Definition and recognition criteria of assets and liabilities

Part 1

The assets is defined as an economic resource that is held by the entity because of past events. The Framework for preparation and presentation of financial statement in Para 89 provides that an entity should recognise assets in the balance sheet if it is probable that the entity will receive future economic benefits. In addition to this, it is provided that in order to record the assets the cost or value of the assets of the entity should be reliably measured (Aiken et al., 2013). In this case, it can be seen that the photographs of the company founders and original building does not satisfy the definition or recognition criteria of assets. It is not expected that future economic benefit will flow to the enterprise from the photographs. Hence, it can be said that the photograph should not be recognised in the financial statement as an asset.

Part 2

As per Para 49 of the Conceptual Framework the liability is defined as the present obligation of the company that is arising from past event. The Para 91 of the Conceptual Framework provides that liability should be recognised in the balance sheet if it is probable that the outflow of economic resources will be required to settle the obligation (Jorissen et al., 2014). The amount that should be recognised as liability should be reliably measurable. In this case, the legal advice state that it is probable that the company will lose the case. The Para 10 of the AASB 137 provides that contingent liability is a possible obligation that arises from past event. The existence of this obligation will be confirmed by future events that is not under the control of the entity (Rahman, 2013). On analysis, it can be said that in this case as the loss is probable but not certain so it is a contingent liability. In this case, the probable ability should be disclosed as notes to accounts.

Part 3

In this case, the legal advice suggests that it is probable that the company will win the case. Therefore, it is not a liability, as it does not fulfil the definition or recognition criteria of liability as mentioned in the conceptual Framework. In addition to this, it is also not a contingent liability because the legal advice suggests there is no possible obligation. On analysis, it can be said that no treatment in the financial statement is required in this case (Henderson et al., 2015).

Part 4

In Para 92 of the framework it is provided that income should be recognised if there is an increase in future economic benefit or decrease in liability. In Para 94 it is provided that expenses should be recognised if the economic benefit decreases or the liability is expected to increase. The conceptual framework provides that the disposal of obsolete plant and equipment should be recorded in the financial statement. In order to record this the asset account should be credited and the bank account should be debited (Benson et al., 2015). If the amount received on sale of assets is more than the book value of the asset then the income should be recognised. On the other hand, if the disposal amount is less than the book value of the assets then loss should be recognised as expenses.

Part 5

Treatment of contingent liabilities

The conceptual Framework provides that recognition of donation depend on the nature and type of the donation. In this case, it is suggested that if the donations is of capital nature should be to be recorded in the financial position statement. On the other hand, if the donation received is of revenue nature then it should be recorded in the income statement.

Part 1

a) The component approach for depreciation is applied if the fixed assets can be classified into separate identifiable units. It is also necessary that the cost and useful life of the separate unit could be measured reliably in order to apply this method (Gipper et al., 2013). On the other hand, in this simple method of depreciation the cost of the entire asset is depreciated over the useful life of the assets. However, in this case component approach of depreciation should be followed because the different components of the airplane is identifiable and the useful life of the components are different. In this case, by simply depreciating the cost of the airplane over the period of ten years will not reflect the correct amount of depreciation. Therefore, it will be advantageous to use component method of depreciation for depreciating the cost of the airplane. 

b) The Para 29 of the AASB 116 provide that an entity can measure the asset after recognition by applying the revaluation model or cost model. The Para 30 of the standard states that in the cost model the assets shall be measured at cost less accumulated depreciation on impairment. The advantage of this model is that the implementation of this model is relatively easy and the cost is less. The Para 31 provides that an asset should be recognised at fair value if the assets could be measured reliably (Biondi & Lapsley, 2014). The advantage of this model is that the assets in the financial statement are always represented in the fair value. The aircraft is a class of asset that means if a component is revaluated then the entire class of assets should be revaluated for avoiding selective revaluation. In this case, the most appropriate method for recognising the cost of aircraft and its component is the cost model.

c) The Para 60 of the AASB 116 states that the depreciation method selected by the organisation should appropriately reflect the future economic benefits derived by the organisation from the Asset. Therefore, the basis for selecting the method of depreciation depends on the expected benefit from the assets. 

Part 2 

Aircraft body

The inspection cost of aircraft body should be recognised as expenses. This is recorded as expenses because it does not add value or increases the useful life of the Asset. 

Engines

The expenses of $300000 incurred as annual maintenance cost should be recognised as an expenses. The expenses of $1million that is expected to be incurred for upgrading the engine should be capitalised. This amount should be capitalised because it will increase the life and usefulness of the engine.

Fittings

The replacement Cost of the seats should be capitalised. The repair of torn seats should be treated as expenses. The cleaning cost should be recognised as expenses. The repairing for electrical equipment should be recognised as expenses. The testing off cockpit equipment should be recognised as expenses. The upgrading cost should be capitalised as it improves the usefulness and life of the asset. 

Recognition of income and expenses

Food preparation equipment

The repair and maintenance cost of food preparation equipment’s should be treated as an expenses.

Part 3

Aircraft body

Cost to be recognized
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 recognized	$      215,000.00

 Table 1: Cost recognised 

Engines

Cost to be recognized
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 recognized	$    1,000,000.00

Table 2: Cost recognised 

Fittings

Cost to be recognized
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 recognized	$       773,333.33

Table 3: Cost to be recognised 

Food preparation equipment

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

Table 4: Cost to be recognised

Total 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

Table 5: Total expenses

Part 1

The Para 10 of the AASB 138 state that a non-monetary identifiable asset without any physical substance is known as intangible assets. The Brands falls within the definition of intangible assets. Therefore, the accounting treatment of brands is conducted in accordance with AASB 138. The Para 21 of the standard states that intangible asset is recognised if it is probable that the future economic benefit arising from the assets will flow to the entity. In addition to this, the intangible assets should be recorded if the amount can be estimated reliably. The initial measurement of intangible assets should be at cost as per Para 24 of the AASB 138. However, it should be noted that internally generated brand name should not be recognised in the financial statement as per para 63 of the standard (Viscarra Rossel et al., 2014). The effective life of the brand name is not assumed to be indefinite so there is a need for amortization of brand names.

Part 2

The recognition of all brand names and formulas are not possible as the AASB 138 states that internally generated brand name should not be recognised. In case of internally generated brand names it is not possible to determine the cost that is incurred for generating the brand name. This is the main difficulty for the standard setting bodies to allow all the brand names or formulas to be recognised in the financial statement (Palmer, 2013). 

Part 1

The Para 10 of the AASB 137 provide that liability is a present obligation that arise due to past event. The settlement of this obligation will require outflow of resources. The liability that are of uncertain amount and timing is recognised as provisions. On the other hand, the contingent liability are possible obligation that are dependent on a future event which is beyond the control of the entity. It is seen that sometime present obligation is also contingent liability as it is not probable that outflow of resources will be required to settle the obligation or the amount cannot be measured reliably (de Villiers et al., 2014). On analysing the definitions, it can be seen that provisions are recognised as the obligation is present and it is probable that resources will be required to settle the obligation. On the other hand, the contingent liability is not recorded in the financial statement as there is no present obligation or the present obligation cannot be reliably measured (Deegan, 2013).

Part 2

a. The provision for long service leave is a present obligation. In order to settle the long service leave obligations the outflow of resources embodying economic benefit will be required. The amount that will be required to settle the obligation can be estimated reliably. Therefore based on the above discussion it can be said that provision for long service leave should be recognised as provision and not liability (Downie & Stubbs, 2013).

b. The Para 10 of the AASB 138 states that liability is a present obligation that arises from past event. In order to settle the liability resources embodying economic benefit is required. In this case the dividend payable is a present obligation. In order to settle this obligation outflow of economic resources will be required. Therefore, it can be said that dividend payable should be recognised as liability.

c. The preference share capital represents the amount that is required to be paid to preference shareholders. This is a present obligation and requires resources embodying economic benefits to settle this obligation. Therefore, the preference share capital should be recognised as a liability. 

Reference List: 

Aiken, M., Lu, W., & Ji, X. D. (2013). The new accounting standard in China. Perspectives on Accounting and Finance in China (RLE Accounting), 8, 159.

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.