The Conceptual Framework - Assignment Example

FINANCIAL ACCOUNTING ASSIGNMENT Student’s Name Professor’s Name Course Name Institution Date Question 1 Expense; Definition 1. The conceptual framework defines an expense as possible decreases in the underlying economic benefits that occur in the course of a given accounting period in relation to both outflows or even depletions of a given set of assets or thereby incurrence of liabilities, which might arise as a result of a decrease in equity; but not ones that are linked to the distributions of equity participants (IAS, 2010). In this regard, the additional factory by ABC Company is perceived as an expense since the decision to actualize it will likely result to incurrence of a liability- the provision for future expansion. It has also met the definition threshold since it is expected to decrease future, precisely five years, underlying economic benefits of ABC Company. Recognition of an Expense The conceptual framework ascertains that the recognition of any given item within the balance sheet or income statement should be effected in the case that there is probability that any possible future economics attributed to it will either flow in or out of a company (IAS, 2010). It should also be recognised in the event that the underlying item immediate cost or value can be subjected to reliable measurements (IAS, 2010). In essence, it notes that expenses will be recognised in the event that resultant decrease in the future economic benefits that are associated with decrease in the asset, which for this case is represented by cash and cash equivalents amounting to $500,000, or whenever the resultant increase in the level of liability, which for the case at hand is manifested by the provision for future expansion, is measured reliably. Both of the situations can be measured reliably by the proposed $500,000- which is represented by $100,000 being incurred on annual basis. Question 2 The conceptual framework indicates that in recognising a preference share; a company should specify the exact amount or even the rate of change in the underlying amounts that it is mandated to use in settling claims (IAS, 2010). These claims are not mandatorily required to be liquidated prior the entire liquidation process has been triggered. For the case at hand, these preferences are more like a liability as they have immense features only perceived with most debt instruments. For instance, the issuer, who for this case is ABC Company, has the sole right to call these shares within the specified period; three years through a buy-back plan. It is important to note that this ability to buy-back the preference shares after the lapse of the three years fairly represents the repayment of principal amounts (Kieso, Weygandt & Warfield, 2006). Subsequently, the guaranteed dividends of 3 per cent that can be back-paid in future periods in case the entity failed to make a profit in the existing year of operations is fairly similar to it paying interest rates (Kieso, Weygandt & Warfield, 2006). Question 3: Exposure Draft: Concept Framework for Financial Reporting-May 2015 The exposure provides that measurement portrays a significant process related to the quantification, in monetary basis, possible amounts of information that relates to a company’s immediate assets, liabilities, equity, income and expenses (IASB, 2015). It ascertains that a measurement basis portrays a fairly identified feature of a given item that is under measurement process can be focused on such bases as historical cost, fair or even possible fulfilment values. The consideration for the goals related to financial reporting; qualitative attributes of useful financial information as well as the cost constraint will likely result in the adoption of a distinctive set of measurement platforms for different categories of assets; liabilities as well as items related to income and expenses. The draft notes that the measurement bases can be presented in form of historical cost or current value. Historical cost form of measurement basis avails monetary form of information in regards to assets; liabilities; income as well as expenses while utilising information that is sought from a given transaction that resulted to their immediate creation (IASB, 2015). However; it is indicated that this basis cannot portray possible fluctuations in prices but will go ahead to show any alterations that could result from consumption or even impairment of assets. Subsequently, fairly noted lies in the proposition that the underlying historical cost of a given non-financial asset at the given time of its acquisition should be able to include all values of possible costs incurred in the process of acquiring or even coming up with the asset; including the level of consideration awarded as well as the transactions incurred in the process. The amount should be altered in a way over a given period in order to accommodate the consumption of the economic resource that encompasses an asset; and, also in the event that the historical cost attributed to the asset is deemed to be irrecoverable in nature (IASB, 2015). The underlying historical cost of a given financial asset is deemed to be the initial value of the consideration awarded in the acquisition process of the asset as well as the transactions costs related to the process. In this regards, the entire measurement takes into consideration of all elements that could possibly have affected the value of the assets like the different form of risks like currency and liquidity risks. In fact, it is established that the carrying amount of these financial assets and liabilities that are measured while utilising armotised cost will always portray possible alterations in the accrual of interest, changes in approximations of cash flows (IASB, 2015). In regards to de-recognition of these assets or liabilities, which have been measured at historical costs, are thereafter recognised as income or expenses of the differences that result from carrying amounts of the asset and consideration awarded. It has been indicated that both income and expenses that are indeed measured at historical costs might have predictive values (IASB, 2015). A perfect example of when in the case of non-financial assets, detailed accounting information relating to the consideration enjoyed from a possible supply of products or services in the past can be utilised as a certain degree of inputs that is needed in the course of evaluating a company’s prospects for future cash flows from a given supply of both goods and services. In my personal view, it might be a simple and affordable process to present relevant level of information relating to historical cost in comparison to the information that utilises a current measurement model. Certainly, accounting information presented in historical cost is deemed to be fairly understandable and for most, it is verifiable in nature. However, it is also marred with distinctive levels of limitations (IASB, 2015). For instance, adoption of this measurement basis becomes a challenge especially when there is no observable transaction price for the asset or even liability under scrutiny. It also limits the ability to compare reporting standards especially since similar classes of assets or liabilities acquired in different periods might be reported using different values. In regards to current value, the measurement basis avails the overall monetary information relating to assets; liabilities; income and expenses that is entirely focused on an updated version data in order to take into account possible changes in the conditions within the measurement date (IASB, 2015). It is important to understand that since the basis allows for continual updates; these current values fairly captures any positive or negative alterations that might have occurred since prior measurement exercise. The draft notes that the current value measurement basis should incorporate fair values and values related to the utilisation of assets and fulfilment for liabilities. Fair value defines the price that should be awarded in order to sell an asset and is very cognizant of the divergent views and opinions of the existing market participants (IASB, 2015). Following this line of reasoning, the current value measurement allows incorporation of different views before a conclusion is made in regards to possible influences of external factors. In essence, the draft exposure identifies these factors as possible estimates of future cash flows; imminent variations within the approximated amounts as well as the timing of future cash flows for the underlying assets or liabilities; and, also the time value for money (IASB, 2015). The basis also entails the value in use and fulfilment values, which are established with the viewpoint of the reporting company. However, these measures can also be a challenge to employ especially since value for similar classes of assets and liabilities in different companies might greatly differ and thus, reduce the possibility of comparison within these entities. Whenever coming up with the decision related to selecting a measurement basis to use; it is important that whichever of these bases indicate a paramount amount of importance to the users of financial information; it should be relevant and faithfully represented at all times. In truth, in my view it should be fair as much as possible, comparable, verifiable, updated and comprehendible to the different users of accounting information. References List IASB. 2015. Exposure Draft: Conceptual Framework for Financial Reporting. Retrieved on May 3, 2016 from http://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Framework/Documents/May%202015/ED_CF_MAY%202015.pdf IAS. 2010. Conceptual Framework for Financial Reporting 2010. Retrived on May 3, 2016 from http://www.iasplus.com/en/standards/other/framework Kieso, D, E, Weygandt, J, J & Warfield T, D. 2006. Intermediate Accounting: IFRS Edition, John Wiley & Sons Publishers, vol.1, pg.666 Read More