Accounting Standards and Reporting Issues for Cherry Ltd.

This report discusses the accounting standards and reporting issues for Cherry Ltd. with reference to three case studies. It covers the AASB framework and the ideal course of accounting as per regulatory frameworks. The report provides detailed analysis and examples of the issues related to reporting of assets, acquisition of assets, and investment in staff development. It also discusses the fair value measurement and the nature of assets that need to be valued at cost or fair value. The report concludes with appropriate disclosures that need to be given in this regard.

1
By student name
Professor
University
Date: 07 January 2018.
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Executive Summary
In the given assignment, a report needs to be prepared for the senior management of the company
named Cherry Ltd. where in three case studies have been mentioned. Here, the contention as per AASB
framework and what is the ideal course of accounting as per the regulatory frameworks needs to be
mentioned. The report has been prepared in lines with the stated accounting standards issued by
Australian Accounting Board as per the AASB Framework. The same has been prepared with references
and examples as to what is the exact issue and what should be the correct treatment of the same in the
books of accounts.
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Contents
Issue 1: Reporting of the cherry picker acquired from Sweets Ltd..............................................................4
Issue 2: Reporting of the ICSA award for which investment was made in staff development.....................6
Issue 3: Reporting of the Assets at fair value rather than cost....................................................................8
References.................................................................................................................................................11
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Issue 1: Reporting of the cherry picker acquired from Sweets Ltd.
The given company Cherry Ltd. has a number of subsidiaries and is a large organization. The asset in the
form of cherry picker has been reported at the cost of $ 80000 however the same was given to the
company by another company named Sweets Limited when the operations of the company were closed
last year. The management now wants to know as to why the same has been reported at $ 80000.
As per the qualitative characteristics of financial statements, Para 53, an asset can only be recognised in
the balance sheet only when it is having future economic benefit to the entity, the entity has control
over it and directly or indirectly and it will lead to the flow of cash and cash equivalents (Alexander,
2016). It should also be a productive asset in the normal course of operations of the business. In the
given case, the company has not acquired the given cherry picker in the normal course of operation, it
was acquired from the other company when it was closing down the operations. Generally, such an
asset which is acquired from a different company when the same is closing down its operations, then
the same should be recorded at cost or the fair value of the asset at which the same was transferred to
the transferee company by the transferor company (Boccia & Leonardi, 2016). It can also be reported as
the single asset in the form of the brand or goodwill in case of the business combination as is stated in
the AASB 3, Para 13, which deals on accounting for business combinations. On the acquisition date, the
acquirer will access the business conditions and recognise the identifiable assets and liabilities as per the
contractual terms with the transferee of the assets and liabilities and then make the classification based
on accounting policies and other pertinent conditions. It should either be reported at the fair value or
the proportionate amount at which the acquisition of the total business was being made. This is being
mentioned in Para 19 of AASB 3 (Belton, 2017).
With respect to the disclosure requirements in the financial statements, the acquisition of the assets
from a different company should be reported in the current accounting period including the terms of the
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acquisition. Furthermore, it should also disclose all the relevant facts of the acquisition which enables
the users of the financial statements to take decisions and understands the effect of the acquisition at
multiple places in the financial statements (Choy, 2018).
IN the given scenario, it needs to be assessed by the management and a proper report needs to be
submitted to the senior management which will have the detailed calculation on the acquisition values
of the asset. How the same is being reported at $ 80000, whether the same is the cost or the fair value
of the asset as on the date of the acquisition or it is just the consideration for the asset which is being
paid to Sweets limited (Chron, 2017). Furthermore, it also needs to be assessed whether the asset is to
be revalued based on the business conditions or it will be reported at $ 80000. It has not been
mentioned in the question that Sweets limited was one of its subsidiaries or any other company not
having associated with the parent company Cherry Limited. In case Sweet Limited is a subsidiary of
Cherry Limited, the cherry picker can be reported as income from discontinued operations rather than
reporting of the same as an asset in the books. This is also been covered in AASB 101, Para 15 and 16
which deals with Presentation of the Financial Statements (Dichev, 2017).
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Issue 2: Reporting of the ICSA award for which investment was made in
staff development
In the given case, the company made a huge investment in the development of its staff in order to win
an award named International Customer Service Award which would have bought great and bid deals to
the company. The decision was taken 2 years back by the company and now the question raised by the
management is why the ICSA Award is not appearing in Balance sheet and is not being reported in the
financial statements (Erik & Jan, 2017).
As per the accounting standards, asset can only be recorded in the books of accounts and the balance
sheet when certain economic benefit is expected to be arising out of it and consideration has been paid
and it is within the control of the entity. The other significant condition is that the same should be
reliably measured and the asset must possess a cost. This is as per SAC 3, Qualitative characteristics of
Financial Information (Dumay & Baard, 2017).
In the given case, the company has not incurred any cost directly for earning the award, the cost has
been expended on training of the individuals rather than earning the award. Furthermore, the award in
itself does not qualify to be recognised as an asset in the balance sheet on the virtue of its own as it
does not entail any economic benefit for the business on its own. It is rather the impact of the award
that helps the business in earning the big contracts and great deals (Jefferson, 2017). As per the
accounting standards, internally developed intangible assets with a fixed life or duration, can be
reported in the financial statements, provided it has economic benefits in the future and the company
has done research and development on the same and any new asset has been developed in the process.
But in the given case, such a thing cannot be established directly as the investment has been made in
the training and development of the employees of the company and the same is generally charged to
profit and loss account of the company as the training and development expenses or the employee
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welfare expenses. AASB 101 also talks about offsetting of the assets and liabilities and the incomes and
the expenses which is not allowed in the normal course of the business and the company should report
the assets and liabilities separately and uniquely (Félix, 2017).
Thus, in the given case, it can be concluded that the company would not be able to reliably measure the
award which is being given to the company in lieu of the efforts and training and development of its
workforce. It is thus, free of cost to the company. Moreover, the probable economic benefits in the
future do not directly accrue from the award and hence it does not qualify the definition of the asset.
The expense which has been incurred by the company to invest heavily in the development of the staff
satisfies the definition of the revenue expenditure rather than the capital expenditure and therefore, it
should be charged off in profit and loss account rather than finding a place in the balance sheet
(Goldmann, 2016). This also justifies the fact that the contention of the senior management of Cherry
Limited that the ISCA Award is one of the biggest assets of the company and thereby should be reported
in the financial statements is also wrong and the reporting is correctly done (Gooley, 2016).
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Issue 3: Reporting of the Assets at fair value rather than cost
In the given case, the company has given a note in the financial statements that assets are being
reported at cost currently in the financial statements. The auditors of the company have mentioned that
the assets should be reported at fair value in the financials rather than the cost in order to have better
presentation and reporting and in order to meet the framework of Accounting Standards Board but the
company has a view that reporting of assets at cost better meets the qualitative characteristics of the
good financial information for the end users (Visinescu, et al., 2017).
As per the SAC 3 on Qualitative characteristics of Financial information, para 16-26 talks on the reliability
of the financial information, which is ensured by reporting the values of the assets in the best possible
manner. AASB 13 dealing with Fair value measurement and AASB 116 dealing in property, plant and
equipment talks on the recognition of the assets in the financial statements (Tysiac, 2017). It states that
the Property, Plant and Equipment should be recognised as an asset when it is having probable
economic benefit in the future and it will flow to the entity and that its cost can be measured reliably. All
the initial costs which help the asset to bring to bring to the workable condition such that the economic
benefits can be derived out of it like the transportation expenses, installation expenses should all be
capitalised with the value of the assets initially (Sithole, et al., 2017). All the assets then need to be
assessed for impairment periodically as and when the situation arises as per AASB 136 which deals with
impairment on assets. IN terms of the subsequent costs that are being incurred on the asset the same
needs to be charged to profit and loss account unless a major repair work has been done on the asset,
which will help in improving the life of the assets or will increase the economic benefits derived out of it.
With respect to final recognition in the financial statements at the year end, the assets particularly the
property plant and equipment needs to be recognised at cost in the Balance sheet less the accumulated
depreciation and the impairment costs. This has been explained in Para 30 of AASB 116. For a non-profit
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making entity, all such assets are required to be valued at the fair value, as on the date of acquisition,
irrespective of whether it has been acquired at no cost or at a nominal cost (Saeidi, 2012). These costs
will include the initial cost of purchase, the cost directly attributable to it and the cost of dismantling and
reorganising the assets to its workable condition. The examples of costs directly attributable include the
cost of the site preparation, handling and delivery costs, installation and assembling costs, professional
fees, etc. The above concept of measurement of the value of the asset at cost needs to be applied to the
assets like land, building, plant and machinery, inventories, etc.
However, in case of the financial assets and all the other non-financial assets, the valuation should be
done as per the fair valuation approach (Knechel & Salterio, 2016). The use of fair value comes when an
asset is being acquired or being sold to a different entity. In such a circumstance, the asset should
always be valued at the fair value. Fair value is the rational estimate of the value of the asset or liability
which it would fetch or has to be incurred respectively when being sold in the market. It should be
measured without any biasness at the arm’s length price in case of related parties. It takes into account
factors like distribution costs, production cost, replacement cost, risks in the market and others factors
like cost of capital and return on capital (Meroño-Cerdán, et al., 2017). IT is one of the standard
concepts being used in accounting particularly in the case of mergers and acquisitions and reporting of
the derivative assets. This concept takes into account the ability of one market participant to generate
the maximum economic benefit out of the asset’s best and highest use by selling it to another market
participant who will be deriving the best benefit out of it by using the asset at its highest use. The
highest and best possible use can only be applied in case the asset satisfies 3 conditions namely physical
possibility, financially feasibility and legal permissibility. As per Para 34 of AASB 13, Fair value
measurement assumes that financial as well as the non-financial assets or the entity’s own equity
instrument , whatever it may be, is being transferred to the market participant, on the measurement
date (Piesse, 2017).
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One other type of asset and liabilities which needs to be valued at fair value in the financial statements
is when the assets and liabilities are being exchanged in an exchange transaction. In such a scenario, the
fair value of the asset or liability is being measured and then paid (for liability) or received (to sell the
asset). Normally, such transactions do not happen at the original cost value at which the asset was
procured. While using the fair valuation techniques, it should be kept in mind that the correct rate of
discounting is being used and the assets and liabilities are not unnecessarily inflated while valuation. All
the assumptions and estimates being made while such a valuation must be clearly stated in the financial
statements.
Thus, it can be concluded from the above discussion that it is not necessary that all the assets needs to
be valued as cost or all the assets needs to be valued at the fair values, it should first be seen as to what
is the nature of the asset (financial, non-financial, tangible, intangible, etc.) and also the nature of the
transaction (exchange transaction or transaction in the normal course of business or acquisition of the
asset) and then the decision needs to be taken as to whether it should be valued at fair value or the
cost. Appropriate disclosures must be given in this regard.
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References
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