Tenet Bank Ltd places a non-cancellable order for a new Automated Teller Machine (ATM) with one of the major commercial ATM manufacturers at a fixed price, with delivery in 30 months and payment in full to be made on delivery.
Required:
Under the conceptual framework, advise whether Tenet Bank should recognise any asset or liability at the time it places the order. (3 marks)
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Under the IASB Conceptual Framework, Network Bank Ltd should not recognise any asset or liability at the time it places the order, because the transaction has not taken place. There is no obligation arising from past events.
The Framework recognises purchase transactions when delivery takes place, and title passes. At this point the bank, and not the manufacturer, has assumed the risks and rewards of owning the ATM machine.
Nonetheless, the bank has made an important and irrevocable commitment. Generally, major capital spending commitments are disclosed in the notes to the financial statements
Criteria for recognition of asset or liability – 1.5 marks
Explanation of whether or not the Bank can be recognised – 1.5 marks