Identifying Assets in Financial Statements

Answer to Part 1:

Assets denote the economic resources, which the business organisations ascertain by evaluating the past events. According to “Paragraph 89 of the conceptual framework of AASB”, the business entities need to identify assets in their balance sheet statements for presenting the financial reports, if the entity is likely to receive future benefits (Biddle et al., 2015). Besides, it is necessary for the business organisations to gauge the asset costs in an accurate manner. Due to this, the photographs of the company founder coupled with the actual building falls in the criteria of rectification of business assets. In this context, it is not possible that the future economic benefits would have a significant inflow from the photograph. Hence, it could be inferred that there need not be realisation of photographs as assets in financial statements.

Answer to Part 2:

According to “Paragraph 91 of the conceptual framework of AASB”, all business liabilities are needed to be mentioned in the financial statements. Another vital aspect is the rightful measurement of liabilities. In addition, “Paragraph 91 of the conceptual framework of AASB”, states that there is depiction of contingent liability, which is adjudged as potential requirements for the firms arising due to past events (Cheng, Dhaliwal & Zhang, 2013). According to the case study, the business organisations control the future business events. Moreover, the business loss is likely and not significant and it would come under the contingent liability section, which could not be mentioned in the financial statements of the existing year.

Answer to Part 3:

It is necessary for obtaining the suggestion of legal advice that the business is plausible in winning the case. A specific liability is not adjudged as a liability, if it fails to fulfil the needed requirements of AASB Conceptual Framework (Flower, 2016). Thus, it could be stated that the situation could not be considered as portion of contingent liability, since there is no likely business obligation. Hence, this case would not be treated in the financial statements of the organisation.

Answer to Part 4:

According to “Paragraph 91 of the conceptual framework of AASB”, the expenses should be ascertained, if there is rise in economic benefits or fall in liability (Frias?Aceituno, Rodríguez?Ariza & Garcia?Sánchez, 2014). According to the conceptual framework of AASB, the outdated plant and equipment is required to be disposed and they need to be depicted in the financial statements of the organisations. This needs crediting the asset account and debiting the bank account. The ascertainment of income tax is relatively easy, if the selling value is greater in contrast to the book value. This indicates that the disposal amount is lower than the book value, which necessitates the need to consider loss in the form of expenditures.

Measurement of Asset Costs

Answer to Part 5:

According to the conceptual framework of AASB, the realisation of donation is based on the type and nature of donation. The business entity is required to report donation in the financial reports, which is capital in nature. Thus, the donations are required to be depicted in the income statement, which are revenue in nature (Gigler et al., 2014).

If the fixed assets could be segregated into distinct identifiable units, the business entities could undertake the strategy of the approach of component for depreciation. It is necessary for the organisations to take into account the life and cost of the valuable life separate units. Moreover, the method of straight-line denotes the actual worth of the assets, which is depreciated over the asset lifetime. Hence, the approach of component related to depreciation should be adopted for the application. The reasons include the easy identification of airplane components and their nature is different. For computing the airplane cost for 10 years, the method of simple depreciation requires to be adopted. Hence, it could be inferred that it is effective to adopt the method of component associated with depreciation for depreciating the airplane cost (Gigleret al., 2014).

According to “Paragraph 29 of AASB conceptual framework”, the business organisations possess the right of gauging the business assets through revaluation model or model of case cost (Hanlon, Hoopes & Shroff, 2014). In addition, “Paragraph 30 of AASB conceptual framework”, denotes that the code of model considers the assets, which need to be gauged at cost after subtraction of accumulated impairment depreciation. The most vital benefits of utilising this method include the ease of use and lower costs in contrast to the other methods. “Paragraph 31 of AASB conceptual framework” signifies that the method of fair value needs to be used when ascertaining the assets. Thus, it could be stated that the model of cost needs to be used for ascertaining the aircraft cost.

According to “Paragraph 60 of AASB conceptual framework”, the chosen depreciation method should be able to signify the future asset economic benefits. Hence, the basis for choosing the depreciation method for the organisations primarily depends on the expected asset benefits (Hunton, Libby & Mazza, 2015).

Aircraft body:

The inspection cost of the aircraft body need to be ascertained as expenditures. It does not possess any advantage in useful life, which necessitates the need to consider the same as expenditure.

Depiction of Contingent Liabilities in Financial Statements

Engines:

The yearly maintenance cost needs to be taken into account as expenditure. In addition, $1 million has been invested in upgrading the engine, which requires capitalisation. This requires significant consideration, since it raises the engine life.

Fittings:

The cost of replacement of the torn seats and the cost of cleaning should be taken into account as expenditures, in which the organisation is required to capitalise the cost of replacement. In addition, the repair cost of electrical components and testing costs of cockpit equipment should be considered as expenditures.

Equipment of food preparation:

The maintenance and preparation of food costs need to be considered as expenditures.

Aircraft body expenses:

Cost to be recognised
Particulars	Amount
Cost of body	$        3,000,000.00
Salvage Value	$         (900,000.00)
Depreciable amount	$     2,100,000.00
Depreciation	$          210,000.00
Inspection cost	$              5,000.00
Total cost recognised	$        215,000.00

Engine expenses:

Cost to be recognised
Particulars	Amount
Cost of Engine	$        4,000,000.00
Scrap	$      (1,200,000.00)
Depreciable amount	$        2,800,000.00
Depreciation	$          700,000.00
Maintenance cost	$          300,000.00
Total cost recognised	$     1,000,000.00

Fittings expenses:

Cost to be recognised
Particulars	Amount
Cost of  seats	$        1,000,000.00
Depreciation	$          333,333.33
Repair of seats	$          100,000.00
Total cost for seats (A)	$        433,333.33
Cost of carpets	$            50,000.00
Depreciation	$            10,000.00
Cleaning costs	$            10,000.00
Total Costs for Carpets (B)	$          20,000.00
Equipment costs	$        1,700,000.00
Depreciation	$          170,000.00
Maintenance cost	$          150,000.00
Total Cost for Equipment (C )	$        320,000.00
Total Cost recognised	$        773,333.33

Expenses related to equipment of food preparation:

Cost to be recognized
Particulars	Amount
Maintenance cost	$            20,000.00

Overall expenses:

Total expenses
Particulars	Amount
Air craft body	$          215,000.00
Engines	$        1,000,000.00
Fittings	$          773,333.00
Food preparation equipment	$            20,000.00
Total	$     2,008,333.00

Answer to Part 1:

According to “Paragraph 10 of AASB Conceptual Framework”, the intangible assets denote the assets having no physical assets. These assets are falling under the intangible asset category. Each accounting treatment of intangible assets is mentioned in AASB 138. In addition, “Paragraph 21 of AASB 138” denotes that intangible assets could be realised only, if the future benefits arise from such types of assets. Furthermore, according to Paragraph 24 of AASB 138”, the calculation of intangible assets is made at cost basis (Jung, Park & Chung, 2016). According to Paragraph 63 of AASB 138”, the assets could not be recognised in the financial statements of the organisations. However, no assumption has been made that the life of brand name is not precise.

Answer to Part 2:

According to AASB 138, the brand names and formulas are impossible to depict, since the existing brand names are required to be generated. However, the realisation of these brand names should be made, if necessary. The amount paid when the brand name is generated could not be ascertained. The issues are related to the standard setting body, which enables the ascertainment of names of the brand as well as formulas (Leuz & Wysocki, 2016).

Answer to Part 1:

“Paragraph 10 of AASB 137” states that liabilities denote the existing business obligations arising from the events related to the past years. In order to settle such types of obligations, pertinent resource outflow is required. Moreover, the liabilities are realised depending on uncertain amounts and times under the provision of heading. Thus, the business organisations could not control the contingent liabilities (Martínez?Ferrero, Garcia?Sanchez & Cuadrado?Ballesteros, 2015).

Answer to Part 2:

1. The provision associated with long service leave is adjudged as existing obligation where the obligations related to long service leave could be settled for minimising the overall resource overflow.
2. “Paragraph 10 of AASB 138” signifies that liability denotes the existing obligations developed from past events. Hence, dividends payable could be adjudged as liability (Nobes. 2014).
3. Preference share capital is the sum to be paid to the preference shareholders of an organisation. In addition, this is an existing obligation needing financial resources in settling down. Thus, they could be treated as liabilities (Zeff, Van Der Wel & Camfferman, 2016).

References:

Biddle, G. C., Callahan, C. M., Hong, H. A., & Knowles, R. L. (2015). Do Adoptions of International Financial Reporting Standards Enhance Capital Investment Efficiency?.

Cheng, M., Dhaliwal, D., & Zhang, Y. (2013). Does investment efficiency improve after the disclosure of material weaknesses in internal control over financial reporting?. Journal of Accounting and Economics, 56(1), 1-18.

Flower, J. (2016). European financial reporting: adapting to a changing world. Springer.

Frias?Aceituno, J. V., Rodríguez?Ariza, L., & Garcia?Sánchez, I. M. (2014). Explanatory factors of integrated sustainability and financial reporting. Business strategy and the environment, 23(1), 56-72.

Gigler, F., Kanodia, C., Sapra, H., & Venugopalan, R. (2014). How Frequent Financial Reporting Can Cause Managerial Short?Termism: An Analysis of the Costs and Benefits of Increasing Reporting Frequency. Journal of Accounting Research, 52(2), 357-387.

Hanlon, M., Hoopes, J. L., & Shroff, N. (2014). The effect of tax authority monitoring and enforcement on financial reporting quality. The Journal of the American Taxation Association, 36(2), 137-170.

Hunton, J. E., Libby, R., & Mazza, C. (2015). Retraction: Financial Reporting Transparency and Earnings Management. The Accounting Review, 90(4), 1711-1711.

Jung, W. O., Park, S. O., & Chung, H. (2016). Debt financing and voluntary adoption of the international financial reporting standards: Evidence from Korean unlisted firms. Emerging Markets Finance and Trade, 52(1), 39-51.

Leuz, C., & Wysocki, P. D. (2016). The economics of disclosure and financial reporting regulation: Evidence and suggestions for future research. Journal of Accounting Research, 54(2), 525-622.

Martínez?Ferrero, J., Garcia?Sanchez, I. M., & Cuadrado?Ballesteros, B. (2015). Effect of financial reporting quality on sustainability information disclosure. Corporate Social Responsibility and Environmental Management, 22(1), 45-64.

Nobes, C. (2014). International Classification of Financial Reporting 3e. Routledge.

Zeff, S. A., Van Der Wel, F., & Camfferman, C. (2016). Company financial reporting: A historical and comparative study of the Dutch regulatory process. Routledge.