SUMMATIVE ASSIGNMENT

Management Accounting & Decision Making

Management Accounting & Decision Making

Areas of Subjective Judgment in DITW's Financial Statements For 2012

The IAB's Conceptual Framework focuses on the nature of reporting entity and there are 3 key mechanisms from which financial statements are constructed on true and fair basis. The Framework recognizes 3 mechanisms that are associated with financial statement position: assets, liabilities, and equity, and 2 associated with the income statement: income and expenses (Clendon, 2011, p.1). Therefore, in order to critically review the areas of concern in DWIT's financial statements for 2012, the key elements highlighted by the Framework are analyzed.

The Framework states are assets must be reported in financial statements as current and non-current assets. As far as DWIT is concern, it is apparent that the company is clearly in line with this requirement, however, their assets are not categorized as being their own or not, i.e. whether the company legally own and control the assets that are reported or not. According to the IAS 17 requirement, in case all the substantial risks and rewards of ownership have passed to the lessee, then it must be regarded as a finance lease an lessee must identify an asset on the financial statement in respect to the benefits that it controls, even if the asset subject to the lease is not legally owned by the lessee. However, in case of DWIT, the financial statements of the firm do not reflect any highlights of whether their assets such as building, land, and equipments are legally owned by them or are they at lease. Therefore, it is recommended that the company (DWIT) must recognize and report their assets on their statement of financial position that whether they are leased or personally owned.

Sa far as liabilities are considered, Framework states that liabilities are basically the current obligations of a company arising from past events, therefore their settlements are expected to yield to an outflow from the company of resources embodying economic advantages. In case of DWIT, the company represents its liabilities on its financial position statement as being current liabilities, such as trade payables, bank overdrafts, and others, which is in accordance with the requirement. But at the same time IASB asks for identifying as well as reporting non-current (long term) liabilities in the statement of financial position, where, in case of DWIT the company does not provide reporting of non-current liabilities in its statement of financial position. Though it is rare, but some firms do not incur non-current obligations, however, they still have to report and highlight this aspect. Therefore, it is recommended that DWIT must include identification as well as reporting of non-current liabilities in its statement of financial position.

Third area that raises the subjective judgment in DWIT's financial statements is the area of income from Income Statement of the firm. Income is referred to increases in economic benefits of the firm during a particular period in the form of inflows or improvements of assets or reduction in liabilities ...