria for Assets


3.
The Para 8, of the AASB 138 states that assets are resources that are owned and managed by the entity and from this, it is likely that the entity will derive benefits of economic nature in future. The identifiable non-monetary asset that does not have physical substance is known as Intangible Assets. In Para 9 of the standard it is provided that few of the common examples of intangible assets are computer software, copy rights, patents, customer lists, franchise etc. The Para 10 of the standard provides that if any of the items does not fit into the definition of intangible assets then the expenses incurred for generating it internally or acquiring from outside should be recognized as an expenses (Wang 2014). The expenses should be recognized when it is incurred. It is provided in Para 11 of the standard the intangible asset should be identifiable and distinct from the goodwill. In Para 16 of the AASB 138 it is provided that an entity can gather by its efforts the portfolio of customers or market share. If there is no legal rights then the entity is not in control over the expected future economic benefit from the relationship with the customer therefore the definition of the intangible assets is not satisfied.

In the given case, Sharks Ltd incurred expenses in generating mailing list for the customer. The company also acquired a mailing list form its competitor. Further, the company has also capitalized the marketing cost as noncurrent assets. From the analysis of the AASB 138 it can be suggested that as per Para 16 as the company does not have any control over the future economic benefit (Chua et al. 2012). Therefore the company should not recognize the expenses as intangible assets and should be recognized as expenses in the year it is incurred as per Para 10 of the AASB 138. The company should recognize the marketing expenses and the current profit of the company should be $10 million.

4. The Para 10 of the AASB 137 provides the definition of contingent liability. Contingent liability is defined as probable obligations that arise from the past event and will be established by the occurrence and non-occurrence of future uncertain events (Horngren et al. 2012). The present obligations is also included in the definition of contingent liability but is not recognized, as the steady flow of resources will not be necessary to pay the present obligation or the amount that is required to settle the obligation is not been able to be estimated reliably. As per Para 27 of the standard a contingent should not be recognized but a disclosure is necessary to be provided in the financial statement (Parker 2013). In the given case at the time of issue of financial statement, it was not probable that the Bird Ltd would lose the case and economic resources will be necessary to settle the obligation. As a result, based on the analysis of AASB137 it can be concluded that, as the legal damage is not probable as on 30 June 2017 so the company is not required to recognize it as liability but is necessary to be treated as contingent liability and a disclosure is required in the financial statement.

The Para 10 of the AASB 137 states that liability is a present obligation that arise from  events of the past and it is possible that the resources embodying economic benefit will be necessary to settle the obligation (Horngren et al. 2012). The provision is recognized for liability of uncertain timing. In the given case after two weeks of publishing the financial statement, the lawyer of the company finds that it is probable that the company will lose the legal case and the outflow of resources will be required to settle the obligation. There is no present obligation it is only a possibility that the company will lose the case. Therefore, it can be concluded that it is not a liability but a contingent liability.

Reference

Brown, P., Preiato, J. and Tarca, A., 2014. Measuring country differences in enforcement of accounting standards: An audit and enforcement proxy. Journal of Business Finance & Accounting, 41(1-2), pp.1-52.

Chua, Y.L., Cheong, C.S. and Gould, G., 2012. The impact of mandatory IFRS adoption on accounting quality: Evidence from Australia. Journal of International Accounting Research, 11(1), pp.119-146.

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

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

Horngren, C., Harrison, W., Oliver, S., Best, P., Fraser, D. and Tan, R., 2012. Financial Accounting. Pearson Higher Education AU.

Horngren, C., Harrison, W., Oliver, S., Best, P., Fraser, D., Tan, R. and Willett, R., 2012. Accounting. Pearson Higher Education AU.

Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.

Parker, R.H., 2013. Accounting in Australia (RLE Accounting): Historical Essays (Vol. 58). Routledge.

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

Wang, C., 2014. Accounting standards harmonization and financial statement comparability: Evidence from transnational information transfer. Journal of Accounting Research, 52(4), pp.955-992.

Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical perspectives on accounting, 25(1), pp.17-26.

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