Understanding Economic Benefit Requirement in Accounting

School: University of New England - Course: MAR 211 - Subject: Accounting

Sample Solutions AFM211 - A1, Trimester 2 2021 This document provides a guide to the content of your assignment. However, given the extensive amount of flexibility within part A of the assignment question, it is not possible to cover all aspects of the question for which you received (or could have received marks). Instead, an outline of the major aspects that you COULD have included in your answer is provided. This question required you to discuss whether or not the second stage thermal processor that was purchased and installed by Large Martfulfils the economic benefit requirementcontained in the AASB's (see Conceptual Framework document "Definition of an asset", paragraphs 4.14 to 4.18) Your answer should have identified two factors related to this requirement. 1)You should have discussed the Conceptual Framework (CF) (para 4.14)does notrequire it to be certain that economic benefits arisefrom an item to meet this part of the asset definition. Instead, an item must only have thePOTENTIALto produce economic benefits in at least one circumstance. The question that then arises is whether the second stage thermal processor has the POTENTIALL to produce economic benefits for Large Mart. CF, para 4.16 provides a list of circumstances in which an item would produce economic benefits for an entity. In the case of the second stage thermal processor, CF, para 4.16 (c) (i) is most relevant. CF, para 4.16 (c)(i), states that "using the economic resource either individually or in combination with other economic resources to produce goods or provide services" is a sign that an item (economic resource) provides an economic benefit for the entity. The second stage thermal processor meets this definition because it is used in combination with other economic resources such as the plant. As indicated in the question, without the second stage thermal processor reducing the level of pollution into the atmosphere the EPA will not reinstate Large Mart's license. Therefore, Large Mart will be unable to manufacture collaborative hubs. This means that the second stage thermal processor not only has the potential to provide economic benefits to Large Mart, but is likely to be highly important for its continued operation (and therefore the continued production of collaborative hubs) in combination with the other assets in the factory. 2)You should have discussed the information in AASB 116, paragraph 11. This accounting regulation deals specifically with the presence/absence of future economic benefits for environmental expenditures. It states that environmental expenditures are deemed to fulfil the "future economic benefit" requirement even if the existence of economic benefits is questionable or doubtful. Given that the rules contained in specific accounting standards always supersede information contained in the Conceptual Framework, this accounting rule highlights that the second stage thermal processor MUST be deemed to fulfil the economic benefit requirements contained in the conceptual framework, even if there would not be any specific economic benefits related to the item. Excellent answers should have identified both aspects of the answer and explained how the situation in the question relates to the two identified accounting requirements. Part b of question onefocused on the three asset definition criteria outlined in the AASB's Conceptual Framework document (paras 4.3-4.25). It was also possible to include the two asset recognition criteria in your answer (However, this was not expected, and you did not lose any marks if you did not discuss the two recognition criteria).