Accounting Justification and Relevant Issues for Defined Benefit Obligation

This assignment discusses the accounting implications of writing off an item immediately rather than amortising it later. It highlights that one-time items written-off have no value to investors and therefore their effect is discounted, which improves profitability in upcoming years. Additionally, immediate expenditures by managers during failures attract additional attention to business activities. The assignment also delves into the concept of Defined Benefit Obligation (DBO) and its recognition as a liability in financial statements according to AASB 119. The calculation of Net DBL is demonstrated through an example, which shows that it is equivalent to the deficit of fund.

ACC210 - Financial Accounting
Task 2 – Major Assignment
Semester 2 - 2017
Student Name:
Student ID #:
Campus:

Table of Contents
Question 1. Ex 3.1..................................................................................................................................3
Accounting Justification:...................................................................................................................3
Relevant Issues:.............................................................................................................................3
1. Determine subject of measurement..........................................................................................3
2. Determine valuation premise/method......................................................................................3
3. Determine market.....................................................................................................................3
4. Determine Valuation technique.................................................................................................3
Question 2. Ex 5.18................................................................................................................................5
Accounting Justification:...................................................................................................................5
Relevant Issues:................................................................................................................................5
1. Calculations & General Journal Entries 1/7/16 to 30/6/17:.......................................................5
2. Calculations & General Journal Entries 1/8/18:.........................................................................6
3. Calculations & General Journal Entries 30/6/18:.......................................................................6
Question 3. Ex 6.11................................................................................................................................7
Accounting Justification:................................................................................................................7
Relevant Issues:................................................................................................................................8
1. Explain accounting issues...........................................................................................................8
2. Differences Internally Generated vs Acquired...........................................................................8
3. Reasons for Reluctance..............................................................................................................8
Question 4. Ex 9.19................................................................................................................................9
Accounting Justification:................................................................................................................9
Relevant Issues:................................................................................................................................9
1. Deficit of Fund...........................................................................................................................9
2. Net Defined Benefit Liability......................................................................................................9
3. Net Interest................................................................................................................................9
4. Reconciliation............................................................................................................................9
5. Summary Journal.....................................................................................................................10
References...........................................................................................................................................11
Question 1. Ex 3.1
Accounting Justification:
Fair value refers to the amount received on selling of an asset or paid for transferring
the liability as per order between the market applications exactly on measurement date.
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The price will fluctuate on entry to exit for any property. The four criteria applicable are
subject of measurement, valuation premise, and determination of advantageous market
and Valuation technique (Ernst & Young, 2012).
International Accounting Standards Board (IASB) issues IFRS 13, incorporated by
AASB 13 measurement of fair Value. AASB 13 helps in defining the fair value, sets a single
standard framework and requires disclosures for measurement (AASB Standard, 2015).
Criteria taken into concern while measurement the fair value is the location along with the
condition of the assets and restrictions on use or sale of these assets are applicable or not
(AASB Standard, 2015).
Relevant Issues:
1. Determine subject of measurement
In the case study, factory and land are the two assets, which can be measured at a
fair value. Alternatively, factory and land can be considered at a single unit of asset for
assessment.
2. Determine valuation premise/method
Estimated value of Land is $1,000,000. Cost provided for demolishing the factory
existing on the land is $100,000. Hence, the property can be sold at $900,000 for residential
purposes. Here the land will be sold considering stand-alone basis and its fair value
(Sangiuolo & Seidman, 2008).
Factory and land can also be sold as a single unit. As per the mentioned data in the
case study, factory price can be depreciated from the construction value $520,000 to
combined value of land and factory at$260,000, which depicts depreciation of 50% till 30th
June 2017. Provided Cost of new factory is $780,000, therefore current replacement value
of the factory after depreciation will be approximately $ 390,000. Here, the factory can be
built on cheaper blocks but residential apartments will require better land blocks. Hence the
market for combined factory and land is not favourable based upon in-use valuation
premise (Crowe Horwath, 2012). Hence, the buyer or market participant will be forced to
buy the land along with factory at $ 900,000 considering its better use for residential
purpose.
3. Determine market
The market will offer maximum advantage, if the property is sold for residential purposes.
4. Determine Valuation technique
The property including the land has a value of $900,000, which is same for residential use,
but if the factory is separately sold, it will have no fair value.
There are two ways of determining the use of the property considering the case study.
I. Land’s value is calculated as a vacant block including factory at nil fair value for
residential use.
II. Land’s value is calculated, considering industrial purpose, where it will be included as
a continuing asset.
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Out of these two ways, one with the higher value will have the best and highest use. If the
first option is taken, then depreciation will not be calculated due to its nil fair value.
Considering the second option, land and factory need to be separately valued for
determining the depreciation.
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Question 2. Ex 5.18
Accounting Justification:
The conceptual framework in this section describes physical as well as financial
capital maintenance. The criteria start with either downwards or upward valuation..
Additionally, the non-current assets must be re-valued and the carried amount is considered
as book value. It is defined as a model, which helps in carrying out a re-valued fixed asset,
where amount carried and recorded in books are considered as a fair value(Deloitte Global
Services Limited, 2017; Deloitte Global Services Limited, 2017a)
Considering paragraph number 75 of AASB 138 and 31 of AASB 116, intangible asset is
carried upon as re-valued amount after recognition, where any accumulated losses due to
impairment and amortisation is deducted. Revaluation of previously recognized assets is
prohibited and initial recognition is completed at the re-valued amount excluding cost
(AASB, 2009; AASB, 2015).
Relevant Issues:
1. Calculations & General Journal Entries 1/7/16 to 30/6/17:
Date Account DR CR
1 July 2016 Machine A 100000
Machine B 60000
Cash 160000
30 June 2017 Depreciation exp. (Machine A)
(1/5 of 100000)
20000
Accumulated Depreciation (Machine A) 20000
Depreciation exp. (Machine B)
(1/3 of 60000)
20000
Accumulated Depreciation (Machine B) 20000
Accumulated depreciation (Machine A) 20000
Machine A
(carried amount written off)
20000
Machine A 4000
Gain on Revaluation of Machine A
(Increment from 80000 to 84000)
4000
Profit on revaluation of Machine A 4000
Surplus of Asset revaluation
(net gain after revaluation in equity)
4000
Accumulated Depreciation (Machine B) 20000
Machine B 20000
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(carried amount written off)
P&L A/C
(loss on revaluation in Machine B)
2000
Machine B
(revaluation as per fair value on 30 June
2017)
2000
2. Calculations & General Journal Entries 1/8/18:
Date Account DR CR
01 Jan 2018 Machine C 80000
Cash
(Acquisition of new machine C)
80000
Depreciation exp. (Machine B) 9500
Accumulated Depreciation (Machine B)
(38000*1/2 *1/2)
9500
Cash 29000
Sale of Machine B 29000
Cost price of machine B after
depreciation
28500
Accumulated Depreciation (Machine B) 9500
Machine B 38000
General Reserve 8000
Surplus of Asset revaluation (Machine A) 2000
Share Capital 10000
3. Calculations & General Journal Entries 30/6/18:
Date Account DR CR
01 Jan 2018 Machine C 80000
Cash
(Acquisition of new machine C)
80000
Depreciation exp. (Machine B) 9500
Accumulated Depreciation (Machine B)
(38000*1/2 *1/2)
9500
Cash 29000
Sale of Machine B 29000
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Cost price of machine B after
depreciation
28500
Accumulated Depreciation (Machine B) 9500
Machine B 38000
General Reserve 8000
Surplus of Asset revaluation (Machine A) 2000
Share Capital 10000
Date Account DR CR
30 June 2018 Depreciation exp. (Machine A) 21000
Accumulated Depreciation (Machine A)
(84000 * ¼)
21000
Depreciation exp. (Machine C) 10000
Accumulated Depreciation (Machine C)
(80000 * ¼ * 1/2)
10000
Accumulated Depreciation (Machine A) 21000
Machine A
(carried amount written off)
21000
Loss on Machine A after revaluation 2000
Machine A
(Value decreasing from $ 63000 to $
61000)
2000
Surplus on Asset revaluation (Machine A) 2000
Loss on Machine A after revaluation
(net loss after revaluation accumulated
to equity)
2000
Accumulated depreciation (Machine C) 10000
Machine C
(carried amount written off)
10000
P&L A/C (Total Revaluation Loss) 1500
Machine C
(fair value after revaluation on 30th June
2018)
1500
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Question 3. Ex 6.11
Accounting Justification:
Intangible assets fall under IAS 38, is defined as an identifiable and non-monetary
assets, having no physical essence to it. Criteria differentiate in intangible assets, where one
is identifiable and the others are internally generated (Krstia & Dor-Devia, 2010).
According to AASB, intangible assets are part of AASB 138: 9, where some of the
major criteria are identifiable and controlled further having economic benefits (AASB, 2015).
Relevant Issues:
1. Explain accounting issues
As per AASB, if there is no expenditure for internally generated assets, it will not
come under AASB 138:24. Measurement of intangible assets is done based on the cost
price. Any expenses incurred for the development of intangible assets is internally
generated and depends on its classification. In AASB 138:56, investigation should be
planned along with original research taking fresh knowledge under prospect. Research
findings provide development as per AASB 138:59. Research expenditure is taken into
account as incurred expenses under AASB 138: 54. Capitalization of development
expenditure depends on various criteria under 138: 57, which needs to be fulfilled. Brands,
mastheads and customer lists among others will not be given the recognition of intangibles
assets excluding patents. Additionally, customer relationship is neither identifiable nor can
be exchanged or sold.. However, it is necessary to amortise the internally generated
intangibles having indefinite life, if customer relationship is recognized (AASB, 2015; CPA
Australia, 2015).
2. Differences Internally Generated vs Acquired
Recognition of acquired intangibles is easier, as the transactions takes place in the
market, where it is measured as per fair value based on business combinations, whereas
internally generated ones are not identified. Fair value can be used for acquired intangible
assets for determining the overall cost. Moreover, the assets are internally generated and
excluded under 138: 63 and can be recognized as acquired ones. However, all the intangible
assets are treated similarly, once it gets identified (AASB, 2015; CPA Australia, 2015).
3. Reasons for Reluctance
Managers look forward to maximize the company profits. Hence, writing off R&D
investments guarantees future earnings from acquisitions, free of any liability prior to
amortization. Furthermore, return on equity and assets will provide better results in future,
if it is written off in the present rather than amortising it later. One-time items written-off
have no value according to the investors and therefore its effect is discounted, which
improves in profitability in the upcoming years. Moreover, immediate expenditures by the
managers will be forced during failures, which attract additional attention to the business
activities. Accounting processes incur costs for measuring the fair values, efficient running of
analytical models along with reviewing the measures through auditors (Wyatt & Frick, 2010;
Artsberg & Mehtiyeva, 2010).
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Question 4. Ex 9.19
Accounting Justification:
Defined Benefit Obligation or DBO is expected payments in the future, which is
required for settling employee service obligations in the current situations. Falling under
paragraph 64 of AASB 119, net DBL (asset) is required to be recognized for obtaining
benefits from post-employment in the financial statement (Henderson, Peirson, Herbohn &
Howieson, 2008; AASB, 2011).
Relevant Issues:
1. Deficit of Fund
Present Value of the defined benefit obligation as on 31st Dec 2016 = $ 23000000
Fair value of the plan assets as on 30th June 2016 = $ 20130000
Deficit of Fund as on 31st December 2016 = 23000000 – 20130000
= $ 2870000
2. Net Defined Benefit Liability
Net defined benefit liability will be same as deficit of fund, which is equivalent to $ 2870000
3. Net Interest
Present Value of the defined benefit obligation as on 1st Jan 2016 = 20000000
Past service cost = 2000000
Total = 22000000
Interest expense component of the defined benefit obligation = 22000000 * 10%
= 2200000
Interest income component of the defined benefit obligation = 19000000 * 10%
= 1900000
Net Interest = 2200000 – 1900000
= 300000
4. Reconciliation
Particulars Net Defined
Benefit
Liability ($)
Defined
Benefit
Obligation ($)
Plan
Assets($)
Balance as on 1st Jan 2016 1000000 20000000 19000000
Past service cost 2000000
Revised new balance 22000000
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Interest @ 10% 2200000 1900000
Current Service Cost 800000
Received contributions by fund 1000000
Paid Benefits by fund (2100000) (2100000)
Return on plan assets excepting evaluated
interest ( working done below)
330000
Actual loss calculated on defined benefit
obligation
100000
Balance as on 28700000 23000000 20130000
Working Note:
Return on Plan assets
Fair Value as on 31st Dec 2016 = $ 20130000
Less:
Opening Balance $ 19000000
Interest Income 1900000
Received Contributions 1000000
Paid Benefits (2100000) = $ 19800000
Return on plan assets excepting evaluated interest = $ 330000
5. Summary Journal
Working Note:
Particulars Profit or Loss Other Comprehensive Income (OCI) Bank Net defined benefit Liability (DBL)
Balance as on 1St Jan 2016 1000000 (Cr)
Past service Cost2000000 (Dr)
Service Cost800000 (Dr)
Net Interest300000 (Dr)
Paid Contributions to the fund 1000000 (Cr)
Profit on Planned Asset excepting evaluated interest 330000 (Cr)
Acquired Loss on defined benefit obligation 100000 (Cr)
Journal Entry3100000 (Dr) 230000 (Cr) 1000000 (Cr) 1870000 (Cr)
Balance as on 31st Dec 2016 2870000 (Cr)
a
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References
AASB Standard. (2015). Fair Value Measurement. Retrieved from
http://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf
AASB. (2009). Property, Plant and Equipment. Retrieved from
http://www.aasb.gov.au/admin/file/content105/c9/AASB116_07-04_COMPjun09_01-
09.pdf
AASB. (2011). Employee benefits. Retrieved from
http://www.aasb.gov.au/admin/file/content105/c9/AASB119_09-11.pdf
AASB. (2015). Intangible assets. Retrieved from
http://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-
18.pdf
Artsberg, K., & Mehtiyeva, N. (2010). A literature review on intangible assets. School of
Economics and Management
CPA Australia. (2015). IAS 38 intangible assets. Retrieved from
https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-
resources/reporting/reporting-ifrsfactsheet-intangible-assets.pdf?la=en
Crowe Horwath. (2012). Premise and standard of value. Retrieved from
https://crowehorwath.net/uploadedfiles/au/insights/insightsassets/premise%20and
%20standard%20of%20value.pdf
Deloitte Global Services Limited. (2017). Conceptual framework — Presentation and
disclosure; elements of financial statements; capital maintenance (IASB only).
Retrieved from https://www.iasplus.com/en/meeting-notes/iasb/2013/march/cf-2
Deloitte Global Services Limited. (2017a). IAS 16 — Property, plant and equipment.
Retrieved from https://www.iasplus.com/en/standards/ias/ias16
Ernst & Young. (2012). Fair value measurement. Retrieved from
http://www.ey.com/Publication/vwLUAssets/ey-applying-ifrs-fair-value-
measurement/$FILE/ey-applying-ifrs-fair-value-measurement.pdf
Henderson, S., Peirson, G., Herbohn, K. & Howieson, B. (2008). Issues in financial
accounting. England: Pearson Higher Education AU.
Krstia, J., & Dor-Devia, M. (2010). Financial reporting on intangible assets: Scope and
limitations. Facta universitatis. Series Economics and Organization, 7(3), 335-348.
Sangiuolo, R. & Seidman, L. F. (2008). Financial instruments: A comprehensive guide to
accounting and reporting. United States: CCH
Wyatt, A., & Frick, H. (2010). Accounting for investments in human capital: A review.
Australian Accounting Review, 20(3), 199-220.
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