ACC 203 Financial Accounting 2: Addressing Muppets Ltd Issues

This report addresses the accounting issues of Muppets Ltd, focusing on asset valuation, disclosure, and the differences between profit and taxable income. It references AASB 116 for asset valuation and disclosure, emphasizing the review of asset lives and residual values. The report also examines AASB 112 to explain the differences between reported profits and taxable income, attributing these differences to timing and permanent factors such as depreciation methods and development costs. Furthermore, it discusses the disclosure requirements for temporary taxation activities and deferred tax assets/liabilities. The analysis provides guidance for aligning accounting practices with statutory requirements and ensuring accurate financial reporting. Desklib provides additional resources like past papers and solved assignments for students.

Running head: FINANCIAL ACCOUNTING
Financial Accounting
Name of the Student:
Name of the University:
Author Note:

2FINANCIAL ACCOUNTING
From: Ms. Ellen Lyrial
Direct Manager
Ebony and Associates
To:
Martin Muller
Managing Director
Muppets Ltd.
Date: 25th May, 2017
Subject: Addressing the issues associated with the accounting treatment of certain assets
along with their disclosure and valuation. Apart from this, the fact that causes difference
between the profit and taxable income has also been addressed.
Respected Sir,
I am writing this letter for addressing as a response to address the issues associated
with the accounting system of your company. I would also like to express our gratitude for
considering us and providing with the opportunity to resolve the issues and assist you
accounting team in the process of decision making. The issue presented concerns with the
implication of taxation for accounting the differences between profit and taxable income and
accounting treatment in relation to deprecation of the assets such as plant and equipment by
aligning with the statutory requirements. All the provisions and accounting standards are
applicable in accordance with the Corporation Act, 2001 as far as statutory requirement are
accounted for (Gheorgh and Damian 2016). We have given a due diligence on the disclosure

3FINANCIAL ACCOUNTING
as well as reference sources where the information’s pertaining to the accounting treatment is
gathered. The queries presented are explained with the proper justification that is listed
below:
Organization is required to perform appropriate disclosure and valuation of assets for
depicting correct accounting treatment in the financial statements:
For this particular aspect, the guidelines are presented in the AASB 116. In this
regard, it is required to take into account several matters for making decision based on the
guidelines.
 The useful lives of assets along with their residual values should be adequately review
by the accounting department of organization at the end of every reporting period. As
against the estimations that have been made earlier and where such estimations are
accounted by the management of organization, the data presented in the current
scenario have given rise to expectation (Lubbe et al. 2014). Therefore, it becomes
essential for organization to make the evaluation of this particular situation with
reference to AASB 108.
 Depreciation amount is the next issue that is to be taken into consideration as the
depreciation should be well aligned with the associated guiding principles. Depending
upon the situation, the amount of depreciated assets should be recorded and
accordingly revised. Such revisions are done until the carrying value of assets is more
than their residual value.
Now, looking at the principle that is used for accounting the treatment of income tax,
considerable amount of differences is accounted between profits reported and taxable income.
Differences have also been identified in the explanation to the shareholders concerning the
subsequent disclosures.

4FINANCIAL ACCOUNTING
It is required by business organization to become adequately acquainted with the fact
that the differences between the profits and taxable income are subjected to application of
several principles. Moreover, the investigation of difference between these two financial or
accounting elements and treatment of such accounts are made by referring to accounting
standard AASB 112. This is because this particular standard helps in explaining the cause of
occurrence of such difference. Hence, the reason attributable to the difference between profits
reported and taxable income is explained below in the listed points.
A. The total amount of expenses and profits recorded by reporting entities is associated
with the financial transactions that have particular component as mentioned in one
specific time period and existence of such relationship is cited by various instances.
Nonetheless, such association has been mentioned with reference to taxable income of
business organization in different time frame (Weygandt, et al. 2016). Various forms
of difference are attributable to the factor of timing differences. The flowing points
discussed below explains occurrence of difference in time with adequate justification.
Depreciation method used by business organization is considerably different from
depreciation that is used for profit and loss determination. In this regard, it is possible
to detect temporary differences because of differences between the corresponding tax
base and assets carrying amount.
Reporting of interest revenue that business earns should be mentioned by accounting
for the timing factor. Nevertheless, in the given case, the taxable income should
incorporate such interest revenue after considering the receipts from cash.
B. When considering the development cost, capitalization and amortization of such cost
for accounting profit evaluation is done at the same time when it is incurred.
However, in the same year, the amount of taxable profit is determined and therefore

5FINANCIAL ACCOUNTING
there is no link between such expenditures and tax base as it has already been reduced
from taxable profit amount.
From the analysis of the case discussed, it can be inferred that in event of revaluation
conducted by organization, no equivalent adjustments have been made and the reason
is that such revaluation has been conducted for activities related to taxation.
The business organization has acquired some of the identifiable liabilities and assets
by way of acquisition. Recording of values of such liabilities and assets are well
aligned with the provisions that are presented under the AASB 3 business
combination (Crawley and Wahlen 2014). However, no such equivalent adjustments
have been made by organization in this situation.
Furthermore, it has also been ascertained that the tax base of liabilities and assets does
not have any difference with the initial carrying amount of liabilities and assets. Such
differences should have been identified when initial recognition is to be done. It can
be stated that the benefits received by reporting entity is attributable to non taxable
grants from government in regard to assets.
The carrying amount of investment that the business has obtained in its branches,
subsidiaries, associates and arrangement of joint ventures is different from the tax
base from interest investment in an appropriate manner (Braun et al. 2015).
Requirement of disclosures:
It is noteworthy to mention about the requirement of disclosures according to
paragraph 81 of the standard when the temporary activities of taxation comes with difference.
Guidelines presented are required to deal with some items depending upon the directions that
are explained with suitable justification:

6FINANCIAL ACCOUNTING
 The differences that have been accounted for in the temporary differences are
associated with the investment that is made in the branches, associates, interest in
joint ventures and subsidiaries when there is no occurrence of deferred tax liabilities.
 The deductible temporary differences in relation to the taxation are represented by the
unused tax credits and unused tax losses (Bora and Saha 2016). In this event, there
will not be recording of any amount of deferred tax assets in the financial statements.
 Regarding the unused deferred tax liabilities and deferred tax assets, the temporary
differences has been accounted for recognition of deferred tax liabilities sand deferred
tax assets.
 The amount that is recorded in respect of deferred tax liabilities and deferred
tax assets is presented in the statement of profit and loss. Any alterations in the
amount are depicted in the financial statements.
 The amount of deferred tax assets and deferred tax liabilities are recorded in
appropriate financial statements.
 In respect to the acquisition, deferred tax benefits should be received by
business, even though if such benefits are not recorded at the date of
acquisition date. Company has recorded such benefits from deferred tax after
the acquisition date where a detailed analysis is required to be presented by
company for recognizing the deferred tax benefits (Zhou 2016).
It can be concluded from above analysis that the discussion presented above is
sufficient for addressing the accounting issues faced by company. However, the authenticity
of advice should be checked for proper application of accounting standards is relation to
accounting transactions and provision treatment.
Thanking You,

7FINANCIAL ACCOUNTING
Yours sincerely
Ellen Lyrial
248 Adelaide Street
Brisbane
QLD 4000

8FINANCIAL ACCOUNTING
References list:
Bora, J. and Saha, A., 2016. Creative accounting in financial reporting and its ethical
perspective. International Journal of Applied Research, 2(3), pp.735-737.
Braun, G.P., Haynes, C.M., Lewis, T.D. and Taylor, M.H., 2015. Principles-based vs. rules-
based accounting standards: The effects of auditee proposed accounting treatment and
regulatory enforcement on auditor judgments and confidence. Research in Accounting
Regulation, 27(1), pp.45-50.
Crawley, M. and Wahlen, J., 2014. Analytics in empirical/archival financial accounting
research. Business Horizons, 57(5), pp.583-593.
Gheorghe, A. and Damian, D.F., 2016. Increasing the Quality of Accounting and Financial
Information through the Use of Cost Management Systems Products. Valahian Journal of
Economic Studies, 7(1), p.63.
Hoggett, J., Edwards, L., Medlin, J., Chalmers, K., Hellmann, A., Beattie, C. and Maxfield,
J., 2014. Financial accounting.
Hussan, S.M. and Sulaiman, M., 2016. Between International Financial Reporting Standards
(IFRSS) and Financial Accounting Standards (FASS): The debate continues. International
Journal of Economics, Management and Accounting, 24(1), p.107.
Lubbe, I., Modack, G. and Watson, A., 2014. Financial accounting GAAP principles. OUP
Catalogue.
Trucco, S., 2015. Drivers of the Alignment of Financial Accounting to Management
Accounting. In Financial Accounting (pp. 65-82). Springer, Cham.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting.
John Wiley & Sons.

9FINANCIAL ACCOUNTING
Zhou, M., 2016. Does accounting for uncertain tax benefits provide information about the
relation between book-tax differences and earnings persistence?. Review of Accounting and
Finance, 15(1), pp.65-84.