ACCT19062 Intermediate Financial Accounting And Australian Accounting
Questions:
Question 1
(a) How is an asset defined in the AASB’s Framework for the Preparation and Presentation of Financial Statements? What is your understanding of this definition: how would you explain an asset to someone who has no accounting knowledge?
(b) What, according to the AASB’s Framework for the Preparation and Presentation of Financial Statements, are the criteria that must be satisfied before an asset can be recognised in the Statement of Financial Position? What is your understanding of these criteria: how would you explain them to someone who has no accounting knowledge?
(c) Apply the definition and recognition criteria from (a) and (b) and discuss why or why not Blue Light Security Ltd would recognise (1) the security patrol officers (2) the guard dogs (3) the Master Licence and (4) the vehicles as assets in its Statement of Financial Position.
Prepare the Statement of profit or loss and other comprehensive income for Gemini Holdings Ltd for the year ended 30 June 2016 in accordance with the requirements of AASB 101 Presentation of Financial Statements.
Explain the adjustment that must be made in the Statement of profit or loss and other comprehensive income as a consequence the gain on the sale of the financial assets being recognised in profit or loss. Why is an adjustment necessary?
Question 2
(a) Prepare the Statement of profit or loss and other comprehensive income for Gemini Holdings Ltd for the year ended 30 June 2016 in accordance with the requirements of AASB 101 Presentation of Financial Statements.
(b) Explain the adjustment that must be made in the Statement of profit or loss and other comprehensive income as a consequence the gain on the sale of the financial assets being recognised in profit or loss. Why is an adjustment necessary?
Question 3
(a) How is fair value defined in AASB 13 Fair Value Measurement?
(b) Briefly explain the steps involved in measuring the fair value of a non-financial asset. How does this differ from the measurement of financial assets, liabilities and an entity’s own equity instruments?
(c) Explain the difference between ‘unit of account’ and ‘valuation premise’.
(d) What is meant by a non-financial asset’s ‘highest and best use’? What is the role of ‘highest and best use’ in measuring fair value?
What is the difference between ‘principal market’ and most advantageous market’? What is the role of these two types of markets in measuring fair value?
What is the ‘fair value hierarchy’ and what is its role in the measurement of fair value?
Answers:
Answer 1
(a). Definition of an asset is defined under paragraph 49(a) of AASB’s framework (2016), which states that any resource which is controlled by a business organization from past transactions and which expects cost-effective benefits from the asset in future that would flow to the business organization. Assets of an organization shall be recorded in company’s financial statements if it fulfills the recognition criterion of AASB’s framework.
Assets are of two types: Tangible Assets are in physical form having physical characteristics and Intangible Assets which do not have any physical form.
In simple words, we can say anything valuable to a business organization or to an individual which helps in generating monetary benefits in future is an asset.
(b). The recognition criteria of an asset in Financial statements of an organization is prescribed under paragraph 83 of AASB’s Framework of Preparation and Presentation of financial Statements (2016), which are as follows:
- The inflow of future economic benefits associated with an item is probable
- The value or cost of an item can be calculated with reliability.
In simple words, after meeting the definition of an asset, it shall be recognized in Balance sheet only if following criteria are met by an organization. Criteria are:
- Asset is recognized only if it increases the value of the organization or benefit’s the organization’s operations
- Asset shall be presented in financial Statements only if their value shall be measured objectively.
In other words, asset shall not be recorded in Statement of Financial position when there is insufficient certainty about the generation of future economic benefits beyond the current accounting period (AASB framework, 2016).
(c). Thus after understanding the definition of an asset (as per Para 49(a)) and recognition Criteria of an asset in Balance Sheet (as per Para 83) from AASB framework (2016). Following adjustments needs to be done in Statement of Financial Position are:
- In this question, Blue light Security Ltd. hired 30 security patrol officers comprises of 10 full time employees at a salary of $57,000 p.a. and 20 casual employees at a award rate of $22 per hour.
Hardworking and motivated workforce contributes to the growth and development of a business organization thus employees are the most valuable asset of an organization but entity has no control over its employees because they may quit an organization any day. Therefore, there is uncertainty of generating future economic benefits from workforce beyond its current accounting period and hence,
Security patrol officers shall not be recognized in Statement of financial position.
- In this Question, Blue Light Security Ltd. purchased 15 guard dogs comprises of 10 German Shepherds and 5 Dobermans from K9 Kennels Ltd. for $20,000.
Dogs are the best and most effective tool to prevent threats at the organization. They are used for many assignments and also to accompany their officers on security patrols. Thus, dogs are assets for an organization but they cannot be recognized in Statement of financial position because their value cannot be measured with reliability.
- In this question, Blue Light Security Ltd. obtain a master license from NSW Police for $15,000 to specify number of persons and types of security services to be provided by license holder that is Blue Light Security Ltd. Master license is valid for 5 years and can be renewed after 5 years.
In this case, NSW police authorizes the Blue Light Security Ltd. to provide certain category of security services with limited access authorization. Therefore, we can conclude that License meets the definition of an asset because it will generate future economic benefits to the license holder from its usage and Hence, Master license shall be recognized in Statement of financial position (AASB-138, 2015).
- In this question, Blue Light Security Ltd. entered into a 5years lease agreement with Thornton Motors Ltd for 10 vehicles comprising 8 specialized vehicles for security patrol officers and for guard dogs and 2 sedans for administrative purposes for $60,000.
In this case, vehicles are held on lease comes under the heading ‘asset’ and shall be recorded in Balance sheet of Blue Light Security Ltd since the company has control over economic benefits for 5 years that would be derived from use of vehicles (AASB-16, 2016).
Answer 2
(a). Preparation of Statement of profit or loss and other comprehensive income as per AASB 101- Presentation of financial statements of Gemini Holdings Ltd. for the year ended 30 June 2016.
Statement of Profit or loss and other comprehensive income
Gemini Holdings Ltd.
For the year ended 30 June 2016 ($’000)
|
Particulars |
Amount |
|
Sales Revenue |
540,000 |
|
Less: Cost of goods sold |
310,000 |
|
Gross Profit |
230,000 |
|
Add: Incomes attributable to P & L Account | |
|
Gain on sale of financial assets |
4,000 |
|
Other Income |
16,000 |
|
Total Incomes |
250,000 |
|
Less: Expenses attributable to P & L account | |
|
Occupancy Expenses |
45,000 |
|
Distribution Expenses |
55,000 |
|
Administrative Expenses |
50,000 |
|
Loss from discontinued operations |
5,000 |
|
Other Operating Expenses |
22,500 |
|
Total Expenses |
177,500 |
|
Profit before Interest and Tax (PBIT) |
72,500 |
|
Finance Costs (Interest expense) |
27,500 |
|
Profit before Tax (PBT) |
45,000 |
|
Tax Expense |
15,000 |
|
Profit |
30,000 |
Statement of Other Comprehensive Income Gemini Holdings Ltd.
|
Particulars |
Amount |
|
Profit |
30,000 |
|
(a) Items will be reclassified | |
|
Add: Unrealized gains on Cash Flow Hedges |
13,000 |
|
Less: Exchange differences on translation of foreign operations |
6,500 |
|
Less: Income Tax Expense |
6,000 |
|
Total of (a) |
500 |
|
(a) Items may not be reclassified | |
|
Add: Gain on revaluation of property, plant and equipment |
20,000 |
|
Less: Remeasurements of defined benefit superannuation plans |
7,500 |
|
Less: Income Tax Expense |
8,000 |
|
Total of (b) |
4,500 |
|
Total comprehensive Income |
35,000 |
(Source: AASB -101).
Working Notes:
- All items of incomes and expenses of Gemini Holdings Ltd for 30 June 2016 shall be recorded in Profit or loss Statement unless other method is specified by the AASB.
- Reclassification adjustments will be recorded in statement of other comprehensive income.
- ‘Presentation of financial statements’ is described under AASB-101 (2015).
- As per AASB-121 (2012), is for ‘The Effects of changes in Foreign Exchange Rates’ where adjustments related to gains and losses from foreign operations are given.
- AASB-139 (2010), explains about ‘Financial Instruments: Recognition and measurement’.
- AASB-119 (2011), explains about ‘Employee Benefits’ which includes adjustments related to remeasurements of defined benefit plans.
- Adjustments relating to ‘Property, plant and equipment’ are given under AASB- 116 (2010).
- ‘Intangible Assets’ which provide adjustments related to changes in revaluation surplus are described under AASB-138 of AASB’s framework (2015).
(b). Gain on sale of Financial Assets is recorded separately under the head ‘non-operating gains and losses’ in credit side of profit or loss and other comprehensive income Statement because these transactions are not related to principal activities of the company.
Adjustment is necessary in profit or loss Statement because to give information to the stakeholders of the entity about economic benefit that has generated from sale of financial assets.
Thus fair value is a market based measurements and not on entity specific measurements.
Answer 3
|
Unit of Account |
Valuation Premise |
|
Unit of Account described under Paragraph 32 of AASB-13. |
Valuation premise is concept for non-financial assets is described under Paragraph B3 of 33 of AASB-13. |
|
In valuing Non-Financial Asset as per AASB-13, Unit of Account identifies what is being measured that is to be reported in Financial Statement and also determines the appropriate level or aggregation or disaggregation for presentation and disclosure purposes either on an individual basis or on a group basis. |
Valuation premise is a valuation concept under AASB-13, which clearly mentioned that how can a Non-Financial asset achieve its maximum value equivalent to its market participants either on a stand-alone basis or on a consolidation basis. |
(AASB-13, 2015).
Role: The assets which are physically possible (that is it considers the physical appearance of an asset), which are legitimately acceptable (that is it considers any lawful restriction on the use of an asset) and financially feasible (that is it considers whether assets which are physically possible and lawfully allowable produces sufficient returns) is considered for its usage.
Thus, entity’s current usage of non-financial asset is Highest and best use unless otherwise specified.
- Difference between Principal market and Most advantageous market is that:
(b).Principal market measures fair value by not including transaction costs whereas most advantageous market includes transaction costs in measuring fair value.
(C) Role: As per AASB-13 framework (2016), fair value of principal market applies irrespective of volume and level of activity (in other words, transaction costs would not be included in fair value measurement) and in absence of principal market, then most advantageous market would apply by an entity (i.e. by including transaction costs in measuring fair value).
- Under Paragraph 61-66 of AASB framework (2016), prescribes the three valuation techniques of measuring fair value:
- Market Approach:In market approach, fair value measurement of similar or identical assets is based on market expectations.
- Income Approach: In income approach, measurement of fair value is based on future amounts that are discounted to a single present amount.
- Cost Approach:Cost approach technique requires immediate amount in order to change the service potential of an asset. Cost Approach is also known as current replacement cost.
Thus, valuation technique shall be applied consistently to measure fair value unless and until appropriate circumstances takes place.
- Fair value hierarchy is included in AASB-13 Framework, 2016 to increase comparability or consistency in fair value measurement. This is categorizing into 3 levels given under paragraph 76-90 of AASB-13 framework to provide insight about reliability of the fair value measurement to users of financial statements.
Level 1: In level 1 input, Unadjusted quoted prices are taken as the best appropriate evidence of fair value for directly observable assets and liabilities.
Level 2: In level 2 hierarchy, quoted prices are different from those of level 1 hierarchy and they are directly or indirectly recognizable for assets or liabilities.
Level 3: These inputs are not visible for assets or liabilities.
References
Australian Government. (2010). Financial Instruments: Recognition and measurement. Australia: Australian Accounting Standards Board.
Australian Government. (2010). Property, plant and equipment. Australia: Australian Accounting Standards Board.
Australian Government. (2011). Employee Benefits. Australia: Australian Accounting Standards Board.
Australian Government. (2012). The effects of changes in foreign exchange rates. Australia: Australian Accounting Standards Board.
Australian Government. (2015). Conceptual Framework for financial reporting. Australia: Australian Accounting Standards Board.
Australian Government. (2015). Fair Value Measurement. Australia: Australian Accounting Standards Board.
Australian Government. (2015). Intangible Assets. Australia: Australian Accounting Standards Board.
Australian Government. (2015). Presentation of financial statements. Australia: Australian Accounting Standards Board.
Australian Government. (2016). Framework for the preparation and presentation of financial statement. Australia: Australian Accounting Standards Board.
Australian Government. (2016). Leases. Australia: Australian Accounting Standards Board.
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