Question

Topic accounting

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Question 1

a) Differentiate between the 'definition of assets' and the criteria for recognition of assets' provided in the conceptual framework.

b) If an asset is expensed in one financial year because future economic benefits were not deemed to be 'probable', can the same asset be reinstated in future periods if the benefits are subsequently assessed as probable? In this respect, does the ability to reinstate assets apply to all assets? Briefly explain.

c) AASB 101 stipulates a number of disclosures that many reporting entities are required to make. What specific disclosures are required by AASB 101 in relation to assets?

d) Is depreciation an allocation process or a valuation process? Provide reasons for your answer

e) In an article that appeared in The Australian Financial Review on 26 August 2011 ('Apple could easily flounder without its founder' by Mark Ritson), it was reported: The news that Steve Jobs has resigned from Apple and will be replaced as CEO by Tim Cook made global headlines yesterday What has followed since has been a frenzied discussion of what the loss of Jobs will mean for new product development timelines, share price issues and corporate culture. Apple's share price fell 5 per cent on the news of the resignation as questions were raised about Apple's prospects without its creative guru at the helm. But the real question for Apple as it enters its post-Jobs period is how well the brand will survive without the founder. Required The fact that the share prices fell following the departure of Steve Jobs is consistent with the view that Jobs was an 'asset' to the company. How do you think this 'asset' would have been disclosed in the financial statements of Apple?

f) What is a contingent asset? When should a contingent asset be disclosed within the notes to the financial statements? If something is initially disclosed as a contingent asset, when can it subsequently be recognised as an asset within the financial statements? Briefly explain.

Answer 1

ANSWER:

According to data-

a)

• An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
• An asset is recognised in the balance sheet when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably.

b)

• To be recognized, an item must meet the definition of an element provided in the conceptual framework, and satisfy the following criteria:
• It is probable that any future economic benefit associated with the item will flow to or from the entity; and
• The item’s cost or value can be measured with reliability.
• The general criteria for recognizing elements Assets in financial statements is provided below:

Assets: An asset is recognized in the balance sheet when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably.

• The economic benefits contribute, directly or indirectly, in the form of cash or cash equivalents.
• Even though many assets are in physical form, such as machinery, the physical form is not essentials.
• For example, patents and intellectual property are assets controlled by the entity and have future economic benefits.

YES ,the ability to reinstate assets are apply to all assets.

c)

Disclosure of Accounting Policies As per AASB 101

An entity shall disclose in the summary of significant accounting policies:

1. the measurement basis (or bases) used in preparing the financial statements; and
2. the other accounting policies used that are relevant to an understanding of the financial statements.

• An entity shall disclose, in the summary of significant accounting policies or other notes, the judgements, apart from those involving estimations, that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements.

d)

• Depreciation is a process of cost allocation, not valuation
• Depreciation accounting is a system of accounting which aims to distribute the cost of tangible capital assets, less salvage (if any) over the estimated useful life of the unit in a systematic and rational manner.
• It is a process of allocation, not of valuation”
• It is not an attempt to value the asset.
• Thus, it is often said that depreciation is a process of “allocation” not “valuation.” Once an asset's cost is calculated, it next becomes necessary to determine the accounting periods benefited.
• In accounting, the term depreciation refers to the allocation of cost of a tangible asset to expense to the periods in which the asset is expected to be used to obtain the economic benefit.
• For example, a company purchases a piece of equipment for $20,000 and estimates that the equipment will be used for a period of 10 years.
• The cost of the equipment (i.e., $20,000) will be allocated to each of 10 years using some systematic and rational allocation method.
• The cost of an asset is initially recorded as an asset in accounting records because the asset will be used for many periods in future.
• Afterward, the portion of cost is allocated to a particular period is removed from the total cost of the asset and becomes the expense of that particular period and is matched against revenue like any other expense.

The concept explained above can be summarized as follows:

e)

• It is mentioned as an intangible asset in the balance sheet. Intangible assets are those which have no physical presence. Trade secrets, Goodwill, Brand recognition, intellectual property, copyrights, patents are examples of the intangible assets.

f)

Contingent Asset:

• A Contingent Asset is a possible asset that may arise because of a gain that is contingent on future events that are not under an entity's control.
• Examples of Contingent Assets
• A company involved in a lawsuit with the expectation to receive compensation has a contingent asset because the outcome of the case is not yet known and the dollar amount is yet to be determined.

Recognition and disclosure of contingent assets

• If the probability of inflow of resources is greater than 50%, contingent asset is disclosed (IAS 37.89) in the notes to financial statements (but not recognised in the statement of financial position).
• Upon meeting certain conditions, contingent assets are reported in the accompanying notes of financial statements.
• They are recorded on the balance sheet only when the realization of cash flows associated with it becomes relatively certain.
• A contingent asset becomes a realized asset recordable on the balance sheet when the realization of cash flows associated with it becomes relatively certain.
• In this case, the asset is recognized in the period when the change in status occurs. Contingent assets may arise due to the economic value being unknown.

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