Acc203-Financial Accounting Assessment Answers

Assume that you are a graduate accountant working for Ebony and Associates a public accounting firm situated at 248 Adelaide Street, Brisbane, QLD 4000. Your direct manager, Ms. Ellen Lyrial has asked you to draft a letter in response to an email received from a client – Mr. Martin Muller, the Managing Director of Muppets Ltd, raising a number of issues regarding his company – see the copy of the email on the next page.

Part A: This mark covers the technical content of your advice and the explanation on each of the issues, the calculations and the sources used.

Part B: This mark covers the generic skills of business letter writing; layout, clear meaning, structure and organisation, appropriate tone and grammar, spelling and punctuation etc.

Martin Muller

Managing Director, Muppets Ltd

Level 13, 248 Adelaide Street,

Brisbane QLD 4000

13 March 2018

Re: Accounting Issues: Year Ending 30 June 2018

Dear Ellen,

I just received your letter and have noted the accounting issues you have informed to me and for your information I have decided the various suggestions regarding the two issues for your accounting team.

Issue 1

For the first issue where the director has fixed the selling price of the assets and the production manager has rejected the idea of increasing the accumulated depreciation. The company must adapt the accounting standard of AASB 116 property, plant and Equipment that deals with account for plant and equipment and property (Kraal, Yapa & Joshi, 2015).

The principle value of the standard is to initially recognize the asset and treat the assets in two process of revaluation and cost (Tran, 2015). The standard considers most of the physical assets unless the asset is particularly covered by some other standard like the inventory. The assets are recognized when future economic benefits are associated with it (Steenkamp & Steenkamp, 2016). After the recognition process the assets value shall be revalued. In the given scenario the value of the assets are to be revalued must be decreased therefore it should be expensed unless it shows the reversal of a previous revaluation increase of the same asset in which case it should be debited to equity under Asset Surplus to the extent of the previous increase. The company may even adapt the accounting standard of AASB 138 that deals with account for Intangible assets.

The primary objective of this standard is to account the technique in which the intangible assets or the non-monetary assets without physical existence are recognized, measured both upon and post initial recognition and disclosed within financial statements (Hu, Percy, & Yao, 2015). The standard outlines the treatment for both identifiable and non-identifiable intangible assets, as well as those generated internally and externally. In the given scenario of the value of the asset that is excess that amounts to $100000 can disclosed as intangible asset as per AAAB 138 (Loyeung & Matolcsy, 2015).

Issue 2

For the given issue where the directors are worried that the tax computation at 30% is accurate or not, the company must adopt the standard AASB 112 that allows the reporting entity to account for income taxes, particularly the differences between tax law and financial reporting. The concept of temporary difference has been discussed in this regard, which is the difference of the carrying amount of an asset or liability and its tax base (Bugeja & Loyeung, 2015).

 The calculation of the tax is done in accordance with the tax rates in Australia this is currently 30%. The Current and deferred tax should be recognized as income or expense and included in profit or loss unless it relates to a business combination or the transaction is recognized directly to equity (Hanlon, Navissi & Soepriyanto, 2014). For calculating the Current tax of the assets or the liabilities for the current and prior periods, it shall be evaluated at the expected amount that are to be paid to recover from the authorities of taxation, using the tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. In this case while measuring the Deferred tax liabilities and the assets shall be measured at the tax rates that are anticipated to apply to the period the liability is settled or the asset is realized, on the basis of tax laws and tax rates that have been enacted or substantively enacted by the end of the reporting period (Russell, 2017).

The various disclosures of the assets includes all items relating to tax should be disclosed separately in the statements (Yao, Percy & Hu, 2015). Major items of tax expense should be disclosed, including:

• Expenses of the tax assets
• The prior period adjustments
• The deferred tax amount of expenses or income that are related to the origination and reversal of temporary differences
• The Expense amount of deferred tax that are related to changes in tax rates or the imposition of new taxes
• The benefit amount arising from a prior unrecognized tax loss, tax credit or temporary difference of a prior period (Bond, Govendir & Wells, 2016)
• The reversal of a prior write-down or write-down, of a deferred tax asset
• The tax income amount or expenditure that are related to alterations in the accounting policies and error correction

Then comes the items that need separate disclosure:

− The total of the items that are reported directly in equity

− tax relating to each component of other comprehensive income

− A tax reconciliation profit to accounting profit or a description of the differences

 −Changes in the Tax rate

− The other details and the amount of deductible temporary differences, unused tax credits and unused tax losses

 − Temporary differences that are associated with the investments in subsidiaries branches and associates (Tran & Zhu, 2017)

 − Details of deferred tax assets.

According to the AASB 112 the tax assessment is done for the previous year at the beginning of the covering period beginning on or after 1^st January 2018 (Bodle, et al., 2018). Earlier application is permitted for periods beginning after 24 July 2014 but before 1 January 2018. If an entity applies this Standard for financial statements covering periods beginning before 1 January 2018, the entity shall disclose that fact.

Kindly note the solutions to the issue and implement the same in the process of accounting.

Regards

Martin Muller

Email: [email protected]

References

Bodle, K., Brimble, M., Weaven, S., Frazer, L., & Blue, L. (2018). Critical success factors in managing sustainable Indigenous businesses in Australia. Pacific Accounting Review, 30(1), 35-51.

Bond, D., Govendir, B., & Wells, P. (2016). An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1), 259-288.

Bugeja, M., & Loyeung, A. (2015). What drives the allocation of the purchase price to goodwill?. Journal of Contemporary Accounting & Economics, 11(3), 245-261.

Hanlon, D., Navissi, F., & Soepriyanto, G. (2014). The value relevance of deferred tax attributed to asset revaluations. Journal of Contemporary Accounting & Economics, 10(2), 87-99.

Hu, F., Percy, M., & Yao, D. (2015). Asset revaluations and earnings management: Evidence from Australian companies. Corporate Ownership and Control, 13(1), 930-939.

Kraal, D., Yapa, P. W. S., & Joshi, M. (2015). The Adoption of International Accounting Standard (IAS) 12 Income Taxes: Convergence or Divergence with Local Accounting Standards in Selected ASEAN Countries?.

Loyeung, A., & Matolcsy, Z. (2015). CFO's accounting talent, compensation and turnover. Accounting & Finance, 55(4), 1105-1134.

Russell, M. (2017). Management incentives to recognise intangible assets. Accounting & Finance, 57(S1), 211-234.

Steenkamp, N., & Steenkamp, S. (2016). AASB 138: catalyst for managerial decisions reducing R&D spending?. Journal of Financial Reporting and Accounting, 14(1), 116-130.

Tran, A. (2015). Can Taxable Income Be Estimated from Financial Reports of Listed Companies in Australia. Austl. Tax F., 30, 569.

Tran, A., & Zhu, Y. H. (2017). The impact of adopting IFRS on corporate ETR and book-tax income gap. In Australian Tax Forum (Vol. 32, No. 4, p. 757). Tax Institute.

Yao, D. F. T., Percy, M., & Hu, F. (2015). Fair value accounting for non-current assets and audit fees: Evidence from Australian companies. Journal of Contemporary Accounting & Economics, 11(1), 31-45