Asset Recognition & Accounting Standards
Added on 2020-02-24
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EXECUTIVE SUMMARYAccounting Standard is regarded as the backbone of the accounting books of every company.Australian Accounting Standard Board lays down the accounting standards which define theprocedures and the policies which shall be adopted for each and every item contained in thefinancial statements. The main aim of this report is to identify and discuss the various issues asdefined in the different case studies with reference to the provisions and the guidelines of theaccounting standards. The main accounting standards that have been dealt are AASB 108 –Accounting Policies, Changes in Accounting Estimates, AASB 116 - Property Plant andEquipment, AASB 137 – Provisions, Contingent Liabilities and Contingent Assets and AASB 138 –Intangible Assets. INTRODUCTIONFinancial statements of every company provide the insights about how the company is workingand performing. It informs about the financial position at the particular date and the financialperformance of the company over the period of time. Financial statements are prepared fromthe books of accounts which in turn are prepared on the basis of the provisions of the definedaccounting standards and the conceptual framework of accounting. Accounting standards,apart from making the accounting entries, help in the presentation of the financial statementsin the true and fair manner. The main objective of this report is to analyze the provisions of thedifferent accounting standards as required by the different case studies and describe how thecase study shall be solved and made available for further analysis. With these considerations,the report has been divided into different heading and sub headings wherever required.
QUESTION 1 - MAGNETA LIMITED – AASB 108 AND AASB 116Magneta Limited has purchase machinery on 1st of July 2014 at the cost of $200000 and sincethen the company has been following the cost model. But on 30th of June 2017, the companyhas decided to change the accounting policy from the cost model to the revaluation model. Inthe first section, the accounting treatment of the change in method is detailed and in thesecond section, the journal entries have been given.a)AASB 108 – ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATESThe Australian Accounting Standard 138 is related to the accounting policies that are adoptedby companies for their accounting purpose and the how the company makes the changes intheir accounting estimates. As per the paragraph 20 and 21 of the Australian accountingstandard number 108, following are the circumstances where standard permits voluntaryadoption of the standard (Australian Accounting Standard Board (AASB), 2011):-If the company makes the standard applied in their company before its application datethen it cannot be inferred that the company has made the standard applicable onvoluntary basis. -In case there is no Australian accounting standard on the particular subject, event or anytransaction, then if the company changes the accounting policy on the basis of thepronouncements made by the other bodies which set accounting standards then it canbe said that the company has changed the accounting policy on the voluntary basis. While changing the method of accounting, the revalued cost so identified crossed the cost thenthe amount shall be transferred to Revaluation Surplus and devaluation in future years aretransferred from the revaluation surplus. The assets are then valued at the revalued amountless the cost of depreciation and the impairment if any (Taplin, Tower and Hancock, 2002).
b)AASB 116 – PROPERTY PLANT AND EQUIPMENTFollowing are the Journal Entries in relation to Property, Plant and Equipment. Journal(In $)DateParticularsDebitCredit1/7/2014Machinery200000 Cash at Bank20000030/6/2015Depreciation25000 Accumulated Depreciation2500030/6/2015Accumulated Depreciation25000 Machinery2500030/06/2016Depreciation25000 Accumulated Depreciation2500030/06/2016Accumulated Depreciation25000 Machinery2500030/06/2017Revaluation Surplus15000 Machinery1500030/06/2017Depreciation22500 Accumulated Depreciation2250030/06/2017Accumulated Depreciation22500 Machinery2250030/06/2018Revaluation Surplus20500 Machinery2050030/06/2018Depreciation18400 Accumulated Depreciation1840030/06/2018Accumulated Depreciation18400 Machinery1840030/06/2019Depreciation19640 Accumulated Depreciation19640
30/06/2019Accumulated Depreciation19640 Machinery196401/7/2019Cash 60000Accumulated Depreciation19640 Profit on Sale of Machinery25680 Machinery53960(Australian Accounting Standard Board (AASB), 2010)QUESTION 2 - GREYMOUTH LIMITED – AASB 137The company is engaged in the area of the construction of chemical manufacturing plant. Theconstruction has been started since 1st of January 2014. The company has obtained the licenseand is required to dismantle the plant at the time of the expiry of the life of the license. Theaccounting treatment has been discussed under the following headings.a)AASB 137 – PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETSIn accordance with the provisions of the Australian Accounting Standard 137, provisions aredefined as the amount which has been kept aside by the management of the company so as toset off the same provision against the liability which may or will generate in the future. Thus, aprovision is defined as the amount which has kept as the reserve due to the probability that thefuture obligation will definitely occur (Wells, 2011.) As per the AASB 137, provision shall be recognized only when:-Liability has occurred in the present due to the acts made in the past by the company,-Due to which the company is liable to pay the amount as discussed for settlement(Australian Accounting Standard Board (AASB), 2010)In the given case of Greymouth Limited, the cost of decommissioning satisfies the definitioncriteria of the provision. It is in the sense that the cost of decommissioning has arisen at the
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