AASB Standards and their Application in Accounting for Himalaya Ltd

This article discusses the application of AASB standards in accounting for Himalaya Ltd. It covers topics such as cash flow reporting, provisions, contributions, property, plant and equipment, intangible assets, and employee benefits.

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By student name
Professor
University
Date: 25 April 2018.
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Contents
ASSESSMENT PART A.............................................................................................................................3
ASSESSMENT PART B.............................................................................................................................5
ASSESSMENT PART C.............................................................................................................................6
ASSESSMENT PART D.............................................................................................................................7
References...................................................................................................................................................9
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Assessment Question 1
1 a) AASB 107, Statement of Cash Flows, deals with the reporting of cash flow from different
activities. These activities are operating, investing and financing. The operating activities are
those activities, which are directly related to the business operation. The cash flow from
operating activity is the result from the events and transactions that determines the profit or
loss (Bizfluent, 2017).
In the given case, cash amounting to $ 20,000 was stolen from the safe of Himalaya Ltd. The
cash theft will be treated as expense, recorded in the income and loss statement, and
correspondingly reduced from the respective asset. The cash theft will result in the reduction of
asset and the same will be reflected in the cash flow statement. As per AASB 107, the cash
payments are included in the operative activities and so will be the cash loss, as it is regarded as
it will be regarded as business loss (Alexander, 2016).
1 b) AASB 137, Provisions, Contingent Liabilities and Contingent Assets, deals with the
recognition and disclosure of provisions, contingent assets and liabilities. As mentioned in the
standards, provision is a present obligation, which is settled through outflow of resources
because of a past event, where the amount of liability is uncertain, and so is the timing. A
provision is required to be created in respect of a liability when the three conditions are
satisfied, it is a present obligation whether legal or constructive with the probability of outflow
of resources and the amount of liability can be reliably estimated. The company is required to
disclose the additional provisions created during the year along with the increases in the
existing provisions (Dumay & Baard, 2017).
In the given case, the court has ordered Himalaya Ltd to repair the environmental damage
caused by it to the local driver system. The accountant does not have any idea of the cost of
repair work; however, the same can be estimated reliably. As per the provisions of AASB 137,
Himalaya Ltd is required to calculate the amount of provision in regard of the cost of repair
work since all the three conditions are satisfied. The same will be treated under liability.
1 c) AASB 1004, Contributions, deals with the measurement, recognition disclosure of
contributions. Contributions are non-reciprocal transfers to the entity. Contributions can be in
the form of assets, grants and donations (Appelbaum, et al., 2018). Cash donations received are
treated as incomes.
In the given case, Himalaya Ltd has received donation of $ 10,000. As per the provision of the
above-mentioned standard, the same is a contribution. It is assumed voluntary contribution
and will be treated as income.
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Assessment Question 2
2) AASB 116, Property, Plant and Equipment deals with the recognition, de-recognition, carrying
amount and all other related disclosures in respect of property, plant and equipment. As per
the provisions of AASB 116 the cost of any item of property, plant and equipment will be
considered as an asset in the books only if there is a probability of flow of future economic
benefits from the items to the entity and the same can be quantified. The standard also
provides for the expenses, which incurred in respect of the assets are required to be capitalized
and which are not (Das, 2017). Capital expenses are those expenses which when incurred in
respect of an asset increases the future economic benefits from that asset. Al the costs incurred
in respect of acquiring an asset is capitalized in the cost of the asset. This standard provides for
the elements, which shall form part of the cost of an asset, these are:
• The acquisition cost of the asset along with the import duties and all other taxes, which
are non-refundable after reducing the amount of trade discounts and other rebates;
• The expenses, which are related directly related to bringing the asset to the location,
and condition which is essential for the asset’s capability of operating in a way as is required by
the management, like site preparation, assembly costs, etc. (Félix, 2017).
Therefore as per the above discussion, the treatment of the various costs and expenses
incurred in relation to the asset are as follows:
2.1) Labour and travel costs for managers to inspect possible machines and negotiation for it is
not directly related to the acquisition of the machine since the same was incurred prior to
acquiring the machine.
2.2) Freight and insurance cost incurred will be capitalized into the cost of the machine since
the same is directly attributable to its acquisition.
2.3) Cost of renovation of a factory section for the machine’s installation is considered as site
preparation and hence should be capitalized (Gooley, 2016).
2.4) Cost of cooling equipment to assist in the efficient operation of the new machine is
handling cost and hence will be capitalized.
2.5) Cost of repairing the back door damaged by the installation of the new machine should not
be capitalized since the same is not incurred in respect of the installation of machine.
2.6) Training costs of workers who will use the machine are employee costs arising directly from
the acquisition of the new machine and hence the same should be capitalized.
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Assessment Question 3
3) AASB 138, Intangible Assets, deals with the treatment of intangible assets in the books and
related disclosures. Intangible assets are those assets, which do not have any physical
existence, and they can be either self-generated or purchased, like goodwill, patent, copyright,
etc. According to this standard, an intangible asset is recognized in the books only if future
economic benefits flow from the asset to the entity. Intangible assets, which are generated
internally, are recorded at the total amount incurred during the three phases of asset
generation, i.e., the total amount incurred in research phase and development phase. The
assets, which are purchased, are recorded at the acquisition cost (Sirois, et al., 2018). The
standard also provides for the amortization of intangible assets. The intangible assets with finite
lives are amortized over the useful lives of the assets and the intangible assets which have
infinite lives are not amortized and every year the circumstances, to determine whether the
conditions supporting the infinite lives of the assets are satisfied or not, are reviewed. If
circumstances do not exist to support the indefinite lives of the intangibles assets then the
same will be impaired as per AASB 136.
In the given case, Harry Ltd has copyrights during 2017, which comes under the definition of
intangible assets, the cost of which is $ 10,500. The estimated life of the above self-generated
copy rights is 5 years. Now according to the provisions of AASB 138, the copyrights will be
recorded at $ 10.500 in the books, it has been assumed that the same is the total cost of
generation of the asset. Since, copyrights have useful life of 5 years, it will be amortized every
year for 5 years, and the amortization cost will be $ 2,100 every year for five years ($ 10,500/5).
Harry Ltd purchased the second copyright at a price of $ 12,000 from the Oxford University
Press on 1st December 2017. This copyright was for the book, which analyses the aboriginal
history in Western Australia prior to 2000, and the life of the copyright of this book is estimated
to be indefinite (Carlin, 2011). Now as per the provisions of AASB 138 as discussed above, the
intangible assets, which are acquired from, outside is recorded at the cost of acquisition.
Therefore, the copyright purchased from Oxford University Press should be recorded at $
12,000 in the books. It is also mentioned that the life of this copyright is estimated to be
infinite, so as per the provisions of the above mentioned standard of accounting there will not
be any amortization in the cost of the copyright. However, Harry Ltd must review every year
that the conditions supporting the indefinite life of the copyright are satisfied. Otherwise, the
copyright should be impaired as per the provisions of AASB 136 (Andiola, et al., 2018).
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Assessment Question 4
4) The given question could be answered with reference to AASB 119, Employee Benefits. The
Accounting Standard 119, Employee Benefits, deals with recognition, measurement and
disclosures related to benefits provided to the employees during and post-employment
benefits under defined contribution plans and defined benefit plans. These benefits include
short-term benefits like wages, salaries, etc.; post-employment benefits like retirement
benefits, etc.; long-term benefits like long service leaves or sabbatical leaves, etc.; and
termination benefits. Employee benefits for the key managerial personnel disclosures are
required under AASB 124 and as per AASB 101, Presentation of Financial Statements; the
disclosures of employee benefit expenses are required. For other long-term benefits, this
standard requires a simplified method of accounting. Where the measure of employee benefits
depend upon the length of service, then there is an obligation on the part of the entity
(Heminway, 2017).
In the given case Harry Ltd provides other long term employee benefit to its employees, i.e.,
long service leaves after the employee has provided ten years of continuous service and the
accountant is of the view that the same should not be considered as liability since the ten years
of service is not yet over. In the view of the provisions of the above standard of accounting,
where the benefit is dependent on the length of service provided, then there arises an
obligation on the part of the entity. Therefore, the contention of the accountant is not correct
and the service leave should be disclosed as liability in the books (Kim, et al., 2017).
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References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp.
411-431.
Andiola, L., Lambert, T. & Lynch, E., 2018. Sprandel, Inc.: Electronic Workpapers, Audit Documentation,
and Closing Review Notes in the Audit of Accounts Receivable. Issues in Accounting Education, 33(2), pp.
43-55.
Appelbaum, D., Kogan, A. & Vasarhelyi, M., 2018. Analytical procedures in external auditing: A
comprehensive literature survey and framework for external audit analytics.. Journal of Accounting
Literature, 40(1), pp. 83-101.
Bizfluent, 2017. Advantages & Disadvantages of Internal Control. [Online]
Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html
[Accessed 07 december 2017].
Carlin, T. a. F. N., 2011. Goodwill impairment testing under IFRS: a false impossible shore. Pacific
Accounting Review, 23(3), pp. 368-392.
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science
Studies, 2(2), pp. 10-17.
Dumay, J. & Baard, V., 2017. An introduction to interventionist research in accounting.. The Routledge
Companion to Qualitative Accounting Research Methods, p. 265.
Félix, M., 2017. A study on the expected impact of IFRS 17 on the transparency of financial statements of
insurance companies. MASTER THESIS, pp. 1-69.
Gooley, J., 2016. Principles of Australian Contract Law. Australia: Lexis Nexis.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and
Organic Documents. SSRN, pp. 1-35.
Kim, M., Schmidgall, R. & Damitio, J., 2017. Key Managerial Accounting Skills for Lodging Industry
Managers: The Third Phase of a Repeated Cross-Sectional Study. International Journal of Hospitality &
Tourism Administration, , 18(1), pp. 23-40.
Sirois, L., Bédard, J. & Bera, P., 2018. The informational value of key audit matters in the auditor's report:
evidence from an Eye-tracking study.. Accounting Horizons., 32(2), pp. 141-162.
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