ACC510 Financial Reporting Task 2 - Major Assignment, Semester 2, ATMC

This document presents a detailed solution for ACC510 Financial Reporting Task 2, a major assignment completed in Semester 2, 2017 at ATMC. The solution addresses four key questions, including case studies on fair value measurement, impairment testing, accounting for research and development costs, and defined benefit plans. Each question includes accounting justifications based on relevant Australian Accounting Standards (AASB) and conceptual frameworks, along with detailed analyses of relevant issues, calculations, and journal entries. The document covers topics such as highest and best use, impairment loss allocation, the difference between research and development phases, and the calculation of deficits and net interest in defined benefit plans, providing a comprehensive understanding of financial reporting principles and their application in real-world scenarios.

ACC510 (ATMC) - Financial Reporting
Task 2 – Major Assignment
Semester 2 - 2017
Student Name:
Student ID #:
Campus:

Table of Contents
Question 1. Case Study 3.1....................................................................................................................3
Accounting Justification:................................................................................................................3
Relevant Issues:.............................................................................................................................3
1. Highest & Best Use................................................................................................................3
2. Application to aged care home..............................................................................................3
3. Two possible uses..................................................................................................................3
Question 2. Ex 7.14................................................................................................................................5
Accounting Justification:................................................................................................................5
Relevant Issues:.............................................................................................................................5
1. Impairment Test 31/12/16....................................................................................................5
a. Calculations:.......................................................................................................................5
b. General Journal Entries 31/12/16:.....................................................................................6
2. Impairment Test 31/12/17....................................................................................................6
a. Calculations........................................................................................................................6
b. General Journal Entries 31/12/17:.....................................................................................7
Question 3. Case Study 6.1....................................................................................................................8
Accounting Justification:................................................................................................................8
Relevant Issues:.............................................................................................................................8
1. Difference between two phases:...........................................................................................8
2. Accounting for Research & Development:.............................................................................8
3. Decision / Conclusion / Reasons and Justification:................................................................8
Question 4. Ex 9.19................................................................................................................................9
Accounting Justification:................................................................................................................9
Relevant Issues:.............................................................................................................................9
1. Deficit of Fund...........................................................................................................................9
2. Net Defined Benefit Liability......................................................................................................9
3. Net Interest................................................................................................................................9
4. Reconciliation..........................................................................................................................10
5. Summary Journal.....................................................................................................................10
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Question 1. Case Study 3.1
Accounting Justification:
Paragraph 36 and paragraph 11 of the conceptual framework and Paragraph B2 of the AASB
13 deals with the fair value measurement, recognition and disclosure. Fair value may be
defined as the amount receivable on the sale of the asset at the market price to the willing
buyer by the willing seller, both being the knowledgeable parties and the transaction being
taking place at arm’s length price in a free market. (Abbott & Kantor, 2017) The concept of
computation of fair value is a subjective and debatable topic and keeps on changing based
on the assumptions, judgements and estimates being taken into account. It may change
from person to person depending on the methods used based on the circumstances of the
case. The transaction cost that that is being incurred in selling an asset or transferring a
liability in the principle market needs to meet the following 2 criteria in order to be
recognised:
1. It should be directly attributable to the entity.
2. This cost would not have arisen had the entity not sold the asset or transferred the
liability.
Relevant Issues:
The relevant issue in the given question is the calculation of the fair value in the real life
situations and why does it vary so frequently based on the assumptions being taken. In case
the property, plant and equipment are being measured at fair value, the same is going to
fluctuate a lot on different days based on computation being done by different people.
(Alexander, 2016) Fair valuation is generally being used for the non-financial assets and it
may be fairly difficult to get the exact and correct fair value for the assets being used by
aged old homes as the same asset will have higher value based on highest and best use.
1. Highest & Best Use
The terminology highest and best use is defined as the best possible use to which the asset
can be put or the what is the highest value that can be extracted from the asset when it is
sold to the other market participant who puts it to the best economic use and gets the
maximum benefit out of it. Further, while calculation of the fair value, 3 factors need to be
considered namely the physical existence, the legal status of the transaction and the
financial feasibility of the transaction. (Das, 2017).
2. Application to aged care home
The same asset may be valued at different prices in the open market based on the fair value
which may change depending on the assumptions and the use to which it is put to. The
same asset may be valued low for an old age home whereas the same may be valued higher
for any commercial entity. But truly it should be based only on the exit price at the time of
measurement rather than the type of entity using it.
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3. Two possible uses
The uses of fair valuation is huge and wide. It can be used for a variety of accounting
purposes like measurement of fair value at the time of impairment of tangible and
intangible assets, determining the value of assets at the time of take-over of any entity,
valuation of the inventory in the books, etc.
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Question 2. Ex 7.14
Accounting Justification:
Australian standard AASB 136 and Agenda 10F(a) of the conceptual framework of general
purpose financial statements deals with the accounting for impairment. It may be defined as
the permanent write down in the value of the asset in case the indicators of impairment so
exists and hints. (Dichev, 2017) Impairment is done both for the tangible and intangible
assets and there may be both internal and external factors. The assets should not be carried
in the books at more than the recoverable value which is higher of the value in use and the
fair value of the asset less the cost of disposal. The impairment assessment needs to be
done periodically.
Relevant Issues:
The given case study is on the computation of the impairment loss of the two cash
generating units which have been given here as Time and leisure. Further, the company has
changed the depreciation amount in next accounting year, the impact of which on
impairment also needs to be analysed, if any. (Visinescu, Jones, & Sidorova, 2017)
1. Impairment Test 31/12/16
a. Calculations:
The impairment loss for the 2 CGUs Time and Leisure is computed to be $ 200 and $ 12
respectively. As per the standards on accounting, the impairment loss needs to be first
allocated to the goodwill and then to the other remaining assets. (Murray & Markey Towler,‐
2017) Further, receivables and inventory need not be impaired as they are current assets
held for sale.
Account Carrying amount Carrying amount
Time Leisure
Plant 850 825
Patent 240 -
Inventories 54 75
Receivables 75 82
Goodwill 25 20
Total carrying amount (A) 1,244 1,002
Recoverable Value (B) 1,044 990
Fair value less cost of disposal of patent 220 -
Amount of impairment (A-B) 200 12
Impairment calculation as on 31st Dec., 2016
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Account Carrying
Amount Pro rata Impairment
loss allocated Adjusted CA Maximum
Allocation
Final Impairment
loss
Final Adjusted
CA
Plant 850 0.78 136 714 - 155 695
Patent 240 0.22 39 201 20 20 220
Goodwill 25 0.00 25 - - 25 -
Total CA 1115 1.00 200 915 20 200 915
Account Carrying
Amount Pro rata Impairment
loss allocated Adjusted CA Maximum
Allocation
Final Impairment
loss
Final Adjusted
CA
Goodwill 20 1.00 12 8 - 12 8
Total CA 20 1.00 12 8 - 12 8
For CGU - Time
For CGU - Leisure
b. General Journal Entries 31/12/16:
Date Account DR CR
31/12/2016 Impairment loss (Time) 200
To Accumulated depn & impairment loss -
Plant
155
To Accumulated depn & impairment loss –
Patent
20
To Accumulated depn & impairment loss -
Goodwill
25
31/12/2016 Impairment loss (Leisure) 12
To Accumulated depn & impairment loss -
Goodwill
12
2. Impairment Test 31/12/17
a. Calculations
The company has changed the values of depreciation for the year ended 31 st December 2017
based on some internal assessments, the impact of which on impairment is such that now
the impairment loss posted last year needs to be reversed based on the positive indicators.
Further, goodwill once impaired cannot be reversed. Therefore, the impairment assessment
is as follows:
Particulars Time Leisure
Total carrying amount (A) 1,322 1,433
Recoverable Value (B) 1,502 1,520
Impairment loss to be reversed(A-B) (180) (87)
Maximum extent of impairment reversal, excluding goodwill 175 0
Final impairment reversal 175 -
Impairment calculation as on 31st Dec., 2017
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b. General Journal Entries 31/12/17:
Date Account DR CR
31/12/2017 Accumulated depn & impairment loss -
Plant
155
Accumulated depn & impairment loss
– Patent
20
To Impairment Loss (Time) 175
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Question 3. Case Study 6.1
Accounting Justification:
Research and development cost question arises generally in the case of the internally
generated intangible assets. Paragraph 8 of AASB 138 and SSAP 13 of conceptual framework
of accounting deals with the issues of impairment extensively and gives a view on the
measurement, identification, classification and accounting of the research and development
costs. (Trieu, 2017) Research cost is the initial and original cost being incurred by any
company to check the scientific and technical feasibility and possibility of any project. It is a
pre requisite to the development cost and may or may not result into an asset. Whereas,
development is a post facto activity which is undertaken by the company only if its sure that
the project would be financially feasible and it would give future economic benefits to the
entity. It is done with the motive of develop a new product which is technically advanced or
to come out with the better and effective version of the old one. (Heminway, 2017) In case
there is an issue in classifying in between the research and development cost, the same
should be considered fully as the research cost.
Relevant Issues:
The most critical issue here is the classification in between the research and development
costs and how to account for the same in the books of accounts.
1. Difference between two phases:
There can be many differences which can be spotted in between the research and
development costs but the major differences include research phase is not sure to give
an asset to the entity neither can the entity demonstrate the same whereas the
development phase is sure to give the asset to the entity and it is done only when the
entity is sure on the development of asset. (Raiborn, Butler, & Martin, 2016) Further,
there cannot be development in the absence of the research cost.
2. Accounting for Research & Development:
The research cost being the initial phase when the objection and intention is not there
to create an asset needs to be charged off as an expense in the profit and loss account.
Whereas, the development phase is sure to give and produce an asset to the entity and
it is undertaken only when the technical and financial feasibility has been checked and
further detailed checking has been done. (Félix, 2017) It is sure that the expenditure
incurred now is going to give the entity future economic benefits and hence the same
should be capitalized in the books as an intangible asset. All the incidental or related
costs at the time of development phase should also be capitalized in the books.
3. Decision / Conclusion / Reasons and Justification:
On discussion and detailed analysis on the type and nature of the costs, it can be
concluded that the research costs needs to be charged off to the P&L account and the
development costs needs to be capitalized as the value of the asset. However, before
accounting is done, due consideration should be given to few questions like whether
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there was an intention to create the asset, whether it is commercially profitable to do
so, whether it can reliably measured and capitalized, etc.
Question 4. Ex 9.19
Accounting Justification:
The company gives benefits like defined benefit plan, defined contribution plan and
superannuation benefits. These are in the nature of the retirement benefits like pension
which are being given by the company to the employees in return of the past services. AASB
1056 deals extensively on these topics. (Werner, 2017). Further, the employee is given an
option to choose in between the benefit plan, in which only the company contributes
towards the funds of an employee payable on retirement or a contribution plan, in which
both the employer and the employee contributes towards the common fund of an
employee. The return on these funds depends on a lot of internal and external factors
including the interest rate prevailing in the market on investments being made by the
company. (Jones, 2017) In the given case study, the company has stopped giving these
benefits to the employees anymore however, it still contributes towards the old funds.
Relevant Issues:
Here, the asset and liability, the interest, the deficit or surplus in the funds needs to be
calculated for the given case study, for which the calculations are shown below:
Date Particulars Amount (Dr.) Date Particulars Amount (Cr.)
1/1/2016 To balance b/d 19,000,000 By Benefit Paid 2,100,000
To Contribution 1,000,000 31/12/16 By Balance c/d 20,130,000
Return on the plan assets (b/f) 2,230,000
22,230,000 22,230,000
Date Particulars Amount (Dr.) Date Particulars Amount (Cr.)
To benefit paid 2,100,000 1/1/2016 By Balance b/d 20,000,000
By Current service cost 800,000
By Actuarial Loss 100,000
By past service cost 2,000,000
31/12/16 To Balance c/d 23,000,000 By Interest (b/f) 2,200,000
25,100,000 25,100,000
Plan Assets A/C
Present Value of defined benefit obligation A/C
1. Deficit of Fund
The Deficit in the fund has been computed to be $ 1,100,000 (2,100,000 – 1,000,000)
2. Net Defined Benefit Liability
The net defined benefit liability of the company at end of the year is $ 23,000,000
3. Net Interest
The net interest as can be seen in Present value of defined benefit obligation account as on
31st December 2016 is $ 2,200,000.
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4. Reconciliation
The reconciliation accounts of company is shown below.
Particulars Amount ($)
Opening balance 20,000,000
Add: Current service cost 800,000
Add: Interest Cost 2,200,000
Add: Past service cost 2,000,000
Add: Actuarial Loss 100,000
Less: Benefit Paid (2,100,000)
Closing balance 23,000,000
Particulars Amount ($)
Opening balance 19,000,000
Add: Contribution 1,000,000
less: Benefit Paid (2,100,000)
Add: Return 2,230,000
Closing balance 20,130,000
Present Value of defined benefit obligation A/C
Plan Assets A/C
Reconciliation of the following accounts:
5. Summary Journal
Date Account DR CR
31/12/2016 Current service cost A/C …………………Dr. 800,000
Interest cost A/C …………………………….Dr. 2,200,000
To Present value of defined benefit
obligation
3,000,000
31/12/2016 Actuarial Loss A/C……………………………..Dr. 100,000
To Present value of defined benefit
obligation
100,000
31/12/2016 Statement of P&L……………………………….Dr. 3,100,000
To Current service cost 800,000
To Interest cost 2,200,000
To Actuarial Loss 100,000
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References
Abbott, M., & Kantor, A. (2017). Fair Value Measurement and Mandated Accounting Changes: The
Case of the Victorian Rail Track Corporation. Australian accounting Review.
Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4),
411-431.
Das, P. (2017). Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social
Science Studies, 2(2), 10-17.
Dichev, I. (2017). On the conceptual foundations of financial reporting. Accounting and Business
Research, 47(6), 617-632.
Félix, M. (2017). A study on the expected impact of IFRS 17 on the transparency of financial
statements of insurance companies. MASTER THESIS, 1-69.
Heminway, J. (2017). Shareholder Wealth Maximization as a Function of Statutes, Decisional Law,
and Organic Documents. SSRN, 1-35.
Jones, P. (2017). Statistical Sampling and Risk Analysis in Auditing. NY: Routledge.
Murray, C., & Markey Towler, B. (2017). A Theory of Return-Seeking Firms.‐ SSRN, 1-14.
Raiborn, C., Butler, J., & Martin, K. (2016). The internal audit function: A prerequisite for Good
Governance. Journal of Corporate Accounting and Finance, 28(2), 10-21.
Trieu, V. (2017). Getting value from Business Intelligence systems: A review and research agenda.
Decision Support Systems, 93, 111-124.
Visinescu, L., Jones, M., & Sidorova, A. (2017). Improving Decision Quality: The Role of Business
Intelligence. Journal of Computer Information Systems, 57(1), 58-66.
Werner, M. (2017). Financial process mining - Accounting data structure dependent control flow
inference. International Journal of Accounting Information Systems, 25, 57-80.
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