Explain howyou would account for the following
items/situations,justifying answers by reference to the
conceptual frameworks defintion and rcognition criteria.
a)A trinket of sentimental value only
b)You are the guarantor for your friends bank loan
i) You have no reason to belive that your friend will
default on the loan
ii) As your friend is in serious financial
dificulties,you think it is likely that he will default on
the loan
c)You receive 1000 shares in X Ltd,trading at $4 each,as a
gift from a grateful client.
d)The panoramic view of the coast from your cafes
windows,which you are convinced attracts customers to your
cafe
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Answer / Veerendra Singh
a) For a trinket of sentimental value only, it would not be recorded as an asset or expense in accounting because it does not have a measurable economic benefit. It is considered a personal item and not relevant for financial reporting. The conceptual framework defines assets as resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow or services are expected to be received (ASC 320). Recognition criteria include that an asset should be probable (more likely than not) to generate future economic benefits and be measurable. The sentimental value does not meet these criteria as it is neither quantifiable nor generates future economic benefits.
b) As a guarantor for your friend's bank loan, the liability would be recorded in your financial statements if your friend defaults on the loan. If you have no reason to believe that your friend will default (i), then there is no need to record the liability at this time. However, if you think it is likely that he will default (ii), the bank will likely pursue you for payment. At that point, the liability would be recognized in your financial statements under ASC 460, Guarantees.
c) Receiving 1000 shares in X Ltd, trading at $4 each, as a gift from a grateful client would be recorded as an equity investment. The shares would be valued at their current market price ($4,000) and recorded as an asset in the financial statements under ASC 320, Investments - Equity Securities.
d) The panoramic view of the coast from your café's windows, which you are convinced attracts customers to your café, is not a tangible asset that can be recorded in the financial statements. However, it could be considered an intangible asset under ASC 350, Intangibles - Goodwill and Other. The criteria for recognizing an intangible asset include its being identifiable (separable from the entity and capable of being sold, transferred, licensed, or rented), having a future economic benefit, being acquired independently (not arising from another transaction), and being measured reliably.
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