Expense Theory

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EXPENSES Kelompok I Pandu – Ambar – Annisa – Asri – Athfi - Dias

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Expense Theory

Transcript of Expense Theory

Page 1: Expense Theory

EXPENSESKelompok IPandu – Ambar – Annisa – Asri – Athfi - Dias

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Expense Defined

Framework paragraph 70 :

Expenses are decreases in economic benefits during the

accounting period un the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to

equity participants.

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IASB/AASB VS FASB

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Change in assets and Liabilities

By the nature, revenues and expenses come about because of events in operation of the business.

• Increase in value of liabilities or decrease in the value of assets

In reality, the events increasing assets and decreasing liabilities may be difficult to observe.

The framework definition refer to outflows or depletions of assets or incurrences of liabilities.

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Expenses and “Cost”

American Accounting Association (AAA), 1957 :• Expense is the expired cost,

directly on indirectly to a given fiscal period, of the flow of goods or services into the market and of related operations.

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Expense Recognition

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consumption of

benefits

loss or lack of future benefits

Kriteria pengakuan

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consumption of benefits

COGS Vs Revenue

Beban gaji

Depresiasi dan

asuransi

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Kaidah pengakuan

associating cause and

effect

systematic and rational allocation

immediate recognition

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COST VS EXPENSE

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• Revenue recognition VS Expense recognition

• Tidak terjadi dalam periode yang sama

• Pembukuan di akhir tahun

Matching concept

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A number of decisions need to be made as how to how expenses should be allocated across

future periods of resultant revenue

The decision criteria are meant to be supported by the accrual accounting concept of matching expenses agains revenues in the period they

relate

IASB/AASB framework paragraph 95 “Expense are recognised in the income

statement on the basis of direct association between the cost incured and the earning of

specific items of income”

EXPENSE MEASUREMENT

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Associating cause

and effect

Systematic and

rational allocation

Immediate recognitio

n

Allocation Expense

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• Ideal way but difficult to prove

• Based on what appears to be reasonable observation, accountans decide that certain goods and services used up must have helped in the creation of revenue for that period

• Revenue recognition principles “there is no cost of sales if there is no revenue”– Long term construction contracts (comppleted contracts

method vs percentage of completion method)

• Critics – Dificult to appy in practice

– Certain amount of revenue can be attributable to certain amount of expense

ASSOCIATING CAUSE AND EFFECT

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Systematic and rational allocation• The aim is to recognise expenses in the

accounting periods in which the economic benefit associated with these items are consumed or expire (framework,para.96)

• The matching process begins by associating expense to segments of time.

• Example: depereciation expense

• IAS 16/aasb 116 property, plant and equipment defines depreciation as the systematic allocation of the depreciable amount of an asset over its useful life (par 6)

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Systematic and rational allocation• The depreciation method used must reflect the

pattern in which an asset’s future economic benefits are expected to be consumed ( par 60)

• Economists : depreciation as a decline in the value of an asset

• Accountans see long term non-current assets as ‘bundles of future services’ that become smaller and smaller because of: Physical factors

Economic factors

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Immediate recognation• If there is no strong reasons to use cause-

effect method and systematic and rational allocation method, cost can recognised immediately as an expense

• Contoh: advertising expense, research expenditure

• IAS 38/aasb 138 hold the view that reserach expenditure does not meet the recognation criteria for an asset, that is, future economic benefit are not probable, or cannot be measured reliably

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Patton dan Littleton menghubungkan matching of expense against revenue dengan matching effort with accomplishment.

Proses bisnis sebagai aliran biaya yang berakhir di laporan laba rugi sebagai costs expire.

Sprouse meletakkan unexpired cost dalam neraca selama mereka menunggu waktu untuk menjadi cost expire dalam laporan laba rugi.

Mengurangi kegunaan neraca bagi pengambilan keputusan.

Framework: matching concept should not be applied in such a way as to allow recognition of items in balance sheet which do not meet the definition of assets or liailities.

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Lesser Requirement for Objective Evidence

• Acceptable practice is reasonable and appropriate, not for objective evidence.

• Alasan lebih sedikit keharusan bagi bukti objektif dalam mengakui expense dibandingkan dengan revenue adalah konvensi konservatisme.

• Mencatat expenses, losses, dan liabilities sesegera mungkin, meskipun buktinya lemah.

• Konservatisme mendasari probability dan reliability dalam Framework.

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• The interpretation of matching concept in practice is biased by the effect of the convention of conservatism.

• Konservatisme tidak berfokus pada bukti tetapi ketakutan akan overstatement pada net asset dan profit.

• Selain probable dan reliable, standar mensyaratkan entitas untuk memiliki present obligation (legal/constructive) sebelum mengakui provisi.

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Evaluation of Each Matching Method

Patton dan Littleton: menghubungkan sebab dan akibat dalam matching effort ith accomplishment tidak mungkin karena cost attach theory tidak dapat dibuktikan.

Akuntan tidak secara langsung menghubungkan cost dengan revenue, tetapi menandingkan cost dengan interval waktu.

Kritik pada pengatribusian sejumlah revenue terhadap sejumlah expense.

If an asset provides benefits for several accounting periods, its cost is allocated to the periods in systematic and rational manner if the first matching method cannot be used.

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Kritik atas matching cost to interval of time: penuh estimasi dan asumsi sehingga dideskripsikan sebagai arbitrary.

Contoh: amortisasi goodwill

Immediate recognition charges many costs as expenses in the period in which they are paid or become payable.

Kritik atas immediate recognition: membuat keputusan ini tidak mudah. Contoh: advertising and R&D expenditures.

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The Allocation Problem• Thomas argues that allocations are unjustified. To be

justified, three criteria are suggested:

– Accountants defend allocations on two grounds.

1. A given input provides services in the current and future periods and the cost allocation pattern reflects the cost of the services in the given periods.

2. Allocated data serve a useful purpose because readers of accounting report find them useful

Additivity

Unambiguity

Defensibility

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The Allocation Problem• Thomas insists that accountants must show that

the services provided by the given input contributed towards a certain amount of cash inflow or revenue or cost savings.

• He contends that the pattern of services or contributions does not exist in the external world.

• Whenever inputs interact, calculation of how much revenue or cash inflow has been contributed by each input are meaningless.

• People have been conditioned to believe that allocated nformation is valid.

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Defence of Allocations – Eckel

The objective of allocations in conventional accounting is to determine profit by a process of matching, in particular by cause and effect.

The effectiveness of matching depends on the existence of a unique and identifiable cause-and-effect relationship betwees cost and revenue.

The objective of matching, however, could be change.

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Defence of Allocations – Zimmerman

• Cost allocations appear to represen certain hard-to-observe costs that arise when decision-making responsibilities are assigned to managers within the firm.

• As long as the benefits of cost allocations exceed the costs of cost allocations, using allocation techniques is rational.

• Allocated fixed costs can serve as a measure for difficult-to-calculate opportunity cost.