Classification of Assets and Liabilities, Provisions and Contingent Liabilities, and Overall Cost of Employment

ACT 204 Advanced Financial Accounting
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Answer 1
The classification of assets is mainly done on the basis of their nature and function as per
the financial reporting rules and regulations provided by IASB (International Accounting
Standards Board). The assets are classified as current and non-current assets as per the IFRS
financial reporting standards. Current assets are the resources that are possessed by a firm to be
utilized within a year. On the other hand, non-current assets are regarded to be long-term
investment of a firm such as property, plant and equipment that are converted to cash in a
reporting period of more than a year.
Liabilities are also classified on the basis of their nature as current and non-current
liabilities. The current liabilities are regarded as obligations of a firm that are due to be paid
within a year and are met generally with the current assets base such as account payable, short-
term loans, employee benefits and accrued income taxes. Non-current liabilities are the
obligations that are to be repaid in a time period of more than a year of the normal operating
cycle of a business (Gordon Raedy and Sannella, 2018). Thus, it can be said that both the assets
and liabilities classification are based on the nature and timing basis. However, it has been
identified that business entities tend to disclose more information about the liabilities. The
liabilities are also classified on the liquidity basis also such as secured vs unsecured, source and
also some specific criteria such as mortgage and debentures. Thus, it can be said that
classification of assets and liabilities though based on the same principle as per IFRS but the
diverse nature of liabilities causes the need to classify them on broad basis (Greuning, 2009).
Answer 2
The business entities are required to pay out money for meeting their current and non-
current liabilities. The non-classification of liabilities would also require the business entities to
depict the total amount of outstanding debt at the end of the reporting period. Thus, it can be said
that classification of liabilities into current and non-current cannot be regarded as necessary as
businesses are eventually required to meet them. However, in this context it is important to
develop an understanding of the nature of liabilities the businesses own for the business
managers and the stakeholders as well (Gordon Raedy and Sannella, 2018). The business
managers need to gain information about the liabilities that they are required to repay within a
year and those that are required to be met in an operating cycle of more than 12 months. The
end-users of the financial reports such as investors, creditors, lenders and suppliers also require
gaining information on the type of liabilities the business firm owns. This is essential for them to
take adequate investment decisions to analyze the returns to be realized on the basis of the type
of liabilities the business owns. Thus, it can be said that classification of liabilities is essential for
a business firm to improve the information disclosed in the financial report. This is because the
nature of liabilities varies as per the type of business transactions and thus are need to recognized
into current and non-current liabilities section to improve the quality of financial disclosures
provided by a firm (Kieso, Weygandt and Warfield, 2010).
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