Conceptual framework examples

1. Mufaba Ltd
The following journal entry was recorded in the accounting records of Mufaba Ltd for the financial
year ended 31 December 2014:
Dr Insurance (P/L) R180 000
Cr Insurance liability loss (SFP) R180 000
On requesting the supporting invoices for the insurance charge, Mr Zama explained that the
financial director had cancelled the insurance policy as of 1st of January 2014 and would in future
self-insure. This was due to the fact that although Mufaba Ltd made the insurance payments no
claim for any moneys had ever been instituted against the insurance company. Mufaba Ltd will
therefore bear all possible future losses. Instead of paying the insurance company R15 000 per
month the above liability has been created.
REQUIRED:
Discuss, with reasons, if you agree with the financial director whether the insurance liability
loss should be treated as a liability in the statement of financial position of Mufaba Ltd for the
financial year ended 31 December 2014 according to the requirements of a liability in terms of the
Conceptual Framework for Financial Reporting 2010. (5)
2. Ceylon Ltd
On 1 August 2013, Ceylon Ltd signed a contract with Handyman Ltd to repair all the office furniture
in their eight storey administration building. The contract stipulated the contract price to be
R200 000, payable on completion of the contract. Handyman Ltd estimated that the total cost to
repair all the furniture in the administration building of Ceylon Ltd would amount to R120 000.
At 30 September 2013, Handyman Ltd completed 25% of the repairs of the furniture (based on
the costs incurred to date to total expected costs). On 30 June 2014 Handyman Ltd completed the
remainder of the contract. After inspection of the repair work done, Ceylon Ltd issued a cheque on
2 July 2014 for the work completed. The repair expense has been recorded in the accounting records
of Ceylon Ltd according to the requirements of International Financial Reporting Standards (IFRS).
REQUIRED:
Motivate, with reasons, why the repairs to the office furniture in the administration building should
be recognised as an expense in the statement of profit and loss and other comprehensive income of
Ceylon Ltd for the year ended 30 September 2014, according to the requirements of an expense in
terms of the Conceptual Framework for Financial Reporting 2010. (5)
FAC3701 SU1 (2014/2) Page 1