Financial Accounting and Reporting: Issues and Solutions Report

This report addresses financial accounting and reporting issues faced by a client, Mr. Con Pewter, and provides solutions based on accounting standards and principles. The primary concerns involve the treatment of deferred taxes and the recognition of income and expenses. The report explains the requirements of AASB 112 regarding deferred taxes, emphasizing the need to consider tax implications in the current period. It highlights the differences between accounting profit and taxable profit and the importance of calculating deferred tax liability. The report also examines the issue of income and expense recognition related to a new agreement, discussing the application of AASB 18 and the principles of accrual accounting and matching. It suggests that the board reconsider its approach to income recognition given the potential risks of the new agreement and the importance of recognizing revenue when it is probable and realized. The report concludes with a summary of the key points and recommendations for addressing the accounting challenges.

Financial accounting and
reporting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK...............................................................................................................................................1
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................5

INTRODUCTION
In any business there are various clients and they will be facing some or other issues. In
order to deal with them it will be required that they shall be provided with the reasons and
solutions for the problems. A similar letter is provided below which will be dealing with issues
of Mr. Con Pewter.
TASK
12th September, 2017
McKenzie and Associates
668 George Street,
Melbourne, VIC 3000
Mr. Con Pewter,
Managing Director,
Pewter Ltd.
Dear Mr. Pewter:
I have received your mail regarding the issue which you are facing in respect of various
accounting treatments. There are main accounting standards and principles which are present and
will be used in order to deal with your problems. The main issues which are being faced by you
are related to the treatment that will be provided in respect of taxes and recognition of income
and expenses.
The first problem which is specified is that directors feels that more amount is discussed
on accounting for future taxes. According to you as there is no kind of cheating which is done I
terms of tax payments so no need is there to account for future taxes as by this lot of funds are
wasted. According to AASB 112 which is set in relation to accounting for deferred taxes states
that in all transactions, there tax treatment shall be considered during that period in which it is
taking place and not at the time when tax payment will be made. So it can be said that all the
incomes and expenses will be recognised in that period when the activity has taken place. So by
this it is clear that all the tax consequences whether they may be related to current or future will
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be considered in present period only in respect of transaction of current year. Therefore it will be
required that you will have to perform two calculations which will be of deferred tax liability and
also about the present tax payments. So the contention of directors that there is no need to
calculate or spend money on its calculation is not required is not appropriate. The difference that
will be existing between the accounting profit and taxable profit will be the amount on which tax
will be charged and will be considered as deferred tax. Accounting profit is that amount which is
calculated according to the provision of standards which are set by authorities. Then taxable
amount will be determined with the help of rules that are mentioned in income tax Act. As both
the methods are variant and the manner in which transactions will be considered under them is
not same so it will be leading to arising of differences. For this it will be needed that all the
losses for which tax benefit has been claimed in past will have to be deducted. The amount that
can be recognised in this will be limited to that credit which is already lying or there are chances
that it will be arising in the coming period so that can be adjusted at that time.
The entries will be made in this respect and when in future actual payment will be made
at that time it will have to be reversed. The difference that arise is due to the timing which varies
and because of this it has to be recorded. According to accounting principles the new rates which
are enacted will be used and on basis of that only amount will be determined that is to be entered.
From all of this it can be identified that it is required under the set framework and shall be
complied with and there is no condition under which any option is provided to to asessee. So it is
compulsory for all to comply with the requirements that are mentioned and you will also have to
do the same so the demand of directors will not be entertained.
The another issue about which you have mentioned is regarding the recognition of
income and expenses. New agreement is entered and for that there is fees which will be received
and also amount will be received for revenue. The board has agreed that revenue shall be
recorded at starting period and all the adjustments that will be required for returned inventory
will have to be made. It is also given that net amount is recorded as all the cost will be adjusted
from this. According to AASB 18 all the incomes are recognised on accrual basis which means
that when they are earned will be period to record them and nit at that time when they will be
received. It is also specified according to principles that matching shall be done of all the
expenses and incomes that will be related to particular transaction will be considered at same
time. According to you the treatment which you are considering will be simplifying the matters
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but looking to standards and other aspects it will not be a good option and this is because as deal
is made recently and there is not guarantee that amount will be received on timely basis. So it
can be said that risk will be involved as there will be chances that other party will be cheating
with you. The treatment which you are providing will not be simplifying the process as there will
lot of misstatements and understanding due to it. There will be many adjustments which will be
required to be made and this will even complicate the whole process. The point of considering
net amount will be good option and will not be required to make various entries for same thing.
According to principles the amount which is realised and the one that is realizable both shall be
considered but according to IFRS it shall be given importance that whether the earning is
probable to come or not and shall be received before we record it in books. So both are giving
different treatment. It is true that being new agreement there are chances that problems may arise
so it will be good if the transactions will be recognised when the amount will be received that
will be at the end of the quarter.
If we look to all the aspects it can be said that tax liability will have to be recognised in
respect of future period and calculations will have to be made in that respect. Regarding second
issue in context of income recognition there is need to reconsider the treatment which is adopted
by board because of the future consequences which will have to be dealt with if the payment will
not be received on time and there are certain chances of it because of new agreement and there is
no knowledge how the other party will be dealing with the transactions and payments.
If you have any further queries in respect of the issues which are discussed above you can
contact anytime. Also of any further issue are there then can ask regarding them and will be
providing you with the clarifications regarding them.
Yours sincerely
Ms. Maria McKenzie
Manager
CONCLUSION
From the above provided business letter all the understanding has been obtained in
respect of various accounting standards which will be required to be followed. Solutions and
explanations in respect of different issue which are faced by client are provided in it that will be
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helpful for him. Also the principles involved in it too are specified that shall be taken into
consideration.
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REFERENCES
Books and Journals
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat?. Routledge.
Agoglia, C.P., Doupnik, T.S. and Tsakumis, G.T., 2011. Principles-based versus rules-based
accounting standards: The influence of standard precision and audit committee strength
on financial reporting decisions. The Accounting Review. 86(3). pp.747-767.
Chen, F., Hope, O.K., Li, Q. and Wang, X., 2011. Financial reporting quality and investment
efficiency of private firms in emerging markets. The accounting review. 86(4). pp.1255-
1288.
Brown, P., 2011. International Financial Reporting Standards: what are the benefits?. Accounting
and business research. 41(3). pp.269-285.
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