Recognizing assets, liabilities, income and/or expenses for TDM Ltd

1.1Photographs of the founders of the company along with the buildings are original and possess sentiments for the existence of the company and also have the historical value. In accordance with the rules and regulations of the Corporations Act read with the accounting standards, no such asset shall be recorded and recognised in the books of accounts. It is because the sentimental value will never accrue the benefit to the company in any manner and therefore accordingly no asset shall be recorded and thus no general ledger account shall be debited (AASB, 2014)

2.In accordance with the accounting standard relating to Provisions, Contingent Liabilities and Contingent assets, the provisions and the contingent liability is required to be disclosed in the financial statements depending upon the likeliness of the future event that might be occurred or not. In the given case it is more likely that the company will definitely loose the case in Court being filed by the Zero Limited. Thus, the provision is required to be made. Accordingly the concerned expense account will be debited and General ledger under current liabilities will be credited (AASB, 2010).

3.In accordance with the accounting standard relating to Provisions, Contingent Liabilities and Contingent assets, the Contingent assets will be shown in the notes to the financial statements only when there is more likely that the company have the full chances of receiving the payment. Therefore, in accordance with the case study the chances of winning is high in case of suit filed from the Bedegr Limited and thus contingent assets shall be disclosed in the notes to the accounts of the financial statements of the company. Accordingly there will be no debit or credit of the general ledger accounts (AASB, 2010).

4.Retirement of an asset is referred to as the situation where the assets of the company is sold and disposed off. These retirements generally occurs when the assets become obsolete or unusable. In the given case, the company has retired the obsolete plant and equipment and accordingly following cases have arisen:

• When the assets are disposed off without any adequate consideration of the same and accordingly the asset account will be credited and the depreciation account will be debited.
• When the assets are disposed off with any adequate consideration of the same then the gain or loss will be arrived in the net terms. Thus, Bank or Cash Account is required to be debited with the amount of consideration, accumulated depreciation account will be debited with the depreciation charged till the date of disposal, and asset is credited with the book value and the difference will be either debited as Loss or credited as Gain. (IFRS, 2012).

5.The donation amounting to $20,000 /- will be shown as the Income in the statement of profit and loss for the year end.

1.a) Component method of depreciation entails that the depreciation will be charged on the basis of the each asset useful life rather than charging one amount as whole for whole of the group of assets. Following are the advantages of the component method of depreciation of $10 millions:- Cost of the asset is charged over the useful life of an asset and that too on components basis whereas in simple method the depreciation is charged in lump sum.- The other advantage is that the profit and loss statement is not affected directly whereas in simple method it affects the profit and loss statement directly.- The third advantage is that the users of the financial statements and the stakeholders of the company will find the financial statements more useful and worth. (Starova and Cerkamova, 2010).   

b) The choice for subsequent recognition of the asset depends upon the two models – cost and revaluation model. The best model will be the cost model. It is because of the fact that the through costs model the cost of the asset will be derived using the purchase cost less the depreciation and the impairment and thus gives actual figure as compared to revaluation model in which the value keeps on fluctuating and may be either increase or decrease and thus there will be the question of reasonableness of the value. Second reason is that the application of revaluation model is more expensive and difficult as compared to Cost Model. Thus, the cost model is more appropriate than the revaluation model in case of components (HKAS, 2016)

.c) The method that has been selected for the depreciation is component method of depreciation and is allowed as per the provisions contained in AASB 116. The basis for selecting the method is based on the premise that the method gives the true and correct view of the financial statements of the company and more importantly the income statement does not get adversely affected in case of the replacement of an asset. Also the method is very easy to adopt and apply (Marton, 2012)

Advantages of a components approach versus a simple depreciation method for SC Airlines Ltd

In accordance with the provisions of the International Accounting Standard 16, the purchase prices of an asset shall be accounted for as an asset. Therefore, the purchase price of aircraft body of $3000000 shall be classified and accounted for as the Fixed Assets of the company. The costs of the inspection of $100000 will be charged to the statement of Profit and Loss (IATA, 2016).  

In accordance with the provisions of the International Accounting Standard 16, the purchase prices of an asset shall be accounted for as an asset. Therefore, the purchase price of engines of $4000000 shall be classified and accounted for as the Fixed Assets of the company. Due to the adoption of the method of component depreciation, the cost incurred in replacement of an asset shall be added to the cost of the fixed asset of the company amounting to 4.5 million dollar and 6 million dollar in 2020 and 2024 respectively (AASB, 2016).   

In accordance with the provisions of the International Accounting Standard 16, the purchase prices of an asset shall be accounted for as an asset. Therefore, the purchase price of seats of $1000000 and $50000 of carpets shall be classified and accounted for as the Fixed Assets of the company. Due to the adoption of the method of component depreciation, the cost incurred in replacement of an asset shall be added to the cost of the fixed asset of the company amounting to 1.2 million dollar and 1.5 million dollar in 2019 and 2025 respectively. Similarly the replacement cost of Cockpit of $1500000 shall be treated as an asset of the company (AASB, 2016).

In accordance with the provisions of the International Accounting Standard 16, the purchase prices of an asset shall be accounted for as an asset. Therefore, the purchase price of equipment of $250000 shall be classified and accounted for as the Fixed Assets of the company (AASB, 2016).

Nil Expense will be recognized (AASB, 2016).

The amount of three lacs dollar shall be recognised as expense (AASB, 2016).

$100000 and $10000 shall be recognised as expenses for repair of seats and cleaning of seats respectively (AASB, 2016)

$20000 shall be recognised as an expense (AASB, 2016)

3.In accordance with the provisions of the accounting standard 138 on the Brands, the accounting treatment of brands is done in two ways. In the first case where the brand is created out of its own i.e. is self constructed then the same shall not be accounted for in the books of accounts with the value because as per the accounting standard the same is valued at NIL. In the second case where the brand is emerged on account of the business combination, it is recognised at the value which is paid at the time of the purchase of the business. These are known as the acquired brands and these are amortised at the end of every year in accordance with the relevant accounting standard (AASB, 2015).

The main difficulty that has been faced by the standard setters has been in the case of Self constructed brands or self generated brands. It is because it is very cumbersome to specify which expense will become the part of the brand and which expense will not.

Application of the cost and revaluation models to aircraft as a whole and the method of depreciation as per AASB 116 for SC Airlines Ltd

As the asset is recognised on the condition that it will flow the economic benefits in future. In case of Self constructed brands it will be again difficult to identify the amount of economic benefits that will occur in future (Paugam L, 2015)

4.Provisions are recognised in the financial statements of the company in the credit side of the Balance Sheet under the head current liabilities and Contingent liabilities are disclosed in the notes to accounts of financial statements. The reasons for difference in their recognition are:

1.The recognition of the provision follows the concept of prudence. As per the prudence each and every entity shall provide for all losses and expenses and shall not anticipate any gains or incomes. Thus, expense will be accounted for only when there are high chances of payment and this booking will be accounted as the provision. If there are less chances of payment then the liability will be disclosed in the notes as contingent liability.

Second major reasons for recognising provision in the financial statements is of following the matching principle which requires that every expense shall be accounted for in the particular year relating to that year and it needs to be reconciled with the revenue earned during that year. Thus, provisioning of expenses is required but booking of contingent liability is not required as the corresponding event has not made the company to account for the revenue (IFRS, 2012)

2.1Provision for Long service leave shall be classified as the Liability and accordingly recognised in the financial statements of the company. It is because these are the employee benefits which the company is required to pay to their employees at the time when it becomes payable. (AASB, 2011)

2The amount of dividend payable shall be recognised as the liability in the financial statements of the company. It is because this item comprise of the company that the company is liable to pay their shareholders after declaration of the same.

3The preference shares shall be recognised as the liability in the financial statements of the company because of the reason that the same will be payable to the shareholders at the time of liquidation.

References

AASB Official Website, (2014) “Conceptual Framework”, available at

https://www.aasb.gov.au/Pronouncements/Conceptual-framework.aspx accessed at 06/06/2017

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 06/06/2017

IFRS Official Website, (2012) “Property, Plant & Equipments”, available at https://www.ifrs.org/Documents/IAS16.pdf accessed at 06/06/2017

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 06/06/2017.

IATA, (2016), “Aircraft Acquisition Cost and Depreciation”, available on  https://www.iata.org/publications/Documents/Airline-Disclosure-Guide-aircraft -acquisition.pdf   accessed on 06/06/2017.

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 06/06/2017.

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 06/06/2017.

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 06/06/2017

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=HVptP CSeCFT_BKaX06NcHpPbnR4&hl=en&sa=X&ved=0ahUKEwjVgL_L oDUAhUMI8AKHeEIBssQ6AEIKTAB#v=onepage&q=standard%20setter%20diffi culty%20in%20brands&f=false accessed on 06/06/2017

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 06/06/2017

AASB Official Website, (2011), “Employees Benefits”, available at https://www.aasb.gov.au/admin/file/content105/c9/AASB119_09-11.pdf accessed on 06/06/2017