Superannuation Plan Accounting Adjustments

This assignment focuses on the accounting treatment of a defined superannuation plan. It presents a journal entry where expenses and contributions are transferred from Bank A/c Cr. to Net Superannuation Defined Plan Liability. A note provides details about income gains from plan assets, specifically highlighting an actuarial loss gain ($230,000) resulting from a difference between the actuarial gain ($330,000) and actuarial loss ($100,000). The assignment also includes relevant references for further research.

ACC510 - Financial Reporting
Task 2 – Major Assignment
Semester 2 - 2017
Student Name:
Student ID #:
Campus:

TABLE OF CONTENTS
Question 1.Case Study 3.1.........................................................................................................3
Accounting Justification.........................................................................................................3
Relevant Issues.......................................................................................................................3
Highest & Best Use................................................................................................................3
Application to aged care home...............................................................................................3
Two possible uses...................................................................................................................3
Question- 2.................................................................................................................................4
Accounting Justification:........................................................................................................4
Relevant Issues:......................................................................................................................4
Leisure........................................................................................................................................5
General Journal Entries 31/12/16:..........................................................................................5
Impairment Test 31/12/17......................................................................................................6
Leisure........................................................................................................................................6
Question 3.Case Study 6.1.........................................................................................................7
Accounting Justification:........................................................................................................7
Relevant Issues:......................................................................................................................7
Difference between two phases:.............................................................................................7
Decision / Conclusion / Reasons and Justification:............................................................8
Question 4. Ex 9.19....................................................................................................................8
1. Deficit of Fund...................................................................................................................8
2. Net Defined Benefit Liability.............................................................................................8
3. Net Interest.........................................................................................................................8
4. Reconciliation.....................................................................................................................9
5. Summary Journal..............................................................................................................10
References................................................................................................................................11
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QUESTION 1.CASE STUDY 3.1
Accounting Justification
The main objective of AASB 13 is to specify the meaning of fair value and provide
single standard guidelines for determining fair value. Further, guidelines relating to
disclosures of fair value measurement have also been provided in AASB 13. In accordance
with provisions specified in this standard fair value is the amount which is received or
transferred to a liability in an ordered transaction between market participants (Liang and
Riedl, 2013).
Relevant Issues
For the purpose of valuing financial instruments, financial institutions use fair value
method as part of everyday business. However, in situations of valuation of property, plant
and equipment, the results are very confusing and have changing valuations. Apart this is also
some inconsistencies in the way business units use methods of fair value for an accounting of
tangible assets, which poses a problem of inconsistency.
1. Highest & Best Use
It is important to determine whether the highest and best use of a particular asset
varies from its current use at the date in which the asset is measured. The highest and the
best use of the non-financial asset is considered a market participant is able to generate better
economic benefits than the current uses; or by selling the asset to another participant that can
use the asset better, which is legal and physically possible and financially feasible. In
accordance with the study of Palea (2014), the physical possibility considers the tangible
characteristics of the asset which is to be taken into account for pricing.
2. Application to aged care home
AASB 13 directs the accountants to use asset’s market price considering the highest and
best use of an asset for determination of fair value. However, this poses a problem for not-
for-profit units. If any of the assets of aged care home sold to a participant for building flats
(which will be it's highest and best use), the figure from the valuation will be inflated as there
would be no buyer for the asset used for altruistic purposes. Thus, the fair value may not
reflect the actual value. Thus, the problem of inflated value makes valuation more complex
and requires a lot of judgement on the part of accountants (Hu, Percy and Yao, 2015).
3. Two possible uses
The application of AASB 13 to aged care homes assumes that the entity’s asset (For
Example Flats) is transferred to a market participant. This creates an outstanding liability on
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the part of a market participant, and the entity's assets would remain outstanding and the
market participant takes on the rights associated with the asset. The fair value for the not for
profit organization is calculated by classifying the assets under the fair value hierarchy
provided by AAS 13.
QUESTION- 2 EX 7.14
Accounting Justification:
AASB 136 states that an asset is impaired when the recoverable amount of the asset
on disposal is less than the carrying amount. Para 7 to 17 of the standard provides the
provision relating to the identification of asset which might be impaired. In accordance with
the provision specified in AASB 136, every entity must conduct an impairment test every
year to assess whether there is any indication of the asset being impaired. (Australian
Accounting Standards Board, 2014).
Relevant Issues:
Impairment Test 31/12/16 (Amount in $)
Calculations:
Total carried value of Time = 1244
Recoverable value of Time = 1044
Total Impairment loss = 200
TIME-
Assets Carrying Amount New Carried Value Impairment
Plant 850
(1500-650)
695 155
Patents 240 220 20
Inventory 54 54 0
Receivables 75 75 0
Goodwill 25 0 25
Total 1244 1044 200
Impairment loss has been adjusted against goodwill to it whole carrying value i.e. $
25; further, the fair value of a patent has been provided i.e. $ 220; thus the difference of
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carrying and fair value $ 20 ($240- $220) has been charged as interest against the patent. The
remaining impairment loss i.e. $ 155 has been allocated to Plant as no fair value of same has
been provided.
LEISURE
1. Impairment Test 31/12/16
Amount in $
A. Calculations:
Impairment loss = Carried Value – Recoverable Value (Capalbo, 2013)
Total carried value of Time = 1002
Recoverable value of Time = 990
Total Impairment loss = 12
Assets Carrying Amount Recoverable amount Impairment
Plant (1200-375)
825
825 0
Patents - -
Inventories
75 75 0
Receivables 82 82 0
Goodwill 20 8 12
Total 1002 998 12
Impairment loss has been adjusted against existing book value of goodwill i.e. $20
and thus the new carrying value is $8 ($20-$12).
B. General Journal Entries 31/12/16:
Journal Entry
Date Particular Amount in
$
Amount in
$
31-12-2016 Impairment Loss A/c Dr 200
Patent A/c Cr. 20
Goodwill A/c Cr. 25
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Accumulated depreciation impairment loss-
Plant Cr.
155
(Being impairment loss recorded in books of
accounts relating to Time Division)
31-12-2016 Impairment Loss A/c Dr 12
Goodwill A/c Cr. 12
(Being impairment loss recorded in books of
accounts relating to Leisure Division)
2. Impairment Test 31/12/17
(Amount in $)
A. Calculations:
Total carried value of asset of Time = 1322
Recoverable value of Time = 1502
Total Impairment loss = -
LEISURE
Impairment Test 31/12/17 (Amount in $)
Calculations:
Total carried value of asset of Leisure = 1433
Recoverable value of Time = 1520
Total Impairment loss = 0.00
B. General Journal Entries 31/12/17
In accordance with provision specified relating to CGU in AASB 136; Para 104 to
108 in case- value of the individual asset is not ascertainable in an appropriate manner than
entity can use the value of CGU to which asset belongs. In the year 2017; as recoverable
value is higher than the value at which assets are being carried down which specifies that
there is no impairment during the year ended on 31/12/17 in case of Time and Leisure
division. Thus no journal entry of impairment will be done.
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QUESTION 3.CASE STUDY 6.1
Accounting Justification:
AASB 138 (Intangible Assets) specifies the provision relating to accounting and
recognizing of an intangible asset. Para 48 to 67 specifies provision regarding internally
generated goodwill and the expense done during research phase and development phase. It
has been provided in the standard that the development phase of an internal project must be
recognized only if the following conditions are fulfilled:
 The development of the intangible asset must be technically feasible so that it
is available for further use or sale.
 There must be a complete intention of completing the intangible asset and
using or selling it (Hitz, 2013).
 The intangible asset is capable of being used.
 The intangible asset generates economic benefits in future.
 Adequate technical, financial and other resources are available to complete the
development of intangible asset.
 The expenditure attributable to intangible of being assets is capable of being
measured during its development phase (Ahmed and Duellman, 2013).
Relevant Issues:
Any expenditure made on the asset before the above criteria are satisfied or the asset
is fully developed, it cannot be recognised as the cost of the asset and remains expensed in
the period in which they were incurred. Thus, the expenditures recognised for an intangible
asset which is internally generated does not comprise of the entire cost. In addition to this
problem, IAS 38 also forbids costs capitalisation of some intangible assets that are internally
generated, in spite of them meeting the criteria of development mentioned above.
1. Difference between two phases:
The research phase is the planned investigation undertaken with the intention of gaining
scientific or technical knowledge and understanding. The research phase relates to an in-
process development attained separately by an entity or in a business combination which is
recognised as an intangible asset and the asset is incurred only after the completion of that
project(André, Dionysiou and Tsalavoutas, 2016). The development phase is the application
of the findings of the research or other knowledge planned or designed for the creation of an
asset.
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2. Accounting for Research & Development:
The requirement to capitalize costs associated with development phase after specified
criteria are met under the accounting provisions of internally generated assets could
considerably affect profit and have long-term effects for the organization. As per AASB 138,
an entity is required to assess the useful life of its intangible assets (R&D). If the assets have
definite life amortisation applies on the estimated useful life of the asset. 20 years is
rebuttable assumption of the maximum amortisation period. Those assets which have an
indefinite life are not amortised but are assessed annually for adjustments of impairment
(Dinh and et.al. 2015).
3. Decision / Conclusion / Reasons and Justification:
AAAB 138 is applicable on those companies which have medium to long-term contracts of
research and development and also to those companies that operate in the technology sector.
Such companies may need to consider that the provisions are followed with a view to
upgrading the level of data in order to give the information required by AASB.
QUESTION 4. EX 9.19
Accounting Justification
AASB 119 deals with the provision relating to employee benefits. Para 57 of the specified
standard provides steps to be involved in defined benefit plans by an organization. The steps
comprise ascertainment of deficit or surplus; ascertaining the amount of net defined benefit
liability. Further, the amount relating to current service cost, net interest on defined benefit
liability and past service gain is to be recognized in profit and loss account. Lastly, net
defined benefit liability is ascertained which comprises actuarial gain or losses, return on plan
asset (as per Para 130) and change in asset ceiling (as per Para 64).
1. Deficit of Fund
Particular Amount In $
000
Value of defined benefit obligation as on 31-12-16 23000
Fair value of defined benefit obligation as on 31-12-16 (20130)
Deficit 2870
2. Net Defined Benefit Liability
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The value of net defined liability is same as deficit (Basu and Andrews, 2014) i.e. $2870000
3. Net Interest
Cost of past service – Interest Income (FIPA and et.al. 2017)
= $2200000-$1900000
= $300000
Calculation
Particular Amount In $
000
Present Value of defined benefit obligation as on 1st January 20000
Cost of past service
= 22000*10%
2200
Fair value of plan assets as on 1st January 19000
Interest Income
=19000*10%
1900
4. Reconciliation
Net defined
benefit
liability
$
Defined
benefit
obligation
$
Plan assets
$
Balance 1 January 2016 1000000 20000000 19000000
Past service cost 20000000
Revised balance 22000000 19000000
Interest @ 10% 2200000 1900000
Current service cost 800000
Contributions received by fund 1000000
Benefits paid by fund (2100000) (2100000)
Return on plan assets excluding interest
recognised *
330000
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Actuarial loss on remeasurement of DBO 100000
Balance 31 December 2016 2870000 2300000 20130000
* Calculation relating to return on plan assets
Fair value of plan assets as on 31-12-16 $2013000
Opening Balance (19000000)
Interest Income (1900000)
Contribution Received (1000000)
Benefit paid 2100000 ($ 19800000)
Return on plan excluding interest $330000
5. Summary Journal
Profit or Loss
(Dr.)
Other
comprehensive
Income
Bank Net DBL(A)
Balance 1 January 2016 1000000
Past service cost 2000000
Net interest 300000
Service cost 800000
Contributions paid to the
fund
1000000
Gain on plan assets (ex.
interest)
330000
Actuarial loss on DBO (100000)
Journal entry 3100000 230000 1000000 1870000
Balance 31 December
2016
2870000
Journal Entry
Date Particular Amount in
$
Amount in
$
30-06-2013 Superannuation Expense A/c Dr 3100000
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Income relating to superannuation A/c Cr
(Note 1)
230000
Bank A/c Cr. 1000000
Net Superannuation defined plan liability 1870000
(Being expenses and contribution relating to
defined superannuation plan transferred.)
Note 1
Income
Gain on plan assets – actuarial loss
$330000-$100000
$230000
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REFERENCES
Books and Journal
Ahmed, A.S. &Duellman, S., 2013. Managerial overconfidence and accounting
conservatism. Journal of Accounting Research, 51(1), Pp.1-30.
André, P., Dionysiou, D. &Tsalavoutas, I., 2016. Mandated disclosures of IAS 36 and IAS
38: value relevance and analysts’ forecasts. Working paper. HEC, Lausanne.
Basu, A. &Andrews, S. 2014. Asset allocation policy, returns and expenses of superannuation
funds: recent evidence based on default options. Australian Economic Review, 47(1), Pp.63-77.
Capalbo, F., 2013. Impairment of Assets.
Collings, S., Impairment of Assets. Interpretation and Application of UK GAAP: For Accounting Periods
Commencing On or After 1 January 2015, Pp.241-259.
Dinh, T., Eierle, B., Schultze, W. &Steeger, L., 2015. Research and development,
uncertainty, and analysts’ forecasts: The case of IAS 38. Journal of International Financial
Management & Accounting, 26(3). Pp.257-293.
FIPA, M.T.G., Stylianou, M.V., Carey, P., Cooper, B., Tanewski, G. &Mroczkowski, N.,
2017. Accounting of Defined benefit plan. IPA-Deakin SME Research Centre.
Hitz, J.M., 2013. Capitalize or expense? Recent evidence on the accounting for intangible
assets under IAS 38 by STOXX 200
firms. ZeitschriftfürInternationaleRechnungslegungIRZ, 5, Pp.319-324.
Hu, F., Percy, M. &Yao, D., 2015. Asset revaluations and earnings management: Evidence
from Australian companies. Corporate Ownership and Control, 13(1), Pp.930-939.
International Accounting Standards Board, 2014. International accounting standards IAS 36,
Impairment of assets, and IAS 38, Intangible assets. IASCF Publications Dept.
Liang, L. &Riedl, E.J., 2013. The effect of fair value versus historical cost reporting model
on analyst forecast accuracy. The Accounting Review, 89(3), Pp.1151-1177.
Palea, V., 2014. Fair value accounting and its usefulness to financial statement users. Journal
of Financial Reporting and Accounting, 12(2), Pp.102-116.
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