Lecture Topic 6 - Recognition and Measurement (PartB)

7/30/2019 Lecture Topic 6 - Recognition and Measurement (PartB)

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TOPIC 6 (part B)

RECOGNITION & MEASUREMENT

ATPB 313

ACCOUNTING THEORY AND PRACTICE

SEM I 2013/2014

(updated July 2013)


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Learning Outcome

At the end of this lecture, students should beable to :

Explain the concepts, principles and issues associatedwith definition, recognition, and measurement of:

Assets Liabilities Revenue Expenses


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Assets & Liabilities

Definition

Assets:A resource controlled by the entity as a result of past events and from whichfuture economic benefits are expected to flow to the entity

Liabilities:A present obligation of the entity arising from past events, the settlement ofwhich is expected to result in an outflow from the entity of resources embodyingeconomic benefits

Recognition

It is probable that any future economic benefits associated will flow to or from the entity

The item has a cost or value that can be measured with reliability

Measurements

Historical costs; Realisable value; Present value; Fair value

Dealing with initial and subsequent measurement


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Issues in the definition of assets


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Issues in the definition of liabilities


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Recognition of assets & liabilities

Past

Reliance on the law Determination of economic substance of

the transaction or events

Ability to measure the value of liability

Conservatism (prudence) principles

Present(CF 4.38)

It is probable that any future economicbenefits associated with the items will flowto or from the entity

Key issue: what does probable mean?

The item has a cost or value that can bemeasured with reliability

IASB framework - reliable measurement isthat which is free from material error and biasand provide faithful representation


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Assets

Intangible

Financial

Inv

Property

PP&E

Inventory

Etc

Defined

Benefit

Biological

assets

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Measurement of assets & liabilities


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ASSET TYPE MEASUREMENT AT INITIALRECOGNITION

MODEL BASED ONFAIR VALUE

BASIS OFIMPAIRMENT

TEST

IFRS 9 FinancialInstruments

Fair value For specified financialassets and for particularbusiness models: fairvalue

IAS 16 Property,Plant andEquipment

Purchase costs + construction costs +costs to bring to the location andcondition necessary to be capable ofoperating in the manner intended bymanagement.

Accounting policychoice: revaluationmodel

Compare carryingamount torecoverable amount.

Recoverable amountis greater of value inuse and fair valueless disposal costs(IAS 36)

IAS 38IntangibleAssets

Purchase costs + development costs +costs to bring to the location andcondition necessary to be capable ofoperating as intended by management

Accounting policychoice: revaluationmodel

IAS 40InvestmentProperty

Cost including transaction costs Accounting policychoice: fair value

IAS 41Agriculture

Fair value less costs to sell Fair valueless costs tosell


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Measurement of liabilities

Under IFRS as well as under Malaysian CF, the most commonly usedmeasurement method for liabilities is historical cost (or modified historicalcost)

Fair value: Used on initial measurement of transactions involving liabilitiese.g. Recognition and Measurement of Financial Instruments (MFRS139) and

Share-based Payments (MFRS2)


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Is there a quoted price in an

active market for an identicalasset or liability?

(Level 1 input)

Are there any observable

inputs* other than quoted

prices for an identicalasset or liability?

Use the Level 1 input =

Level 1 measurement

No use of significant

unobservable

(Level 3) inputs =Level 2

measurement

Use of significant

unobservable(Level 3) inputs =

Level 3

measurement

NoYes

Yes No

Must use without

adjustment

* Maximise the use ofrelevant

observable inputs.

Observable inputs include

market data (prices and other

information) that is publicly

available

Unobservable inputs include

the entitys own data (eg

budgets, forecasts), which

must be adjusted if market

participants would usedifferent assumptions

10Measurement of assets & liabilities Fair value hierarchy


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11Revenue - Definition

the gross inflow of economic benefits during the period arising in the courseof the ordinary activities of an entity when those inflows result in increases inequity, other than increases relating to contributions from equity participantsMFRS 118 (7)

This definition focuses on inflows or other asset enhancements arising from anentitys ongoing major or central operations

Revenue forms part of income that also include gains

Behavioral view of revenue:

- revenue = accomplishment- expense = effort

Therefore, matching results in profit = net accomplishment


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12Revenue - Definition

For revenue to be recorded in the incomestatement, a point of recognition needs to bedetermined i.e.:

(a) Myers Based on when is thecritical event?

- may varies depending on thenature of the business

- e.g. manufacturing companiesvs. financial institution

(b) Paton & Littleton Accruethroughout the earningprocess:

- revenue exists because ofsomething that the companies do

- companies have gone throughthe earningprocess


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13Revenue Recognition & measurement

Recognition and measurement rules in MFRS 118/IAS118

Sale of good e.g. products aredelivered or services are

rendered

Rendering of services Interest, royalties and dividends

Recognition criteria established in Malaysian/IASB CF

It is probable that any future economic benefitsassociated with the items will flow to or from the

entity

The item has a cost or value that can be measuredwith reliability

General recognition criteria

Measurability of asset value Existence of transactionSubstantial completion of the

earning process


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14Expenses

Measurement: Matching concepts

Associating cause and effectsSystematic and rational

allocationImmediate recognition

Recognition criteria

It is probable that any future economic benefitsassociated with the items will flow to or from the

entity

The item has a cost or value that can be measuredwith reliability

DefinitionDecreases in economic benefits during the accounting period in the form of outflows or depletions of

assets or incurrences of liabilities that result in decreases in equity, other than those relating todistributions to equity participants


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15Summary Topic 6 (Part B)

Definition : Assets, Liabilities, Revenue & Expenses

Recognition: criteria (CF):

- It is probable that any future economic benefits associated with theitems will flow to or from the entity

- The item has a cost or value that can be measured with reliability

Measurement:

- Assets & liabilities: Highlight the use of HCA, FVA, and revaluation model

- Revenue: Highlighted in MFRS 118/IAS 188

- Expenses: Closely link to the 3 matching concepts i.e. associating cost &effect, systematic & rationale allocation, and immediate recognition


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16Tutorial questions

Godfrey et al:-Problem 7.1

-Chapter 7: Questions 3 & 7

-Chapter 8: Questions 3 & 6-Chapter 9: Questions 5

-Chapter 10: Question 5

Lecture Topic 6 - Recognition and Measurement (PartB)

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