Question

A new children’s hospital is being built in Springfield, and Friendly Corp. has publicly 8.3 pledged that it will contribute $5 million toward the hospital’s construction. In its pledge agreement dated 1/1/X1, Friendly Corp. and the hospital have agreed upon the following contribution schedule: $2 million to be contributed

at 12/31/X1, $2 million at 12/31/X2, and $1 million at 12/31/X3. Friendly’s typical borrowing rate is 6%. How must Friendly Corp. report the contribution in its financial statements at the end of each reporting period and as of the inception of the agreement? What disclosures are required, if any?

Answer 1

As per IAS 1 — Presentation of Financial Statements, there are 3 concepts 1^st going concern, 2^nd consistency and 3^rd accrual basis of accounting .

Accrual basis of accounting

Accrual basis of accounting: IAS 1 requires that an entity prepare its financial statements, except for cash flow information, using the accrual basis of accounting. Further Accrual basis is a method of recording accounting transactions for revenue when earned and expenses when incurred.

Most financial reporting in the US is based on accrual basis accounting. Under the accrual system, an expense is not recognized until it is incurred. This means it is unimportant with regard to recognition when a business pays cash to settle an expense.

Hence Friendly Corp. should report contribution of $2 million as an expenses in the year in which it has contributed. And Remaining amount of contribution should be report as an expenses when it will be paid . It is not necessary to report future contribution in current FY.

Further , make a note of the upcoming payable to ensure you will be prepared when it comes due, but do not make accounting entries for the payable, if using the cash method. If you elect to use the cash method, you will only record an expense for the payable when you make a cash payment. Therefore, you will not make any accounting adjustments, also known as journal entries, until the next period.