Advanced Financial Accounting
Classification of liabilities is based on the same principles as the classification of assets.’ Do you agree with this? Why or why not?
According to Lubbe, Modack, and Watson (2014 p.100), the primary basis of classifying the various assets is based on the function and nature of the particular assets. The assets are therefore classified into two types that is the non-current and current assets. The non-current assets are typically those assets which are categorized according to their nature and function and they are therefore not considered as part of the operating cycle. However, the current assets are considered as those assets which give rise to a variety of financial resources and this is usually ion the short term which has to be within an operating cycle (McBride et al.2017 p.458). The current assets are often classified on the basis of their nature and unlike the non-current assets which are not part of the operating cycle, they occur within an operating cycle.
Generally, the liabilities in different companies have varying classification bases. For example, the liabilities have been classified according to the time of meeting such obligations and their nature. Usually, the obligations which arise in the organizations must be paid within the operating cycle. The classification of liabilities is typically on the time of future outflow of economic resources (Anokhina, 2014 p.15). Such a timing basis is a reflection of the nature of the different types of liabilities, for instance, the existence of debenture holders in reference to the trade creditors. There is usually a wide classification of the liabilities and hence such a classification cannot be restricted just to the two bases that is nature and time as opposed to the assets which are just two and hence their classification must be on the basis of nature and function.
A look into the different financial statements of various companies indicates that the assets have often been classified on the basis of nature and time. However, for the liabilities, they have been classified according to the time which they are to be settled by the particular company. Further, a lot of information on the liabilities is disclosed in the financial statements. The liabilities are also classified other bases such as the specific conditions, source, liquidity and secured v. unsecured (Laing, Douglas, and Watt, 2015 p.16).
Classification of liabilities as current or non-current is not that important. The money is paid out eventually anyway, so what’s the big deal? Discuss.
In the real sense, the liabilities usually need the sacrifice of the economic resources and this is done in the future. The absence of the classification of the liabilities will, therefore, result in the provision of liabilities at a date which is balanced and this should not be the case in an organization. The most important issue in the above case always depends on whether such a classification of the liabilities would generally result in the enhancement of the information provided in the reports (Jordan, 2016 p.22). The other matter of concern is on whether the assessment and interpretation of the reports will improve the financial reports through the classification of the liabilities which should be paid within a particular operating cycle or not. Also, it should be looked at whether such an evaluation and interpretation of the financial reports will improve the grouping of the liabilities and hence be in a position of separating the liabilities which must be paid over a long period of time or not.
There are usually a variety of transactions and events which lead to the creation of the liabilities and therefore the liabilities are usually different based on their nature. Further, there are usually various benefits which can be derived from the classification of the liabilities. For example, the grouping of the liabilities provides information to the various users of reports to comprehend the varying nature of the liabilities and hence appreciate the presence of liabilities in various organizations (Bauman and Shaw, 2016 p.80). Additionally, the classification of the liabilities enables the users of the reports to evaluate the various effects of the liabilities that is long term and short term on a particular operating cycle. It also aids in analyzing the impact of the liabilities on the long term financial stability of a particular business enterprise. There are a lot of questions which arises during the classification of the liabilities. For instance, there is the question on whether there is the need for the various users of the financial reports to have information on the impact of payments of the liabilities on the operating cycle.
The other question relates to the payment of interest on the borrowings made and whether such repayments can be met in the long run or not. The classification of the liabilities is useful and this is because it improves the ability of different report users to analyze some of the mentioned issues such as repayment of interests on the loans borrowed by a particular company. Also, the question which needs to be addressed by various individuals is if there is an abandonment of the classification of the liabilities which is on the based on the date of payments, there would be another technique of classification which would be appropriate (Morris, 2017 p.8). The above differences have been made in reference to the conceptual framework which has the ability to acknowledge the differences in the two terms.
A provision and a contingent liability are the same.’ Discuss.
The above statement is regarded as false and this is because a contingent liability and a provision of a contingency all have the same element. A provision can be defined as the event which results to a decline in the value of an asset and such could be a provision for the bad debts. Often the value which is reduced and can be estimated reliably and this is in comparison with the contingent liability. On the other hand, the contingent liability can be said to be a liability which is probable cash outflow in the future which is as a result of a particular activity. However the cash outflow must be estimated. The future sacrifices of economic resources of a particular business enterprise are expected to occur and thus they will be needed by such an entity (Kayhan and Jenkins, 2016 p.50). Such future sacrifices of economic resources are considered to be liabilities in any particular organization. A company can at times be faced with the problem of identifying the liabilities and hence it has to take into account the various differences existing between a contingent liability and a contingency provision. However such differences have often been subjected to various interpretations and this has led to a controversy based on the recognition of and reporting of the two terms in the statement of financial position. The IAS37 has therefore provided the terms contingent assets and contingent liabilities which has therefore provided the variances in the two terms (Lagrange, Viger, and Anandarajan, 2015 p.125).
According to the international accounting standards, the provisions can be considered as a liability and this is because they are liabilities whose time of repayment is uncertain but still, they can identified as liabilities. However, for the contingency, it can be said to be a liability which the outcome can be confirmed after an occurrence of a particular event or rather a non-occurrence of future events which are uncertain and hence cannot be controlled by a particular business enterprise (Arslanalp, 2015 p.198). However the contingency at times may not meet the definition and recognition criteria of a liability and it will therefore not be recognized in the statement of financial position but instead, they are reported in the notes to the annual reports of a particular business enterprise. It can, therefore, be concluded that a contingent liability is that liability which cannot satisfy the recognition criteria of a liability. Such an argument is based on the fact that it is not probable that there will a requirement of the future sacrifice of various resources (Ülgentürk, 2017 p.500). Also, it cannot be classified as a liability because the exact amount of a contingent liability cannot be estimated reliably.
The differences between the two terms can be illustrated in the sense that the existence of a contingency liability can result due to damages which in the long run lead to a lawsuit in the court of law by a particular individual against an entity (Bova, 2016 p.90). When a company loses a particular lawsuit and the amount of the loss is yet to be recognised,it can be argued that there is the existence of a contingency liability which the particular entity has meet when it will arise in the future. However, for the provision, such a lawsuit has to be awarded for the damages which should be paid in the next twelve months.
Employees often fail to appreciate the true cost of their employment”. Discuss.
In as much as the take home pay of a particular employee is considered to be essential, it is an additional cost to the employer which has to be taken into account t by various business enterprises while planning for the remuneration of their employees. Often there are certain additional costs to the employer which the employees ignore, however they must be taken into considerations in a particular company (Keynes, 2018 p.100). Some of the additional costs may include the income taxes which could be as a result of superannuation payments to the various employees of an organization.
The other additional costs may be those relating to leave costs which are often provided to the employees of any particular organization. During the recruitment of the more workers into an organization, considerations must be taken into on the various additional costs which would be brought in by such new workers (Ehrenberg and Smith, 2016 p.400). It is important to take into account such costs since they affect the policies of any particular organization. Additionally, there are certain key valuable benefits which most of the employees receive and hence fail to recognize and this is attributed to the fact that they do not appreciate the cost of their employment in various organizations (Macaulay, 2018 p.160).
Conclusion:
In summary, the absence of the classification of the liabilities will, therefore, result in the provision of liabilities at a date which is balanced and this should not be the case in an organization and therefore it is important to classify the assets since they can be classified on two particular bases that are nature and function unlike the classification of the liabilities which has several bases of classification. A provision and a contingent liability are the same are a false statement because a contingent liability and a provision of a contingency only have the same element. The provisions can be considered as a liability and this is because they are liabilities whose time of repayment is uncertain but still, they can identified as liabilities.
On the other hand, the contingency, it can be said to be a liability which the outcome can be confirmed after an occurrence of a particular event or rather a non-occurrence of future events which are uncertain and hence cannot be controlled by a particular business enterprise. The employees often fail to appreciate the true cost of their employment because of the key valuable benefits which most of the employees receive and fail to recognize
References:
Anokhina, K., 2014. Structure and classification of intangible assets in industrial enterprises. Socio-economic research bulletin, (4), pp.13-17.
Arslanalp, M.S., 2015. Contingent Liabilities from Banks. International Monetary Fund.
Bauman, M.P. and Shaw, K.W., 2016. Balance sheet classification and the valuation of deferred taxes. Research in Accounting Regulation, 28(2), pp.77-85.
Bova, M.E., 2016. The Fiscal Costs of Contingent Liabilities. International Monetary Fund.
Ehrenberg, R.G. and Smith, R.S., 2016. Modern labor economics: Theory and public policy. Routledge.
Jordan, C.E., 2016. FASB’s New Standard for Classifying Deferred Taxes. The CPA Journal, 86(7), p.22.
Kayhan, I.E. and Jenkins, G., 2016. Build-operate-transfer projects in Turkey: Contingent liabilities and associated risks. In Development discussion paper, 2016-01.
Keynes, J.M., 2018. The general theory of employment, interest, and money. Springer.
Lagrange, B., Viger, C. and Anandarajan, A., 2015. Contingency liabilities: The effect of three alternative reporting styles. Research in Accounting Regulation, 27(2), pp.119-128.
Laing, G., Douglas, S. and Watt, G., 2015. Aspects of Corporate Delegation, Reliance and Financial Reporting: Lessons from Australian Securities and Investments Commission v. Healey. Canberra L. Rev., 13, p.16.
Lubbe, I., Modack, G. and Watson, A., 2014. Financial accounting GAAP principles. OUP Catalogue.
Macaulay, S., 2018. Non-contractual relations in business: A preliminary study. In The Law and Society Canon (pp. 155-167). Routledge.
McBride, K., Liu, Q., Veladanda, H., Tomic, G. and Ashley, P., Symantec Corp, 2017. Discovery and classification of enterprise assets via host characteristics. U.S. Patent 9,830,458.
Morris, J.L., 2017. Classification of Deferred Tax Assets and Deferred Tax Liabilities: An Evaluation of FASB’s Attempt at Standards Simplification. Journal of Accounting & Finance (2158-3625), 17(8).
Oliver, K., 2014. Balance Sheet Presentation under IAS 1 and US GAAP.
Ülgentürk, L., 2017. The role of public debt managers in contingent liability management.
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