Company Reporting Classifications Of Assets, Liabilities And Owner Equities

1040 words - 4 pages

1a) Purchase of capital equipment Parity Ltd has entered into a contract with Siemens Ltd to purchase capital equipments. The issue is whether an asset of $ 25 million should be recognized, with a liability for $ 2.5 million also being recognized.Firstly, it must be determined whether Parity can control its future economic benefits and whether the company has an obligation to pay for the equipment. SAC 4 defines assets as future economic benefits controlled by the entity as a result of past transactions or other past events; and "control of an asset" means the capacity of the entity to benefit from the asset in pursuit of the entity's objectives and to deny or regulate access of others to that benefit.Since the amount of $ 25 million may fail to qualify for recognition as an asset as it may not satisfy the recognition criterion relating to probability of occurrence of future economic benefit, then the $ 25 million amount should be recognized as an asset.In order to recognize a liability, there must be a certainty that there is an existence of a firm and legally enforceable contract. Since there are insufficient facts to support that there is a firm purchase commitment, no liability exists.In conclusion, the only amount that can be recorded in the company's financial statement is the deposit paid to Siemens. SAC 4, paragraph 22 supports the previous conclusion as it suggests that cash on deposit is of benefit to an entity because of the command over future economic benefit it provides. Therefore, only the deposit paid to Siemens will be recognized as an asset in the financial statement.1b) Notification of government export excellence grant Parity has received notification from the government that it would be the recipient of the government export excellence grant of $ 2 million. The grant may be recorded as revenue, and if this is so, the corresponding debit will normally be treated as an asset.According to SAC 4, revenues are defined as inflows or other enhancements, or savings in outflows, of future economic benefits in the form of increases in assets or reductions in liabilities of the entity, other than those relating to the contribution by owners, that result in an increase of equity during the reporting period.SAC 4, paragraph 113, suggests that revenues in the form of inflows or other enhancements of future economic benefits can arise from the entity providing goods and services, investing in or lending to another entity, holding and disposing of assets, or by receiving contributions, such as grants, donations and bequests. If it is determined that the grant meets the definition of revenue, paragraph 125 of the SAC 4 should be used to recognise the revenue.As the amount of $ 2 million can be measured reliably, and it is probable that the inflow or other enhancements or saving in outflows of future economic benefit has occurred, Parity should recognise the grant as revenue in the reporting period and record the corresponding debit as an...

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