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1.2 -The definition of liability can help decide the accounting treatment of the
situation. Under the Conceptual Frameworka liability is a present obligation of
the entity arising from past events, the settlement of which is expected to
result in an outflow from the entity of resources embodying economic
benefits. In this case, the past event is the fall and injury to the pedestrian.
- Present obligation depends on the probability of payment. The attorney has
advised that a $25 000 loss is probable. Therefore appropriate accounting
involves recognising a liability for the probable payment. An expense would
also be recognised.
- Expenses are decreases in economic benefits during the accounting period
in the form of outflows or depletions of assets or incurrences of liabilities. In
this case, the expense arises at the time the pedestrian is injured because a
liability has also arisen at that time.
(a)Trinket of sentimental value
- Fails the para 49(a) asset definition as it does not constitute future economic benefits, defined
in para 53 as the potential to contribute, directly or indirectly, to the flow of cash and cash
equivalents to the entity.
- Recognition criteria are irrelevant, as there is no asset to recognize
(b) Guarantor for friend’s loan
(i) Friend unlikely to default on his loan
- Meets the para 49(b) liability definition: (1) present obligation - legal obligation via the
guarantor contract; (2) past event - signing the guarantor contract; (3) settlement involving
outflow of economic benefits - payment of the guarantee.
- Fails probability recognition criterion, as it is not likely that you will be required to pay on the