Internal Code: 1HAGG
For each of the following independent cases, discuss whether you believe the items mentioned would meet the definition and recognition criteria for the various elements of financial statements as outlined in the ‘Framework for the Preparation and Presentation of Financial Statements’ (i.e. the AASB Framework). You are required to justify your answers with reference to the details in the AASB framework and the features of each case.
Assumptions should be clearly stated.
Agency theory suggests that a way to motivate managers to act in the best interests of the owners/shareholders is to link managerial compensation to performance measures such as net income or share prices. However such linkage imposes risk on the manager.
1. a) On 1 July 2015 Blue Sky Airlines, an established airline, implemented a frequent flyer program to more effectively compete with its better-established competitors. Each Blue-Sky customer who has paid for six return flights is now eligible for a free return flight. Blue Sky recorded 15 000 flights and revenue of $4 500 000 for the
period 1 July 2015 to 30 June 2016. The company has sought your advice as to whether it should record a provision for the future free flights resulting from the frequent flyer program. Do you believe the provision account would meet the definition and recognition criteria for a liability? (Normally you would not consider the recognition criteria if the definition for a liability was not met; however, for the purpose of this assignment you should address the recognition criteria regardless of whether or not you determine that the definition criteria have been satisfied).
2. b) The Melbourne High School was gifted a bus by a prominent local personality on the 12 June 2017. Whilst preparing the financial statements for the 2016-2017 financial year, a School adviser suggested that because the School adopted a historical cost basis of measurement and the bus had a zero cost to the School, it was unnecessary to record it in the financial report. Do you agree with the School’s adviser or would this item satisfy the definition and recognition criteria of an asset as per the criteria outlined in the AASB Framework? (Normally you would not consider the recognition criteria if the definition for assets was not met; however, for the purpose of this assignment you should address the recognition criteria regardless of whether or not you determine that the definition criteria have been satisfied).
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