Topic 3 - Definition and Recognition

Question 1

What is the definition of an assets?

Answer 1

An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow.

Question 2

When should an asset be recognised?

Answer 2

An asset is recognised in the balance sheet when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably

Question 3

In which area of an assets definition and recognition criteria is the most professional judgement needed? (2)

Answer 3

-Probability - Assets involve a forward-looking statement about future economic benefits. Uncertainty about whether future economic benefits will materialise
-Reliable Measurement, Role for professional judgement in determining whether measurement is
sufficiently reliable

Question 4

What is the definition of income reliant on?

Answer 4

The definition of income is dependent upon the definition of assets and liabilities. “includes revenue and gains e.g. sales, fees, interest, dividends, royalties and rents” (this is not it’s definition)

Question 5

Which standards are Revenue recognition principles based on?

Answer 5

AASB 118

Question 6

When are sales of goods recognised and income from services recognised?

Answer 6

when Significant risks and rewards of ownership are

transferred to the buyer and when services are rendered.

Question 7

when a company develops a website for internal and external use, what type of asset is it? can costs of planning stage be capitalised? why/why not?

Answer 7

it is an internally generated intangible asset.

cost from planning stage are the same as costs from research stage and should therefore be expensed AASB 138

Question 8

Is this an asset? DEFINITION only
Redwood Ltd acquired materials to be used to manufacture widgets for sale to customers.
Give reasons for your answer.

Answer 8

Resource expected to provide future economic benefits, Yes, it is expected to be used to make inventory that can be sold.

Has control over the future economic benefits been established by a past transaction or event. Control has been established by purchase.

Question 9

Is this an asset? DEFINITION only
Blackberries grew on land owned by Woodlands Ltd. Although the entity did not plant the blackberries, it intends to harvest them for sale to a local jam factory.
Give reasons for your answer.

Answer 9

Yes, it is an asset.
Resource expected to provide future economic benefits, Yes, it is expected to sell blackberries that grow on the land.

Has control over the future economic benefits been established by a past transaction or event. Control has been established by purchase of land, so Woodlands owns and controls the land and the bushes on it.

Question 10

Is this an asset? DEFINITION only
Professional Services Ltd sent some
of its employees on a staff training course. The manager believes there will be efficiency gains from the staff training.
Give reasons for your answer.

Answer 10

No it is not, doesn’t meet definition criteria.

does gain economic benefit from staff having greater skill and knowledge.
however, there is insufficient control over staff/future employment AASB 138 - should be expensed

Question 11

Evandale Ltd purchased a permit that enabled it to manufacture goods that it intends to sell to customers.
Should we recognise an asset? Why / why not?

Answer 11

• Economic benefits are expected from the use of the permit to manufacture inventory
• a legal right is established by the acquisition of the permit
• to the extent that it is likely that the permit will be used to make inventory If not, we would need to consider whether it can be sold
• Reliable measurement – Yes, e.g., cost, what Evandale Ltd paid for it

Question 12

in regards to Reliable Measurement, do you need to know with certainty the amount?

Answer 12

No, but do need to make estimates in accounting.

Question 13

does all income have to be earned?

Answer 13

no e.g., valuation gains, recognised in profit or other comprehensive income, are not earned.

Question 14

Cash received prior to delivery of goods or provision of services is a ______?

Answer 14

Liability

Unearned income/ Unearned revenue

Question 15

AASB 15 Revenue from Contracts with

Customers is effective as of_____?

Answer 15

annual reporting periods commencing on or after 1 January 2018
Early adoption is permitted

Question 16

For something to be defined as an asset, it must be a resource that possesses which three attributes? why?

Answer 16

•  future economic benefits or services are expected to flow to the entity
•  it must be controlled by the entity
•  it must be the result of a past event

These attributes ensure that whatever is defined as an asset is of economic value to the entity and is an asset of the entity itself rather than some other entity.

Question 17

Provide an example of an appropriate event or transaction that would give rise to a present obligation for each of the following items:

a. wages payable
b. loan payable
c. accounts payable to suppliers

Answer 17

a. wages payable – the provision of services by the employee
b. loan payable– receipt of money from the lender
c. accounts payable to suppliers - delivery of goods by the supplier

Question 18

what is the difference in treatment for expenses incurred during the research or development phase of an intangible asset?

Answer 18

• research phase : expensed as it is not probable that asset exists
• development phase: costs can be amortised towards the asset, as the asset now meets the definition and recognition criteria of an asset

Question 19

All labour costs associated with planning the website

def, recog, measurement, disclosure?

Answer 19

intangible assets must have cost incurred during research/planning phase expensed

Question 20

Labour costs and other costs incurred for developing operating software and graphic design development up to the time that the website becomes operational, and that can be directly attributed to the website, 3yrs useful life.

def, recog, measurement, disclosure?

Answer 20

DEFINITION
The website is an intangible asset -Planning costs are expenses

RECOGNITION
The website ‘under development’ is recognised from the time it is in the development stage

MEASUREMENT
Measured at cost, amortised over 3 years, s/line But which costs are included?
Costs in the planning stage? NO
Costs in the development stage? Yes, up to the time that the website becomes operational
Costs after the website goes live? NO

DISCLOSURE
A Ltd discloses the cost, accumulated
amortisation and any accumulated impairment of the website.

Question 21

costs of a website before it goes live and after it goes live, how are they treated?

Answer 21

expensed

Question 22

The definition of income is dependent upon what?

Answer 22

the definition of assets and liabilities

Question 23

what does income include?

Answer 23

includes revenue and gains

Question 24

what is the definition of income?

Answer 24

increase in ec benefits in form of:

• inflows
• enhancements of assets
• decrease in liabiliies

resulting in an increase of equity - other than contributions from owners

Question 25

list examples of income?

Answer 25

sales, fees, interest, dividends, royalties and rents

Question 26

what is the recognition criteria for income?

Answer 26

• probable

- reliably measured

Question 27

rendering service:
•E.g. Provision of professional services under fixed fee contract for $10 000
•Estimated associated expenses $8 000
•40% complete in current period

how would revenue be recognised?

Answer 27

Recognise 40% of expected fee revenue (i.e., $4 000) and 40% of total associated expenses (i.e., $3 200)

Question 28

when is AASB 15 Revenue from Contracts with Customers effective of?

Answer 28

1 January 2018

Early adoption is permitted