Cost, matching, full disclosure, materiality, prudence; assets to losses

Five principles as decisions, not definitions

A principle earns marks on this paper only when it is applied to a fact. Here are five Northlake decisions, each settled by one principle.

A $40 stapler is expensed, not recorded as equipment. The principle is materiality: an item is material if omitting or misstating it would change a user's decision. Whether $40 is material depends on the reference point — Northlake has $2 million of assets and $700,000 of revenue, and no bank will decide differently over a stapler. Always state the reference point; "$40 is small" is not an argument, "$40 against $2 million of assets" is.

The groomer is carried at its $96,000 cost, not the $110,000 a dealer quoted for a replacement. The cost principle: assets are recorded at the amount given up to acquire them, because that amount is verifiable and the quote is not.

Northlake is being sued by a skier over a trail injury; the lawyer says a loss is unlikely. Nothing is accrued, but the lawsuit is described in a note. Full disclosure: whatever the face of the statements cannot show but a user would want to know goes in the notes.

Twenty rental skis are damaged beyond repair and written down to zero. Prudence (conservatism): when a loss is likely, recognise it now; do not carry an asset above what it is worth. Prudence is not a licence to pick any low number — it forbids overstatement, it does not reward understatement.

December's wages, paid on 3 January, are recorded in December. Matching: expenses are recognised in the period whose revenue they helped earn, not when the cash leaves. This is the principle behind every adjusting entry in Module 5.

The seven elements

ASPE names seven elements of financial statements. Assets are resources the entity controls from past events that will bring future benefit. Liabilities are present obligations from past events that will require giving up resources. Equity is the residual: assets minus liabilities. Revenues are increases in economic resources from ordinary activities — passes, rentals, lessons, café sales. Expenses are decreases from ordinary activities — wages, propane, amortization. Gains and losses are increases and decreases from peripheral or incidental transactions and events.

That last split is where ASPE differs from IFRS, which folds gains into income and losses into expenses. Under ASPE they are separate elements, and the classic test is a disposal.

Worked example — twelve items into seven elements

Northlake sells an old snowmobile with a carrying amount of $3,000 for $4,200 cash.

Cash received            4,200    asset up
Snowmobile removed       3,000    asset down
Difference               1,200    GAIN on disposal — not revenue

Selling snowmobiles is not what Northlake is in business to do, so the $1,200 is a gain, shown below operating income, never inside Service Revenue. Eleven more:

When a case asks "which element" — or, more often, "which statement and where" — the gain/revenue distinction is the one that separates a full-mark answer from a near miss.