LECTURE 8LIABILITIES AND OWNERS’ EQUITY

ARTHIK DAVIANTI, SE. MSI. AK. CA.

PERSPECTIVE OF THE FIRM

Proprietary theory is based on the idea that the owner is the centre of attention accounting is done with the owners’

interests in mind Entity theory focuses on the firm as the centre of attention

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PROPRIETARY THEORYProprietorship (owner’s equity)P = assets less liabilities

= net worth of owners = capital P = A – L

The objective of accounting is to determine the net worth of the owners Profit is the increase in net worth includes operating profit includes changes in the values of assets

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Assets belong to the proprietor and liabilities are obligations of the proprietor The objective of accounting is to determine the net worth of the owner. Income is earned and expenses are incurred – the decisions and actions of the owner. Net income – the increase of the owner from business during a given period. Income – change in net worth derives from income generating activities & changes in value of assets. 4

PROPRIETARY THEORY

Present accounting is largely based on this theory dividends – distribution of profit interest on debt & income tax - expense salaries to owners – not an expense equity method in long term investments –

ownership of the investor. consolidation financial statement - parent

Has a financial view of capital emphasis on the financial investment of

the owners and changes in owners’ wealth 5

PROPRIETARY THEORY

With the advent of the company the theory has proved inadequate as a basis for explaining company accounting developed when businesses were smaller a company is separate from its owners a company is a legal entity in its own right shareholders rely on managers for

information no longer so relevant

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PROPRIETARY THEORY

Inadequacies in proprietary theory led to the entity theory Formulated to address separate legal status of company The company is viewed as a separate entity with its own identity (Martin, 1978): separation of owners and the enterprise accounting procedures from the view of the

entity as an operating unit accounting principles and procedures not

formulated in terms of an ownership interest can also be applied in proprietorships,

partnerships and not-for-profit organisations7

ENTITY THEORY

ENTITY THEORY The objective of accounting may be either stewardship or accountability entity seen as being in business for

itself interested in its own survival sees owners as outsiders reports to owners to meet legal

requirements and maintain good relationships with them

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Focuses of the accounting equation is assets and equities. Accounting equation:

Assets = equities Assets are resources controlled by the entity Liabilities are obligations of the entity Profit increases net assets and accrues to the entity The owners only have a residual claim on the net assets of the entity

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ENTITY THEORY

ACCOUNTING PRACTICE

Both proprietary and entity theories are still influential in practiceEntity theory

conventional accounting theory based on it

financial reports reflect itProprietary theory

interest charges are an expense dividends are a distribution of profit

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LIABILITIES DEFINEDIASB Framework definition of liabilities: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.

Two main components: Existence of the present obligation, requiring

a future settlement The result of a past transaction

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LIABILITASKerangka Dasar Penyusunan dan Penyajian Laporan Keuangan (KDPPKL) SAK per efektif 1 Januari 2015Paragraf 49:Liabilitas merupakan utang perusahaan masa kini yang timbul dari peristiwa masa lalu, penyelesaiannya diharapkan mengakibatkan arus keluar dari sumber daya perusahaan yang mengandung manfaat ekonomik.Paragraf 60:Karakteristik esensial liabilitas adalah bahwa perusahaan mempunyai kewajiban masa kini. Kewajiban adalah suatu tugas atau tanggung jawab untuk bertindak atau untuk melaksanakan sesuatu dengan cara tertentu.Paragraf 63:Liabilitas timbul dari transaksi atau peristiwa masa lalu

PRESENT OBLIGATIONLiabilities are expected to give rise to an outflow of economic benefits. The actual sacrifices are yet to be made Obligation is already present Planned obligation included if to an

external party Legal enforceability Settlement of liability in various ways Equitable and constructive obligations

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PAST TRANSACTIONA past transaction (or event) ensures that only present liabilities are recorded and not future onesWhat kind of past transaction or event is acceptable? Place an order – goods received. The case of wholly executory contracts

Signing a contract creates a liability?Unconditional purchase obligation?

Mine site restoration for an extractive industry that commences mining.

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LIABILITY RECOGNITIONRecognition criteria: Reliance on the law - legal enforceability Determination of the economic substance

of the event – ‘real’ obligation

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LIABILITY RECOGNITIONRecognition criteria (continue): Ability to measure the value of the liability

normally the nominal amount if period longer than 12-months, based

on the present value of expected future cash flows

Use of the conservatism principleat what point is the entity too conservative

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Kerangka Dasar Penyusunan dan Penyajian Laporan Keuangan (KDPPKL)SAK per efektif 1 Januari 2015Paragraf 91:Liabilitas diakui dalam neraca jika besar kemungkinan bahwa pengeluaran sumber daya yang mengandung manfaat ekonomik akan dilakukan untuk menyelesaikan kewajiban saat ini dan jumlah yang harus diselesaikan dapat diukur dengan andal.

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LIABILITAS

IASB FRAMEWORKA liability should be recognised if (paragraph 82): it is probable that any future economic benefit

associated with the items will flow to or from the entity; and

the item has a cost or value that can be measured with reliability

What does probable mean? Vary - inconsistency

What is meant by reliable measurement?‘free from material error & bias’‘faithfully represents’ what it purports to represent

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LIABILITY MEASUREMENT The Framework provides little guidance about how to measure liabilities A number of different measurement bases may be used Under IFRS, historical cost is the most common Fair value measurement is more commonly being used leases financial instruments share based payments business combinations

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PROVISIONS AND CONTINGENCIES

Provisions and contingencies occur where there is a blurring between present and future obligationsIAS 37 Provisions, Contingent Liabilities and Contingent AssetsParagraph 10, Contingent Liabilites:a) A possible obligation that arises from past events and

whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

b) A present obligation that arises from past events but not recognised.

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PROVISIONS AND CONTINGENCIES

Liabilities and provisions are recognised only when there is a present obligation, it is probable and it can be reliably measuredContingent liabilities do not meet these criteria Notes – future settlement may be required,

but the estimated probability is not high enough to warrant recognition

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PSAK 57 Provisi, Liabilitas Kontinjensi, dan Aset Kontinjensi per efektif 1 Januari 2014Paragraf 10Liabilitas kontinjensi: a) kewajiban potensial yang timbul dari peristiwa masa

lalu dan keberadaannya menjadi pasti dengan terjadi atau tidak terjadinya satu atau lebih peristiwa di masa depan yang tidak sepenuhnya berada dalam kendali entitas

b) Kewajiban kini yang timbul sebagai akibat peristiwa masa lalu, tetapi tidak diakui, karena (i) tidak terdapat kemungkinan mengeluarkan sumber daya ekonomik dan (ii) tidak dapat diukur secara andal.

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LIABILITAS

Paragraf 10Provisi adalah liabilitas yang waktu dan jumlahnya belum pastiParagraf 14Provisi diakui jika (a) entitas memiliki kewajiban kini sebagai akibat peristiwa masa lalu, (b) kemungkinan besar penyelesaian kewajiban tersesut engakibatkan arus keluar sumber daya yang mengandung manfaat ekonomik, (c) estimasi yang andal mengenai jumlah kewajiban tersebut dapat dibuat.

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LIABILITAS

OWNERS’ EQUITYFramework defines equity as the residual interest in the assets of the

entity after deduction of its liabilities Owners’ equity is a residual claimEssential features Rights of the parties Economic substance of the arrangement

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CLASSIFICATIONS WITHIN OWNERS’ EQUITY

The distinction between contributed and earned capital is useful retained earnings not all transactions fit nicely into

categories share dividends

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Kerangka Dasar Penyusunan dan Penyajian Laporan Keuangan (KDPPKL)SAK per efektif 1 Januari 2015Paragraf 49:Ekuitas adalah hak residual atas aset perusahaan setelah dikurangi semua liabilitas.Paragraf 65:Ekuitas dapat disubklasifikasikan dalam neraca. Contoh: setoran modal oleh pemegang saham, saldo laba awal periode (retained earnings), penyisihan saldo laba dan penyisihan penyesuaian pemeliharaan modal.

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EKUITAS

CONCEPT OF CAPITAL Influenced by legal prescriptions capital maintenance

Financial capital invested money or invested purchasing

power Physical capital the productive capacity of the entity

Capital can be measured on either a nominal dollar or purchasing power (‘real’) scale

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Kerangka Dasar Penyusunan dan Penyajian Laporan Keuangan (KDPPKL)SAK per efektif 1 Januari 2015Paragraf 104:Konsep modal keuangan (paragraph 102) menciptakan dua konsep pemeliharaan modal:a) Pemeliharaan modal keuangan – laba

berdasar jumlah finansialb) Pemeliharaan modal fisik – laba berdasar

kapasitas produktif fisik

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KONSEP MODAL

CHALLENGES FOR STANDARD SETTERS

IASB has several projects which will affect the definition, recognition and measurement of liabilities debt versus equity distinction –

preference share extinguishing debt with equity – ‘set-off

and extinguishment of debt’ or ‘in-substance defeasance’

employee shares (share-based payment) – share or option

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ISSUES FOR AUDITORS The completeness of liabilities recognised on the balance sheet and the note disclosures about contingencies and other obligations are major issues for auditors evidence, timing, cut off concealment and understatement going concern overstatement - provisions reasonableness of fair values

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

ACCOUNTING THEORY 7 TH EDITIONIAI (2015) STANDAR AKUNTANSI KEUANGAN

PER EFEKTIV 1 JANUARI 2015