Acct19061 Advanced Financial Accounting And Assessment Answers

Answers

a). Outline – Company’s Main Business Activities and Revenue Generation

b). Investments in Other Companies

No the company has not invested in any company which has resulted in no significance influence or the case where the entity is controlled jointly or direct or indirect control on the entity in which investment has been done. This is as per the note number 16 of the financial statements and also the heading of Current Assets and Non Current assets under the Balance Sheet. The company wholly owned subsidiaries and the same has been listed in the Note number 17 of the Financial Statements.

c) Financial Instrument

As per the Australian Accounting Standard number 132 on the Presentation of the Financial Instruments, it is defined as the contract which results in the generation of financial asset of the one company and simultaneously it will result in the financial liability of the other company. And it is defined as the asset which consists of cash, an equity of the other company, a right which is contractual and gives the company the right to have the cash or the other financial asset from the other company or the right to receive the financial asset or the liability in exchange with other financial asset or the other financial liability and right which again is contractual but which will be or may be settled in the company’s own equity. The last one contractual right includes the financial derivatives or the non derivative instruments (AASB, 132).

In the given case of Nearmap Limited, since the company has not invested in the equity of another company and thus it cannot be said whether the investment made by the company satisfies the definition of the financial instrument or not. 

d) Derivative Financial Instrument

Financial Instruments as per AASB 132 includes the accounts receivables, accounts payables and the equity component and the derivative financial instruments includes the financial options, futures, forwards, swaps including swapping in the currency fluctuation and the swapping in the interest rates. Derivatives are also in the scope of this standard. It is defined as the asset which derives its asset with the value of underlying asset. As per Note number 9 of the financial statements, the company has hedged its foreign currency exposure through the derivative and the non derivative financial instruments and has valued the same on the basis of the value which it will fetch in the market as on that particular date and transfer the hedging currency gain or loss to the statement showing Other Comprehensive Income which is prepared immediately after the preparation of statement of profit and loss.

In the given case company has not invested in any entity which does not give them the right of having the significant influence or control over the other company and hence the question of discussing whether the investment made by the company includes the derivative financial instrument is or not.

e) Recognition of the Investment

As per paragraph 4 of the AASB 9, the company may value its investment as the financial instrument at the value which it will fetch in the market through the statement of Income account. With this the company will have the higher transparency and the company will have no confusion as to how the assets or the liabilities in the nature of financial instruments are valued. The financial asset and the financial liability are recognized in the Balance Sheet as on that date and it is done only when the company has the legal and enforceable right to become the party to the contract relating to the investment. As per paragraph number 33 of the AASB 9, at every subsequent year the investment will be valued at the fair value less or add the changes if any occurs during the period. The change so made will be transferred to the statement of Income. In this way, investment made by the company is valued initially and then subsequently (AASB 9 and AASB 139).

The method so adopted has been named as the equity method and are applicable in case of the joint ventures and the associates also. The same way of recognition has been listed in the International Reporting Financial Standards and the same has been mentioned in the Australian Accounting Standards (IAS 28, 2011).

In the given case as the company has made the investment only in the wholly owned subsidiary companies and hence the need for initial and subsequent recognition of the investments will not arise in any manner.

Particulars 30-06-2016

Total Income Tax Expense that has been reported by the company is $2442000.

b. Whenever the tax expense is calculated then it includes two expenses. One is the current income tax and the other one is the deferred tax expense. Both are disclosed in the statement of Income and the respective cumulative balances are disclosed in the Balance Sheet.

Current Tax Expense

This expense is the income tax which is required to be valued on the net profit of the company at the rate of 30% and is deducted from the profit of the company and is transferred to the Balance Sheet of the company prepared as on that date. In accordance with the Note number seven of the financial statements of the company, current tax expense or the current tax benefit is measured at the amount which the company expects and measures accordingly to be recovered from the taxation authorities or to be released in favor of the taxation authorities (AASB,112). The income tax on the current year income is calculated at the rates which are made available for the companies to be computed as on the year end. In the given case the current income tax has been calculated at rate of 30% which is defined as by the Australian Taxation Authorities.

Deferred Income Tax Expense

As per Australian Accounting Standard 112 on Income Taxes, company assess its profitability to the best judgment in the manner that future profits will be available with the company against which the company will be able to set off its unutilized tax losses and the temporary differences which are deductible in the near future periods. Deferred income tax is calculated on the differences which are not permanent in nature and that are available at the reporting date on which the financial statements are prepared (AASB,112). The temporary differences are those which can be easily reversed in the near future. For example depreciation, preliminary expenses, etc. On these temporary differences, the tax is calculated at the rate of 30% which is prevailing at the time of the reporting date and whether it results to the deferred tax expense or the deferred tax income depends on the results of the temporary differences.

c. Deferred Tax

Following are the amounts of deferred tax assets and deferred tax liabilities which have been reported in their Balance Sheet forming part of the Annual Report for the year ending 30^th of June 2016:

• Assets $2624000
• Liabilities $2525000

Both have detailed in the Note number 7 of the Annual report of the company.

Yes both the figures pertaining to the assets and liabilities in the nature of deferred tax have been shown separately under the proper head of the Balance Sheet which is Non Current Assets and Non Current Liabilities as on that date respectively. Both the amounts have not been set off rather have been disclosed separately and that too has been done as per the provisions of the accounting standard 112 issued by the Australian Accounting Standard Board.

As per paragraph number 74 of the Australian accounting standard 112, the company can set off both the figures of the assets and the liabilities if following conditions are satisfied:

• The company is legally allowed to adjust its tax assets against the tax liabilities as on that date and
• The assets and liabilities which are deferred in nature so computed have been regulated by the same taxation authorities on:
• The similar company which is taxable
• The different companies which are taxable and which intends either to adjust the tax assets and liabilities simultaneously or on the one hand recognizes the current tax assets and settles the liabilities in the future periods in which the amount of the tax assets or liabilities so created are liable for set off or settled in the future periods.

Thus, in this manner both the tax assets and tax liabilities are reported in the statement of financial position as period ending as on that date.

d. Income Tax Reconciliation

Yes, the company has provided the reconciliation of the company’s profit before tax to the income tax expense. On profit before tax the company has reported the tax of $1408000 in Note number 7 of the financial statements. The amount of Income Tax expense that has been reported is $2442000 for the year ending 30^th of June 2016.

Following are the reasons for differences in the aforesaid amounts:

• Research and Development Grant amounting to $266000.
• Effect of higher tax rate in the USA, being one of operating segments of the company, amounting to $600000.
• Share based payment expense amounting to negative $532000
• Entertainment expense amounting to negative $79000.
• Other non deductible expenses amounting to $31000
• The amount of current year losses for which the company has not recognized any tax assets in the nature of deferred tax in the financial statements. These are equivalent of negative 4320000.
• The amount of $184000 which has been overprovided in the prior year. 

e. Yes the figure of income tax detailed by company is not similar to the amount which is required to be released to the Australian Taxation department. As per the Note 7 of financial statements the entity has paid the tax of $1408000 but the company has booked the income tax benefit of $2442000 in the balance sheet. In this manner the income tax reported by the company in the annual report and the income tax released by the company is totally different.

References

AASB, (2017), “AASB101 Presentation of Financial Statements” available on https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-04_COMPsep05_01-06.pdf accessed on 19/08/2017.

AASB, (2007), “AASB132 Presentation of Financial Instruments” available on https://www.aasb.gov.au/admin/file/content105/c9/AASB132_07-04_COMPapr07_07-07.pdf accessed on 19/08/2017.

AASB, (2010), “AASB9 Financial Instruments” available on https://www.aasb.gov.au/admin/file/content105/c9/AASB9_12-10.pdf accessed on 19/08/2017.

AASB, (2013), “AASB139 Financial Instruments : Recognition and Measurement” available on https://www.aasb.gov.au/admin/file/content105/c9/AASB139_07-04_COMPoct10_01-11.pdf accessed on 19/08/2017.

AASB, (2012), “AASB112 Income Taxes” available on https://www.aasb.gov.au/admin/file/content105/c9/AASB112_07-04_COMPsep11_07-12.pdf accessed on 19/08/2017.

Company official Website ,available on https://www.nearmap.com.au/about accessed on 20/08/2017

Fridson M, (2015), “Financial Statement Analysis”, available on https://books.google.co.in/books?id=Iha4OzyPN48C&printsec=frontcover&dq=online+free+books+on+presentation+of+financial+statements&hl=en&sa=X&redir_esc=y#v=onepage&q&f=false accessed on 16/08/2017.

Hove M, (2016), “Consolidated Financial Statements – An International Perspective”, available on https://books.google.co.in/books?id=BcgtnlDHsXcC&printsec=frontcover&dq=online+free+books+on+consolidation+of+financial+statements&hl=en&sa=X&redir_esc=y#v=onepage&q&f=false accessed on 16/08/2017.

IAS Official Website, (2011), “IAS 28 – Investments in Associates and Joint Ventures” available at https://www.iasplus.com/en/standards/ias/ias28-2011 accessed on 17/08/2017