Corporate Accounting Report: ACC00713, S1 2019, Financial Analysis

This report provides a comprehensive analysis of corporate accounting principles, specifically focusing on the application of AASB 15 (Revenue from Contracts with Customers) and its implications for financial reporting. The report is divided into two main parts. Part A delves into the requireme...Read More

Running head: CORPORATE ACCOUNTING
Corporate Accounting
Name of the Student:
Name of the University:
Author’s Note:

1
CORPORATE ACCOUNTING
Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................3
Part A...........................................................................................................................................3
Recognition of Revenue..............................................................................................................3
Measurement of Revenue............................................................................................................4
Part B...........................................................................................................................................5
Analysis of Key Financial Ratios................................................................................................6
Conclusion.......................................................................................................................................8
Reference.........................................................................................................................................9

2
CORPORATE ACCOUNTING
Introduction
The assessment which is being considered in this assessment is subdivided into two parts
which is Part a and Part b. The first part of the assessment deals with the accounting treatment
which is associated with the revenue which is generated from a contract. The assessment would
be discussing the revenue recognition requirements according to the provisions of the AASB
115. The assessment would be assessing the requirements of the standards for the purpose of
recognition of revenue of the business (Pro Bono Australia. 2019). In the second part of the
assessment, financial performance of the business would be assessed for Reckon Ltd. In order to
assess the financial performance of the business, key financial ratios of the business are
computed considering the financial statements of the business for the current year (Asx.com.au.
2019). The performance of the business would be depending on the ratios of the business.
The regulatory framework which is followed by the management of the company are
appropriate as the same is consistent with the conceptual framework which is used for the
purpose of reporting different items in the financial statements of the business. The case shows
the recognition and measurement criteria which is followed by businesses in case the business is
engaged in generation of revenue from contracts.
Discussion
Part A
Recognition of Revenue
The introduction of AASB 15 has replaced both AASB 118 Revenue and AASB 111
Construction contracts and appropriate provides significant provisions in order to make the
reporting framework which is followed by businesses more effective. The major changes which

3
CORPORATE ACCOUNTING
has been made in the process of revenue recognition is to allocate revenue in accordance with the
satisfaction of the performance obligations of a contract (Wagenhofer 2014). In case of a
contracting business, the new standard requires businesses to effectively assess the performance
obligation of the contract, determine what values applies to each performance obligations and the
appropriately record the same as revenue in the financial records which is maintained in the
business.
As per the provisions of Para 31 of ASA 15, the entity of the business can recognize the
revenue when the entity satisfies a performance obligation of the business when the promised
good or services is transferred to the customer (Bloom and Kamm 2014). An asset would be
considered to be transferred when the customer obtains control over the usage of the asset
(Aasb.gov.au. 2019). Therefore, it can be reasonably stated that a revenue would be recognized
in a business if the performance obligation of a contract is satisfied or when the goods which was
promised has been transferred to the customers of the business (Yeaton 2015). In the case of
businesses which are engaged in performance of a long-term contract than the revenue can be
effectively be recognized when it can be appropriately be measured the revenue which can be
generated by the business. It is also to be noted that the costs which is incurred for the
completion of the project should also be recognized along side with the revenue which is
generated by the business (Srivastava 2014). The important consideration in this aspect is that
the revenue which is generated by the business must be appropriately measurable. As per the
provisions of Para 44 of AASB 15 an entity can appropriately recognize revenue from a
performance obligation, if the entity is satisfied that the business would be able to appropriately
measure the progress which is made by the business in terms of the contract which is provided
by the business (Aasb.gov.au. 2019).

4
CORPORATE ACCOUNTING
Measurement of Revenue
The provisions of Para 46 of AASB 15 states that when the performance obligation of the
business would be satisfied then the entity needs to recognize the revenue which the transaction
price which is allocated to the performance obligation. In addition to this, the provisions of Para
47 of AASB 15 further provides that the business would be considering the term of contract and
customary practices of the business to determine the transaction prices of the contract
(Aasb.gov.au. 2019). It is to be further notes that the transaction price which is being considered
by the entity may comprises of fixed amounts, variable amounts or both and the same would be
depending on the nature of the contract which is made by the management of the company
(Barker and McGeachin 2013). This shows that the management of the company plays a vital
role in measuring the revenue which is generated by the business during the period.
The standard also provides for appropriate disclosures which needs to be presented in the
financial statement of the business so that the management of the company is able to
appropriately disclose information regarding the nature, amount, timing and uncertainty of
revenue and cash flows arising from contracts with customers (McCarthy and McCarthy 2014).
The standard also requires the management to provide for appropriate disclosures regarding the
contracts which is undertaken by the business and also different judgements which is considered
by the management of the company.
Part B
This part would be analyzing the financial performance of the business of Reckno Ltd
which is considered for this assessment. Reckon ltd is a computer software company which
provides accounting software which can be used for the purpose of reporting and also for
maintaining appropriate books of accounts of the business. The business of Reckon provides

5
CORPORATE ACCOUNTING
appropriate accounting solutions to the different entities which are looking to switch to
computerized accounting settings in the business.
If the management of the company adopts AASB 15, the business would be able to
appropriately report on the contract agreements which is entered into by the business for
software development of different entities (Aasb.gov.au. 2019). The new standards would
require the management to recognize revenue for the period on the basis of satisfaction of the
performance obligation of the business. The new standard would definitely enhance the
efficiency in the reporting framework which is followed by the business. The new standard
would also provide appropriate disclosures regarding the business and provide a clear
understanding regarding the revenue recognition policies which is followed by the management
of the company.
Analysis of Key Financial Ratios
The ratios of the business are considered to be important estimates which help the
management of the company take major decisions regarding the operations of the business. The
ratios of the business ate considered to be important as the same helps the management to
identify the trends in the business and on the basis of the same take appropriate decisions
regarding the operations of the business (Babalola and Abiola 2013). The ratios of the company
also demonstrate whether the financial position of the business is appropriate and effectively
formulate strategies for the purpose of enhancing the revenue which is to be generated by the
business.
Key Financial Ratios of the Business
Reckon ltd
Particulars 2018 2017
$*000 $*000

6
CORPORATE ACCOUNTING
Total Revenue $ 75,427.00 $ 80,337.00
Net Profit $ 7,706.00 $ 7,470.00
Cost of Good Sold $ 1,418.00 $ 1,606.00
Total Assets $ 81,913.00 $ 85,571.00
Total Current Assets $ 15,704.00 $ 18,823.00
Inventory $ 1,959.00 $ 2,835.00
Debtors $ 7,103.00 $ 10,010.00
Current Liabilities $ 14,576.00 $ 15,200.00
Total Equity $ 15,599.00 $ 13,099.00
Long term Borrowings $ 44,562.00 $ 50,606.00
Interest Expense $ 1,532.00 $ 1,706.00
Profitability Ratios
Net Profit Margin 10.22% 9.30%
Return on Equity 49.40% 57.03%
Return on Assets 9.41% 8.73%
Efficiency Ratio
Total Asset turnover ratio 0.9208 0.9388
Inventory turnover ratio 0.591572799 0.5664903
Debtor Turnover Ratio 8.815169754 8.025674326
Liquidity Ratio
Current Ratio 1.077387486 1.238355263
Liquid ratio 0.942988474 1.051842105
Gearing Ratio 2.85672 3.86335
Figure 1: Table Showing Key Financial Ratios of the Business
Source: (Created by the Author)
The above table shows the key financial ratios of the business for the period of 2018. The
same is analyzed by the management of the company for appropriate analysis of the financial
position of the business. The above table shows the profitability, solvency and liquidity ratios of
the business. The profitability ratios of the business show net profit margin, return on equity
return on assets of the business (Delen, Kuzey and Uyar 2013). The net profit margin of the
business is shown to have increased in comparison to previous year analysis which shows that
the management of the company has been focusing on enhancing the profits of the business. The

7
CORPORATE ACCOUNTING
increase in the profits of the business I mainly due to decrease in the costs of the business which
automatically enhances the profits of the business. The return on equity shows a decline which is
an indicator that the management is not meeting the expectations of the shareholders or in other
words not declaring appropriate dividends according to the profits which is generated by the
business. On the other hand, the return on asset estimate is shown to have increased from
previous year which is a clear sign that the management of the company is appropriately utilizing
the assets of the business for the purpose of generating appropriate revenue for the business.
The efficiency ratio of the business comprises of inventory turnover ratio, debtor turnover
ratio and asset turnover ratio. The inventory and debtor turnover ratio of the business shows that
the management of the company has effectively made changes in the both the policies as the
estimates which is computed for 2018 shows significant improvements (Edmonds et al. 2013).
This shows that the management of the company is trying to maintain its efficiency in
operational process of the business.
The net ratio which is computed in the table above is liquidity ratios of the business
which are considered to be indicators of whether the business is successful or not. The analysis
of yje current ratio of the business suggest that the management of the company is trying to make
improvements in the liquidity position of the business. The current ratio of the business is shown
to have increased which is a favorable sign for the management of the company. The gearing
ratio of the business is shown to have reduced significantly which is mainly due to the efforts of
the business to reduce the debts of the business. This also means that the management of the
company is trying to reduce the overall risks which is associated with use of debt capital in the
business.

8
CORPORATE ACCOUNTING
The financial information which is available to the management of the company can be
used by the management of the company to take appropriate decisions regarding the business and
also helps the management to forecast the future activities of the business.
Conclusion
The above discussion effectively shows the changes which have brought about in the
revenue recognition principle by the introduction of the new standard which is AASB 15. The
new standard replaces AASB 118 and AASB 111 and the same helps in appropriate disclosures
which is to be provided by the business. The first part deals with revenue recognition and
measurement of revenue principles which is stated in AASB 15. The second part deals with
performance of the business of Reckon Ltd which is a software-based company. The financial
performance of the business is evaluated on the basis of key financial ratios of the business
which is effectively computed and analysed in the above discussion.

9
CORPORATE ACCOUNTING
Reference
Aasb.gov.au. (2019). [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB15_12-14.pdf [Accessed 24 May
2019].
Aasb.gov.au. (2019). [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB118_07-04_COMPoct10_01-11.pdf
[Accessed 24 May 2019].
Asx.com.au. (2019). [online] Available at:
https://www.asx.com.au/asx/share-price-research/company/RKN [Accessed 24 May 2019].
Babalola, Y.A. and Abiola, F.R., 2013. Financial ratio analysis of firms: A tool for decision
making. International journal of management sciences, 1(4), pp.132-137.
Barker, R. and McGeachin, A., 2013. Why is there inconsistency in accounting for liabilities in
IFRS? An analysis of recognition, measurement, estimation and conservatism. Accounting and
Business Research, 43(6), pp.579-604.
Bloom, R. and Kamm, J., 2014. Revenue recognition: how we got here and where it will take
us. Financial Executive, 30(3), pp.48-53.

10
CORPORATE ACCOUNTING
Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A
decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.
Edmonds, T.P., McNair, F.M., Olds, P.R. and Milam, E.E., 2013. Fundamental financial
accounting concepts. New York, NY: McGraw-Hill Irwin.
McCarthy, M. and McCarthy, R., 2014. Financial statement preparers' revenue decisions:
Accuracy in applying rules-based standards and the IASB-FASB revenue recognition
model. Journal of Accounting and Finance, 14(6), p.21.
Pro Bono Australia. (2019). Impact of Accounting Standard Changes in Recognition of Revenue
| PBA. [online] Available at: https://probonoaustralia.com.au/news/2017/07/impact-accounting-
standard-changes-recognition-revenue/ [Accessed 24 May 2019].
Srivastava, A., 2014. Selling-price estimates in revenue recognition and the usefulness of
financial statements. Review of Accounting Studies, 19(2), pp.661-697.
Wagenhofer, A., 2014. The role of revenue recognition in performance reporting. Accounting
and Business Research, 44(4), pp.349-379.
Yeaton, K., 2015. A new world of revenue recognition: revenue from contracts with customers.
The CPA Journal, 85(7), p.50.

11
CORPORATE ACCOUNTING