Question

Comfort Pty Ltd is a wholesaler of home furniture. The recent bushfire destroyed one of its warehouse located in Cooma, NSW. The inventory loss amounts to $180,000. Required: Discuss and justify how Comfort Pty Ltd should account for the inventory loss of $180,000 as an ‘expense’, in accordance with the definition and recognition criteria provided in the AASB Conceptual Framework.

Answer 1

Definition-According to AASB, "Expenses" are consumptions or losses of future economic benefits in the form of reductions in assets or increases in liabilities of the entity, other than those relating to distributions to owners, which result in a decrease in equity during the reporting period.

In given case, Comfort Pty Ltd's recent bushfire destroyed one of its warehouses located in Cooma, NSW where inventory loss amounts to $180,000 which leads to reductions in assets.

Criteria for Recognition of Expenses- An expense should be recognized in the operating statement, in the determination of the result for the reporting period, when and only when:

(a) it is probable that the consumption or loss of future economic benefits resulting in a reduction in assets and/or an increase in liabilities has occurred; and

(b) the consumption or loss of future economic benefits can be measured reliably.

In given case, Comfort Pty Ltd's fulfills both criteria in inventory loss amounts to $180,000 as-

1. Loss of future economic benefits resulting in a reduction in assets and

2. Loss of future economic benefits can be measured reliably.

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