Part B On 1 March 2015 a supplier has waived a debt owing by Saiham Motors Ltd (
ID: 2587135 • Letter: P
Question
Part B On 1 March 2015 a supplier has waived a debt owing by Saiham Motors Ltd (the Company) amounting to $1,200. In other words, the Company needs not pay the amount, which will reduce the Company's payable balance by $1,200. The Company's accountant shows the $1,200 as "income" on the Company's income statement. REQUIRED Discuss whether Saiham Motor Ltd's accounting treatment of $1,200 as "income" is consistent with the definition and recognition criteria of income as specified in the Conceptual Framework for financial reporting. (5 marks)Explanation / Answer
Saiham Motor Ltd’s treatment of $1,200 as income is not consistent with definition and recognition criteria of income specified in the conceptual framework for financial reporting.
As per the framework revenues are inflow of assets (Cash or other assets ) to the company or settlement of liabilities of the company through supply of goods or services.
In this case there has been no supply of goods or services by Saiham Motors. Also there is no inflow of assets. Liability is waived and not settled through supply of goods or services.
Under the framework definition of income includes revenues and gains. Revenues can be through sales, dividends, interests, royalties , rent etc. The amount of $1,200 do not fall in any of these catagories.
Gains can be through disposal of non-current asset or revaluation of assets. In this case there is no disposal or revaluation of assets.
As per recognition criteria , the revenues need to be earned.