Financial Accounting Principles | West Ltd

Financial Accounting

EXECUTIVE SUMMARY
Financial accounting is a wider field which not only contains accounting of fiscal events
but also includes guidelines, framework and accounting standards. It help in effective and proper
treatment of fiscal events in final accounts. The study summarises applicable accounting
standards in context of case provided and a useful recommendation. Along with it provide
explanation about relevance and importance of accounting treatment as per applicable AS.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................4
TASK ..............................................................................................................................................4
RECOMMENDATION...................................................................................................................8
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Financial accounting comprises combination of different accounting and fiscal tasks
which assist in preparation of an effective framework for formulation and reporting of
corporation's final accounts. One of the core task of financial accounting is application and
compliance of accounting standards issued by AASB (Griffin and Wright, 2015). Use of
different standards enhance creditability of financial statements and accepted by different
stakeholders. These standards also facilitates quick and easy analysis of financial results,
outcomes and performance of corporation over a specified period. The study comprises analysis
case of West Limited and give advise to company's chairman about proper treatment as per
relevant accounting standards.
TASK
This assessment is based on case study of West Ltd, which is a well known corporation
and core activity of company is sale of produce like frozen and canned fish. Here first stated
fact is that Company is selling these items with two different brand name “Tropical Taste” and
“Artic Fresh”. Fish obtained though waters of Southern Australian are labelled with Artic Fresh
which is company's traditional brand name while in northern oceans' captured fishes are labelled
with Tropical Taste a develop brand of Fishy Tales.
Fishy Tales Limited is in acquisition of West Limited so complete assets and liabilities of
company are transferred to West Ltd. Company West has popularised itself as an organisation
operating its business in environment responsible ways and emphasise on sustainable fishing. In
public also company has maintained this image as dolphin-friendly corporation because of
company's earlier campaigns for ensuring that dolphins are safe and not impacted by tuna
fishing.
Other fact in case study is that marketing manager of West Limited has noticed that the
Steve Irwin is famous for its efforts towards restrict and disrupt acts of whalers in southern
oceans. Then he recommended directors of company to enhance the environmentally responsible
company image company should guarantee repair expenses of any damage of Steve Irwin due to
attempt to prohibit whalers. He argued that this step will lead to increase in company's goodwill
also such guarantee will not impact company's profitability. Further he explained that damage to
the Steve Irwin occurs, West Ltd can capitalize the resulting repair costs to the carrying amounts

of its brands, as such costs will have been incurred basically for marketing purposes. He also
advised to capitalize such repair costs to brands' carrying amounts with assumption that it has
been incurred essentially for the purpose of marketing.
Here from above analysis of case study it has been analysed that following two key ratios
will apply here, as discussed below:
AASB 138 Intangible Assets:
This accounting standard mainly deals with recognition of intangible assets, recording of
intangible assets and appropriate treatment of these asset along with proper disclosure in final
accounts. AASB 138 indicated that it's not possible to recognize several internally sourced
intangibles as assets. AASB 138, para-63 explained that publishing or copy right titles,
mastheads, internally-generated brands, customer lists and other similar kind of items can not be
recognized as intangible assets (Ji and Lu, 2014). It implies that, irrespective of fact that these
spending on intangibles may produce future-economic advantages, many expensive and valuable
intangible assets would not be outlined in financial statement. Thus, users might not be able to
acknowledge true-economic worth of intangible assets while framing financial statements.
While recognising an asset as intangible asset following criteria must be satisfied as
stated in provisions of AASB 138, as described below:
Identifiability: In order to be an asset identifiable, that asset require to be either easily separable
from corporation or originated through legal documentation like a contract or legal-right like
trade-mark.
Non-Monetary: Asset required to be non-monetary, which means that it cannot be valued in a
fixed or ascertainable figures of money.
Lack of Physical Substance: Another criteria is that asset have lack of physical-substance.
Which means that asset have no physical substance and no one can physically hold or touch it,
like goodwill or trade-marks.
Control: You need to be capable of exercising control over asset and what may be happening
with it. This also relies on whether corporation have control over asset or have the authority to
gain future fiscal economic advantages. Company should also capable to restrict others from
gaining economic-benefits.
Future Economic Benefit: One other crucial variable is asset's future economic benefits. It is
required to ascertain that asset will provide future economic benefits. Moreover, company can

reliably assess future-economic benefits. Such benefits include revenue obtained from products
selling or saving in costs.
In respect of intangible assets which are specifically acquired as a result of any business
combination, criteria of probability as well as reliability will always fulfil. In this case assets are
assessed at fair value at the date of acquisition (Hu, Percy and Yao, 2015).
While in case of intangible assets which are internally generated, related expenditures are
categorized as research or development expenses. Amount recognised as Research are treated as
expense where as amount recognised as development can be capitalised. Internally-generated
goodwill is never recognized.
Amortisation of any intangible asset need an assessment regarding useful life of asset whether
indefinite
or finite (Steenkamp, N. and Steenkamp, S., 2016).
Based on above discussed provision of AASB 138, West Limited can recognise goodwill
if any arise due to acquisition of Fairy Tales Limited. But as per manager's contention that
guarantee in respect of repair of asset will provide addition in goodwill value is wrong as it is
internally generated goodwill so as per AS 138 it can not be recognised.
AASB 136: Impairment of Assets:
AASB 136 is designed to assure that the assets of company are recorded in the balance
sheet at not more than asset's recoverable amount. An asset is deemed to be impaired if
organization can not retrieve the carrying sum of asset by either using or selling asset in the
enterprise activities. For instance, an organization has a machine which is carried at $260,000
(original cost is $400,000 while accumulated-depreciation of $40,000) in balance sheet.
However, corporation expects to be able to sold asset for $220,000 currently, while in case they
persisted to use asset in business for rest of the useful life, net-cash inflows of $230,000 will be
generated (Bond, Govendir and Wells, 2016). The grounds for checking impairment of assets are
that carrying amount of an asset do not necessarily indicate asset's recoverable amount, as this
instance shows:
 Assets' carrying amount stated in a corporation’s balance sheet is outcome of estimation
and assumptions taken by accountant
 Amount of depreciation reflects cost allocation of assets and not consider fact about
asset's recoverability.

As per provisions stated in AASB 136, an corporation required to evaluate whether any
clear indication exist that asset could be impaired in any reporting period. When any indication
exist, corporation shall make estimation about asset recoverable amount. Here following listed
assets required to be tested for assessment of impairment every year even if no indication with
respect to impairment exists:
 Goodwill acquired under business combination.
 Intangible assets which are not yet accessible for use,
 Intangible assets having indefinite useful life.
A CGU or cash-generating units is lowest asset cluster that contains the particular
property and produces money inflows mainly separate from inflows of other resources and
investment organizations. Typically, a CGU is recognizable as a separate retail-shop, a specific
item range or geographical region. A CGU may identify assessments depending on the
management and monitoring of the activities of the company (Zhuang, 2016).
Carrying amount in respect of any CGU covers only CA of those assets which directly
attributed to such CGU or allocated on reasonable basis, since they would provide future cash-
inflows in ascertaining asset's value in use. It not cover carrying amount related to recognised
liability or obligation unless CGU's disposal require a purchaser to assume such liability.A
recoverable amount of any asset or CGU would be higher of asset's fair value less disposal
costs and asset's value in use.
Value in Use is actually an amount which is present value of potential future cash-flows
anticipated to be achieved through continuing use of any asset or any CGU, on the basis of
future projected cash-flows expected through an asset’s regular use in asset's current form and by
applying effective discount rate. Fair value excluding disposal costs is amount which will be
received in case asset sold in current condition, less sale costs (Kabir, Rahman and Su, 2017).
If the recoverable amount reaches carrying value of asset, then asset is not affected and
no additional measures are necessary. If asset's carrying value reaches amount of recoverable
amount of assets, the differentiation amount against asset shall be recognized as impairment's
loss. In respect of a CGU, impairment amount is assigned first with any goodwill amount, then
against any other asset in CGU, based on pro-rata basis ascertained supported on asset's carrying
amount. In case asset which was prev0iously upward revalued using reserves, then impairment

first recognized against uplifted amount in reserves, to the extent any reserve exists, while any
excess transferred to profit or loss.
In West Limited, marketing manager's argue that company can capitalise repair costs of
ship Steve Irwin to carrying amounts of brands, since such expense basically for marketing
purposes. But this is improper as Steve Irwin is cash generating unit, so capitalisation of repair
costs to company's brands is not proper. Company should apply impairment test and assess the
amount of impairment loss if any. Also thinking that there will be not impact on P&L account is
wrong since as per AS 136 impairment loss should be recognised as profit or loss.
RECOMMENDATION
As referred to above, it was recommended that companies embrace the appropriate
adjustment method for Steve Irwin, based on the debate and the link to distinct accounting
standards appropriate to the study of West Ltd. Since the purchase of this property was made by
business acquisition and through synergy effect, the property of the purchased business was also
obtained. The West Ltd marketing director is partly misguided, since the business may use such
ship in advertising but this is not proper accounting practice to capitalize on the subsequent
reparation expenses. Because any reduction or inversion of deficiency is adapted appropriately
with Profit and Loss or Goodwill. Further manager's argue that business' net-position will be
increased, as well as it would not affect profit or loss account of company is false, since
impairment loss amount is recognised immediately as company's profit or loss (Brown, Preiato
and Tarca, 2014). West Ltd is advised to make proper impair of value of Steve Irwin based on
AS 136 and 138 provisions and accordingly should provide impairment loss or reversal.
Therefore to attain properness in accounting procedures and effective accounting practices,
CONCLUSION
As per above discussed study it has been articulated that consideration of provisions of
different accounting standards is crucial as it assist in removing any complexity in financial
reporting. For this before entering major transaction and taking fiscal-decision accountant should
identify and assess the applicability of accounting standards. AS compliance enhances the
creditability of accounts and build the trust of investors. While reporting at global level
importance of accounting standards is high as it brings uniformity in accounts.

REFERENCES
Books and Journal:
Ji, X.D. and Lu, W., 2014. The value relevance and reliability of intangible assets: Evidence
from Australia before and after adopting IFRS. Asian Review of Accounting, 22(3),
pp.182-216.
Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence
from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.
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.
Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by Australian
firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1),
pp.259-288.
Zhuang, Z., 2016. Discussion of ‘An evaluation of asset impairments by Australian firms and
whether they were impacted by AASB 136’. Accounting & Finance, 56(1), pp.289-294.
Kabir, H., Rahman, A. and Su, L., 2017. The Association between Goodwill Impairment Loss
and Goodwill Impairment Test-Related Disclosures in Australia. In 8th Conference on
Financial Markets and Corporate Governance (FMCG).
Griffin, P.A. and Wright, A.M., 2015. Commentaries on Big Data's importance for accounting
and auditing. Accounting Horizons, 29(2), pp.377-379.
Brown, P., Preiato, J. and Tarca, A., 2014. Measuring country differences in enforcement of
accounting standards: An audit and enforcement proxy. Journal of Business Finance &
Accounting, 41(1-2), pp.1-52.