The Pragmatic Description of a Liability - Term Paper Example

Research Assignment Students Name: Institutional Affiliation: Department Course: Date: Abstract The application of financial accounting theory is substantively articulated by the accounting standards where there is clarity of the conceptual foundation that essentially addresses the practical complexities that determine the financial position and financial performance of an entity. Viewed from such perspective under practice using IFRS, liabilities are often measured substantively in some ways depending on the particular class considered. Given the definition of liabilities, they are considered to have a direct implication on the reported profits of a given entity. Introduction The pragmatic description of a liability as provided by the IASB Framework articulates a present obligation of a given enterprise that arises from past actions, the resolution of this present obligation is probable to bring about an out flow of the resources of the entity that have substantive economic benefits. The IASB Framework also articulates that a liability is substantively recognized in the balance sheet when it is likely that an out flow of the wealth that expresses monetary repayment will accrue from the settlement of the current obligation and the amounts that the settlement will occur can be measured reliably[Alf12]. The definition of the IASB Framework articulates two recognition thresholds, that is, the outflow of resources is probable and there is reliability in the measurement of the settlement amounts. Liabilities are classified into current and non-current where the distinction between the two classification methods are made on the basis of the period within which the entity expect to settle the liability. The current liability is expected to be cleared within one year from the time it was reported while the non-current liability is predictable to be settled inside a year from the date of reporting. Question One There exist a great deal of literature to articulate the alternative liability measurement approaches. The explanation on the alternative liability measurement approaches is described as follows The fair value is expressed by the quantity for which the liability that could be exchanged linking parties that has a will and knowledge in a transaction that is at an arm’s length. The elementary goals and objective of fair price is to replicate the market value of a liability on the dimension date substantively. Breville Group Limited prepares the financial derivatives held using the fair value measurement approach. The historical cost is articulated as an alternative liability measurement approach where the liabilities are substantively recorded at the fair value of the receipt of the deliberation in the exchange of incurring the debts at the time they arise. The amount may not be a reasonable measure of the amounts outstanding because of an absence of the relationship between the amounts of consideration received for incurring the liability and the amounts of probable sacrifice of future benefits that the liability entails. Thus, the historical cost objective applied to the liabilities purports to measure only the fair value of the consideration received rather than the value of the obligation incurred. Breville Group Limited prepares its financial report on a historical cost basis and in accordance with the Australian Accounting Standards The current cost of an alternative liability measurement approach is substantiated as the fair value of the consideration that the owing entity would have received if the liability had been incurred at the date of measurement. The primary concern for current cost is on whether, and if in agreement, the holding of gains and losses that is realized by measuring the asset at their cost of replacement should be allocated between the liabilities and equity. The cost of release as an alternative liability measurement approach articulates the amount that can be related to the immediate exit from an obligation. Ideally, the cost of the release can either be an amount that the creditor settles for the claim or a third party would charge to admit the transfer of the liability from the obligor. Where there is more than one way of securing release from an identified liability, the lowest amount becomes the cost of a release. Question Two IFRS 13- Fair Value Measurement IFRS 13-Fair Value Measurement was initially issued in May 2011, and its application was from the annual periods that started on or after 1 January 2013. The standard applies to IFRSs that need or permit fair value measurements or disclosures and substantively offers a single IFRS framework that measures fair value and requires disclosures about fair value measurement. IFRS 13 pragmatically articulates fair value on the principle of an exit price basis and puts into use fair value hierarchy that substantiates a market-based measurement rather than the entity-specific measurement. The Standard strives so as to increase the comparability and consistency of fair value capacity and the related disclosures substantively during the concept of fair value hierarchy. The hierarchy substantively classifies the inputs that are used in the valuation techniques into three levels. Level one input articulate the prices that are quoted in an active market for the liabilities or assets that the reporting body can have admittance at the date of measurement. The market price that is quoted in a market that is active gives rise to the most dependable evidence of fair value and it is subsequently used without the modification to determine fair value whenever obtainable with the limited exceptions. The inputs in level two encapsulate the inputs additional than the market prices that have been quoted inside level 1 that are noticeable for the liability or asset that are directly or indirectly. The inputs in level 2 embrace; i. The value of the related liabilities that are quoted in the lively markets. ii. The value of the related liabilities that are quoted in markets those are not active. iii. The inputs other than the prices quoted that are observable for the liability. iv. The inputs that are resultant primarily from or validated by the market data that is observable by association or any other means. The level three inputs articulate the inputs that are not observable for the liability because the fair value measurement objective is to approximate the value at which a operation that is orderly to transfer a given liability that would take place in between the participants in a market as at the date of measurement that are under the market surroundings that are presently exist. The appropriate valuation techniques are used by an entity in the circumstances that there is sufficient data available for the measurement of fair value, the general use of significant noticeable inputs are maximized and also there is minimum use of the non observable inputs. The broadly used assessment techniques include The market technique that uses the prices and other information that are relevant and generated by the transactions in the market involving similar liabilities. The income approach converts the future amounts to discounted amounts to reflect the expectations of the market about those future amounts. The revelation objective of IFRS 13 needs that a company so as to disclose the financial in order to help the users to assess that the liabilities are deliberate at fair value on either recurring or non-recurring basis after recognition. The accounting standards adopted by Breville Group Limited are consistent with those of previous years and in its financial statements and interprets the financial statements that are in agreement with AASB 13 Fair Value Measurement. The Standard applies to Breville Group Limited because it is essential to practice its financial reports in agreement with the Corporation Act, and the financial statements are always held out to be the universal reason financial statements. IFRS 10- The Consolidated Financial Statements IFRS 10 which is about the Consolidated Financial Statements was a standard that was issued in May 2011 and is incorporated in the annual periods that started from 1st January 2013. The Standard sufficiently expresses the requirements for the preparation and presentation of the group consolidated financial statements outlining that the entity consolidates the entities under its control. The principle of control articulates that the entity has disclosure or the rights to the variable returns and the capability to influence the returns from first to last power over the person investing. The objective of IFRS 10 is substantiated by the establishment of the principles for the preparation and presentation of the group financial statement where on or more entities are controlled by a parent entity. The preparation of the group financial statements by the parent company is encapsulated by the use of accounting policies that have uniformity for like events and transactions that have similar situations. The investing entity in accordance with the standard measures the investment in a subsidiary at using the fair value measurement approach. The consolidated financial statement thus combines all the items of the parent with those of the subsidiaries. Breville Group Limited financial report is a common principle financial report that is organized in agreement with the Corporation Act requirement and the A AS. The financial report complies with IFRS as issued by the IASB. Question Three Breville Group Limited uses the derivative financial instruments that comprise of the forward exchange contract and the interests rate swaps so as to hedge the risk that are associated with the general fluctuations in the foreign currency and the interest rates. The derivatives of financial instruments are measured initially using the fair value approach on the prescribed date the derivative contracts is entered into it, and consequently they are re measured to fair. The derivatives are always carried as liabilities when fair value is negative. The wages and salaries liabilities that also includes the non-money benefits, the annual leave and then the accumulated sick leave that are predictable to be established within one year of the date of exposure are substantively recognized in the trade and other payables. These items are measured at the amounts they are expected to be settled when the liabilities are paid. Thus, the liabilities are measured using the current cost liability measurement approach. Under the IFRS 10 – the Consolidated Financial Statement, the Consolidated Financial Statements are made up of the Financial Statements of Breville Group Limited and its respective subsidiaries prepared and presented at 30th June every year. The subsidiaries comprise of all those companies that the group controls. The principle of control articulates that the group has exposure or the rights to the changeable returns and the capability to influence the returns through right over the subsidiaries. The preparation of the financial statement of the subsidiaries is carried out at the same period using the accounting policies which are consistent. All the inter-group balances and all transactions have to be eliminated in full. The carrying amount of certain liabilities is thus determined on the basis of assumptions and estimates of future events. The trade and other payable for the group represent the liabilities for both goods and services that had been provided before the end of the fiscal year and are owing and they arise when the group is required to pay expenditure in the future with respect to those purchased goods and services. The trade and other payables are measured using the current cost liability measurement approach. The recognition of provisions arises when the group has present obligations that are either lawful or productive, arise accordingly of an event in the past and the probability that an outflow of resources that embodies the economic benefits will be needed to settle the obligation and hence an estimate that is reliable can be made on the quantity of the obligation[Cai11]. The group measures the provisions by the current value of the organization best estimates of the expenses that is necessary to settle the compulsion at the date of balance sheet. The liabilities for long service is adequately recognized by the group as a stipulation and subsequently calculated as the present value of the probable payments for future to be made to the employees in respect of the provided services until the date of reporting of the statements of statements. The future payments that are expected are economical by using the suitable market yields as at the date of reporting so as to approximate the future cash outflow substantively. The group classifies the borrowings as present liabilities except there is an unqualified right to defer the conclusion for a minimum of 12 months from the date of the date of balance sheet and includes the cash advance facilities. The group recognizes the borrowings at the fair value of the deliberation that were received less the transactions cost that are attributable to the borrowing. After the initial recognition, the group measures the borrowings at the costs amortized by using the efficient interest rate technique. Conclusion This kind of research paper articulates under practice using IFRS/AASB, liabilities are measured in a variety of ways depending on the particular class of liabilities that are considered and hence the way that the IFRS/AASB define liabilities they have a direct impact on the profits reported. The AASB uses the same framework that is issued by the IASB and only make slight changes due to the accounting environment present in Australia. The paper expresses the various alternative liability measurement approaches and their applicability in the yearly report for the year that ends in 2014 of Breville Group Limited. The discussion then shifts to the description of the IASB/AASB accounting standards that comprises of IFRS 13 - Fair Value Measurement and IFRS 10 - Consolidated Financial Statements and also the suggested liability measurement approaches suggested by the two standards. The paper further applies the discussion to the annual report of the group. The last part with regards to the IFRS 13 and IFRS 10 and the context of Breville Group Limited annual report highlights the liability measurement approaches that have been adopted. The paper thus creates the basis for the application of standards issued by the IASB/AASB in a company annual reports and the identification of the various liability measurements approaches articulated. References Alf12: , (Alfredson, 2012), Cai11: , (Cairns, 2011), Read More