Acc510 Financial Reporting : Accounting Assessment Answers

1.TDM Ltd is a manufacturing business at Mudjimba on the Sunshine Coast. You are the accountant for the company and the following items/issues relate to the financial year ending 30^th June, 2016:

1. Photographs of the company’s founders and original buildings, which are of great sentimental and historical value only.
2. TDM Ltd is being sued for negligence by Zero Ltd and the legal advice is that it is likely the company will losethe case in court.
3. TDM Ltd is being sued for negligence by Badger Ltd and the legal advice is that it is likely the company will winthe case in court.
4. Obsolete plant and equipment is now (as at 30 June 2016) retired from use by the company.
5. TDM Ltd has received a donation of $20,000.

Required:

Explain how TDM Ltd should account for each of the above items. You must justify your answer by reference to the AASB Conceptual Framework’s definitions and recognition criteria for assets, liabilities, income and/or expenses as applicable. You must also state which General Ledger accounts are to be debited and credited.

2.On 1^st July, 2016, SC Airlines Ltd acquired a new aeroplane for a total cost of $10 million dollars. The following breakdown of the costs to build the aeroplane was given by the manufacturers.

All costs include installation and labour costs associated with the relevant part.

It is expected that the aircraft will be kept for 10 years and then sold. The main value of the aircraft at that stage will be the body and the engines. The expected selling price is $2.1 million, with the body and engines retaining the existing proportionate value.

Costs in relation to the aircraft over the next 10 years are expected to be as follows:

• Aircraft body: This requires an inspection every 2 years for cracks and wear and tear, at a cost of $10,000.
• Engines: Each engine has an expected life of 4 years before being sold for scrap. It is expected that the engines will be replaced in 2020 for $4.5 million and again in 2024 for $6 million. These engines are expected to incur annual maintenance costs of $300,000. The manufacturer has informed SC Airlines that a new prototype engine with an extra 10% capacity should be on the market in 2022, and that existing engines could be upgraded at a cost of $1 million.
• Fittings: Seats are replaced every 3 years. Expected replacement costs are $1.2 million in 2019 and $1.5 million in 2025. The repair of torn seats and faulty mechanisms is expected to cost $100,000 per annum. Carpets are replaced every 5 years. They will be replaced in 2022 at an expected cost of $65,000, but will not be replaced again before the aircraft is sold in 2026. Cleaning costs amount to $10,000 per annum. The electrical equipment (such as the TV) for each seat has an annual repair cost of $15,000. It is expected that, with the improvements in technology, the equipment will be totally replaced in 2022 by substantially better equipment at a cost of $350,000. The electrical equipment in the cockpit is tested frequently at an expected annual cost of $250,000. Major upgrades to the equipment are expected every 2 years at expected costs of $250,000 (in 2015), $300,000 (in 2017), $345,000 (in 2019), and $410,000 (in 2024). The upgrades will take into effect the expected changes in technology.
• Food preparation equipment: This incurs annual costs for repair and maintenance of $20,000. The equipment is expected to be totally replaced in 2022.

Required:

1. 1. Aircraft body;
   2. Engines;
   3. Fittings;
   4. Food preparation equipment.
   5. Where relevant consider/discuss issues such as:
   6. the treatment of the upgrades of cockpit equipment.
   7. accounting for inspections.

1. 1. Aircraft body;
   2. Engines;
   3. Fittings;
   4. Food preparation equipment;
   5. Total Expenses.

3.In the discussion by Upton (2001, 71) regarding the lives of intangible assets it is noted that the formula for Coca-Cola has grown more valuable over time, not less, and that Sir David Tweedie, former chairman of the IASB, jokes that the brand name of his favourite Scotch whisky is older than the United States of America — and, in Sir David’s view, the formula for Scotch whisky has contributed more to the sum of human happiness.

Required:

Outline the accounting treatment for brands under AASB 138/IAS 38, and discuss the difficulties for standard setters in allowing the recognition of all brands and formulas on statements of financial position.

4.Provisions are recognised as a liability in the statement of financial position whereas contingent liabilities are not recognised in the financial statements but disclosed in the notes to financial statements. Paragraph 12 of AASB 137/IAS 37 Provisions, Contingent Liabilities and Contingent Assets states that ‘in a general sense, all provisions are contingent because they are uncertain in timing or amount’.

Required:

1. Discuss possible reasons as to why provisions are recognised in the financial statements whilst contingent liabilities are not.
2. Determine whether the following items would be classified and recoded as liabilities or not (provide a brief explanation for your decision):
   1. Provision for long-service-leave;
   2. Dividends payable;
   3. Preference shares.

1.1Photographs of the founders of the company along with the buildings are original and possess sentiments for the existence of the company and also have the historical value. In accordance with the rules and regulations of the Corporations Act read with the accounting standards, no such asset shall be recorded and recognised in the books of accounts. It is because the sentimental value will never accrue the benefit to the company in any manner and therefore accordingly no asset shall be recorded and thus no general ledger account shall be debited (AASB, 2014)

2.In accordance with the accounting standard relating to Provisions, Contingent Liabilities and Contingent assets, the provisions and the contingent liability is required to be disclosed in the financial statements depending upon the likeliness of the future event that might be occurred or not. In the given case it is more likely that the company will definitely loose the case in Court being filed by the Zero Limited. Thus, the provision is required to be made. Accordingly the concerned expense account will be debited and General ledger under current liabilities will be credited (AASB, 2010).

3.In accordance with the accounting standard relating to Provisions, Contingent Liabilities and Contingent assets, the Contingent assets will be shown in the notes to the financial statements only when there is more likely that the company have the full chances of receiving the payment. Therefore, in accordance with the case study the chances of winning is high in case of suit filed from the Bedegr Limited and thus contingent assets shall be disclosed in the notes to the accounts of the financial statements of the company. Accordingly there will be no debit or credit of the general ledger accounts (AASB, 2010).

4.Retirement of an asset is referred to as the situation where the assets of the company is sold and disposed off. These retirements generally occurs when the assets become obsolete or unusable. In the given case, the company has retired the obsolete plant and equipment and accordingly following cases have arisen:

• When the assets are disposed off without any adequate consideration of the same and accordingly the asset account will be credited and the depreciation account will be debited.
• When the assets are disposed off with any adequate consideration of the same then the gain or loss will be arrived in the net terms. Thus, Bank or Cash Account is required to be debited with the amount of consideration, accumulated depreciation account will be debited with the depreciation charged till the date of disposal, and asset is credited with the book value and the difference will be either debited as Loss or credited as Gain. (IFRS, 2012).

5.The donation amounting to $20,000 /- will be shown as the Income in the statement of profit and loss for the year end.

1.a) Component method of depreciation entails that the depreciation will be charged on the basis of the each asset useful life rather than charging one amount as whole for whole of the group of assets. Following are the advantages of the component method of depreciation of $10 millions:- Cost of the asset is charged over the useful life of an asset and that too on components basis whereas in simple method the depreciation is charged in lump sum.- The other advantage is that the profit and loss statement is not affected directly whereas in simple method it affects the profit and loss statement directly.- The third advantage is that the users of the financial statements and the stakeholders of the company will find the financial statements more useful and worth. (Starova and Cerkamova, 2010).

b) The choice for subsequent recognition of the asset depends upon the two models – cost and revaluation model. The best model will be the cost model. It is because of the fact that the through costs model the cost of the asset will be derived using the purchase cost less the depreciation and the impairment and thus gives actual figure as compared to revaluation model in which the value keeps on fluctuating and may be either increase or decrease and thus there will be the question of reasonableness of the value. Second reason is that the application of revaluation model is more expensive and difficult as compared to Cost Model. Thus, the cost model is more appropriate than the revaluation model in case of components (HKAS, 2016)

.c) The method that has been selected for the depreciation is component method of depreciation and is allowed as per the provisions contained in AASB 116. The basis for selecting the method is based on the premise that the method gives the true and correct view of the financial statements of the company and more importantly the income statement does not get adversely affected in case of the replacement of an asset. Also the method is very easy to adopt and apply (Marton, 2012)

2.Aircraft body

In accordance with the provisions of the International Accounting Standard 16, the purchase prices of an asset shall be accounted for as an asset. Therefore, the purchase price of aircraft body of $3000000 shall be classified and accounted for as the Fixed Assets of the company. The costs of the inspection of $100000 will be charged to the statement of Profit and Loss (IATA, 2016).

Engines

In accordance with the provisions of the International Accounting Standard 16, the purchase prices of an asset shall be accounted for as an asset. Therefore, the purchase price of engines of $4000000 shall be classified and accounted for as the Fixed Assets of the company. Due to the adoption of the method of component depreciation, the cost incurred in replacement of an asset shall be added to the cost of the fixed asset of the company amounting to 4.5 million dollar and 6 million dollar in 2020 and 2024 respectively (AASB, 2016).

Fittings

In accordance with the provisions of the International Accounting Standard 16, the purchase prices of an asset shall be accounted for as an asset. Therefore, the purchase price of seats of $1000000 and $50000 of carpets shall be classified and accounted for as the Fixed Assets of the company. Due to the adoption of the method of component depreciation, the cost incurred in replacement of an asset shall be added to the cost of the fixed asset of the company amounting to 1.2 million dollar and 1.5 million dollar in 2019 and 2025 respectively. Similarly the replacement cost of Cockpit of $1500000 shall be treated as an asset of the company (AASB, 2016).

Food preparation equipment

In accordance with the provisions of the International Accounting Standard 16, the purchase prices of an asset shall be accounted for as an asset. Therefore, the purchase price of equipment of $250000 shall be classified and accounted for as the Fixed Assets of the company (AASB, 2016).

3.Aircraft body

Nil Expense will be recognized (AASB, 2016).

Engines

The amount of three lacs dollar shall be recognised as expense (AASB, 2016).

Fittings

$100000 and $10000 shall be recognised as expenses for repair of seats and cleaning of seats respectively (AASB, 2016)

Food preparation equipment

$20000 shall be recognised as an expense (AASB, 2016)

Total Expenses

3.In accordance with the provisions of the accounting standard 138 on the Brands, the accounting treatment of brands is done in two ways. In the first case where the brand is created out of its own i.e. is self constructed then the same shall not be accounted for in the books of accounts with the value because as per the accounting standard the same is valued at NIL. In the second case where the brand is emerged on account of the business combination, it is recognised at the value which is paid at the time of the purchase of the business. These are known as the acquired brands and these are amortised at the end of every year in accordance with the relevant accounting standard (AASB, 2015).

The main difficulty that has been faced by the standard setters has been in the case of Self constructed brands or self generated brands. It is because it is very cumbersome to specify which expense will become the part of the brand and which expense will not.

As the asset is recognised on the condition that it will flow the economic benefits in future. In case of Self constructed brands it will be again difficult to identify the amount of economic benefits that will occur in future (Paugam L, 2015)

4.Provisions are recognised in the financial statements of the company in the credit side of the Balance Sheet under the head current liabilities and Contingent liabilities are disclosed in the notes to accounts of financial statements. The reasons for difference in their recognition are:

References

IFRS Official Website, (2012), “IAS 37- Provisions, Contingent Liabilities and Contingent Assets” available at https://www.ifrs.org/IFRSs/Documents/English%20IAS%20and%20IFRS%20PDFs %202012/IAS%2037.pdf accessed on 06/06/2017

AASB Official Website, (2011), “Employees Benefits”, available at https://www.aasb.gov.au/admin/file/content105/c9/AASB119_09-11.pdf accessed on 06/06/2017