Adapted from: Henderson, S, Peirson, G & Herbohn, K 2008, Issues in financial accounting, 13th edn, Pearson Education Australia, Frenchs Forest.For each of the following independent cases, discuss whether you believe the items mentioned would meet the definition and recognition criteria for the various elements of financial statements as outlined in the 'Framework for the Preparation and Presentation of Financial Statements' (i.e. the AASB Framework). You are required to justify your answers with reference to the details in the AASB framework and the features of each case. Assumptions should be clearly stated.
a) On 1 July 2010 Blue Sky Airlines, an established airline, implemented a frequent flyer program to more effectively compete with its better-established competitors. Each Blue Sky customer who has paid for six return flights is now eligible for a free return flight. Blue Sky recorded 24000 flights and revenue of $4 800 000 for the period 1 July 2010 to 30 June 2011. The company has sought your advice as to whether it should record a provision for the future free flights resulting from the frequent flyer program. Do you believe the provision account would meet the definition and recognition criteria for a liability? (Normally you would not consider the recognition criteria if the definition for a liability was not met; however, for the purpose of this assignment you should address the recognition criteria regardless of whether or not you determine that the definition criteria have been satisfied).
b) The Rockhampton State High School was gifted a bus by a prominent local personality on the 9 June 2010. Whilst preparing the financial statements for the 2009-2010 financial years, a School adviser suggested that because the School adopted a historical cost basis of measurement and the bus had a zero cost to the School, it was unnecessary to record it in the financial report. Do you agree with the School's adviser or would this item satisfy the definition and recognition criteria of an asset as per the criteria outlined in the AASB Framework? (Normally you would not consider the recognition criteria if the definition for assets was not met; however, for the purpose of this assignment you should address the recognition criteria regardless of whether or not you determine that the definition criteria have been satisfied).
c) PC Land Ltd has placed an order with a computer manufacturer in USA. The amount of the order is $3 200 000. The computers will be built to Australian specification standards by the manufacturer in USA. PC Land has paid a deposit of $320 000 which will be forfeited in the event of cancellation. The chief accountant argues that the following entry should be recorded:
Inventory of computers 3 200 000
Cash at bank 320 000
Accounts payable 2 880 000
The board of directors of PC Land, however, argues that no goods or invoice have been received and there is no need to record the accounts payable liability at this time. Do you agree with the board of directors or would the item satisfy the definition and recognition criteria of a liability as per the criteria in the AASB Framework? (Normally you would not consider the recognition criteria if the definition for liabilities was not met; however, for the purpose of this assignment you should address the recognition criteria regardless of whether or not you determine that the definition criteria have been satisfied).
General guidelines regarding Question 3 of the assignment: In each case, discuss whether you believe the definition criteria from the AASB Framework are satisfied. For example, in relation to assets, you should discuss whether there are future economic benefits that are controlled by the entity and whether a transaction or event giving rise to the control has already occurred. You are then required to discuss whether the item satisfies the recognition criteria. For example, in relation to assets, you should discuss whether you believe future economic benefits are probable and the cost can be reliably measured.