Question

Dribnor Ltd entered into the following transactions and events during 2018. Do these transactions and events meet the Framework 2014 definitions of assets, liabilities, equity, income or expenses? Give reasons. (a) Dribnor entered into a contract with Melbourne Metal Manufacturers Ltd to purchase capital equipment at a cost of $1 million. Dribnor paid a 10% deposit, which was non refundable. (b) Dribnor has a regular program of maintaining its plant and equipment. In order to provide for this program, it has established a 'provision for plant maintenance account that the company shows with liabilities in the statement of financial position. (c) Dribnor has non participating, cumulative, redeemable preference shares on These are shown as a component of equity. However, the accountant believes that the preference shares meet the definition of liabilities (d) As a result of its expansion program, the company applied for a government grant of $2 million as part of the government's employment enhancement program. During 2018 it was informed that it had been awarded the grant to be paid during the 2019 reporting period

Answer 1

(a) Deposit of $1 million paid shall be recorded as an asset

Amount paid shall be recorded as an asset, when benefit from the asset will flow to the entity for more than one financial period and such asset should be in the control of the entity. Here entity had paid $1 million as non-refundable deposit for purchase of asset and it is certain that Dribnor Ltd will purchase such asset and benefit from the asset will flow to the entity. Hence as per IFRS such payment need to be recorded as asset and at the time when Dribnor Ltd will get possession of the asset then such amount paid need to be capitalized in the value of asset.

(b) Provision for plant maintenance shall be recorded as a liability

Where there is certainty of outflow of economic resources of the entity to meet certain expenditure. Then as per IFRS entity need to recognize such estimated outflow of resources as a provision. Here Dribnor has created provision for maintenance of plat and equipment and as per IFRS it should be recorded as liability.

(c) Such preference share meet the definition of liability as per IFRS, hence it should be presented as a liability

As per IFRS, when there is a contractual obligation to deliver cash to the preference shareholders that cannot be avoided, then such instrument shall be classified as financial liability. Here Dribnor Ltd need to pay cash for the redemption of preference shareholders and that cannot be avoided. Hence it shall be classified as financial liability. Here accountant is correct.

(d) Grant receivable $2 million need to be presented as current asset

As per IFRS, when there is certainty of recoverability of grant. Then such amount shall be recorded as an asset. Also, when it is certain that such amount shall be received within next financial year then such asset shall be classified as current asset. Here recoverability of government grant of $2 million is established. Hence it should be recorded as an asset also here it is certain that such amount shall be received within 2019. Hence it should be recorded as current asset.