Accounting Essay

696 words - 3 pages

2014
a) Phil N. Tropic should recognize this as the asset. In the Conceptual Framework (CF) of IASB, it states that an item can be recognized as the asset if it meets the definition of the asset and meets the recognition criteria at the same time (IASB, 2014). And the definition of the asset in CF is “a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity” (IASB, 2014). In other words, if the item is an asset, it must have three characteristics: it can generate inflows of future economic benefits; it is controlled by the entity as a resource; and the transaction or event giving rise to the control must already have occurred. For the recognition criteria, CF states that “ an entity recognises an item that meets the definition of an element if it is probable that any future economic benefit associated with the item will flow to or from the entity and the item has a cost or value that can be measured ...view middle of the document...

As for the recognition amount, it is €90. Because the asset, as an economic resource, is the right to participate the lottery game for the company. However, the value of the right for the entity is measured reliably in the secondary market with the price of €90. Therefore, this ticket can be recognize as the asset with the amount of €90.
b) It cannot be recognized as an asset. Although it meets the definition of the asset, it doesn’t meet the recognition criteria because of the low probability of the future economic benefit. As mentioned in the CF, an asset cannot be recognized if it is considered as improbable inflow of future economic benefit (IASB, 2014). The probability of winning the prize, which is 1/10000, is too low to warrant the recognition. Furthermore, the value of the item cannot be measured with reliability because there is no secondary market. We have no idea about the value of the right to participate in the lottery for the entity. Instead, this transaction result should be recognized as the expenditure in the income statement.
2015
a) Phil N. Tropic should recognize this as an asset. Firstly, it meets the definition of the asset as mentioned in the part a) of 2014. It can be traded in the secondary market and generate the inflows of the future economic benefit which is €110 in cash. And the transaction giving the right of control, which is buying the ticket from the lottery company, has occurred already. Furthermore, it meets the recognition criteria as well. It can generate the future economic benefit both in selling it in the secondary market with the price of €110 and from the prize. Because the probability of winning prize is 5111/10000 which is much higher than it in 2014. It can be considered as a method of generating the future economic benefit. However, for the recognition amount, it is €110. Because the ticket as a recourse is a right to participate the lottery rather than the cash prize. The amount cannot be the prize although it has a higher probability now. The entity can measure the asset with reliability in the secondary market, which is its price €110. Therefore, this lottery ticket can be recognized as an asset in the balance sheet with the amount of €110.
Reference
IASB, 2014. A Review of the Conceptual Framework for Financial Reporting.

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