Question

Question 1) Large Mart has recently purchased and installed a filter system through which all exhaust fumes from its Personal Computer (PC) factory are passed before being released into the atmosphere. The filter system was purchased and installed because the Australian Environmental Protection Agency (EPA) threatened to close the factory unless all exhausted fumes were filtered.

The Chief Executive Officer (CEO) has asked the CFO whether or not the filter system represents and asset of the company. The CFO is not sure if the filter system is an asset because he reviewed the Australian Conceptual Framework document and is concerned that the filter system may not meet the future economic benefit requirement that is part of the asset definition. The main reason for the CFO’s concerns is that the filter system is not actually used in the production process.

a)     Provide a detailed discussion of whether or not the filter system that was purchased and installed in the Large Mart factory meets the future economic benefit requirement that is included in the asset definition criteria, AND provide a detailed description of the future economic benefits (if any exist) that the filter system is producing.

b)    Determine whether or not the filter system can be recognised as an asset in the books of Large Mart. When making this decision provide a detailed discussion that outlines how each of the asset definition criteria is (or is not) fulfilled.

Answer 1

a. With regard to future economic benefit from the filter ,

Paragraph 4.14 of the accounting conceptual framework clearly states that

The economic benefits produced by an economic resource, here the filter, could be include:

the filter definitely has the potential to generate future cash inflows or save cash outflow ,to the entity--- by the following facts:

(i) the filter is an integral part of the production & sale of personal computers, without which there will be no manufacture of the same --without which there will be no production process at all.

So, along with(in combination with) other assets such as land, plant & equipment,the filter also ,is responsible for the purpose for which the business was established.

In fact,the Australian Environmental Protection Agency (EPA)'s stipulation" to close the factory unless all exhausted fumes were filtered" makes the purchase all the more very essential for the "future economic benefit" criterion.

(ii)In addition, as said above,this economic resource,namely the filter , certainly enhances the value of other economic resources ,like land,plant & equipment ,etc. that are bought ,to be directly involved in the production of perdonal computers.

b)    To determine whether or not the filter system can be recognised as an asset in the books of Large Mart

Large Mart is the legal & rightful owner of the filter

spent money in its purchase &

that economic resource (filter) possesses the potential to produce future economic benefits , to the purchaser/owner/ namely,Large Mart

& Large Mart is in a position to control its use or has the right to direct its use, in any manner ,as may be beneficial to produce income or save expense

Hence, the filter ,in all certainty, can be considered as an asset in the books of Large Mart.