Question

1. Describe what a reporting entity is and discuss the nature of a reporting entity.
2. Discuss the definition and essential characteristics of an asset.
3. What is the difference between the two types of events occurring after the end of the reporting period? Is their accounting treatment identical?
4. When do dividends become a legal debt of the company? When are they to be recognised as liabilities? (8 marks each)

Answer 1

a). An obligation of business to prepare external financial reports for its stakeholders like- investors, suppliers, lenders etc., is called reporting entity of the business.

Nature of financial reporting entity- Reporting entity is a system of communication between the management and the stakeholders of the financial statements. in order to report the results of the business activities of the enterprise, it must-have credibility, accountability, and reliability of its working. It is as an explanation or exhibit attached to a financial statement or embodied in a report containing a fact, opinion, or detail required or helpful in the interpretation of the statement or report.

b) Assets refer to economic resources of an enterprise that are recognized and measured in monetary value.

Future economic benefit’ or ‘service potential’ is the essence of an asset. This means that the asset has capacity to provide services or benefits to the enterprises that use them. In a business enterprise, that service potential or future economic benefit eventually results in net cash inflows to the enterprise.

c) There are two types of events described in AASB 110:

1.Adjusting events-Which arise after the end of the reporting period which provide evidence of conditions that existed at end of the reporting period (e.g. the settlement of a court case after the end of the reporting period that confirms the company had a present obligation at the end of the reporting period).

2. Non-adjusting events-Which arise after the end of the reporting period (e.g. a flood or fire after the end of the reporting period that destroys a company’s building and plant).

The treatment in the financial statements is different in both cases.

Paragraph 8 of AASB 110 requires the financial effect of the adjusting events to be reflected in the financial statements prepared at the end of the reporting period, i.e. an adjustment must be made to the financial statements before publication. AASB 110, paragraph 21 requires material non-adjusting events to be disclosed by way of note to the financial statements.

d) If a dividend is declared by the company, a liability is recorded on the financial records and reported on the company's balance sheet. It is a current liability, and payable within the next accounting year.

Thanks & all the best.........