Tutorial 2 (Week beginning 16 March 2020)

Topic 1: Introduction to accounting and conceptual framework

SOLUTIONS TO HOMEWORK QUESTIONS

1. Q13.9 (p.880)

The conceptual framework sets out both the primary and other users. The primary
users of the general purpose financial reports being those users who provide resources
to the entity and therefore require information to make decisions concerning the
provision of those resources.

(1) Equity investors provide resources to an entity usually by investing cash for the
purpose of receiving a return and include shareholders, holders of partnership interests
and other equity owners.

(2) Lenders provide resources to an entity by lending cash for the purpose of receiving
a return in the form of interest.

(3) Other creditors including employees, suppliers and customers (but only in their
capacity to provide resources to the entity are they considered primary users).
Suppliers are considered to be other creditors when they extend credit to facilitate a
sale, employees are considered to be other creditors when they provide their services
(human resources) in exchange for remuneration and customers are considered to be
other creditors when they prepay for goods or services which are to be provided in the
future.

These parties are only considered resource providers to the extent that they provide
the entity with resources in the form of credit or services, and they make decisions
based on providing such resources. When they are not in this capacity they are
referred to as other users. Figure 13.3 summarises the three main categories of users.

In addition to ‘primary users’ there are also ‘other users’.

Other users include government agencies, members of the public as well as suppliers,
customers and employees (when not resource providers as explained above). The
information needs and questions of other users vary considerably. For example,
taxation authorities such as the ATO want to know whether the entity complies with
the tax laws. Regulatory agencies such as the Australian Securities and Investments
Commission (ASIC) or the Australian Competition and Consumer Commission (ACCC)
want to know whether the entity is operating within prescribed rules.

While these other users have specialised information needs, they may find the financial
information that meets the needs of resource providers useful. Like the primary users,
the common information needs of other users include an assessment of the entity’s
future cash flows (amount, timing and uncertainty) and evidence that management has
discharged its responsibilities to use the entity’s resources efficiently and effectively.
However, it is made clear that financial reporting is not primarily directed to other users
but rather to equity investors, lenders and other creditors.

2. BE13.10 (p. 884)

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 (a) Assets are defined in the Conceptual Framework as a resource controlled by the
entity as a result of past events and from which ‘future economic benefits’ (not
resources) are expected to flow ‘to’ (not ‘from’) the entity.
(b) Expenses are defined in the Conceptual Framework as ‘decreases’ (not
‘increases’) in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrence of liabilities that result in decreases
in equity, other than those relating to distributions to equity participants.
(c) Equity is defined in the Conceptual Framework as the residual interest in the
‘assets’ (not ‘equity’) of the entity after deducting all its liabilities.
(d) Income is defined in the Conceptual Framework as increases in economic benefits
during the accounting period in the form of inflows or enhancements of assets or
decreases of liabilities that result in increases in equity, ‘other than those relating
to’ contributions from equity participants (not ‘as well as’ contributions from equity
participants).

3. Messy Ltd is an oil company. The company is aware that it that is has caused severe
contamination to land during the process of oil extraction. While Messy Ltd operates in
countries where there is no environmental legislation, the company has a widely
published environmental policy specifying that it undertakes to clean up ALL
contamination that it causes. The company has had a record of honouring this
published policy for the last thirty years and has previously cleaned up after 4
contamination incidents.
Required:
With reference to the AASB Framework, discuss whether Messy Ltd should recognise
a “Liability for Environmental Clean Up”.

Liabilities: Definition.

Future outflow Future costs to clean up

Present obligation to another entity Constructive obligation based upon policy

and previous clean ups.

May also argue equitable

Past event Oil extraction causing contamination

Conclusion It is a LIABILITY

Recognition criteria

Probable Given they are extracting and past history of

clean ups it is highly likely they will continue
with policy of cleaning up

Reliable Measurement Only if past evidence can allow reliable

estimation

Conclusion If past evidence, recognizes as liability. If

unreliable ,record in notes

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 4. A well-known Australian airline has entered into a contract to order a new Airbus A480
plane. The price between the airline and the manufacturer is fixed and delivery is to
occur in 24 months with full payment to be made on delivery. The contract is for $300
million. The manufacturer has agreed that the contract is non-cancellable from their
point of view. The airline can cancel the contract but must pay a cancellation penalty
of $500 million to do so.
Required:
What should the airline recognise, if anything, at the time it enters the contract? Justify
in accordance with the relevant Conceptual Framework definitions and recognition
criteria.
Asset
Definition Criteria Yes/No Discuss
Future Economic Yes Expected inflows from sales through use of plane
Benefit when we eventually receive it
Controlled by the Yes Manufacturer cannot cancel contract therefore
Entity airline has control over the right to receive the plane
Past Event Yes Signing of the contract
Conclusion Meets the definition of asset
Recognition
Criteria
Probable future Yes More likely than less likely that airline will get plane
economic benefit as manufacturer cannot cancel and airline would be
required to pay a huge penalty and thus unlikely to
cancel
Reliable Yes $300million
Measurement
Conclusion It can be recognised in the reports as an asset.

Liability
Definition Criteria Discuss
Future outflow Yes Payment of the $300million under the contract
Present Obligation Yes We have agreed under contract to pay the
manufacturer the $300million.
Past Event Yes Signing of the contract
Conclusion Meets the definition of Liability
Recognition
Criteria
Probable future Yes More likely than less likely given that the airline will
outflow either pay the $300million under the contract or the
$500million penalty. The airline is unlikely to pay the
penalty when buying the plane is much cheaper.
Reliable Yes $300million stipulated in the agreement
Measurement
Conclusion It can be recognised in the reports as a liability.

5. Tickets Ltd is an organisation that sells concert tickets for upcoming events. The
company has a ‘no refund’ policy once the sale has been finalised. The company
accountant is considering how the ticket sales should be recorded. Of the ticket sales
during 2017, 70% of the events have occurred, while the remaining events are
scheduled to occur during 2018.

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Required:
With reference to the AASB Framework, explain how Tickets Ltd should record the
ticket sales during 2017. (Please note that you are not required to prove that Cash at
Bank is an asset)
Definition of Income
Inflow of EB due to Increase in
Asset or decrease in Liability
Increase in owner’s equity
Not a contribution from Owners
mark
Conclusion
Recognition Criteria (ONLY for
events already performed)
Probable Occurrence
Reliable Measurement
Conclusion
Definition of Liability (Events/Concerts not yet performed in 2017)
Future outflow
Present obligation
Past event
Conclusion
Probable occurrence
Reliable measurement
Conclusion
Cash from ticket sales is an increase in asset
(cash)
For 70% of ticket sales - Assets increased
and no change in liabilities => equity
increased.
For 30% of ticket sales – Assets increased
BUT corresponding increase in liability as
Ticket Ltd is obligated to provide the
concerts/events => no change in equity.
Ticket holders are not owners of Ticket Ltd.
mark
For 70% of ticket sales = Meets definition of
income
For 30% of ticket sales = Does NOT meet
definition of income.
The inflow is certain as the cash is received
and the concert performed.
70% of ticket sales which would have
invoices.
Money received for events performed in 2017
should be recognized as Income
Cost of putting on the concert/event
Legal obligation as ticket sale
constitutes a contract
Receipt of cash for ticket
IT is a liability
Ticket purchasers expect to attend
the concert; otherwise they will want
their returned. Despite it being non-
refundable, if the concert wasn’t
held, they would be entitled to their
money back
Ticket Cost
The cash received for
events/concerts not yet performed
should be recognized as a liability in
2017