Accounting for Liabilities - Assignment Example

Accounting for liabilities Synopsis For liabilities to be realized in the financial statement, it ought to conform to the following definition provided by the framework A liability is an existing commitment of a firm consequential from historic event, the settlement of which is anticipated to lead to cash outflow from the firm of resource personified economic advantage (IASB framework). it is apparent from the above meaning, that the commitment ought to be existing due to historic event and consequently, a firm will not account for liabilities in expectation of anticipated commitment like bank loan anticipated to be taken in three year’s time. Other than complying with the meaning of the word liability, the framework has as well recommended the following recognition criterion to be complied with prior to a liability being portrayed on the face of a financial statement (Alexander Mills, 2009). the cash outflow of resource personified economic advantage like cash from the firm is likely as well as the expense of the commitment may be appraised dependably., it is therefore rational to realize liability merely if it is probable that the firm will be commanded to settle it as well as merely liabilities that may be objectively appraised are realized in the financial statement. Where an obligation adheres with the definition of a liability to conform to the recognition criterion, it is categorized as a contingent liability which is not accounted for as liability in the financial statement but rather accounted for in the notes to the financial statements. Introduction accounting standards point out the asset and liabilities that are realized in exposure draft in the annual report and its books of accounts as well as the manner to which they are appraise exposure draft .the exposure draft identifies the appraisal concept that provides manual in the selection of appraisal basis in selecting appraisal basis for liabilities where there are non exposure draft s in IFRS. It is concern therefore with appraisal basis that might be employ exposure draft in the financial statement, it doesn’t take into consideration application of theses basis to other general purpose financial reports outside the financial statement. Since the meaning of constituents connects exposure draft, the value at which liabilities are appraising exposure draft will impact the value of income; expense as well as other constituents realizes exposure draft. As a result, the selection of an appraisal bases is significant not merely for the statement of financial position but as well for the reporting of constituent in other financial statement. Question one The standard that applies to asset is the same standard that applies to accounting for liabilities, nevertheless, the importance of specific concern is different as well as the meaning that is significant for liabilities must be assumed. Appraisal basis for liabilities might categorize in terms of if they are entry or exist values (Anthony, 2004). Entry values recount to the transaction under which a commitment is acknowledge or the value that a firm may assume as liability. Exist values depict the values necessary to guarantee an obligation or the value necessary to release a firm from an obligation Alternative liability measurement approaches A. Historical cost basis Under this approach, asset or liabilities is accounted for at the amount of cash paid or the fair value of the asset that need to be paid for at the date of acquisition. The liabilities are accounted for at the value of proceeds acknowledged in exchange for obligation at the value of cash anticipated to be paid to guarantee the liability in the usual course of trading B. Market value This is the value of which a liability may be settled between informed willing parties at an arm’s length transaction at the reporting date. At the date of settlement, the, market value and historical cost are similar where the transaction is ignored. The extent to which market value conforms the goals of the financial reporting as well as the information requirement for users varies on the basis upon the significance of market price to the appraisal being executed on the market in which the liability is being settled market value is specifically relevant where the difference between exit and entry is probable to be significant. In principle, market values provide significant information they reasonably portray the worth of the liabilities to a firm. In an open and active market, the liabilities rarely be less than the market value since, a firm may obtain the value by disposing the asset to settle the liabilities (Anthony, 2004). The importance of market value nevertheless, is more doubtful where the assumption that markets are open ,active and methodical .it cannot be assumed that the asset or liabilities might be disposed or settled at the same time at which it may be incurred or acquired as well as fair value model is required to approximate an anti-based worth. Current cost. Under this approach, assets are accounted for at the value of cash that may be paid where the similar asset was bought presently. The liabilities are accounted for at the undiscounted value of cash that may be mandatory to settle the obligation at present. (c) Realizable (settlement) value. In this method, assets are accounted for at the value of cash that may presently be accessible by disposing the asset in a standard disposal. The liabilities are accounted for at their settlement worth, that is, the undiscounted value of cash anticipated to be paid to guarantee the liabilities in the standard course of trading. D. Present value Under this approach, the asset are accounted for at present discounted value of the anticipated net cash inflows that item is anticipated to create in the ordinary course of trading. The liabilities are accounted for at present discounted value of the anticipated net cash outflow that are anticipated to be mandatory to settle the debt in the ordinary course of doing business The measurement that is frequently assumed by corporations in preparing the comprehensive annual reports is the historical cost basis (Barry J. Epstein, 2009). This is normally combined with other measurements for instance; inventories are normally accounted at lower of cost and net realizable value. Some corporation employees the current cost basis as a retort to the incapacity of the historical cost basis in order to deal with impact of changing prices of non monetary Question two Two IASB / AASB accounting standards and the liability measurement approaches AASB 13; fair value Measurement This is market based appraisal, not a firm unique appraisal. For some liabilities, the observable market transactions may be existing while for those they may not exist. The goals of the fair value assessment is similar in both cases, to appraise the value at which a transaction to dispose an asset or settle a liabilities may be assumed between the market participant at the appraisal date under existing market situation. Where a value for same liability is not observable, a firm appraises fair value by employing another appraisal approach that capitalize the use of appropriate observable units as well as reduces the employment of unobservable inputs, since fair value is market based assessment, it is appraised by employing the assumptions that market participant may employ when pricing the liability inclusive of assumption concerning risk (Bennett, 2003). Whether liability is a stand alone or a group of liabilities, for recognition or disclosure purposes ,it depends on the unit of account which shall be established in compliance with the standard that commands or allow the fair value assessment unless as provided in the AASB 13. An entity will appraise the fair value of the liability using the assumption that the market parties may employ when valuing the liabilities assuming the parties act in their economic utmost interest. In creating this assumption s, a firm must not identify relevant market parties instead; the firm shall identify traits that differentiate parties generally, taking into consideration the factors relevant like the liabilities, the principle amount, and utmost best market as well as market parties with whom the firm may enter into a transaction with. IFRS 13 (Far Value Measurement) According to IFRS 13, the standards commands fair value assessment as well as provide a single IFRS principle for appraising the fair value as well as commands disclosure concerning fair value measurement. The standard defines fair value on the basis of an exit price idea as well as employs the fair value structure consequential from market based instead of firm specific appraisal. The standard therefore seeks to grow conformity as well as compliance in fair value measurement as well as linked disclosures across a fair-value structure that categorize the inputs employed in valuation approach into three distinct stages. The liabilities as well as the least precedence to unobservable inputs [IFRS 13:72]. Where the input employed to appraise the fair value are classified into diverse stages of fair value structure, the fair value assessment is classified in its entirety of the least level input that is relevant to the whole measurement on the basis of application of judgment. [IFRS 13:73] Question three; the liability measurement approaches A case study of E& A limited E& A limited is a publicly trade mining company that operate 8 entirely owned subsidiary venture in manning, resource, defense, water, energy as well as financial services. The company assumes an historical method of accounting standard in preparing its books of account as observed in their annual. A. Historical cost basis Under this approach, asset or liabilities is accounted for at the amount of cash paid or the fair value of the asset that need to be paid for at the date of acquisition. The liabilities are accounted for at the value of proceeds acknowledged in exchange for obligation at the value of cash anticipated to be paid to guarantee the liability in the usual course of trading Accounting for Asset and liabilities for E & A limited It can be observed that the annual report of E & A limited that is accounted for on an historical cost basis. The cost includes the purchase cost, transfer of equity due to gain or loss for proceeds on disposal of the qualifying asset like plant and equipment. The asset residual value and its useful life is evaluated and adjusted that is deem significant is accounted for in the financial statement in order to portrays a true and fair view of the company statement of financial position. The company’s financial disclosure for the financial year 20014/15 is superior and reliable for decision making this is in accordance to the financial reporting framework in compliance with the generally accepted accounting principle (GAAP) as well as the Australian Accounting Standard Board (AASB).The integrated financial report entails an comprehensive information together with the governance report which is deem appropriate by users of the financial report as well as the compliance of international financial reporting standards (IFRS). Accounting for Asset depreciation and impairment The E& A limited employs the historical cost basis with straight-line method of depreciating its asset in order to appraise the written down value of its asset at the end of the financial period. E & A limited therefore assumes the accounting policy in depreciating its. The property plant and equipment is depreciated using string line method which is applicable at present by the company .It can be observed from the E & A limited’s annual report that straight-line method of fixed asset depreciation is used. The company tested for goodwill impairment by appreciating the AASB 136 (Impairment of asset). The standard provides that the company appraised with the worth as well as the carrying amount inclusive of the goodwill, the surplus of the fair value from the book value calculates the fair value of the reporting unit. The company then calculates the value of goodwill impairment and realizes loss in the income statement as expense. This methodology is in compliance with the accepted accounting principles which are applicable with the global business operation and consequently the corporation performance in terms of asset net worth is comparable with other global world. The E & A limited financial disclosure for the financial year 2014/15 is therefore sufficient and reliable for investment decision making since, it is in compliance with the financial reporting framework in compliance with the generally accepted accounting principle (GAAP) as well as the internal accounting standard (IAS).The comprehensive financial statement entails an inclusive information combined with governance report which is deem significant by users of the reports and also the conformity of international financial reporting standards (IFRS). It can therefore be observed that both companies account there for the asset on an historical cost basis which provides that asset should be recorded at historical cost with an accumulated depreciation in order to derive net realizable value of the asset at the time of reporting (Peter Holgate, 2009). 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