Financial Accounting Answer 2022

Running head: FINANCIAL ACCOUNTING
Financial accounting
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Answer 1
Fair value measurement can be made on the basis of different level. Level 1 is based
on the quoted prices for the identical assets as well as liabilities under active market, when
the same information is available. However, if such information is unavailable, level 2 is used
where quoted prices on the similar assets as well as liabilities under active market is used
after making appropriate adjustments for differences (Lachmann, Stefani and Wöhrmann
2015). Level 3 estimation requires the judgments while selecting and applying the relevant
inputs and valuation techniques. However, the external auditors and company accountants are
less experienced regarding 3rd level that uses the estimates on the basis of discounted cash
flows as well as other valuation techniques those are produced through the company
managers instead of referring to market prices (Benston 2006).
Instances are there where historical based transaction based numbers are misleading
or reported fraudulently like inventories are mispriced and misreported, expenses are
capitalized instead of expensed and revenues are reported before earned. Bankruptcy of
Enron and subsequent investigation as well as public revelations regarding how the managers
used the estimated in accordance with level 3 for both external as well as internal accounting
and impact of the measurement on the entity’s operation along with performance shall
provide useful insights into issues that the auditors are expected facing the proposed SFAS
fair value measurement shall be adopted (Magnan, Menini and Parbonetti 2015). Though
numbers of reasons are there behind Enron’s collapse, strong belief is there that continuing as
well as early adoption of level 3 approach of fair value accounting played major role for its
collapse. It is seemed that initially Enron applied the level 3 for fair value projections without
the intention of misleading the investors, rather for motivating as well as rewarding the
managers for the economic benefits obtained by them for the shareholders. It revalued the
energy contracts 1st that reflected innovation regarding how the contracts are structured with

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enhancement in the value that is reported as the earnings for current period (Benston 2006).
Then the level 3 revaluations applicable to the other assets specifically what is termed as
merchant investment by Enron. As operations of Enron were not as profitable as estimated by
the managers regarding the stock market, the upward valuation were opportunistically used
for inflating the reported income. Further, in accordance with fair-value accounting, reduction
of the values were recognized as well as reported rarely as the same was either ignored or
assumed as temporary. It further used level 2 estimates for valuing restricted stock though in
most of the cases they were not modified in account for the differences in value among
holdings of Enron and stocks those were traded publicly as mentioned by FASB (Benston
2006). Apart from that it entered into the partnership with Blockbuster for broadcasting films.
Though Enron did not have required technology and Blockbuster did not have rights for
broadcasting, Enron measured the investment at fair value on the basis of future assumed
profits and recognised the same under profit and loss though the project could not generate
any revenue. Moreover, the investment in the broadband services that involved swapping
surplus on dark fibre for right to use the same for other network was recognized as the gain
under profit and loss account through revaluing the surplus (Benston 2006).
After the Enron case, accounting for the contracts with customers at the fair value and
reporting income from the initial measurement or from subsequent re-measurement is
considered as inconsistent with the IFRS 15 / AASB 15 - Revenue from contracts with
customers. The said standard needs the revenue to be reported after each of the performance
obligations is fulfilled. Some other applications for fair value accounting adopted by Enron
involved the complex contractual arrangements that may have impact through multiple
accounting standards (Dong, Ryan and Zhang 2014). For example, some of the contracts
involved embedded derivatives and suitable treatment for the same may vary based on the
specific contract terms like whether parties can be settled on the net basis rather than delivery

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of the commodities. However, IFRS 13 / AASB 13 Fair value measurement stipulates
requirement of extensive disclosures for estimates of fair value those use level 3 inputs.
These requirements for disclosures are expected to deter the scandalous application for the
fair values like those applied by Enron. At very least it will provide the users with additional
information that can be used for assessing credibility of used estimates and hence, similar
scandals are less likely to take place in future (Palea 2014).
Question 2
In accordance with AASB 138, Para 18, recognition of any item as intangible asset
obliges an organization to exhibit that it meets definition of the intangible asset and
recognition criteria. This criterion is applicable to the costs those are initially incurred to
acquire or any intangible asset generated internally and those assets which are subsequently
incurred to add or to replace the part or to service it (Aasb.gov.au 2019). Any entity shall
report the intangible asset if and only if it is likely that predictable economic benefits in
future period that can be generated from the asset will be inflow for the entity and the asset’s
cost can be reliably measured. Further, the entity shall evaluate probability of estimated
economic benefit for the future period through supportable and reasonable assumptions
representing the best estimate of the management for the set of economic conditions those are
expected to be in existence over the assets useful life. Entities use judgments for assessing
certainty level attached with flow of the future economic benefits those are attributable to use
of asset based on the available evidences while recognising the same at initial level through
giving greater weightage to the external evidences (Aasb.gov.au 2019).
As per AASB 138 an asset is a resource that is controlled by the entity owing to past
events and which can generate economic benefit in future that will flow to the organization.
On the other hand, intangible asset is the non-monetary identifiable asset that does not have

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any physical substance. Any asset is identifiable while it can be separated or can be divided
from the organization and can be licensed, transferred, sold, exchanges or rented either
individually or with the associated contract, liability or asset or arises from the contractual or
any other legally applicable rights (Russell 2014)
Costs associated with direct mailings to the prospective customers regarding capitalisation
and amortisation – as per AASB 138 regarding customer lists generated internally and the
items those are similar in substance should not be reported as the intangible asset. In
accordance, Easy Books Ltd shall write off all the costs those are capitalised till date and
expensed all these costs as incurred from now onwards (Yao, Percy and Hu 2015).
Purchased customer lists regarding capitalisation and amortisation – it meets definition of
asset. Easy Books Ltd has the control as the entity has power of obtaining future economic
benefit generated from it as well as can restrict other’s access to it. Here, future economic
benefits exist in form of the potential sales. Further, it meets definition of intangible asset as
it does not have any physical substance and non-monetary in nature and can be sold as it is
identifiable. On the basis of assumption that it is likely that the future economic benefit will
be generated from the list, treatment provided by Easy Books Ltd is appropriate that is
recognising the same as intangible asset at the cost and thereby as per the indication of
question that the entity selected cost model shall amortise it (Hu, Percy and Yao 2015).
Cost related to phone survey for purchasing customer list required to be capitalised – as per
AASB 138 the subsequent expenses associated with customer lists and the items those are
similar in substance are always expensed when incurred irrespective of whether acquired
externally or generated internally. Hence, Easy books Ltd shall recorded the cost related to
phone survey as expenses (Russell 2017).

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Marketing costs shall be capitalised and amortised - Definition for asset has not been met and
hence, Easy Books Ltd cannot demonstrate the control over future economic benefit arising
from the same as it is not able to restrict access of others to the benefits. It is stated by AASB
138 that control in normal terms arises from the legal rights for instance, from restraint of the
trade agreements. Without these types of tights it is not easy to demonstrate the control.
Marketing practices of Easy Books Ltd are known to the competitors and thereby can be
easily replicated. Hence, Easy Books Ltd shall write off all the costs those are capitalised till
date and expensed all these costs as incurred from now onwards (Ji and Lu 2014).
Hence, Easy Books Ltd shall account for its assets in accordance with the suggestions
and justification for the same provided above for different assets including purchase of
customer lists, conducting phone survey for purchasing customer list and direct mailings to
the prospective customers.

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References
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf
[Accessed 27 Aug. 2019].
Benston, G., 2006. Fair-value accounting: A cautionary tale from Enron. Journal of
Accounting and Public Policy, 25(4), pp.465-484.
Dong, M., Ryan, S. and Zhang, X.J., 2014. Preserving amortized costs within a fair-value-
accounting framework: Reclassification of gains and losses on available-for-sale securities
upon realization. Review of Accounting Studies, 19(1), pp.242-280.
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.
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.
Lachmann, M., Stefani, U. and Wöhrmann, A., 2015. Fair value accounting for liabilities:
Presentation format of credit risk changes and individual information processing. Accounting,
Organizations and Society, 41, pp.21-38.
Magnan, M., Menini, A. and Parbonetti, A., 2015. Fair value accounting: information or
confusion for financial markets?. Review of Accounting Studies, 20(1), pp.559-591.
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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Russell, M., 2014. Capitalization of intangible assets and firm performance. The University of
Queensland, pp.1-67.
Russell, M., 2017. Management incentives to recognise intangible assets. Accounting &
Finance, 57, pp.211-234.
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.