Accounting For Assets And Liabilities, And Depreciation Expense In Airlines

Recognition criteria for Assets and Liabilities

Part 1

As per the provisions of Para 49(a) of the conceptual framework, the asset is only recognized in the balance sheet when there is a probability that economic benefits will flow to the entity in the future period. Hence the photographs of the founders of company and buildings will not be recorded as the asset. As no future economic benefits will flow to the company by the photographs of company as per Para 53.

Part 2

As per the provision of Para 49(b), the liability arises by way of some past event and a present obligation is there and the settlement of the obligation will require the outflow of resources. As per the provision of Para 91, the case had satisfied the criteria of recognition of liability, as the suit in court will give rise to a present obligation and the cash will be required to settle the liability. It is assumed that liability of $25000 will arise and thus it will recorded by increasing the law suit liability and accordingly increasing the expense as there will be decrease in the economic benefits in the future period.

Part 3

As per the provision of Para 49(b), the law suit is a liability as explained but recognition criteria as per Para 91 does not satisfy as there is no probability that outflow of resources will be required for the purpose of settlement of liability as the company will win the case. Hence no liability will be recorded but the suit in court should be disclosed in the notes to financial statements.Part 4

The definition of asset as required by the provisions of Para 49(a) had not been satisfied as the company will not receive economic benefits from the asset. The plant will be written from the books of accounts. The account of plant will be decreased and expense will be increased.

Part 5

As per the Para 49(a), the asset definition is satisfied as there is a past event of receiving the donation, and an $10000 inflow of cash will be received and the company is also having control over the benefits that will be received in future. Hence the asset will be recorded at a value of $10000. The definition of income as per Para 70(a) had also been satisfied as economic benefits will increase, it will also lead to increase in the level of asset by $10000 and it will also lead to increase in equity. Hence the income of $10000 will be recognized as the recognition criteria of Para 92.

Reference List:

Deloitte, 2010, “Conceptual Frameowrk for Financial Reporting 2010”; Available at: https://www.iasplus.com/en/standards/other/framework

AASB, 2005, “Proposed Amendments to AASB 3 Business Combinations”; Available at: https://www.aasb.gov.au/admin/file/content105/c9/ACCED139_07-05.pdf

Part 1

1. The advantages of the component approach versus a simple depreciation of the $10 million dollars over the 10 year period are as follows:
2. This method is simple and easier.
3. This method helps in giving smooth results over life of the asset as it does not impact the statement of income in a direct manner.
4. The advantages of using the cost model to the aeroplane as a whole are as follows:
5. It helps in recording the assets at the initial cost.
6. It is easy to verify the amount recorded with the supporting documents of purchase.

The disadvantages of using the cost model to the aeroplane as a whole are as follows:

1. It does not update the value of the aeroplane
2. It also does not take into consideration the level of inflation in the market.

The advantages of using the revaluation model to the aeroplane are as follows:

1. It helps in adjusting the amount of the aeroplane.
2. It shows the accurate amount of amortization and impairment in regard to value of the asset.

The disadvantages of using the revaluation model to the aeroplane are as follows:

1. It may intentionally helps in increasing the value of asset.
2. It will increase income which may show favourable position of the company and may not give true information to the users.

The revaluation model will be most appropriate for the purpose of showing the value of different components that are being identified.

1. According to AASB 116, the basis of selecting the method of depreciation is the dependent on the amount and pattern of the economic benefits that will be derived from the asset throughout the life of the asset. The selection of the method of depreciation is also dependent on the nature of the asset which is to be depreciated.

Part 2

Aircraft body

The expense incurred on inspection and depreciation will be shown as expense in the books of account.

The amount of annual maintenance and depreciation will be shown as expense.

The amount of repair of torn seats, cleaning costs of carpet, repair cost of equipment and testing cost of electrical equipment will be shown as expense. The cost of upgrades of cockpit equipment will be shown as expense in the year in which they are incurred.

The amount of repair and maintenance will be shown as expense.

The cost of inspection of cracks will be shown as expense.

The depreciation will be shown as expense in the books of account.

Particulars	Amount
Cost of inspection done in every two years	$ 10,000.00
Annual expense of inspection	$ 5,000.00
Value of aircraft	$ 3,000,000.00
Value of engine	$ 4,000,000.00
Useful life of aircraft	10
Residual value	$ 2,100,000.00
Depreciation expense	$ 210,000.00

The body and the engine constitute the main part of the aircraft and thus represents that total of $7 million. Thus these parts will be having proportionate value at the end of 10 year period. Hence in order to calculate the depreciation the amount of residual value will be proportionately reduced.

The expense of depreciation and the maintenance will be shown as the expense in the books of account. The engine will be depreciated in the 4 year period as this is the expected life.

Particulars	Amount
Value of engine	$ 4,000,000.00
Useful life of engine	4
Depreciation expense	$  1,000,000.00
Maintenance expense	$ 300,000.00

The proportionate value of engine will not be taken into consideration as compared to aircraft as the engine is to be replaced after every 4 years whereas the aircraft body is having the effective life of 10 years.

Fittings

Particulars	Amount
Seats
Cost of repair of torn seats and faulty mechanisms	$ 100,000
Effective life of seats	3
Value of seats	$ 1,000,000
Depreciation expense on the seats	$  333,333
Total expense on seats	$  433,333

Particulars	Amount
Carpets
Cost of cleaning the carpet per annum	$                 10,000.00
Value of carpets	$                 50,000.00
Effective life of carpets	5
Depreciation expense to be recorded in the books	$                 10,000.00
Total expense on Carpets	$                 20,000.00

Particulars	Amount
Passenger Seats
Cost of repairing the equipment fitted on seats	$                 15,000.00
Value of passenger seats	$               200,000.00
Effective life of the equipment (Equipment will be replaced in 2022 thus the period will be 6 years	6
Depreciation expense to be recorded in books	$                       33,333
Total expense on passenger seats	$                       48,333
Cockpit
The cost of testing of the cockpit	$               250,000.00
Effective life of cockpit	10
Value of cockpit	$           1,500,000.00
Amount of depreciation to be charged on the cockpit	$               150,000.00
Total expense on cockpits	$               400,000.00

Particulars	Amount
Cost of repair and maintenance on equipment	20000
Effective life as equipment will be replaced in 2022	6
Value of food preparation equipment	250000
The amount of depreciation to be charged	41667
Total expenses
Expenses other than depreciation	$               700,000.00
Depreciation expense	$           1,778,333.33

Reference List

David Stromberg, Niclas Aberg, 2012, “Component Depreciation in Airline Companies: A Study about harmonization of accounting”; Available at: https://gupea.ub.gu.se/bitstream/2077/29351/1/gupea_2077_29351_1.pdf

Australian Government, 2004, “Accounting Standard  AASB 116: Property, Plant and Equipment”; Available at:

https://www.legislation.gov.au/Details/F2005B00678

The accounting treatment for brands under AASB is as under:

1. Brands that are internally generated: the brands must meet the recognition criteria that had been specified in Para 57 but provision of Para 63 should also be taken into consideration which had excluded the internally generated brands recognition.
2. Brands that are acquired: the acquired brands should be recognized at cost and brands are part of acquired business. Then as per AASB 3 it should be identified as distinct asset.

The standard setters are facing various kinds of difficulties in allowing the recognition of brands and formulas on statement of financial position such as:

1. There are high level of inconsistencies in the treatment and recognition of brands.
2. The test of relevance and reliability are very complicated and they are to be conducted in order to pass the test of recognition.

Reference List:

Kristina Artsberg & Nigar Mehtiyeva, 2010, “A Literature review on tangible assets”; Available at:

https://www.stir.ac.uk/media/schools/management/documents/accountingfinance/eufin2010/EUFIN%20-%20Artsberg%20-%20Mehtiyeva.pdf

Patricia Stanton, 2016, “Contemporary Issues in Accounting”; Available at: https://www.slideshare.net/AmanyFaroun1/ch14-sm-rankin 

The possible reasons as to why provisions are recognized in the financial statements while contingent liabilities are not are as follows:

1. A provision is recognized as there is a present obligation which had resulted from the event that had taken place in the past hence the obligation is confirmed.
2. The outflow of resources will be required in regard to settlement of the obligation that had arise due to some pass acts and thus outflow of cash will be there.
3. The amount that is to be paid in regard to settlement of the objective can be estimated with a high reliability.

1. Provision for long service leave: It will be recognized as liability as the employee had already provided services in exchange for the benefits that had been given to them and thus these will be recognized in the books of accounts as liability as the company is having a reliable estimate and the company had also received economic benefit from the employees in return for service leave.
2. Dividend payable: the dividend payable will be recognized as the liability as the company had declared the dividend in the general meeting and thus it is the duty of the company to pay the declared amounts to the shareholders by a specified date and hence will be recorded as liability till the total amount of dividend is being paid to them.
3. Preference shares: The preference shares are not recognized as liability rather they are the part of the share capital. It is the type of capital which is having preference in regard to payment of dividend and the repayment of the preference capital at the time of winding up. Hence it is the part of shareholders funds of the company and are paid after the payment of creditors.

Reference List

Deloitte, 1999, “IAS 37 – Provisions, Contingent Liabilities and Contingent Assets”; Available at:

https://www.iasplus.com/en/standards/ias/ias37

Deloitte, 2011, “International Financial Reporting Standards: Provisions, pensions and share based payments”; Available at:

https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-ifrs-session6-provisions-pensions-102114.pdf