Conceptual Framework Of Accounting, Accounting Standards And Accounting Principles

Recognition of Assets and Contingent Liabilities

Part 1

According to Conceptual Framework of Accounting and Principle of Recognition, the photographs of the company about its originator and old building are not recognised as asset in the books of accounts of the company. According the accounting concept asset in only recognized in the books of account when the asset will provide any future financial and economical advantage to the company. The photographs only have sentimental values with people of TMD Ltd (AASB, 2014)

Part 2

According to Accounting Standard on Contingent Liability, a contingent liability is recognized when there is future financial obligation occurred and it depends on future event and the amount of obligation is not ascertainable at the reporting date. In the given case of TMD Ltd, the case file against the company by Zero Ltd on account negligence and it has been substantiated by the lawyer that the company will have future financial obligation for damages imposed by the court in the given case but how much will be the amount is not identified in the given case. The TMD Ltd management should mention the fact as Contingent Liability in the Notes of the financial statements (AASB, 2010).

Part 3

As per the Accounting Principle on Contingent Asset, a contingent is only recognized in the books of account when there is certainty about the amount and date by which by the asset will be acquired and owned by the company. In the given case of TMD Ltd, the lawyer has given the indication that there are likely chances of winning the case which has been file by Badger Ltd for negligence by the management of the company but the confirmation has not been received about the date of winning and amount which the company will going to receive in winning as at reporting date. Therefore, the fact will not be recognized in the financial statements (AASB, 2010).

Part 4

The retirement of outdated Plant and Equipment from the financial statements as on 30.06.2016 from the books of account will lead to following accounting treatment as per accounting standards and accounting principles (IFRS, 2012):

Option 1- The company will retire the asset and it will not be sold as scarp, then the writing of the assets from books will be done by passing the following Journal Entry:

Plant & Equipment – Accumulated Depreciation Dr

Plant & Equipment – Historical Cost Cr 

Option 2- The company will retire the asset and it will be sold as scarp, then the writing of the assets from books will be done by passing the following Journal Entry:

Accounting Treatment of Retired Plant and Equipment

Bank Dr

Plant & Equipment – Accumulated Depreciation Dr

Loss on Sale (the sale price is less than carrying amount) Dr Plant & Equipment – Historical Cost Cr

Profit on Sale (the sale price is more than carrying amount) Cr 

Part 5 

TMD Ltd has received a donation and it will be considered as Indirect Income of the Company and it will be recognized in Income Statement of the company by passing the following Journal Entry:

Bank Dr $20,000

Donation Received Cr $ 20,000 

a) As per the simple method of depreciation, the amount is charged on the basis of the useful life of an asset and the cost is allocated over that useful life. Whereas in the case of the component method, the amount of depreciation is calculated on the basis of the individual component present in the system rather than charging the amount as depreciation on the lump sum basis. The first and foremost advantage of adopting this method of depreciation is that the cost is allocated over the useful life on reasonable basis. Secondly the method so adopted does not affects the income statement of the company as if the new asset is replaced then the same will be added to the cost of an asset. The next advantage is of giving the shareholder the value which helps the company to grow not only in financial terms but also in non financial terms (Starova and Cerkamova, 2010).   
b) The first and foremost advantage of using the cost model is that the it entails the uniform application of the valuation of the asset at each reporting period whereas in the case of the revaluation model at the end of the very reporting period the revaluation is done keeping in view the consideration of the market condition and then accordingly decision is made. The other advantage that has been provided by the cost model is that it is very cheap to apply in comparison to the application of the revaluation model. As per the situation given in the case study, it is very much clear that the cost model shall be applied for whole of the aeroplane as well as the each and every component (HKAS, 2016).
c) In accordance with the provisions given in the Australian Accounting Standards 116, the component method of depreciation has been selected. The main reason for selecting the component method of depreciation is that the statement of income and the expenditure will not be affected suddenly. The second main reasons are that the method will be beneficial for the management of the company to take the appropriate decision. (Marton, 2012) 

Part 2 

Aircraft body

In accordance with the relevant accounting standard and the generally accepted accounting principle, the initial cost of the purchase will be accounted as the tangible asset of the company. Therefore, the cost of $3000000 million shall be treated as an asset. As per the provisions of the accounting standards, the inspection cost will be capitalised if it is known that the cost incurred has been the heavy one and will increase the life of an asset. Otherwise it shall be expensed in the statement of profit and loss. In the given case the inspection cost of $10000 is majorly for normal inspection for checking out if there has been any loss of wear and tear. Thus, the amount shall be charged to Profit and Loss account as the expense (IATA, 2016).  

Engines 

In accordance with the relevant accounting standard and the generally accepted accounting principle, the initial cost of the purchase will be accounted as the tangible asset of the company. Therefore, the cost of $4000000 million shall be accounted as an asset.

In case of the component method of depreciation the replacement cost is added to the value of an asset rather than charging as an expense in the profit and loss account. By applying the component method of depreciation, the replacement cost which is 4.5 dollar million and 6 dollar million have been accounted for as an addition to the asset rather than charging the same in profit and loss account (AASB, 2016).    

Fittings 

• Seats and Carpet –The cost of $ 10, 00,000 and $ 50,000 will be the initial cost and added in overall cost of asset. Replacements will be incurred as $ 12, 00,000 in 2019, $ 1500,000 in 2025 for seats and $ 65,000 in 2022 for covers will treated as cost of the asset.
• Cockpit and Passenger Seats – The starting cost of $ 200,000 for passenger seats and $ 15, 00,000 for cockpit will enhanced the overall cost of asset. The replacement cost which will be incurred after every two years will increase the cost of the asset.
• TV Sets: -The Replacement cost of $ 3,50,000 in 2022 will be treated as cost of asset  (AASB, 2016). 

Food preparation equipment

The cost of $ 250,000 will be considered as cost of food preparation equipment and will be added to overall cost of the asset (AASB, 2016). 

Aircraft body 

The expense in relation to Aircraft will be zero in the financial year 2016 -17 as the usage and verification of aircraft body will start in 2018 (AASB, 2016). 

Engines

Maintenance charged on Annual basis will be considered as expense in the financial year starting from 1^st July, 2016 to 30^th June 2017 amounting to $ 300,000 (AASB, 2016). 

Recognition of Donations as Indirect Income

Fittings

Cost incurred annually of $ 10,000 for cleaning of fittings and $ 100,000 for repairing and maintaining seats and correct the fault mechanism will be considered as expenses for the year under consideration (AASB, 2016) 

Food preparation equipment

Annual charges of $ 20,000 for maintaining and repairing the food preparation equipment will be considered as expenses for FY 2016-17 (AASB, 2016) 

Total Expenses 

The total of all the above expenses will be $ 430,000 recognised as total expenses in relation to all the components.

Part 1 

Brands in the business are of two types. One is self constructed and generated brands and other are acquired or purchased brands. The Self generated and self constructed brands will not find any place in the financial statement of the company s it is difficult to ascertain the actual cost incurred for generation of the brand. On the other hand purchased or acquired brand will find place in the Balance Sheet of the company and recorded as Intangible Asset of the company will be impaired over its economic useful life.. The acquired or purchase brand will come in the company when the business combination agreement has entered by the company (AASB, 2015).

Part 2 

The accounting standards are framed by the group of people which are the member of the accounting standard board. Sometimes it becomes difficult for them to permit recording of all the brands in the books of account.  The following complications which are faced by the accounting standard board member:-

1. If recognition of all brands will allow by the accounting standard board member then the matching expenses are difficult to ascertain by them which will be the violation of the fundamental principles of the accounting which state that the revenue from asset and related expenses in the year should match be each other.
2. The authenticities of all brands are complicated in relation to their validity and corresponding technologies which help in creation of the brand.
3. All brands consists of self generated brands which make it point of discussion of the accounting standard board to member to consider the facts which cost should be included or which should be excluded (Paugam L, 2015) 

Part 1 

Provisions are the part of the financial statements and Contingent Liabilities are the parts of the Notes of Accounts which are also part of Financial Statements. But Provisions are recognized in the financial data that is in Balance Sheet and Income Statement and Contingent Liability are shown just to provide information. The reason for doing the same is listed below:

1. The provisions can be ascertained in monetary amount terms where as the contingent liability obligation cannot be quantified. The balance sheet and Income Statement contains only the things which can quantified in monetary terms.
2. The certainty of the payment with amount is confirmed in case of provisions where as contingent liability have chance that they might not become the company’s actual liability in future as it depends on future uncertain event (IFRS, 2012)

Part 2 

1. Long Service Leave Provision– Accounting to Australian Accounting Standard Board 119, Leave Service Provision will be determined as Liability and should be recorded under the head Provisions in the Current Liabilities. This will classified as actual liability which will depend on future obligation and amount will be determine after getting external professional advice (AASB, 2011)
2. Dividend Payables –It will classify as actual Liability of the company as on reporting date. One the dividend is declared by the company it becomes actual obligation for the company to pay the amount to its shareholders on reporting date. It will show under the head of Current Liability in the Balance Sheet of the company.
3. Preference Shares –Preference shares are classify as the capital of the company which consists of shares having priority in payment of dividend and repayment at the time of liquidation. These will be shown as capital under the head shareholders fund in teh balance sheet.

Reference List:

AASB, (2016), “Property Plant and Equipment” available on https://www.aasb.gov.au/admin/file/content102/c3/AASB116_07-04_ERDRjun10_07-09.pdf  accessed at 21/05/2017. 

IATA, (2016), “Aircraft Acquisition Cost and Depreciation”, available on https://www.iata.org/publications/Documents/Airline-Disclosure-Guide-aircraft-acquisition.pdf   accessed on 21/05/2017.

HKAS, (2016), “The cost and revaluation model under Property Plant and Equipment”, available on https://www.hkiaat.org/images/uploads/articles/AAT_Paper_7_Cost_Model_Full.pdf   accessed on 21/05/2017.

Marton J, (2012), “Component Depreciation in Airlines” available on https://gupea.ub.gu.se/bitstream/2077/29351/1/gupea_2077_29351_1.pdf  accessed on 21/05/2017.

Starova M and Cermakova H, (2010), “Method of Component depreciation of Fixed Assets and its comparison with Traditional Methods”, Agris, On line Papers in Economics, Vol II(3), pp 4-12

AASB Official Website, (2015), “Intangible Assets”, available at https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf accessed on 21/05/2017

Paugam L, (2015), “ Brand Valuation” , available at https://books.google.co.in/books?id=HicRDAAAQBAJ&pg=PT26&lpg=PT26&dq=standard+setter+difficulty+in+brands&source=bl&ots=yeDA7ym9gX&sig=HVptPCSeCFT_BKaX06NcHpPbnR4&hl=en&sa=X&ved=0ahUKEwjVgL_L-oDUAhUMI8AKHeEIBssQ6AEIKTAB#v=onepage&q=standard%20setter%20difficulty%20in%20brands&f=false accessed on 21/05/2017

AASB Official Website, (2014) “Conceptual Framework”, available at https://www.aasb.gov.au/Pronouncements/Conceptual-framework.aspx accessed at 21/05/2017

AASB Official Website, (2010) “Provisions, Contingent Liabilities and Contingent Assets”, available at https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf accessed at 21/05/2017

IFRS Official Website, (2012) “Property, Plant & Equipments”, available at https://www.ifrs.org/Documents/IAS16.pdf accessed at 21/05/2017

IFRS Official Website, (2012), “IAS 37- Provisions, Contingent Liabilities and Contingent Assets” available at https://www.ifrs.org/IFRSs/Documents/English%20IAS%20and%20IFRS%20PDFs%202012/IAS%2037.pdf accessed on 21/05/2017

AASB Official Website, (2011), “Employees Benefits”, available at https://www.aasb.gov.au/admin/file/content105/c9/AASB119_09-11.pdf accessed on 21/05/2017