Q

Assignment on ACT 204 Advanced Financial Accounting- report the operations in an honest and fair manner

Home, - ACT 204 Advanced Financial Accounting

ACT 204 Advanced Financial Accounting

Classification of liabilities is based on the same principles as the classification of assets.’  

As per the provisions of AASB 101 , the reporting entity is required to report the operations in an honest and  fair manner. In general, the balance sheet is prepared on the basis of permanence or a classified balance sheet. A classified balance sheet is a balance sheet in which the assets and liabilities are presented in the form of current assets, current liabilities, fixed assets, long term liabilities, shareholders equity etc. in order so that the viewer and the reader is able to grasp the essence of the financial position at a glance. 

When a classified balance is made the assets and liabilities are quite classified similarly. While assets are classified like current assets followed by the long erm assets, the liabilities are classified as current liability first and long-term liabilities and shareholder’s equity later. 

On the asset side the current assets are shown in the beginning if it satisfies the following criteria:

a) The asset is held for trading or 

b) The asset is held with the expectation of being released within the current operating cycle of the company concerned. 

c) The assets are also expected to be sold and released within the next twelve-month period and is classified as either cash or equivale tot cash. 

Assets which satisfies all of the above conditions or any one of them is classified as current assets in the current balance sheet and assets which are expected to not meet the above criteria’s are shown as non-current in the books. Non-current or long-term assets include intangible assets, tangible assets and other financial assets with a life term of More than twelve months duration. So assets are basically classified as either short term (current) or noncurrent in the balance sheet of an reporting entity (BAKER & CORTRELL, 2011). 

Like the current assets, the current liabilities are termed as so if they fulfill the following criteria:

a) A liability in general would be classified as current if the liability under analysis is expected to be settled within the operating cycle of the reporting entity. 

b) The liability is held for trading purpose 

c) The assets are also expected to be settled within the next twelve-month period form the operating cycle reported date. 

d) The reporting entity is not entitled to defer the settlement of the said liability unconditionally for at least a period of 12 months from the date of reporting the same. 

Similarly, financial liabilities would be branded and reported as current in the present balance sheet if they are expected to fall due within the next 12 months form reporting date even if the financial liabilities are of grater maturity.  A part can be reported as current if the liability is expected to become partially due in the next 12 months from the date of reports (ATRILL & EDDIE, 2012). 

 

All other kinds of liabilities would report in the books as long term liabilities which would mature in the future and exactly the opposite of the long term or fixed assets. 

Thus, from the analysis of the above shows that assets and liabilities are classified and reported quite similarly by reporting entity following similar regulations under AASB and IFRS. This classification of reporting short term assets and liabilities first and then the long-term assets and liabilities ensure the analysts and investors are aware of the current debt and paying obligations ad are easily capable od identifying the liabilities separately to compare against the assets etc. also the current debt obligations and future debt obligations can be seen in different lights from this classification as well. 

 

 

2. Classification of liabilities as current or non-current is not that important.  The money is paid out eventually anyway, so what’s the big deal?  

In a classified balance sheet, the assets and liabilities are presented in the form of current assets, current liabilities, fixed assets, long term liabilities, shareholders equity etc. in order so that the viewer and the reader is able to grasp the essence of the financial position at a glance. So, the basic process and duty of the reporting entity is to separate what’s current and what’s non-current. 

 

Current liabilities are termed as so if they are found to be expected to be settled within the present operating cycle of the reporting entity or they are held for trading purpose or the liabilities  are also expected to be settled within the next twelve-month period form the operating cycle reported date or the reporting entity is not entitled to defer the settlement of the said liability unconditionally for at least a period of 12 months from the date of reporting the same. Simply speaking the current liability is a liability which needs to be paid in the next 12 months form the reporting date (Carl S. Warren and James M. Reeve, 2012, 12th edition). 

On the other hand the long term liabilities are not expected to be settled within the present operating cycle of the reporting entity nor they are expected to be settled within the next twelve-month period form the operating cycle reported date. the long-term liabilities are those liabilities are those which would be paid over a long period of time like 5 years or 10 years. 

Current liabilities includes in general items alike accounts payables, taxes payable ad bills payables etc. non-current or long term liabilities include liabilities like Long term bonds , notes payable of duration more than 12 moths. Log term loans etc (David Kieso,Jerry J. Weygandt and Terry D. Warfield, 2012, 15th edition). 

While current liabilities are expected to be measured in terms of the liquidity of the entity under analysis the long-term liabilities would be analyzed under the solvency or leverage etc.

For example, current liabilities are used for assessment of a current ratio and quick ratio which makes an effective assessment of the short-term ability of the firm to meet payment obligation towards lenders, suppliers etc. 

on the other hand, the long-term liabilities are used to assess the solvency position of the firm and often compared with total assets and total equity of the entity. The comparison with total assets is generally aimed at finding how leveraged the firm overall is or to find how much debt is used to finance the assets of the firm. With increase in the overall use of the long-term liability the leverage would be higher and vice versa. 

Thus, it is clear that both current and long term liabilities are sued for different purposes in the balance sheet and helps in making investing and financing decision decisions and used by both investors and the managers. So the classification is necessary for the management and the investors as well because current liability serves a different purpose of finding out the liquidity of the form and the long term liabilities are used find the solvency and leverage position of the firm. Thus, even if both are eventually required to be paid off they needs to be reported separately for convenience of making separate and different decisions (Deegan, 2014).  

 

3.‘A provision and a contingent liability are the same.’ 

For an accountant it is quite necessary to be able to distinguish between a provision and a liability which is contingent. 

 

A provision is defined as a liability for which the timing of the liability and the actual amount of the liability is quite uncertain. But in general, a provision meets the criteria to be classified as a liability because the obligation is arising because of the occurrence of a past event and which when settled with in the next few quarters would end of with a sizable amount of cash outflow. It also meets the criteria of recognition with reliability of the measurement goes with the probable economic benefits being derived. 

On the other hand, the contingent liability is something for which there is an expectation of cash outflow in the future but the happening of the same is quite remote. For example, there can be affair and reliable estimation of a civil liability but the possibility of the entity losing the case and paying the amount is quite less and pretty uncertain (Deegan, 2015). 

A provision on the other hand is something which is most likely cause a reduction in the value of an asset. For example, if the entity is estimating probable bad debts and makes a provision against receivables in excess of 60 days at 5% of the gross value then the same is likely to cause a reduction in the value of the net realizable value of the receivables. The estimation of the provision for bad debt and provision for depreciation etc. would be done quite reliably than a contingent liability. 

 

While the provisions made and created in a particular financial year is charged to the income statement ( a debit) the contingent liability is not charged to a income statement and shown as a footnote in the balance sheet. The provisions made by a reporting entity  is shown as an expense ( charged to the income statement)  because of the reason that provisions not only meets the criteria of being a liability but also it can be estimated with reliability and thus it meets the recognition criteria as well. The contingent liability is shown as a footnote in the balance sheet is because of the reason that contingent liability meets the criteria of being a liability but no way it can be estimated with reliability and thus it fails to meet the recognition criteria. Because of these differences the provisions are not the same as a contingent liability ad thus are treated differently despite both being liabilities (Kieso & Wayangant, 2016). 

4. “Employees often fail to appreciate the true cost of their employment”. 

In general employees believe that the only thing they were paid by the employer to them are the take home payments. They fail often to take into consideration of other benefits which were paid to them or paid for them and ended up evaluating the total benefits as the take home salary. This is because they are found to be largely unaware fot he non-cash value of the benefits they were given, and they were served. 

Employees are paid the followings:

a) Wage or salary in cash 

b) Wages and salary in kind 

c) Free health and life insurances 

d) Benefits of transport free of cost

e) Free lunch 

f) Free clothes

g) Bonusses paid annually 

h) Benefits of retirement 

i) Tax benefits 

j) Insurance extended to family members of the employees 

k) Free education benefits extended to family members ad children of the employees.

l) Interest free of concessional loans provided to employees.

m) Home loans or hosing benefits 

In general, the employee only count what’s being paid in cash and does not consider the benefits paid in kinds such as the health care insurance and insurance for accidents etc. which can cause immense damage to one’s ability to earn if the employee is met with a serious accident at the workplace. Similarly, taxes on fringe benefits are paid by the employer on behalf of the employee and the same is often ignored but the employees. Free housing facility provided to employee generally tends to be 15%-20% of the entire cash salary. This is also not evaluated properly by the employees. However, the employer has to spend considerable amount of money on them as well. Loans at concessional rates means the employer undergoing opportunity costs and paying taxes for them also sizable. Many other benefits like a car benefit is also not considered monetarily by the employee and as a result of which the employee is not aware of the real cost that the employer is spending for their benefit and thus undermines the efforts made by the employer to increase their standard of living (Carl S. Warren and James M. Reeve, 2012, 12th edition). 

 

Maintenance of the workplace which is safer and convenient etc. for the employees is often ignored by employees while estimating the true cost of employment because they regard the same as a statutory requirement and duty of the employer, but a good workplace is maintained for health benefits for the employees and only benefits them in the long run. Thus, the failure to recognize and understand the benefits is the main reason why employees often fail to appreciate the true cost of employment. As the value of the additional non-cash benefits are pretty significant and sizable they must be included in the true cost analysis for the individual employee to see the real costs being incurred by the employer and unless the real cost is estimated and seen with perspective the same won’t be understood.

Leave a comment


Captcha

Related :-