Advanced Accounting Report: IFRS Framework and Liability Analysis

This report delves into the intricacies of the International Financial Reporting Standards (IFRS) framework, with a specific emphasis on the definitions and recognition criteria for assets and liabilities. It begins with a memorandum discussing the conceptual framework issues, including the need for improved information for stewardship assessment and the impact of measurement uncertainty. The report proposes revised definitions for assets and liabilities, suggesting that assets should be easily convertible to cash and liabilities should reflect the debt condition of an entity. It then examines the recognition criteria, emphasizing fair presentation and the importance of relevant information. Furthermore, the report includes a letter to a client, Robinwood Company Ltd, highlighting the impact of IFRS policy changes on liabilities, using Commonwealth Bank Ltd. as a case study. It analyzes the bank's liability recognition, focusing on customer deposits and debt issues, and discusses the implications of revised accounting policies on financial statements. The report concludes by emphasizing the need for companies to adapt to the new regulations and prepare financial statements accordingly, considering the changes in the definition and recognition of liabilities.

Running head: ADVANCED ACCOUNTING
Advanced Accounting
Name of the Student
Name of the University
Author’s note

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Table of Contents
Memorandum.............................................................................................................................1
Proposed definition of assets and liabilities...............................................................................2
Recognition criteria for assets and liabilities.............................................................................3
Letter to the client highlighting changes in the IFRS framework for Liabilities.......................4
References..................................................................................................................................6

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Memorandum
To: Accountants of Superintendence Company Ltd.
From: Supervisor of Superintendence Company Ltd.
Date – 21 September 2019
Subject: Conceptual framework of IFRS
The purpose of this memorandum is to bring about a discussion regarding the
different issues that are stated in the conceptual framework formulated by IFRS. In this
context, the issues can be many. Some of these issues would be summarised below.
There has been a need for providing information for the assessment of stewardship
while discussing the objective of financial reporting (Gebhardt, Mora and Wagenhofer 2014).
There has been a severe impact of the uncertainty in measurements on the appropriateness
and accuracy of the financial information of the companies (Ifrs.org 2019) This uncertainty
has occurred with reference to both recognition as well as measurement of the financials.
There has been also raised concerns regarding the reliability of the figures of the financial
statements. The issues are also raised regarding the usage of fair value as one of the basis of
measurements.
In the context of the existing definitions of the assets and liabilities of the framework,
there could be many issues (Page 2014). The definitions of assets and liabilities which are
attributed to the flow of the economic benefits, do not vividly distinguish between the
resource obligation and the flows resulted from the economic benefits (Ifrs.org 2019). It has
been misunderstood by some accountants or readers that the term “expected” might denote a
probability threshold for the assets and liabilities. Due to this reason, many issues have been
raised.

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Proposed definition of assets and liabilities
Considering the definition of asset as proposed by the conceptual framework, the
definition might not be considered as complete (Barker and McGeachin 2015). According to
the definition, an asset has been regarded as an economic resource of an organisation and has
the potential to provide economic benefits (Ifrs.org 2019) There can be certain additions to be
done in this discussion. An asset can be considered to be a liquid instrument of the company
which can be easily converted to cash for meeting up the liabilities of an organisation. Assets
are reported on the balance sheet for the purpose of increasing the market value of the firm.
Considering the definition of liability, it is regarded as a present obligation that is
possessed by an entity. A liability can able to transfer the economic resource which are the
results of the past events (Ifrs.org 2019) This definition can be revised with appropriate
additional statements. A liability shows the debt condition of an entity and from the figure of
the liability, an accountant can judge the extent of debt in a company. This, in a way reflects
the financial performance of an entity.
The definition of equity as explained in the framework can also have a modified
version. The framework defines equity as a residual interest of the assets excluding the
liabilities (Ifrs.org 2019). In a broader sense, equity is defined as the amount that would be
required to pay off to the shareholders due to liquidation of assets of the company (Neag
2014). In this context, equity would be termed as shareholder’s equity.
The term income is correctly defined as an increase in the value of assets with the
decrease in the value of the liabilities (Zhang and Andrew 2014). The income can also be
stated as an indicator that would lead to generation of greater revenue of the company. The
company would then be considered to be financially strong and demanding in the market and
also among its competitors.

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In a similar way, expenses can also be termed as determinants for suggesting the
performance of the companies (Bauer, O'Brien and Saeed 2014). If the expenses increase
more than the income, it may indicate poor financial result for a company. Such companies
would be risky and might lead to shifting away of the investments by the shareholders.
Recognition criteria for assets and liabilities
The recognition criteria for assets and liabilities as proposed by the conceptual
framework can be summarised briefly.
The assets or the liabilities should be presented in the financial statements along with
their containing information. The information should be relevant and specific to the class of
assets and liabilities (Wagenhofer 2014). The assets and the liabilities should be presented
fairly in the financial statements barring any kind of misinterpretation. The fair representation
also applied to other key financials such as income, expenses or equity (Wagenhofer 2014).
The changes in these elements should be amended on a regular basis in the financial
statements of the company. Another statement of this criteria is provided regarding the
information that is provided about the assets and liabilities. The information provided in the
financial statements regarding these financials should exceed the cost that has been incurred
in furnishing the information.
The recognition criteria that is proposed in the conceptual framework defines the
assets and the liabilities suitably. However, the definition could be extended in order to
properly identify the existence of an asset and a liability in an organisation. The asset should
be identified as tangible or intangible based on which the recognition criteria would be
segregated. The existence of the asset should also be properly defined. Goodwill which is
kind of intangible asset should be highlighted separately and it should be defined in a
separate section (Baboukardos and Rimmel 2014). The inflow and outflow of the economic

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benefits are still under question. This part should be excluded from the definition of the
framework. Instead a quantifiable measure should be incorporated that would easily reflect
the amount of cash inflows and outflows from the business (Baboukardos and Rimmel 2014).
The measurement criteria that has been set up for the assets and the liabilities has high level
of uncertainty. Due to this the calculation can result in a huge amount of anomaly within the
business.
The calculation of the assets and liabilities could be performed through the usage of
significant variables or factors that would provide legitimate measurements and would
increase accuracy in the business.
Letter to the client highlighting changes in the IFRS framework for Liabilities
To,
The Client
Robinwood Company Ltd
21 September 2019
Subject – Impact of IFRS policy
Sir/Madam,
The purpose of this letter is to bring about to the notice of the management of the
company regarding the influence of the proposed IFRS policy about liabilities. In this
context, a company is chosen, which is Commonwealth bank Ltd. and the accounting policies
are analysed in order to provide an overview regarding the effect of recognition criteria set up
for the liabilities. The impact of the revised recognition criteria to the preparation of the
financial statements of your company would also be stated.

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The company, commonwealth bank limited has recognised several elements of liabilities. A
majority of these liabilities have occurred due to the deposits from the customers. The
remaining liabilities include debt issues and the loan capital (Commbank.com.au 2019) Due
to the change in the accounting policies of the company, the figures of the liabilities have
shown major fluctuations. The major changes in the accounting policy have reflected the
figures of the total interest bearing customer deposits. The deposits have decreased by 2% on
the previous year (Commbank.com.au 2019) This was due to the changes in the funding
method from short term funding to long term funding. The bank replaced its short-term
wholesale deposit funding with the long-term issues of debt for the purpose of improving the
funding stability (Moore and McPhail 2016). This is mainly done for lowering the
investment deposits which are results of increased competition from the market as well as the
domestic and foreign banks. This decrease has been partly compensated through strong
growth of the deposits of transactions in the retail banking services, business and private
banking and other institutional banking and markets.
Deposits have initially been recognised at the fair value which has been excluded
from the transaction costs that are directly attributable (Sia, Soh and Weill 2016). After the
initial recognition, these liabilities are measured at their cost of amortisation
(Commbank.com.au 2019) The interest which is incurred from these deposits are recognised
under the net interest income and are measured using the effective interest method.
According to the updated definition of liability, it has been defined as a current
obligation for the transfer of economic resource. It is the duty of every entity to meet up its
liabilities. The balance sheet of your company would be also subjected to these changes
(Gimbar, Hansen and Ozlanski 2016). The changes in the definition of recognition has
included certain items in the liability section and excluded certain other items from it.
Therefore, some of the previously derecognised items might occur in the liability section and

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therefore the account balances would be affected accordingly. This would also impact the
other accounting figures of the financial statements. Therefore, the financial statements
should be prepared catering to the new regulations and considering all the above mentioned
changes.

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References
Baboukardos, D. and Rimmel, G., 2014, March. Goodwill under IFRS: Relevance and
disclosures in an unfavorable environment. In Accounting Forum (Vol. 38, No. 1, pp. 1-17).
Taylor & Francis.
Barker, R. and McGeachin, A., 2015. An analysis of concepts and evidence on the question
of whether IFRS should be conservative. Abacus, 51(2), pp.169-207.
Bauer, A.M., O'Brien, P.C. and Saeed, U., 2014. Reliability makes accounting relevant: a
comment on the IASB Conceptual Framework project. Accounting in Europe, 11(2), pp.211-
217.
Commbank.com.au (2019)guidance/newsroom/commonwealth-bank-of-australia-releases-
2018-annual-report--201808.html Commonwealth Bank of Australia releases 2018 Annual
Report. [online] Commbank.com.au. Available at:
commbank.com.au/guidance/newsroom/commonwealth-bank-of-australia-releases-2018-
annual-report--201808.html [Accessed 21 Sep. 2019].
Gebhardt, G., Mora, A. and Wagenhofer, A., 2014. Revisiting the fundamental concepts of
IFRS. Abacus, 50(1), pp.107-116.
Gimbar, C., Hansen, B. and Ozlanski, M.E., 2016. The effects of critical audit matter
paragraphs and accounting standard precision on auditor liability. The Accounting
Review, 91(6), pp.1629-1646.
Ifrs.org (2019). IFRS. [online] Ifrs.org. Available at: ifrs.org/issued-standards/list-of-
standards/conceptual-framework/ [Accessed 21 Sep. 2019].

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Moore, D.R. and McPhail, K., 2016. Strong structuration and carbon accounting: A position-
practice perspective of policy development at the macro, industry and organizational
levels. Accounting, auditing & accountability journal, 29(7), pp.1204-1233.
Neag, R., 2014. The effects of IFRS on net income and equity: evidence from Romanian
listed companies. Procedia economics and finance, 15, pp.1787-1790.
Page, M., 2014. Business models as a basis for regulation of financial reporting. Journal of
Management & Governance, 18(3), pp.683-695.
Sia, S.K., Soh, C. and Weill, P., 2016. How DBS Bank Pursued a Digital Business
Strategy. MIS Quarterly Executive, 15(2).
Wagenhofer, A., 2014. The role of revenue recognition in performance reporting. Accounting
and Business Research, 44(4), pp.349-379.
Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical
perspectives on accounting, 25(1), pp.17-26.