accounting elements assets

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Financial statement elements practice question

Local council management of the city of Wonga Wonga has been discussing financial reporting requirements needed to satisfy accounting pronouncements. A matter of some concern is the appropriate treatment of houses built by the council on land owned by the local aboriginal community. The houses are currently used by the council to provide inexpensive accommodation for low-income earning families. Specifically, the council is considering whether or not they should disclose these houses as assets in the statement of financial position. The councillors have been told by the aboriginal landowners that they are willing to allow local governments to manage the houses as long as the management is consistent with the objectives of the aboriginal community.

A further question that councillors are discussing is, assuming the houses are recognized in the statement of financial position, whether these houses should also be depreciated over their respective useful lives. One councillor has stated that this second issue is not as important, since “…any depreciation charge will only affect performance and have no affect on financial position”.

REQUIRED:

a) Identify what you believe to be the essential criteria that must be met before a particular item of expenditure should be treated as an asset in the statement of financial position.

b) Discuss whether the houses meet the criteria identified above and thus whether they should be reported in a statement of financial position for Wonga Wonga City Council.

c) Suppose that the Wonga Wonga City Council decided to recognise the houses as assets in their statement of financial position. Explain whether you believe these houses should also be depreciated. (In doing so, explain the general rationale for charging depreciation on non-current assets).

d) Is the councillor correct in stating that depreciation charges will only affect performance and have no

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