,Solution manual for Intermediate Accounting,
18th Edition Donald E. Kieso
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, IFRS CONCEPTS AND APPLICATION
IFRS1.1
The two organizations involved in international standard-setting are IOSCO
(International Organization of Securities Commissions) and the IASB
(International Accounting Standards Board.) The IOSCO does not set
accounting standards, but ensures that the global markets can operate in an
efficient and effective manner. Conversely, the IASB’s mission is to develop
a single set of high quality, understandable and international financial
reporting standards (IFRSs) for general purpose financial statements.
LO: 5, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Diversity, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
IFRS1.2
The standards issued by these organizations are sometimes principles-
based, rules-based, tax-oriented, or business-based. In other words, they
often differ in concept and objective.
LO: 5, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Diversity, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
IFRS1.3
A single set of high quality accounting standards ensures adequate
comparability. Investors are able to make better investment decisions if they
receive financial information from a U.S. company that is comparable to an
international competitor.
LO: 5, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Diversity, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
IFRS1.4
While there is some agreement that the role of financial reporting is to assist
users in decision-making, the IASB framework has had more of a focus on the
objective of providing information on management’s performance—often
referred to as stewardship. It is likely that there will be much debate regarding
the role of stewardship in the conceptual framework. Both Boards have the
same objective, and that is to develop a conceptual framework consisting of
standards that are principles-based and internally consistent, thereby,
leading to the most useful financial reporting. Hopefully, the two Boards will
eventually agree on the key components of a common conceptual framework.
LO: 5, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Diversity, Communication, AICPA BB: Global, AICPA FC: Reporting, AICPA PC: Communication
Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 1-1
,IFRS1.5
The FASB differentiates gains and losses from revenue and expenses where
gains and losses are incidental transactions of the entity. Further, the FASB
includes changes in equity as elements: investment by owners, distributions
to owners, and comprehensive income.
LO: 5, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Diversity, Communication, AICPA BB: Global, AICPA FC: Reporting, AICPA PC: Communication
IFRS1.6
The IASB and FASB frameworks are strikingly similar. This is not surprising,
given that the IASB framework was adopted after the FASB developed its
framework (the IASB framework was approved in April 1989). In addition, the
IASC, the predecessor to the IASB, was formed to facilitate harmonization
of accounting standards across countries. This objective could be aided by
adopting a similar conceptual framework.
Specific similarities include that both frameworks adopt similar definitions
for assets and liabilities and define equity as the residual of assets minus
liabilities.
Some differences with regard to the elements are that the IASB defines just
five elements without specific definitions for Investments by and
Distributions to Owners or Comprehensive Income. There is also no
distinction in the IASB framework between gains and revenues and losses
and expenses.
Note to Instructors—These differences may be resolved as the FASB and
IASB work on their performance reporting projects.
LO: 2, 5, Bloom: C, Difficulty: Simple, Time: 5-10, AACSB: Diversity l, Communication, AICPA BB: Global, AICPA FC: Reporting, AICPA PC:
Communication
IFRS1.7
Search Strings: “materiality”, “completeness”
(a) According to the Framework (QC 11): Information is defined to be
material if its omission or misstatement could influence the economic
decisions of users taken on the basis of the financial statements.
1-2 Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only)
,IFRS1.7 (Continued)
(b) According to the Framework (OB 17): Accrual basis
In order to meet their objectives, financial statements are prepared on
the accrual basis of accounting. Under this basis, the effects of
transactions and other events are recognized when they occur (and not
as cash or its equivalent is received or paid) and they are recorded in
the accounting records and reported in the financial statements of the
periods to which they relate. Financial statements prepared on the
accrual basis inform users not only of past transactions involving the
payment and receipt of cash but also of obligations to pay cash in the
future and of resources that represent cash to be received in the future.
Hence, they provide the type of information about past transactions and
other events that is most useful to users in making economic decisions.
LO: 5, Bloom: C, Difficulty: Simple, Time: 5-7, AACSB: Diversity, Communication, Technology, AICPA BB: Global, Technology, AICPA FC:
Measurement, Reporting, Technology, AICPA PC: Communication
IFRS1.8
Marks and Spencer plc (per Note 1 – Accounting Policies)
(a) Revenue Recognition
Revenue comprises sales of goods to customers outside the Group
less an appropriate deduction for actual and expected returns,
discounts and loyalty scheme vouchers, and is stated net of value
added tax and other sales taxes. Revenue is recognised when
performance obligations are satisfied and goods are delivered to our
franchise partners or the customer and the control of goods is
transferred to the buyer.
(b) Historical Cost
1) Property, plant and equipment - The Group's policy is to state
property, plant and equipment at cost less accumulated
depreciation and any recognised impairment loss. Property is not
revalued for accounting purposes.
2) Intangible assets (B. Brands)—Acquired intangible assets include
trademarks or brands and customer relationships. These assets are
capitalised on acquisition at cost and included in intangible assets.
Intangible assets are amortised on a straight-line basis over their
estimated useful lives. Acquired intangible assets are tested for
impairment as triggering events occur. Any impairment in value is
recognised within the income statement.
Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 1-3
,IFRS1.8 (Continued)
Fair Value—Trade receivables, trade payables, investments and other
financial assets, loan notes, intangible assets (A. Goodwill)—Goodwill
arising on consolidation represents the excess of the consideration
transferred and the amount of any non-controlling interest in the
acquiree over the fair value of the identifiable assets and liabilities
(including intangible assets) of the acquired entity at the date of
acquisition. Goodwill is recognised as an asset and assessed for
impairment annually or as triggering events occurred. Any impairment
is recognised immediately in the income statement.
New Accounting Policies
“The Group has applied the following new standards and
interpretations for the first time for the annual reporting period
commencing 31 March 2019:
– IFRS 16 Leases.
– IFRIC 23 Uncertainty over Income Tax Treatments.
– Amendments to IFRS 9 Prepayment Features with Negative
Compensation.
– Amendments to lAS 28 Long-term Interests in Associates and Joint
Ventures.
– Amendments to lAS 19 Plan Amendment, Curtailment or Settlement.
– Annual Improvements to IFRS Standards 2015–2017 Cycle
(Amendments to IFRS 3, IFRS 11, lAS 12 and lAS 23).”
(c) Critical accounting adjustments and estimation uncertainties related
to determining the lease term:
The Group determines the lease term as the non-cancellable term of
the lease, together with any periods covered by an option to extend the
lease if it is reasonably certain to be exercised, or any periods covered
by an option to terminate the lease, if it is reasonably certain not to be
exercised. The Group has several lease contracts for land and
buildings that include extension and termination options. The Group
applies judgement in evaluating whether it is reasonably certain
whether or not to exercise the option to renew or terminate the lease.
1-4 Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only)
,IFRS1.8 (Continued)
That is, it considers all relevant factors that create an economic
incentive for it to exercise either the renewal or termination, including:
whether there are significant penalties to terminate (or not extend);
whether any leasehold improvements are expected to have a
significant remaining value; historical lease durations; the importance
of the underlying asset to the Group's operations; and the costs and
business disruption required to replace the leased asset.
Most renewal periods and periods covered by termination options are
included as part of the lease term for leases of land and buildings. The
Group typically exercises its option to renew (or does not exercise its
option to terminate) for these leases because there will be a significant
negative effect on trading if a replacement property is not readily
available. The lease term is reassessed if a significant event or a
significant change in circumstances occurs which affects the
assessment of reasonable certainty—for example, if a store is
identified to be closed as part of the UK store estate strategic
programme.
LO: 5, Bloom: C, Difficulty: Simple, Time: 15-20, AACSB: Diversity, Communication, Technology, AICPA BB: Global, Technology, AICPA FC:
Measurement, Reporting, Technology, AICPA PC: Communication
Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 1-5
, IFRS CONCEPTS AND APPLICATION
IFRS2.1
The date of transition is the beginning of the earliest period for which full
comparative IFRS information is provided. The date of reporting is the
closing balance sheet date for the first IFRS financial statements.
LO: 9, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Diversity, Communication, AICPA BB: Global, AICPA FC: Reporting, AICPA PC: Communication
IFRS2.2
When countries accept IFRS for use as accepted accounting policies,
companies need guidance to ensure that their first IFRS financial statements
contain high-quality information. Specifically, IFRS 1 requires that information
in a company’s first IFRS statements (1) be transparent, (2) provide a suitable
starting point, and (3) have a cost that does not exceed the benefits.
LO: 9, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Diversity, Communication, AICPA BB: Global, AICPA FC: Reporting, AICPA PC: Communication
IFRS2.3
A company follows these steps:
1. Identify the timing of its first IFRS statements.
2. Prepare an opening balance sheet at the date of transition to IFRS.
3. Select accounting principles that comply with IFRS, and apply these
principles retrospectively.
4. Make extensive disclosures to explain the transition to IFRS.
LO: 9, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Diversity, Communication, AICPA BB: Global, AICPA FC: Reporting, AICPA PC: Communication
IFRS2.4
The date of the opening balance sheet is January 1, 2025. The IFRS financial
statements will include years ended December 31, 2026 and 2025.
LO: 9, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Diversity, Communication, AICPA BB: Global, AICPA FC: Reporting, AICPA PC: Communication
Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 2-1
,IFRS2.5
(a) Assets
53 The future economic benefit embodied in an asset is the potential
to contribute, directly or indirectly, to the flow of cash and cash
equivalents to the entity. The potential may be a productive one
that is part of the operating activities of the entity. It may also take
the form of convertibility into cash or cash equivalents or a
capability to reduce cash outflows, such as when an alternative
manufacturing process lowers the costs of production.
54 An entity usually employs its assets to produce goods or services
capable of satisfying the wants or needs of customers; because
these goods or services can satisfy these wants or needs,
customers are prepared to pay for them and hence contribute to
the cash flow of the entity. Cash itself renders a service to the
entity because of its command over other resources.
55 The future economic benefits embodied in an asset may flow to
the entity in a number of ways. For example, an asset may be:
a. used singly or in combination with other assets in the
production of goods or services to be sold by the entity;
b. exchanged for other assets;
c. used to settle a liability; or
d. distributed to the owners of the entity.
(b) Liabilities
60 An essential characteristic of a liability is that the entity has a
present obligation. An obligation is a duty or responsibility to act
or perform in a certain way. Obligations may be legally
enforceable as a consequence of a binding contract or statutory
requirement. This is normally the case, for example, with amounts
payable for goods and services received. Obligations also arise,
however, from normal business practice, custom and a desire to
maintain good business relations or act in an equitable manner.
If, for example, an entity decides as a matter of policy to rectify
faults in its products even when these become apparent after the
warranty period has expired, the amounts that are expected to be
expended in respect of goods already sold are liabilities.
2-2 Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only)
, IFRS2.5 (Continued)
61 A distinction needs to be drawn between a present obligation and
a future commitment. A decision by the management of an entity
to acquire assets in the future does not, of itself, give rise to a
present obligation. An obligation normally arises only when the
asset is delivered or the entity enters into an irrevocable
agreement to acquire the asset. In the latter case, the irrevocable
nature of the agreement means that the economic consequences
of failing to honour the obligation, for example, because of the
existence of a substantial penalty, leave the entity with little, if
any, discretion to avoid the outflow of resources to another party.
62 The settlement of a present obligation usually involves the entity
giving up resources embodying economic benefits in order to
satisfy the claim of the other party. Settlement of a present
obligation may occur in a number of ways, for example, by:
a. payment of cash;
b. transfer of other assets;
c. provision of services;
d. replacement of that obligation with another obligation; or
e. conversion of the obligation to equity.
(c) Accrual basis
22 In order to meet their objectives, financial statements are
prepared on the accrual basis of accounting. Under this basis,
the effects of transactions and other events are recognised when
they occur (and not as cash or its equivalent is received or paid)
and they are recorded in the accounting records and reported in
the financial statements of the periods to which they relate.
Financial statements prepared on the accrual basis inform users
not only of past transactions involving the payment and receipt
of cash but also of obligations to pay cash in the future and of
resources that represent cash to be received in the future. Hence,
they provide the type of information about past transactions and
other events that is most useful to users in making economic
decisions.
LO: 9, Bloom: K, Difficulty: Simple, Time: 10-15, AACSB: Diversity, Communication, Technology, AICPA BB: Global, AICPA FC: Reporting, AICPA PC:
Communication
Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 2-3
18th Edition Donald E. Kieso
Hello all ,
We have all what you need with best price
Our email :
Our website :
testbanks-store.com
, IFRS CONCEPTS AND APPLICATION
IFRS1.1
The two organizations involved in international standard-setting are IOSCO
(International Organization of Securities Commissions) and the IASB
(International Accounting Standards Board.) The IOSCO does not set
accounting standards, but ensures that the global markets can operate in an
efficient and effective manner. Conversely, the IASB’s mission is to develop
a single set of high quality, understandable and international financial
reporting standards (IFRSs) for general purpose financial statements.
LO: 5, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Diversity, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
IFRS1.2
The standards issued by these organizations are sometimes principles-
based, rules-based, tax-oriented, or business-based. In other words, they
often differ in concept and objective.
LO: 5, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Diversity, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
IFRS1.3
A single set of high quality accounting standards ensures adequate
comparability. Investors are able to make better investment decisions if they
receive financial information from a U.S. company that is comparable to an
international competitor.
LO: 5, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Diversity, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
IFRS1.4
While there is some agreement that the role of financial reporting is to assist
users in decision-making, the IASB framework has had more of a focus on the
objective of providing information on management’s performance—often
referred to as stewardship. It is likely that there will be much debate regarding
the role of stewardship in the conceptual framework. Both Boards have the
same objective, and that is to develop a conceptual framework consisting of
standards that are principles-based and internally consistent, thereby,
leading to the most useful financial reporting. Hopefully, the two Boards will
eventually agree on the key components of a common conceptual framework.
LO: 5, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Diversity, Communication, AICPA BB: Global, AICPA FC: Reporting, AICPA PC: Communication
Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 1-1
,IFRS1.5
The FASB differentiates gains and losses from revenue and expenses where
gains and losses are incidental transactions of the entity. Further, the FASB
includes changes in equity as elements: investment by owners, distributions
to owners, and comprehensive income.
LO: 5, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Diversity, Communication, AICPA BB: Global, AICPA FC: Reporting, AICPA PC: Communication
IFRS1.6
The IASB and FASB frameworks are strikingly similar. This is not surprising,
given that the IASB framework was adopted after the FASB developed its
framework (the IASB framework was approved in April 1989). In addition, the
IASC, the predecessor to the IASB, was formed to facilitate harmonization
of accounting standards across countries. This objective could be aided by
adopting a similar conceptual framework.
Specific similarities include that both frameworks adopt similar definitions
for assets and liabilities and define equity as the residual of assets minus
liabilities.
Some differences with regard to the elements are that the IASB defines just
five elements without specific definitions for Investments by and
Distributions to Owners or Comprehensive Income. There is also no
distinction in the IASB framework between gains and revenues and losses
and expenses.
Note to Instructors—These differences may be resolved as the FASB and
IASB work on their performance reporting projects.
LO: 2, 5, Bloom: C, Difficulty: Simple, Time: 5-10, AACSB: Diversity l, Communication, AICPA BB: Global, AICPA FC: Reporting, AICPA PC:
Communication
IFRS1.7
Search Strings: “materiality”, “completeness”
(a) According to the Framework (QC 11): Information is defined to be
material if its omission or misstatement could influence the economic
decisions of users taken on the basis of the financial statements.
1-2 Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only)
,IFRS1.7 (Continued)
(b) According to the Framework (OB 17): Accrual basis
In order to meet their objectives, financial statements are prepared on
the accrual basis of accounting. Under this basis, the effects of
transactions and other events are recognized when they occur (and not
as cash or its equivalent is received or paid) and they are recorded in
the accounting records and reported in the financial statements of the
periods to which they relate. Financial statements prepared on the
accrual basis inform users not only of past transactions involving the
payment and receipt of cash but also of obligations to pay cash in the
future and of resources that represent cash to be received in the future.
Hence, they provide the type of information about past transactions and
other events that is most useful to users in making economic decisions.
LO: 5, Bloom: C, Difficulty: Simple, Time: 5-7, AACSB: Diversity, Communication, Technology, AICPA BB: Global, Technology, AICPA FC:
Measurement, Reporting, Technology, AICPA PC: Communication
IFRS1.8
Marks and Spencer plc (per Note 1 – Accounting Policies)
(a) Revenue Recognition
Revenue comprises sales of goods to customers outside the Group
less an appropriate deduction for actual and expected returns,
discounts and loyalty scheme vouchers, and is stated net of value
added tax and other sales taxes. Revenue is recognised when
performance obligations are satisfied and goods are delivered to our
franchise partners or the customer and the control of goods is
transferred to the buyer.
(b) Historical Cost
1) Property, plant and equipment - The Group's policy is to state
property, plant and equipment at cost less accumulated
depreciation and any recognised impairment loss. Property is not
revalued for accounting purposes.
2) Intangible assets (B. Brands)—Acquired intangible assets include
trademarks or brands and customer relationships. These assets are
capitalised on acquisition at cost and included in intangible assets.
Intangible assets are amortised on a straight-line basis over their
estimated useful lives. Acquired intangible assets are tested for
impairment as triggering events occur. Any impairment in value is
recognised within the income statement.
Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 1-3
,IFRS1.8 (Continued)
Fair Value—Trade receivables, trade payables, investments and other
financial assets, loan notes, intangible assets (A. Goodwill)—Goodwill
arising on consolidation represents the excess of the consideration
transferred and the amount of any non-controlling interest in the
acquiree over the fair value of the identifiable assets and liabilities
(including intangible assets) of the acquired entity at the date of
acquisition. Goodwill is recognised as an asset and assessed for
impairment annually or as triggering events occurred. Any impairment
is recognised immediately in the income statement.
New Accounting Policies
“The Group has applied the following new standards and
interpretations for the first time for the annual reporting period
commencing 31 March 2019:
– IFRS 16 Leases.
– IFRIC 23 Uncertainty over Income Tax Treatments.
– Amendments to IFRS 9 Prepayment Features with Negative
Compensation.
– Amendments to lAS 28 Long-term Interests in Associates and Joint
Ventures.
– Amendments to lAS 19 Plan Amendment, Curtailment or Settlement.
– Annual Improvements to IFRS Standards 2015–2017 Cycle
(Amendments to IFRS 3, IFRS 11, lAS 12 and lAS 23).”
(c) Critical accounting adjustments and estimation uncertainties related
to determining the lease term:
The Group determines the lease term as the non-cancellable term of
the lease, together with any periods covered by an option to extend the
lease if it is reasonably certain to be exercised, or any periods covered
by an option to terminate the lease, if it is reasonably certain not to be
exercised. The Group has several lease contracts for land and
buildings that include extension and termination options. The Group
applies judgement in evaluating whether it is reasonably certain
whether or not to exercise the option to renew or terminate the lease.
1-4 Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only)
,IFRS1.8 (Continued)
That is, it considers all relevant factors that create an economic
incentive for it to exercise either the renewal or termination, including:
whether there are significant penalties to terminate (or not extend);
whether any leasehold improvements are expected to have a
significant remaining value; historical lease durations; the importance
of the underlying asset to the Group's operations; and the costs and
business disruption required to replace the leased asset.
Most renewal periods and periods covered by termination options are
included as part of the lease term for leases of land and buildings. The
Group typically exercises its option to renew (or does not exercise its
option to terminate) for these leases because there will be a significant
negative effect on trading if a replacement property is not readily
available. The lease term is reassessed if a significant event or a
significant change in circumstances occurs which affects the
assessment of reasonable certainty—for example, if a store is
identified to be closed as part of the UK store estate strategic
programme.
LO: 5, Bloom: C, Difficulty: Simple, Time: 15-20, AACSB: Diversity, Communication, Technology, AICPA BB: Global, Technology, AICPA FC:
Measurement, Reporting, Technology, AICPA PC: Communication
Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 1-5
, IFRS CONCEPTS AND APPLICATION
IFRS2.1
The date of transition is the beginning of the earliest period for which full
comparative IFRS information is provided. The date of reporting is the
closing balance sheet date for the first IFRS financial statements.
LO: 9, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Diversity, Communication, AICPA BB: Global, AICPA FC: Reporting, AICPA PC: Communication
IFRS2.2
When countries accept IFRS for use as accepted accounting policies,
companies need guidance to ensure that their first IFRS financial statements
contain high-quality information. Specifically, IFRS 1 requires that information
in a company’s first IFRS statements (1) be transparent, (2) provide a suitable
starting point, and (3) have a cost that does not exceed the benefits.
LO: 9, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Diversity, Communication, AICPA BB: Global, AICPA FC: Reporting, AICPA PC: Communication
IFRS2.3
A company follows these steps:
1. Identify the timing of its first IFRS statements.
2. Prepare an opening balance sheet at the date of transition to IFRS.
3. Select accounting principles that comply with IFRS, and apply these
principles retrospectively.
4. Make extensive disclosures to explain the transition to IFRS.
LO: 9, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Diversity, Communication, AICPA BB: Global, AICPA FC: Reporting, AICPA PC: Communication
IFRS2.4
The date of the opening balance sheet is January 1, 2025. The IFRS financial
statements will include years ended December 31, 2026 and 2025.
LO: 9, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Diversity, Communication, AICPA BB: Global, AICPA FC: Reporting, AICPA PC: Communication
Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only) 2-1
,IFRS2.5
(a) Assets
53 The future economic benefit embodied in an asset is the potential
to contribute, directly or indirectly, to the flow of cash and cash
equivalents to the entity. The potential may be a productive one
that is part of the operating activities of the entity. It may also take
the form of convertibility into cash or cash equivalents or a
capability to reduce cash outflows, such as when an alternative
manufacturing process lowers the costs of production.
54 An entity usually employs its assets to produce goods or services
capable of satisfying the wants or needs of customers; because
these goods or services can satisfy these wants or needs,
customers are prepared to pay for them and hence contribute to
the cash flow of the entity. Cash itself renders a service to the
entity because of its command over other resources.
55 The future economic benefits embodied in an asset may flow to
the entity in a number of ways. For example, an asset may be:
a. used singly or in combination with other assets in the
production of goods or services to be sold by the entity;
b. exchanged for other assets;
c. used to settle a liability; or
d. distributed to the owners of the entity.
(b) Liabilities
60 An essential characteristic of a liability is that the entity has a
present obligation. An obligation is a duty or responsibility to act
or perform in a certain way. Obligations may be legally
enforceable as a consequence of a binding contract or statutory
requirement. This is normally the case, for example, with amounts
payable for goods and services received. Obligations also arise,
however, from normal business practice, custom and a desire to
maintain good business relations or act in an equitable manner.
If, for example, an entity decides as a matter of policy to rectify
faults in its products even when these become apparent after the
warranty period has expired, the amounts that are expected to be
expended in respect of goods already sold are liabilities.
2-2 Copyright © 2022 WILEY Kieso, Intermediate Accounting, 18/e, Solutions Manual (For Instructor Use Only)
, IFRS2.5 (Continued)
61 A distinction needs to be drawn between a present obligation and
a future commitment. A decision by the management of an entity
to acquire assets in the future does not, of itself, give rise to a
present obligation. An obligation normally arises only when the
asset is delivered or the entity enters into an irrevocable
agreement to acquire the asset. In the latter case, the irrevocable
nature of the agreement means that the economic consequences
of failing to honour the obligation, for example, because of the
existence of a substantial penalty, leave the entity with little, if
any, discretion to avoid the outflow of resources to another party.
62 The settlement of a present obligation usually involves the entity
giving up resources embodying economic benefits in order to
satisfy the claim of the other party. Settlement of a present
obligation may occur in a number of ways, for example, by:
a. payment of cash;
b. transfer of other assets;
c. provision of services;
d. replacement of that obligation with another obligation; or
e. conversion of the obligation to equity.
(c) Accrual basis
22 In order to meet their objectives, financial statements are
prepared on the accrual basis of accounting. Under this basis,
the effects of transactions and other events are recognised when
they occur (and not as cash or its equivalent is received or paid)
and they are recorded in the accounting records and reported in
the financial statements of the periods to which they relate.
Financial statements prepared on the accrual basis inform users
not only of past transactions involving the payment and receipt
of cash but also of obligations to pay cash in the future and of
resources that represent cash to be received in the future. Hence,
they provide the type of information about past transactions and
other events that is most useful to users in making economic
decisions.
LO: 9, Bloom: K, Difficulty: Simple, Time: 10-15, AACSB: Diversity, Communication, Technology, AICPA BB: Global, AICPA FC: Reporting, AICPA PC:
Communication
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