ACC210 Financial Accounting Task 2 - Major Assignment, Semester 2

This document presents a comprehensive solution to the ACC210 Financial Accounting Task 2 assignment, focusing on key financial accounting concepts. The solution addresses four main questions, starting with an analysis of fair value measurement, exploring valuation techniques, and considering relevant market factors. The second question delves into expense recognition, including calculations and general journal entries. The third question examines accounting issues related to internally generated and acquired intangible assets, discussing the reasons for reluctance in recognition. The final question tackles defined benefit plans, calculating deficits, net liabilities, and net interest, along with reconciliation and summary journal entries. The solution references the Conceptual Framework and relevant AASB standards to support the accounting justifications and analysis provided.

ACC210 (ATMC) - Financial Accounting
Task 2 – Major Assignment
Semester 2 - 2017
Student Name:
Student ID #:
Campus:

Table of Contents
Question 1. Ex 3.1..................................................................................................................................3
Accounting Justification:................................................................................................................3
Relevant Issues:.............................................................................................................................3
1. Determine subject of measurement..........................................................................................3
2. Determine valuation premise/method......................................................................................3
3. Determine market.....................................................................................................................3
4. Determine Valuation technique.................................................................................................3
Question 2. Ex 5.18................................................................................................................................4
Accounting Justification:................................................................................................................4
Relevant Issues:.............................................................................................................................4
1. Calculations & General Journal Entries 1/7/16 to 30/6/17:.......................................................4
2. Calculations & General Journal Entries 1/8/18:.........................................................................4
3. Calculations & General Journal Entries 30/6/18:.......................................................................4
Question 3. Ex 6.11................................................................................................................................5
Accounting Justification:................................................................................................................5
Relevant Issues:.............................................................................................................................5
1. Explain accounting issues...........................................................................................................5
2. Differences Internally Generated vs Acquired...........................................................................5
3. Reasons for Reluctance..............................................................................................................5
Question 4. Ex 9.19................................................................................................................................6
Accounting Justification:................................................................................................................6
Relevant Issues:.............................................................................................................................6
1. Deficit of Fund...........................................................................................................................6
2. Net Defined Benefit Liability......................................................................................................6
3. Net Interest................................................................................................................................6
4. Reconciliation............................................................................................................................6
5. Summary Journal.......................................................................................................................6
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Question 1. Ex 3.1
Accounting Justification:
Conceptual Framework AASB para. 100; Criteria: Basis of measurement, Definition: Defines various
methods such as historical cost, current cost, present values, realisable cost (AASB, 2016).
Relevant Issues:
1. Determine subject of measurement
Fair value refers to the price that is expected to be received if the asset is sold or paid in case
of a liability transfer arising on account of market participants enabled transaction taken place
on the date of measurement. Thus, it is noteworthy that fair value would be measures by
undertaking the assumptions which would be utilised by the market participants when they
have to price a particular asset or liability.
2. Determine valuation premise/method
For asset valuation which applies to fixed assets (such as land and building), AASB 13 paves
way for application of the three valuation techniques namely market approach, replacement
approach and income approach. In accordance with the applicable accounting standard, the
underlying entity can choose a suitable technique for valuation which is suitable in the
underlying circumstances considering the availability of data for measurement of fair value
(AASB, 2015c).
Market approach involves value derivation considering comparable assets. Income approach
involves value derivation on the basis of income which can be derived from a particular asset
after discounting the same. Replacement approach considers asset valuation considering the
replacement value of a comparable asset (Deegan, 2014).
3. Determine market
If the given land is utilised for residential purpose, then in accordance with the property
value, the value of the land would be $ 1,000,000. However, in order to realise the same, it
would be required to dismantle the building of the factory at an estimated cost of $ 100,000.
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Hence, the fair value of land in line with the market approach is estimated at $ 900,000.
Further, it is known that the building serving as factory can be substituted for an approximate
cost of $780,000. Hence the building fair value in accordance with the replacement cost
method is $780,000.
4. Determine Valuation technique
In accordance with the given information, it is apparent that Maple Ltd has a land on which a
factory for manufacturing has been built. As on June 30, 2017, the land has a book value of $
200,000 while the building has a book value of $ 260,000. Based on the information given, it
is known that Perth has witnessed a property boom on account of residential houses demand
and hence the prices of these properties have doubled. For the given company i.e. Maple Ltd,
the information provided also suggests that the same land can be used for residential purpose
also. Thus, the land’s fair value would assume the value which is higher amongst the factory
value and the residential development site value (Deegan, 2014).
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Question 2. Ex 5.18
Accounting Justification:
Conceptual Framework AASB para. 94 Criteria: Expense Recognition Definition: “Expenses are
recognised in the income statement on the basis of a direct association between the costs
incurred and the earning of specific items of income.” (AASB, 2016)
Relevant Issues:
1. Calculations & General Journal Entries 1/7/16 to
30/6/17:
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2. Calculations & General Journal Entries 1/8/18:
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3. Calculations & General Journal Entries 30/6/18:
Question 3. Ex 6.11
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Accounting Justification:
Conceptual Framework AASB, para. 89 , Criteria: Cost measurement, Definition: Asset
Recognition
Conceptual Framework AASB, para. 90 , Criteria: Reasonable estimation of future benefits,
Definition: Asset Recognition
Relevant Issues:
1. Explain accounting issues
In the event of no expenditure in relation to the internally generated asset existence,
recognition cannot be done under AASB 138 (para 24). Also, intangible assets are measured
initially at cost only. Also, expenditure related to internally generated intangibles
development can be capitalised depending upon the underlying spending being termed as
research or development. Besides, it is essential that research has to be original and aims to
investigate with the objective of acquiring new knowledge as per AASB 138 (para 56). Also,
AASB 138 (para 56) defines development as the application of findings of research. Further
as per AASB 138 (para 54), the expenditure on research would be expensed as the same is
incurred. The capitalising of the development expenditure could be carried on is the six
criteria outlined in AASB 138 (para 57) are fulfilled. Additionally, intangibles that are
internally generated (example brands and mastheads) would not be recognised in accordance
with AASB 138 (para 63). Besides, customer relationship should not be termed as intangible
asset owing to lack of control on asset and also lack of identifiability criterion being met. The
internally generated intangibles if recognised must undergo amortisation with the only
exception being when their live is indefinite (AASB, 2015b).
2. Differences Internally Generated vs Acquired
The main differences between the internally generated and acquired goodwill is in terms of
initial recognition and post recognition the accounting treatment extended to both is same.
With regards to acquired intangibles, recognition becomes easier in comparison to those
assets which are internally generated. The main issue with internally generated intangibles is
that the precise cost cannot be determined in a reliable manner. This is not the case with the
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acquired intangibles as these are typically acquired in market transactions and hence these
can be recognised at cost to begin with. However, if internally generated intangible (which
otherwise cannot be recognised) is part of assets acquired, then para 63 AASB 138 allows
recognition of the same (AASB< 2015b).
3. Reasons for Reluctance
The various reasons for reluctance in recognition of internally generated assets are outlined
below (Deegan, 2014).
 Preference of managers to inflate profits expected in the future – If there is writing off
of investments carried out in R &D, then no future amortisation expense would be
witnessed and hence the profitability would be higher. Also, future measures of
profitability such as ROA and ROE also get boosted by the write off currently.
 Investor attitude – The investors do not consider one time write offs as a major issue
but any periodic expense becomes a major concern for the profitability and
subsequent valuation of the company. Thus, managers in a bid to improve shareholder
perception tend to be reluctant to recognition of internally generated assets.
 Concern with regards to relevance of capitalised numbers- There is no authoritative
support between capitalisation of costs and derivation of expected future benefits.
Also, for certain assets particularly knowledge based, it is impossible to ascertain the
benefits with certainty.
 Also, it leads to incremental pressure on the managers as recognition of internally
generated assets require that incremental revenues be generated. However, if such
assets do not result in success, then there could be a negative impact on the stock and
also the managers.
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Question 4. Ex 9.19
Accounting Justification:
Conceptual Framework AASB, para. 60 (AASB, 2015a).
Definition of Liability: “An essential characteristic of a liability is that the entity has a present
obligation. An obligation is a duty or responsibility to act or perform in a certain way.”
Relevant Issues:
1. Deficit of Fund
There would be deficit value which can be computed as highlighted below.
As on December 31 2016, PV of the defined benefit plan = $ 23,000,000
As on December 31 2016, the fair value of plan assets = $ 20,130,000
Hence, deficit in the fund (December 31, 2016) = $ 23,000,000 - $ 20,130,000 = $ 2,870,000
2. Net Defined Benefit Liability
The above value of the fund deficit amounting to $ 2,870,000 would be recognised as net
defined benefit liability as on December 31, 2016.
3. Net Interest
1) The net interest computation is indicated below (Deegan, 2014).
Defined benefit obligation that has been brought forward = $20,000,000
The past service cost = $ 2,000,000
Hence, total = 20,000,000 + 2,000,000 = $22,000,000
Interest cost of the above = (10/100)* 22,000,000 = $ 2,200,000
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Interest income component = (10/100)*19,000,000 = $ 1,900,000
Net Interest = 2,200,000 - 1,900,000 = $ 300,000
The return on plan assets is computed below.
4. Reconciliation
5. Summary Journal
The summary journal entries are indicated below.
Relevant Working
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References
AASB (2016), Framework for the Preparation and Presentation of Financial Statements,
AASB Website, [online] Available at
http://www.aasb.gov.au/admin/file/content105/c9/Framework_07-04_COMPjun14_07-14.pdf
[Accessed October 5, 2017]
AASB (2015a), Conceptual Framework for Financial Reporting, AASB Website, [online]
Available at http://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf
[Accessed October 5, 2017]
AASB (2015b), Intangible Assets, AASB Website, [online] Available at
http://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf
[Accessed October 5, 2017]
AASB (2015c), Fair Value Measurement, AASB Website, [online] Available at
http://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf [Accessed October 5,
2017]
Deegan, C. (2014). Financial Accounting Theory, 4th edn. Sydney: McGraw-Hill
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