Financial Accounting and Reporting

This document discusses accounting issues related to fair value treatment and the same is covered under AASB 13. It also covers the treatment of goodwill and intangible assets of a business which are covered under AASB 138.

Running head: FINANCIAL ACCOUNTING AND REPORTING
Financial Accounting and Reporting
Name of the Student:
Name of the University:
Author’s Note:

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FINANCIAL ACCOUNTING AND REPORTING
Letter
Re: Accounting Issues: Year Ending 30 June 2019
From: McKenzie and Associates
Sent: 10 July 2019
To: Con Pewter ([e-mail])
Dear Peter
Thank you for raising your concern, regarding the accounting treatments for the period.
The accounting standards which is referred by Martin Keller is related to fair value treatment and
the same is covered under AASB 13.
Issue 1
The standard is applicable to all the company and the same provides guidance regarding
fair value treatment of a business. As per the provisions which is stated under AASB 116, all
recognised assets of a business are measured at costs and not at fair value. The change in manner
of valuing an asset would be considered as a change in accounting policies and the same is not
advised as per the accounting standards unless it results in better presentation of the financial
statements. Considering the current reporting framework which is used by the company, I would
be recommending that the valuation process is appropriate and would not be requiring any
changes. The management of the company had valued the inventory of the business lower than
the original costs of the inventory which is the appropriate practice for the business. As per the
paragraph 9 of AASB 102 Inventories, an inventory of a business needs to be valued at a figure
which is lower than the net realizable value or costs of the inventory of the business. Therefore,
the case shows that the original costs of the inventory is higher than the net realizable value of

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the inventory. Therefore, considering the provisions of AASB 102, the valuation process which
is adopted by the business is appropriate.
Issues 2
As per the situation which you have stated, you have developed a machinery which has
effectively reduced your batch processing time significantly. As per the case which is provided
the management of the company has generated the asset which contributes in reducing the time
in the operational process of the business. The provisions which is stated in AASB 138 clearly
shows that an item would be recognised as an asset in the balance sheet if the benefits accruing
from the same is certain. The case shows that the management of the company has generated
goodwill from internal process and the same should be recorded in the financial statements of a
business. The standard AASB 138 deals with intangible assets and the same states that the
business needs to recognise internally generated goodwill in the balance sheet of the company.
However, the management of the company can show the same in the notes to account section of
the balance sheet but the same would not be appearing in the financial statements of the business.
Further the business has the option of recognising the asset either following cost model or
revaluation model and the same would be considered as a part of the accounting policies of the
business. Therefore, it can be stated that the management of company needs to recognise the
asset at revaluation model in the balance sheet of the company. Further more proper disclosures
also need to be provided by the management of the company.
With Regards
McKenzie and Associates

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FINANCIAL ACCOUNTING AND REPORTING
Technical Issues
Fair value Measurement
The case shows the option which is available to the management of a company for
measuring the assets of the business either using the historical costs or fair value method. The
provisions of AASB 116 states that all recognised assets of a business are measured at costs and
not at fair value. Any change in the valuation process would be regarded as change in accounting
policy of the business and therefore the same needs to be done only if the change results in better
presentation of the financial information of the business (Yao, Percy and Hu 2015). The
inventory valuation of the business is done as per the provisions of AASB 102 and the same is
appropriate considering the original costs of inventory is more than the net reliable value of the
inventory of the business. The inventory value is to be measured at the higher of the cost or net
reliable value in the financial statements of the business (Joubert, Garvie and Parle 2017).
Treatment of Goodwill and Intangible Assets
The treatment of goodwill and intangible assets of a business are covered under AASB
138. The standards effectively state the conditions under which an intangible asset would be
recognised and how the same is measured. The case shows the business has generated a
machinery part which helps the business to earn more revenue (Steenkamp and Steenkamp
2016). Internally generated goodwill is quite different from purchased goodwill as a business
cannot explicitly show internally generated goodwill in the balance sheet of the business unless
the goodwill generated meets the descriptions of an intangible assets as stated in AASB 138. On
the other hand, purchased goodwill need to be disclosed in the financial statements of a business
(Russell 2017). The goodwill amount which has increased for the company forms a part of
internally generated goodwill and the same would not be shown in the balance sheet of the

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business as per the provisions which is stated under AASB 138. The business also hs the option
of selling the new item of machinery to external parties and the same can be recorded in the
financial statements if the transaction takes place. The same would be shown as revenue for the
business in the income statement of the company.

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References
Joubert, M., Garvie, L. and Parle, G., 2017. Implications of the New Accounting Standard for
Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance Sheet. The
Journal of New Business Ideas & Trends, 15(2), pp.1-11.
Russell, M., 2017. Management incentives to recognise intangible assets. Accounting &
Finance, 57, pp.211-234.
Steenkamp, N. and Steenkamp, S., 2016. AASB 138: catalyst for managerial decisions reducing
R&D spending?. Journal of Financial Reporting and Accounting, 14(1), pp.116-130.
Yao, D.F.T., Percy, M. and Hu, F., 2015. Fair value accounting for non-current assets and audit
fees: Evidence from Australian companies. Journal of Contemporary Accounting &
Economics, 11(1), pp.31-45.