Tag: Role Play and Simulation

An advertising strategy can be defined as a blueprint to help sell a given product to consumers. There are almost as many different advertising strategies are there are products to advertise, and each company follows its own unique strategy plans. However, all forms of advertising strategy follow a few basic principles.

Principles:

Qualities of the Product

Before an advertising strategy can begin in earnest, the company must define the qualities of the product or service, according to U.S. Legal. That means stating what purpose the product fulfils, what features it includes and what advantages it offers over other products intended for the same purpose. These qualities will form the core of the advertising’s branding, helping to define the message of the strategy and the features the company wishes to emphasize in its ads.

State of the Market

With the product now defined, the question becomes who will want to purchase it. According to Adcracker.com, market research can pinpoint the characteristics of key customer demographics, including such elements as age, gender, social standing and interest towards certain forms of advertising (such as how often they watch certain television shows or read certain magazines). It also means defining how much of the market may be open to purchasing that product and what percentage of the market is currently occupied by rival products. It may also try to pin down the current economic climate in order to understand potential sales. For example, selling a luxury product such as a speedboat may be more difficult in times of economic downturn.

Advertising Goals

A knowledge of the possible market; including competitors, customer preferences and conditions for selling; and an understanding of the product itself can then lead to developing a specifics set of goals for the advertising. According to Rex Stewart’s “Building an Advertising Strategy,” the company can state what they hope to accomplish through the advertising (such as “increase sales by 15 percent,” or “promote further sales to women ages 24-39”) and the timetable in which they intend to meet those goals. That forms a road map by which the company can gauge the advertising’s success as the strategy continues.

Methodology

The company must decide upon the methods by which the advertising will be implemented. This includes the overall tone of the advertising, the particular qualities emphasized, the specifics medium (magazine ads, television commercials, product placements, and the like) and the geographic location of the ads (specific cities where billboards will be placed, television stations and/or programs where ads will run, and so on). In addition, the company must draw up a budget covering the resources they are prepared to spend on the advertising strategy and the specific ways in which those resources will be used. With the methodology firmly in place, the company can then go about implementing the strategy.

Types:

Seasonal advertising

This type of advertising strategy is used for the advertising of seasonal products or advertising of your business or products during a particular season. Several huge companies swear by this advertising strategy and advertise their products right before the beginning of the season and through the season. This advertising strategy proves to be beneficial as it provides a high return on investment. Because companies spend their money on advertisements when there is a need for their products in the market rather than wasting money on ads throughout the year.

For example, during important festivals like Diwali, Dussehra, Christmas, companies like Amazon and Flipkart run-heavy advertising, which results in the revenue generation of millions to these companies. Seasonal advertising is not only adopted by giant companies, but it is also popularly used by small businesses to attract customers.

Social media advertising

Social media advertising is one of the most popular advertising strategies used by companies to advertise their products and services and to stay in touch with their customers. Companies create their social media handles on different social media platforms like Facebook, Instagram, etc. and share information about their business on these platforms. People can not only learn about the products and services offered by companies but can also interact with the markets through these platforms.

Companies run their advertising campaigns on these platforms and also take the help of social media personalities to promote their products. For example, Olay Company advertise their face cream with the help of social media influencers and mobile companies like Redmi and Oppo also support the latest models of their mobile phones on their social media handles and even with the help of social media influencers.

Social media has become the first choice of advertising of both small as well as large businesses. Businesses are not required to spend millions on advertising using social media advertising strategies like they are required to pay when promoting their business on other advertising platforms.

Moreover, using social media advertising, they can learn about the response of people towards their advertising campaign and can make changes as per their reaction.

Ownership advertising

In an ownership advertising strategy, you make your customers participate in your ad campaign. For example, coke asked their customers to share their selfies with a coke bottle on their social media platforms and tag them in their posts.

In this way, they indirectly made people buy their product, and by sharing on their social media platform, they make their customers advocate their product to their friends and family.

Modelling the advertising strategy

The modelling advertising strategy is when companies make the use of celebrities or renowned personalities to advertise their products. It is an effective advertising strategy as the followers of the superstar will be influenced to buy your product.

Utility advertising strategy

The utility advertising strategy is a unique advertising strategy where you advertise your product by helping people achieve their goals.

Evocation advertising strategy

This type of advertising strategy to attract the attention of people by evoking strong emotions in them. You create a positive image of your brand and product by connecting with people at an emotional level.

Steps to implement:

1. Determine the purpose of advertising

The first step is to determine the purpose of advertising. There can be different purposes for which you want to advertise. For example, to boost the sales, to promote your newly launched product, to attract foot traffic in the store, to increase traffic on the website, to make people aware of the benefits of the product.

Having the clarity of the purpose of advertising is a step forward in the direction of creating an effective advertising strategy. You can select media platforms on which you want to advertise your product and services and can also decide how much you want to spend on your advertising campaign.

2. Determine your target audience

The second and even a crucial step in creating an effective advertising strategy is to determine the audience that you want to target using your advertising strategy. Knowing the audience that you want to focus on makes your advertising strategy more effective. You will create content that will grab the attention of your target audience.

Determining your target audience is not as easy as it seems. It is a complex process to identify your target audience. Your target customer is a person who will ultimately buy your product. You can determine your target audience by creating a profile of the customer who will buy your product. Next, you should evaluate the influence of the people around your target customer, such as family members, colleagues, friends, etc. who will influence the decision of your target customer. For Instance, if you are into the business of selling cars, then your target audience will be the people with regular income. The people who have a stable job or who run a successful business. The decision of these people will be influenced by the people they are working with, their friends, their children, and their spouse. Therefore, make sure that when you are creating an advertising strategy, then don’t forget to target this group of people.

3. Decide your advertising budget size

The next important step is to determine the budget for your advertising campaign. It is essential to decide your advertising budget before you decide on your advertising strategy. Your strategies will be ineffective if it does not match your budget.

Sometimes low budget advertising can do wonders for your business if you choose the right strategy that fits your budget.

4. Selecting media for advertising and deciding the schedule

Once you have determined your product and target audience, the next step that you are required to take is to choose the type of media that you want to use to reach your audience. There are many advertising media such as

1. Print media: Newspapers, magazines, pamphlets, posters, banners, etc.
2. Digital media: Website advertising, social media advertising, World Wide Web, email advertising, YouTube ads, Television ads.
3. Direct mails
4. Word of mouth
5. Outdoor advertising: Billboards, Advertising on public transportation like public buses and cabs.
6. Trade shows.
7. Radio advertising

All of these advertising mediums have their advantages and disadvantages. You can choose one or a group of advertising mediums to implement your strategy. For example, if your target audience is older people than advertisement medium like television ads and newspaper ads will be the right choice of medium to advertise your product.

On the other hand, if you are targeting youngsters, then to reach them, you should opt for social media advertising, YouTube ads, and the world wide web. Because nowadays, most youngsters spend their time on these platforms and spend less time watching television or reading newspapers.

Therefore, the right advertising medium can help increase the return on investment on your advertising strategy.

5. Implementation of the advertising program

The next step is to implement your advertising strategy as planned. The implementation of advertising strategies is referred to as an advertising campaign. An advertising campaign is a different concept from an advertising strategy, but an advertising strategy is used as guidelines to create an advertising campaign. As it is crucial to achieving across the board consistency. Everything that is part of your advertising campaign such as music, artwork, images should be as it is decided in the advertising strategy. It is essential to achieve consistency when you are advertising your product through several advertising mediums. Make sure to use one slogan, image, or a music track that creates the coherency of your advertisement on different advertising platforms.

6. Measure the effectiveness of advertising

The last step is to measure the effectiveness of your advertising strategy. Whether your advertising strategy was successful or not will depend on the return on investment that you get by the implementation of an advertising strategy.

Check whether your objective is met or not. For example, if you aimed to boost sales, then check how much your advertising strategy was successful in achieving the desired number.

Advertising media is the medium through which an advertisement is delivered to the public. It carries messages, stories or points regarding the product that is being advertised. It is a highly informative way to reach the masses and ask them to buy the product or avail of the service.

Advertising Media plays a significant role in binding the direct communication relationship between the seller and the buyer.

With the help of right types of advertising, there is not a single speck of doubt about the fact that you will be able to make your brand known to people in the best way.

Advertising is a parallel universe. It is the most powerful medium through which anything in our mind, thoughts, and dreams, can be conceptualized and presented in the world, and most importantly to the target audiences and beyond.

Significant Features of Media

• Space for interactivity: New media constructions frequently promote more interaction as compared to old media. It gives space to the audience to engage with the information received from the media and interact with it.
• Power of users: Interactivity also grants more power to its audience. Admittedly, in some new media compositions, the audience is reasonably better defined as users since there is a decrease in the gap between the media producers and their consumers. The audience can use streaming services to follow the various television programmers they desire to watch according to their convenience.
• Better accessibility: New media can be termed as open media. When people have the means and broadband internet access, they can get instant access to the many media content (much of which is free). It allows media producers to make money, moving towards the various subscription services and increasing the significant amounts of advertising to attract more viewers.

Role:

Many companies spend a lot of money on advertising, relying on the various forms of media out there to spread awareness about their products and increase their sales. Here is a breakdown of the role of advertising in the media.

Spreading Awareness through Advertising

Advertisements alert people about new products and services in the market that could potentially fulfil their needs or solve their problems. A typical advertisement will tell you what the service or product is, where it can be bought, for how much, by whom, and why it should be bought. This is possible through the power of the media to reach millions of people at the same time.

Popularizing a Brand

Think of all the popular brands you know, such as Coca-Cola or McDonald’s. These brands are where they are today because they utilized the phenomenon of advertising well. Through constant republishing and replay to large groups of people, the media popularizes the brand. Many people see it multiple times, and it sticks in their heads. Eventually, when they see it out there, they will recognize it and are more likely to buy it.

Increasing Customer Demand

The target audience of advertisements is typically large, whether you’re advertising in social media, print media, radio, or television. A well-crafted advertisement will convince the public that they should buy the product or subscribe to the service being advertised. As a result, whatever is already in the market becomes exhausted or oversubscribed, leading to an increase in demand for the product or service.

Increased Company Profits

This one works for the same reasons as the previous one on demand. Advertisements are usually displayed to large groups of people at the same time. This means that, even with a low conversion rate, many people will end up buying your products eventually. If you execute your advertisement well, you will get a good conversion rate and great sales. Increased sales, of course, mean increased profits.

It all boils down to how well you do your advertisement. A badly executed ad will not do any good for your company, no matter how many people see it. A well-executed ad, on the other hand, can do wonders for your bottom line and turn your brand into a household name. Ultimately, it can’t be denied that advertising in media is the fuel that drives global business.

Advantages of Media

• Education: Media educates the mass. With the help of television or radio shows, the mob discovers various facts about health affairs, environmental preservation, and many more topics of relevance.
• Updated: People receive the latest news in a short time. Distance does not make a barrier in distributing information to people from any place on earth. People get daily news updates from media outlets, which keeps them updated on the current trends and happenings worldwide.
• Exercise innate potentialities: People get to exercise their hidden talents through media. Media helps to showcase their hidden skills such as comedy, performing, singing, recitation, etc.
• Gather knowledge: Media helps to increase knowledge about various subjects.
• Mass production: Media acts as a great tool in promoting mass consumer products, increasing sales of the assets.
• Entertainment: Serves as a good source of entertainment. People get entertained through music and television programs.
• Cost reduction: Electronic media promotes electronic duplication of information, reducing the production cost and making mass education achievable.
• Cultural immersion: Media allows the diffusion of diverse cultures by showcasing different cultural practices. It helps people around the world to be understanding of each other and welcome their differences.

Disadvantages of media

• Difficulty to Access: Some media topics are unsuitable for children; limiting access to such content can be challenging for elders in specific scenarios.
• Fraudulence and Cybercrime: The Internet opens up avenues for imposters, criminals, and hackers, or such predators with the possibility to commit criminal acts without any knowledge of the victims.
• Individualism: People spend an excessive amount of time on the internet, watching or binging content. As a result, their relationship with friends or family and neighbours may be affected.
• Addiction: Some television programs and internet media can be very addictive to most children and adults, leading to a drop in productivity.
• Faulty advertisement tactics: It often makes the use of drugs and alcohol appears cool, which can be harmful to the nations’ youth.
• Health Concerns: Prolonged television watching or internet binging can lead to vision problems, and exposure to loud noises by using headphones or earphones can lead to hearing defects.
• Personal Injury: Some people decide to try the stunts that have been showcased in the media, which lead to severe injuries.
• Malware and Fake Profiles: An individual can create an anonymous account and pretend to be someone else. Anyone can use such profiles for malicious reasons, such as spreading lies, which can ruin the reputation of any targeted individual or company.

Advertising research is a systematic process of marketing research conducted to improve the efficiency of advertising. Advertising research is a detailed study conducted to know how customers respond to a particular ad or advertising campaign.

Objectives of Advertising Research

• To Enhance Awareness: Through research, it is easy to plan the marketing strategy of any product/service.
• To Know Attitudinal Pattern: A thorough research predicts the people’s attitude. It analyses the changing attitudinal pattern of a geographic area. Knowing the consumers’ attitude is very important before launching a new product and its advertisement.
• To Know People’s Action/Re-action: Research also records and analyzes people’s action or re-action regarding a particular product/service.
• Analysis: Based on deep research and analysis, it is simple to design and develop a creative ad, effective enough to influence consumers.

Types

There are two types of research, customized and syndicated. Customized research is conducted for a specific client to address that client’s needs. Only that client has access to the results of the research. Syndicated research is a single research study conducted by a research company with its results available, for sale, to multiple companies. Pre-market research can be conducted to optimize advertisements for any medium: radio, television, print (magazine, newspaper or direct mail), outdoor billboard (highway, bus, or train), or Internet. Different methods would be applied to gather the necessary data appropriately. Post-testing is conducted after the advertising, either a single ad or an entire multimedia campaign has been run in-market. The focus is on what the advertising has done for the brand, for example increasing brand awareness, trial, frequency of purchasing.

Pre-testing

Pre-testing, also known as copy testing, is a specialized field of marketing research that determines an ad’s effectiveness based on consumer responses, feedback, and behaviour. Pre-testing is conducted before implementing the advertisement to customers. The following methods can be followed to pre-test an advertisement:

• Focus group discussion
• In-depth interview
• Projective techniques
• Checklist method
• Consumer jury method
• Sales area test
• Questionnaire method
• Recall test
• Readability test
• Eye movement test

Campaign pre-testing

A new area of pre-testing driven by the realization that what works on TV does not necessarily translate in other media. Greater budgets allocated to digital media in particular have driven the need for campaign pre-testing. The addition of a media planning tool to this testing approach allows advertisers to test the whole campaign, creative and media, and measures the synergies expected with an integrated campaign.

Post-testing

Post-testing/Tracking studies provide either periodic or continuous in-market research monitoring a brand’s performance, including brand awareness, brand preference, product usage and attitudes. Some post-testing approaches simply track changes over time, while others use various methods to quantify the specific changes produced by advertising either the campaign as a whole or by the different media utilized.

Overall, advertisers use post-testing to plan future advertising campaigns, so the approaches that provide the most detailed information on the accomplishments of the campaign are most valued. The two types of campaign post-testing that have achieved the greatest use among major advertisers include continuous tracking, in which changes in advertising spending are correlated with changes in brand awareness, and longitudinal studies, in which the same group of respondents are tracked over time. With the longitudinal approach, it is possible to go beyond brand awareness, and to isolate the campaign’s impact on specific behavioral and perceptual dimensions, and to isolate campaign impact by media.

Essentials of Advertising Research

• Research Equipment: It is the basic requirement of advertising research. It includes a skilled person, computer system with internet, and relevant newspapers and magazine. However, field research is also important. For example, interviewing people in the market or their residential places.
• Marketing Trends: Knowledge of marketing trends help advertisers to know what products people are buying and what are the specific features of the products, which compels people to buy. With this information, manufacturers can modify their product according to the trend on competitive price.
• Media Research: To determine, which media is the most effective advertisement vehicle, media research is necessary. It helps to reach the potential customers in a short period of time and at lower cost.
• Target Audience: For any advertising research, it is very important to identify target audience and geographic location.

Benefits of Advertising Research

• Develops creative design and strategy: Once, all information is available, it is very simple to develop an eye-catching design. It also helps in making a well-defined strategy to develop your business.
• Identifies Opportunity in the Market: Research suggests: what is the right time to launch the product. It also tells which geographical location is the best for the product.
• Measures Your Reputation: It is always beneficial to know your competitor’s reputation and credit in the market. It helps to develop faultless strategy.
• Identifies Major Problems: Research helps to identify the potential problems.
• Analyzes Progress: It helps to analyze the performance of your product. Likewise, you can monitor your progress.
• Minimize the Risk: If you have done a thorough market research, there is least chance of failure.

Advertising efforts represent only one spoke in the wheel of the marketing mix. It is one of the four Ps of marketing mix namely, product, price, place and promotion. That is why, advertising coordination implies establishing unity of thought, purpose and action between the advertising efforts and those of others having bearing on his efforts.

It is building of internal and external relations to his department and vertical and horizontal within the organisational set-up.

Advertising agency brings a good coordination between the advertiser, itself, media and distributors. This is a very important function. If coordination is proper, it will increase the sales of the product.

Recognition and identifying performance obligation

An entity should assess the goods or services promised in a contract and identify as a performance obligation each promise to transfer either:

• Good or service or
• A series of distinct goods or service that are similar and have the same pattern of transfer

Contract with the customer can include promises that are implied by an entity’s business practice apart from those explicitly stated in the contract. Performance obligation does not include activities undertaken an entity to execute the contract which does not result in a transfer of goods or services.

Distinct Goods or Services

Goods or services that are promised to a customer are distinct if both the conditions are met:

Distinct goods or services include the following:

Sale of goods produced by an entity

• Resale of goods produced by an entity
• Performing a contractually agreed-upon task
• Resale of rights to goods or services purchased by an entity
• Constructing, manufacturing or developing an asset on behalf of a customer etc

Goods or services (not distinct) can be combined with other goods or services and in some cases, an entity might account for all the goods or services in a contract as a single performance obligation.

Satisfaction of Performance Obligation

Revenue should be recognised when (or as) the entity satisfies a performance obligation by transferring a promised goods or services to a customer (customer obtains control). For each performance obligation, an entity should determine the following:

Goods and services are assets even when they are received and used momentarily. Control over an asset is the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. To evaluate whether the customer has the control over an asset, the entity should consider any agreement or repurchase the asset.

 Measuring progress of satisfaction: Revenue Recognition

Each per performance obligation satisfied over time, revenue should be recognised by measuring the progress of complete satisfaction at the end of every reporting period. An entity should use the single method consistently for such measurement.

Two types of methods used are input method and output method which an entity should consider based on the nature of the goods or services. Following points to be noted:

• When applying method, excluding goods or services for which control is not transferred.
• Update the measure of progress to reflect any changes in the performance obligation outcome.
• Recognise revenue only if the entity can reasonably measure its progress, if not recognise only the cost incurred.

Measurement

An entity shall recognise the amount of allocated transaction price as revenue once a performance obligation is satisfied. Transaction price which can be fixed or variable amount is determined based on the terms of contract and entity’s customary practice.

a) Variable Consideration

If the consideration includes a variable amount, an entity should estimate the amount of consideration to which it will be entitled in exchange for transferring the promised goods or services to a customer. Estimation can be done using any of the two methods being:

The expected Value: The sum of probability-weighted amounts in a range of possible consideration

The Most Likely Amount: Single most likely outcome of the contract

b) Constraining estimates of Variable Consideration

In assessing the uncertainty related to variable consideration, an entity should consider both the likelihood and the magnitude of revenue reversal. Following are the factors that indicate the high probability of revenue reversal related to the amount of consideration:

• High susceptibility to factors outside entity’s control
• Uncertainty exists and it’s expected to resolve for a long time
• Entity’s experience has limited predictive value
• Has a large range of possible consideration amounts etc.

c) The existence of a significant financing component

In determining the transaction price, an entity should adjust the promised amount of consideration for the time value of money if significant financing components exist.

In assessing if a contract contains a significant financing component; an entity should consider the relevant facts including both of the following:

• Difference between the amount of promised consideration and the cash selling price of the goods or services.
• The combined effect of the prevailing interest rate in the market and expected length of time between when the transfer of goods or services and the time when the customer makes the payment.

d) Non-Cash Consideration

When customer promises to pay consideration other than in cash form, an entity should measure it at fair value. If fair value cannot be reasonably measured, then entity should measure the consideration indirectly by reference to the stand-alone selling price of the goods or service in exchange for consideration.

e) Consideration payable to Customer

Consideration payable to the customer includes cash amounts, credits or other items (voucher or coupon) and entity account it as a reduction of transaction price (revenue). An entity should recognise the reduction of revenue when (or as) either of the following events occurs:

• Recognises revenue for the transfer of related goods or service to the customer
• Pays or promises to pay the consideration

Allocation of Transaction Price to Performance Obligation

Entity should allocate the transaction price to each performance obligation identified in a contract on a relative stand-alone selling price basis (It is the price at which an entity would sell a promised good or service separately to a customer). If this price is directly not available, it should be estimated using methods such as:

The adjusted market assessment approach

• Expected cost plus margin approach
• Residual approach
• Contract Cost

Incremental cost of obtaining a contract with a customer – Entity should recognise as an asset if the entity expects to recover those costs. These are expenses which an entity would not have incurred if the contract had not been obtained (eg. sales commission)

Cost to fulfil a contract: Entity should recognise an asset from the cost incurred to fulfil a contract if those costs:

• Relate directly to a contract that an entity can specifically identify
• Generate or enhance resources of the entity used in satisfying the performance obligation in future.
• Is expected to recover

Objective To prescribe accounting for: i. Provision ii. Contingent liabilities iii. Contingent Assets iv. Provision for restructuring cost III. Scope This standard shall may be used all entities in accounting for: i. Provisions ii. Contingent liabilities iii. Contingent Assets. Except for those covered by specific other standards like

1. Ind AS -12 Income Taxes
2. Ind AS 116-Leases
3. IndAS -19 Employee Benefits
4. IndAS -104 Insurance Contracts
5. IndAS-103 Business Combinations
6. Revenue from contracts with customers –Ind AS 115
7. Ind AS-19 Financial Instruments

Factors affecting Measurement of Provisions

1. Measured at Best Estimate of the expenditure required to settle the present legal or constructive obligation as a result of past obligating event.
2. Management should really incorporate all available information in their estimates and they must not forget about
3. Risks and uncertainties
4. Time value of money

Some probable future events

Obligating event

• A present obligation (legal or constructive) has arisen as a result of a past event (the obligating event),
• Payment is probable (‘more likely than not’), and
• The amount can be estimated reliably.

An obligating event is an event that creates a legal or constructive obligation and, therefore, results in an entity having no realistic alternative but to settle the obligation.

A constructive obligation arises if past practice creates a valid expectation on the part of a third party, for example, a retail store that has a long-standing policy of allowing customers to return merchandise within, say, a 30-day period.

A possible obligation (a contingent liability) is disclosed but not accrued. However, disclosure is not required if payment is remote.

In rare cases, for example in a lawsuit, it may not be clear whether an entity has a present obligation. In those cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the balance sheet date. A provision should be recognised for that present obligation if the other recognition criteria described above are met. If it is more likely than not that no present obligation exists, the entity should disclose a contingent liability, unless the possibility of an outflow of resources is remote.

Legal obligation

Legal Obligation is also referred to as the legal duty. Legal Obligation is generated through the contract or law. Also, it requires an individual to conform their actions to a specific standard.

A provision is recognised as contamination occurs for any legal obligations of clean up, or for constructive obligations if the company’s published policy is to clean up even if there is no legal requirement to do so (past event is the contamination and public expectation created by the company’s policy).

Constructive obligation

A provision is a liability of uncertain timing or amount. The liability may be a legal obligation or a constructive obligation. A constructive obligation arises from the entity’s actions, through which it has indicated to others that it will accept certain responsibilities, and as a result has created an expectation that it will discharge those responsibilities. Examples of provisions may include: warranty obligations; legal or constructive obligations to clean up contaminated land or restore facilities; and obligations caused by a retailer’s policy to make refunds to customers.

An entity recognises a provision if it is probable that an outflow of cash or other economic resources will be required to settle the provision. If an outflow is not probable, the item is treated as a contingent liability.

A provision is measured at the amount that the entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time. Risks and uncertainties are taken into account in measuring a provision. A provision is discounted to its present value.

Contingent Liability

No need to recognize it. Whereas, the entity should disclose in the financial statements.

A contingent Liability is

1. 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.
2. A present obligation that arises from past events but is not recognized because:
3. it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation.
4. the amount of the obligation cannot be measured with sufficient reliability.

Contingent Asset

No need to recognize it. Whereas, the entity should disclose in the financial statements.

Contingent Asset is a possible asset 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 entity.

Provisions

A provision is a liability of uncertain timing or amount. The liability may be a legal obligation or a constructive obligation. A constructive obligation arises from the entity’s actions, through which it has indicated to others that it will accept certain responsibilities, and as a result has created an expectation that it will discharge those responsibilities. Examples of provisions may include: warranty obligations; legal or constructive obligations to clean up contaminated land or restore facilities; and obligations caused by a retailer’s policy to make refunds to customers.

An entity recognises a provision if it is probable that an outflow of cash or other economic resources will be required to settle the provision. If an outflow is not probable, the item is treated as a contingent liability.

A provision is measured at the amount that the entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time. Risks and uncertainties are taken into account in measuring a provision. A provision is discounted to its present value.

IAS 37 elaborates on the application of the recognition and measurement requirements for three specific cases:

• Future operating losses; a provision cannot be recognised because there is no obligation at the end of the reporting period;
• An onerous contract gives rise to a provision; and
• A provision for restructuring costs is recognised only when the entity has a constructive obligation because the main features of the detailed restructuring plan have been announced to those affected by it.

Contingent Liabilities

Contingent liabilities are possible obligations whose existence will be confirmed by uncertain future events that are not wholly within the control of the entity. An example is litigation against the entity when it is uncertain whether the entity has committed an act of wrongdoing and when it is not probable that settlement will be needed.

Contingent liabilities also include obligations that are not recognised because their amount cannot be measured reliably or because settlement is not probable. Contingent liabilities do not include provisions for which it is certain that the entity has a present obligation that is more likely than not to lead to an outflow of cash or other economic resources, even though the amount or timing is uncertain.

A contingent liability is not recognised in the statement of financial position. However, unless the possibility of an outflow of economic resources is remote, a contingent liability is disclosed in the notes.

Contingent assets

Contingent assets are possible assets whose existence will be confirmed by the occurrence or non-occurrence of uncertain future events that are not wholly within the control of the entity. Contingent assets are not recognised, but they are disclosed when it is more likely than not that an inflow of benefits will occur. However, when the inflow of benefits is virtually certain an asset is recognised in the statement of financial position, because that asset is no longer considered to be contingent.

The Objective of Ind AS 36 is to ensure that assets are carried at not more than at recoverable value. The standard also specifies when an entity should reverse an impairment loss and provide disclosures while preparing and presenting the financial statements.

This standard shall not apply to:

• Inventories
• Contracts that are recognized in accordance with Ind AS 115
• Deferred Tax Assets
• Financial Assets
• Non Current Assets classified for sale in accordance with Ind AS 105
• Biological Assets related to agricultural activity
• Assets arising from the employee benefits.

Therefore, IAS 36 applies to (among other assets):

• Land
• Buildings
• Machinery and equipment
• Investment property carried at cost
• Intangible assets
• Goodwill
• Investments in subsidiaries, associates, and joint ventures carried at cost
• Assets carried at revalued amounts under IAS 16 and IAS 38

Impairment loss

Impairment Loss = Recoverable Value – Carrying Amount

Recoverable amount of an asset is less than it carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss.

If recoverable amount is more than carrying amount of an asset, then no impairment loss will be recognized. Recoverable amount shall be higher of the following:

• Fair Value less cost of disposal
• Value in use

Fair Value less cost of disposal

Costs of disposal are deducted while determining the fair value less cost of disposal. Examples of such costs are:

• Legal costs
• Stamp duty and similar taxes
• Costs of removing the assets
• Incremental costs for bringing the assets into the conditions for its sale
• Other costs

Value in use.

It shall be calculated on the following basis:

• Estimated Future Cash Flow
• Discount Rate

Indications of impairment [IAS 36.12]

External Sources:

• Market value declines
• Negative changes in technology, markets, economy, or laws
• Increases in market interest rates
• Net assets of the company higher than market capitalisation

Internal Sources:

• Obsolescence or physical damage
• Asset is idle, part of a restructuring or held for disposal
• Worse economic performance than expected
• For investments in subsidiaries, joint ventures or associates, the carrying amount is higher than the carrying amount of the investee’s assets, or a dividend exceeds the total comprehensive income of the investee.

A financial concept of capital is adopted by most entities in preparing their financial statements. Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity. Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on, for example, units of output per day.

The selection of the appropriate concept of capital by an entity should be based on the needs of the users of its financial statements. Thus, a financial concept of capital should be adopted if the users of financial statements are primarily concerned with the maintenance of nominal invested capital or the purchasing power of invested capital.

If, however, the main concern of users is with the operating capability of the entity, a physical concept of capital should be used. The concept chosen indicates the goal to be attained in determining profit, even though there may be some measurement difficulties in making the concept operational.

Concepts of capital maintenance and the determination of profit

The capital maintenance concept states that the business net worth is said to have been maintained if net assets at the end of the period are equal to or more than net assets at the beginning of the accounting period keeping aside any withdrawal during the said period. In other words, it states that the company must book net income only when it has recovered its capital or the cost, i.e., an adequate amount of capital has been maintained.

Financial capital maintenance. Under this concept a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.

All the inflows such as the sale of stock to shareholders, the addition of capital from owners, and payment of dividends to shareholders payment of bonus to shareholders are excluded. The two measurement units of financial capital maintenance theory are constant purchasing power units and nominal monetary units.

Financial capital maintenance is affected only by the entire amount of funds available at the starting of the year and the funds available at the end of the year. Therefore, this concept is least concerned with any other capital assets transaction undertaken during the financial year.

Physical capital maintenance. Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.

This method books profit only when the physical production capacity of the business at the end of the year is more than or equal to the physical production capacity of the business at the beginning of the year except any amount adjusted towards any amount paid to owners during the year or any amount raised by the owner. The main use of this method is for checking and maintaining the operational business capacity.

Capital Maintenance and Inflation

Inflation is the increase in any product/service cost or decrease in purchasing capacity. When the inflation rate is high, which has occurred in a short duration of time can affect the business’s ability to determine if it has achieved capital maintenance or not accurately. Due to inflation, the purchase price of assets gets increased accordingly, the value of the company’s net assets also increases. But the increase due to this inflation misrepresents the original value of the company’s assets.

Capital maintenance is distorted at the time of inflation as the pressure of inflation will increase the net assets even if their original value is unchanged. Due to this reason, at the time of inflammation, the companies must adjust the value of their assets to determine whether they have achieved capital maintenance. This is very important if the business operates in a hyperinflationary  economy.

Financial position

The financial position of an enterprise is primarily provided in a balance sheet. The main purpose of financial statements is to provide financial information to the users to assist them in their economic decisions. The financial statements basically present the financial information in such form that it is not only understandable but also useable. That is why financial statements present the financial effects of different business events that also includes business transactions.

In order to enhance the quality of information in financial statements, business transactions are grouped in different classes or categories on the basis of their economic characteristics. The broad classes or categories are called elements of financial statements.

The elements of a balance sheet or the elements that measure the financial position are as follows:

Asset: An asset is a resource:

• Controlled by the enterprise as a result of past events, and
• From which future economic benefits are expected to flow to the enterprise.

Liability: A liability is a present obligation of the enterprise arising from the past events, the settlement of which is expected to result in an outflow from the enterprise’ resources, i.e., assets.

Equity: Equity is the residual interest in the assets of the enterprise after deducting all the liabilities. Equity is also known as owner’s equity.

Financial performance

The financial performance of an enterprise is primarily provided in an income statement or profit and loss account. The elements of an income statement or the elements that measure the financial performance are as follows:

Income:

• Increases in economic benefit during an accounting period in the form of inflows or enhancements of assets, or
• Decrease of liabilities that result in increases in equity.

However, it does not include the contributions made by the equity participants, i.e., proprietor, partners and shareholders.

Expenses:

Expenses are:

• Decreases in economic benefits during an accounting period in the form of outflows, or
• Depletions of assets or incurrences of liabilities that result in decreases in equity.

Measurement of the Elements of Financial Statements

According to the Framework of IAS, the term ‘measurement’ has been defined in the following words:

“Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the balance sheet and income statement.”

There are a number of measurement basis that are employed in different degrees and in varying combinations in financial statements. They are listed below:

• Historical cost: Historical cost is the most common measurement basis adopted by enterprises in preparing their financial statements. This is usually combined with other measurement basis, such as current cost basis, realisable basis, etc., which are discussed later in this section. Under historical cost measurement basis, assets are originally recorded at their costs or purchasing price or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation.
• Current cost: Under current cost basis, assets are carried at the amount of cash that would have to be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash that would be required to settle the obligations currently.
• Realisable value: Assets are carried at the amount of cash that could currently be obtained by selling the asset in an orderly disposal. Liabilities are carried at their settlement values; that is, the undiscounted amount of cash expected to be paid or satisfy the liabilities in the normal course of business.
• Present value: Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business. Liabilities are carried at the presented discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business.