Question

The elements of financial statements as per the AASB Framework are assets, liabilities, expenses, income and equity. Refer to RQ2.19 and RQ2.20 and Deegan, pages 65 to 73, as well as the AASB Framework for the definitions and recognition criteria of the various elements.
Assuming each of the following scenarios is material, use the AASB Framework to justify if the items meet any of the definition of assets, liabilities, equity, income or expenses. Provide the reason(s) for your view with reference to the definition criteria for the elements of the financial statements. If you believe the item meets the definition of any of the elements, identify the amount the item would be recorded at.
Tech-In-Fo Ltd operates a computer manufacturing business, and has five branches. Tech-In-Fo Ltd is considering the following scenarios for the year ending 30 June 2020:

a.Computer equipment with a carrying amount of $2,000 has become technologically obsolete and isnow no longer able to be used by any of the branches. Tech-In-Fo Ltd believes the equipment willbe able to be sold for scrap for approximately $100.

b.Specialised equipment with a nil carrying amount which is expected to be able to be used as abackup item for the next 3 years.

c.Tech-In-Fo Ltd is aware a customer is unhappy with a computer purchased from Tech-In-Fo Ltd on13 January 2020 for $10 000. Tech-In-Fo Ltd believes the customer will ask for compensation of$50,000, being the cost of the computer plus associated damages. However, Tech-In-Fo Ltd has notreceived a formal request for this from the customer.

a. Computer Equipment

b. Specialised equipment

c. Unhappy customer

Answer 1

Australian Accounting Standards Board(AASB)

Defines "Assets" as those ,on which a company will have the authority & control of its future economic benefits , by virtue of some past transaction or events that occurred.(Paragraph 14 & above till 37)

so, going by the above definition, an asset , to be so called, should have the following characteristics, ie.

1. Future ecomonic benefits--in the form of cash inflows or savings in cash outflows

2.The company owning the asset should have control(ie. Legal ownership/possession)to enjoy the above future economic benefits , over others.

3. The underlying past transaction /event, conferring the above control must have occurred.

As per the reconition criteria,(paragraph 38,39)

Recognition in the statement of financial position , is to be done only when

1. the future ecomonic benefits are probable to happen and

2. they are reliably measurable

Similarly, the AASB defines (thro' para 48)

Liabilities

as future sacrifice of economic benefits, that the company is presently obligated, due to some past transaction/event.

Also, recognition in the statement of financial position   , is to be done only when

1. Future sacrifice is certainly imminent &

2. that it can be measured

Definition of revenues

Inflows or savings in outflows in the form of accretion to future economic benefits , other than by way of equity, but that result in increase of equity for the period

Recognition in the operating statement for the year,if

1.the future benefit has occurred &

2. it can be measured reliably.

Definition of expenses

Outflows or losses in the form of consumption of future economic benefits , other than by way of equity, but that result in decrease of equity for the period

Recognition in the operating statement for the year,if

1.the future outflow/loss has actually occurred &

2. it can be measured reliably.

That said, we shall see individually , all of the above three:

a.Computer equipment with a carrying amount of $2,000 has become technologically obsolete and isnow no longer able to be used by any of the branches. Tech-In-Fo Ltd believes the equipment willbe able to be sold for scrap for approximately $100.

The computer equipment fits the definition of " an asset"

1. capable of generating future ecomonic benefits--in the form of cash inflows or savings in cash outflows

2. Owned by & in the possession of the company

3.It came under the company's control by an act of purchase , in the past.

The asset will be recognised in the statement of financial position

by recording it

at its scrap value--- as that is the only economic benefit (cash inflow) that is expected---- to the amount of $ 100

The balance ---2000-100=1900

is a loss of consumption of future economic benefits---as defined for an expense--- & will be recorded in the operating statement , for the period

b.Specialised equipment with a nil carrying amount which is expected to be able to be used as a backup item for the next 3 years.

As this equipment does not have any carrying value, it does not qualify as an asset & currently, not in the books of accounts at all.

It will not appear anywhere in the financial statements.

c.Tech-In-Fo Ltd is aware a customer is unhappy with a computer purchased from Tech-In-Fo Ltd on13 January 2020 for $10 000. Tech-In-Fo Ltd believes the customer will ask for compensation of$50,000, being the cost of the computer plus associated damages. However, Tech-In-Fo Ltd has not received a formal request for this from the customer.

This $ 50000 falls under the definition of Liabilities given by the AASB

Loss if future economic benefit(cash outflow for damages) is both

probable , imminent &

the company is able to measure it as $ 50000

So, it is to be recorded as

an expense , in the form of consumption of future economic benefits---to the extent of $ 50000-- in the operating statement for the year--

& also

a liability (for the same amount-- 50000--in the statement of financial position, for the current obligation , that happened as consequence of the past event, a sale of computer that actually occurred