Expense

LECTURE 10EXPENSES

ARTHIK DAVIANTI, SE. MSI. AK. CA.

EXPENSES DEFINED

Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants (Framework para.70)

EXPENSES DEFINED The decrease in value pertains eventually to the outflow of cash Expenses encompass losses as well as expenses which arise in the course of ordinary activities The distinction between abnormal and extraordinary items is no longer permitted

To make a definition of expenses operational, it must be associated with a physical activity of the entity - something it does

production and sales generate revenue and the using up of goods and services in support of those functions causes expenses to occur

EXPENSES DEFINED

CHANGES IN ASSETS AND LIABILITIES

Expenses represent a value changeFramework definition of expenses refers to outflows or depletions of assets or incurrence of liabilitiesFramework makes no reference to the relationship of expenses to revenue

EXPENSES AND ‘COSTS’ Sometimes an expense is referred to as an ‘expired cost’ The using up of assets entails a cost - expense - to the entity If there is no cost to the firm there is no expense Later … The recognition criteria for expenses are consistent with those of the other accounting elements

EXPENSE RECOGNITIONAn expense is recognised 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 with reliability prudence and neutrality freedom from material error and bias,

represent faithfully

EXPENSE RECOGNITION

The decrease in future economic benefits relates to a decrease in an asset or an increase in a liability recognition of an expense occurs

simultaneously with the recognition of an increase in a liability or a decrease in assets

EXPENSE MEASUREMENT

In measuring expenses a number of decisions have to be made as to how expenses should be allocated over periods of resultant revenue

accrual accounting matching expenses against revenues in

the period to which they relate

ALLOCATION OF EXPENSES Revenue = accomplishment Expenses = effort For any given period, matching revenue and expenses yields net accomplishment (periodic profit) Most of the problems of profit determination have to do with expense allocation and matching

ALLOCATION OF EXPENSES

The accountant must decide whether a cost pertains to future revenues

and therefore should be deferred whether a cost pertains to current revenues

and therefore should be written-off against that revenue in the current period

whether a cost, although incurred and not yet paid, is related to current revenue and therefore should be accrued

The matching process involves the simultaneous or combined recognition of revenues and expenses that result directly and jointly from the same transactions or other events sales and cost of goods sold


ALLOCATION OF EXPENSES In practice, matching is

very difficult to do involves a great deal of judgement arbitrary

Three basic methods of matching

associating cause and effect systematic and rational allocation immediate recognition


ASSOCIATING CAUSE AND EFFECT

The ideal way of matching is by associating cause with effect Cause and effect relationships are very difficult to prove

reasonable observation

SYSTEMATIC AND RATIONAL ALLOCATION

An alternative is to use a systematic and rational allocation procedure

associate expenses to segments of time

the expense is assumed to correlate with the revenue for that perioddepreciation

Requires estimates and assumptions which are usually arbitrary

IMMEDIATE RECOGNITION

Used if neither of the previous two can be used Recognise the outlay immediately as an expense advertising expenses research expenditure impairment expenses

CRITICISMS OF ALLOCATIONS

The doctrine of conservatism means that expenses, losses and liabilities are recognised as soon possible, even if evidence for them is weakThe asymmetrical treatment of revenue and expenses may create a conservative bias and misleading financial statementsPersonal incentives may influence managers’ judgement in the allocations process

The allocations (matching) process is an essential part of accounting practice The process has made the balance sheet secondary to the income statement The balance sheet has become a repository for unexpired costs Most of what accountants put in accounting reports is ‘rubbish’


The allocation problemThomas (1975) – allocations in accounting do not meet the following criteria

additivity unambiguity defensibility


Allocations are defended by accountants on two grounds a given input provides services in the

current and future periods and the cost allocation pattern reflects the cost of the services received in the given periods

allocated data serves a useful purpose because readers of accounting reports, which include allocated data, find them useful


But, allocations are ‘incorrigible’ (bad beyond correction) – Thomas (1975) they are not capable of verification or

refutation by objective, empirical means the patterns of allocation do not exist in the

real-world; they exist only in the minds of accountants

an input’s individual contribution to the output cannot be known because all the inputs interact with each other to generate an output

empirical studies do not demonstrate that allocations are useful


Alternative approaches suggested exit price accounting

no allocations


DEFENCE OF ALLOCATIONS

Change the objective of allocations Continue with allocations only if the benefits outweigh the costs of doing so

CHALLENGES FOR ACCOUNTING STANDARD

SETTERSThe IASB is aware of the allocations problem and is tackling it in its current projectsThe plea is for reasonableness or appropriateness and not for objective evidence contradicts the recognition of revenue conservatism

ISSUES FOR AUDITORSAuditors face issues surrounding the distinction between expenses and assets, the period in which expenses are recognised, and appropriate measurement of expenses concepts such as matching and

conservatism are not helpful if they distort information and reduce its utility

managers have incentives to distort expenses

big bath and cookie jar accounting26

SOURCE:GODFREY, HODGSON, HOLMES, AND TARCA (2012)

ACCOUNTING THEORY 7 TH EDITIONIAI (2015) STANDAR AKUNTANSI KEUANGAN

PER EFEKTIV 1 JANUARI 2015

Business

Expense