Financial Reporting: Issues in Financial Reporting Analysis Report

This report provides a detailed analysis of financial reporting issues. It begins with a memorandum addressing the accounting treatment of emission allowances, discussing asset recognition based on the AASB Conceptual Framework and concluding that both free and purchased allowances should be recognized as assets. The report then presents a statement of profit or loss and comprehensive income for the year ending June 30, 2016, along with the comprehensive income statements for 2017 and 2018. Finally, the report examines changes in accounting estimates related to depreciation, differentiating them from changes in accounting policy and prior period errors according to AASB 108. It provides depreciation calculations for several years, explains the appropriate accounting treatment, and includes a disclosure note outlining the changes in depreciation expense and residual value due to increased product demand. This assignment highlights key aspects of financial reporting, including asset recognition, financial statement preparation, and the impact of accounting estimates.

ISSUES IN FINANCIAL REPORTING
STUDENT ID:
[Pick the date]

Financial Reporting
Question 1
Memorandum
DATE: 23 August 2017
TO: Rebecca Jones (Chief Accountant, Oris)
FROM: Student Name
SUBJECT: Accounting treatment for emissions allowance
Dear Madam
In order to understand the desired accounting treatment for emission allowances that the
company would obtain, it is imperative to understand the parameters related to the
recognition of assets in accordance with the AASB Conceptual Framework.
Definition and Recognition of Asset
The definition of an asset is highlighted below.
“An asset is a resource controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity” – Para 4.4(a)
Thus, based on the above, an asset has essentially the following three mandatory
characteristics.
 Control of resource by entity
 Arisen on account of events or activities in the past
 Likely future economic benefits to result from these
It is noteworthy that control of resource does not necessarily amount to ownership but having
legal rights is sufficient. Further, the prevention of liability in the future also amounts to
resulting in future economic benefits.

Financial Reporting
The following two conditions need to be satisfied for the recognition of a resource as an
asset.
 Economic benefits to arise in the future for the controlling entity should be probable
(i.e. probability in excess of 50%).
 Also, there has to be a cost for the asset which can be reliably measured.
Application to Emission Allowance
In wake of the above discussion, it is prudent that both the allowances received from the
government for free and also the purchased allowance should be recognised as assets. This is
because irrespective of whether they are purchased or not, these are legal rights which the
company would have and which it can sell to others for a definite value depending on the
prevailing market price. Additionally, these emission allowances would enable the company
to prevent any future penalty by the regulator on account of the emissions released and hence
nullifies a potential future liability. This amounts to economic benefit. Hence, the key
parameters of definition of asset are satisfied in the given case.
Further, even though the government granted allowances may be free of cost but it is still
possible to determine a fair value of these which essentially would become the cost. Hence,
the emission allowances granted by the government would be initially recorded at existing
fair value when grant is made. Further, the emissions that are purchased would be initially
recognised at the purchase cost. However, at the end of the reporting period all the emission
allowances irrespective of their source would be recognised at the prevailing fair value.
Further, as the company engages in various emissions, there would be amortisation of this
asset.
Conclusion
Hence, the company needs to recognise the various emission allowances or permits as assets
and to be more precise as intangible assets since they are monetary assets but are non-
identifiable.
Yours Sincerely
STUDENT NAME

Financial Reporting
Question 2
a) The requisite statement of profit or loss along with the comprehensive income statement
for the year ending on June 30, 2016 based on the given information and AASB 101 is
indicated below.
Statement of Profit or Loss along with comprehensive income
For the year ending on June 30, 2016
Particulars
Amount (in $
000's)
Sales Revenue 50000
Other income 5000
Total Revenue 55000
Cost of Goods Sold -30000
Gross Profit 25000
Distribution Expenses -5000
Occupancy Expenses -3500
Administrative Expenses -3000
Other operating expenses -1500
Finance Costs -2000
Profit before tax 10000
Income tax expense -3000
Profit for the year from continuing operations 7000
Loss on account of discontinued operations -2000
PROFIT FOR THE YEAR 5000
Other comprehensive Income
Items that will not be reclassified to profit or loss
Loss on revaluation of investments in equity instruments -2000
Gain on revaluation of property, plant and equipment 6000
Income tax relating to items that will not be reclassified 1000
Items that will be reclassified to profit or loss
Loss on cash flow hedges -1000
Gain on exchange difference on translation of foreign operations 4500
Income tax relating to items that will be reclassified 1500
Other comprehensive income net of tax 10000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 15000
b) The requisite entries to the given template are indicated below.
30 June 2017 Line item description: Amount ($):
Profit or loss PROFIT OR LOSS FOR THE YEAR 20.000.000

Financial Reporting
(Assumed)
Other comprehensive income Gain on revaluation of financial
investments
80,000
Total comprehensive
income
Total comprehensive income for the
year
20,080,000
30 June 2018 Line item description: Amount ($):
Profit or loss PROFIT OR LOSS FOR THE YEAR
(Assumed)
25,000,000
Other comprehensive income Gain or Loss on sale of financial assets 0
Total comprehensive
income
Total comprehensive income for the
year
25,000,000
Question 3
(a)In relation to AASB108, it is essential to differentiate between change in accounting
policy, change in accounting estimates and prior period errors as the adjustment and
disclosures required in each of the three cases is different. Based on the given facts, it is
appropriate to conclude that there is no change of accounting policy by Nelson Ltd since
the depreciation is still based on UOP method. Further, this cannot be also taken to be
prior period error as based on the information at the time of purchase, the depreciation
schedule was drawn. It is only after almost three years that the company realised that the
demand is more robust that they expected and hence decided to increase production and
thereby extended the project life till 2020 resulted in lowering of residual value to zero.
Hence, it is appropriate to account for both of these changes as accounting estimates
change and make requisite adjustments.
(b) In accordance with AASB 108, for change in accounting estimates, the changes are not
made retrospectively but are limited to the current year and future. Hence, in the given
case, the depreciation expense for FY2015 and FY2016 would be computed in accordance
with the old estimates while the depreciation expense from FY2017 onwards would be
based on the new estimates. The requisite computations are indicated below.

Financial Reporting
Year ended: Depreciation
expense ($) Supporting calculations
30 June 2015 80,000 (280000-30000)*(40000/125000) = $ 80,000
30 June 2016 50,000 (280000-30000)*(25000/125000) = $ 50,000
30 June 2017 45,000 (150000-0)*(30000/100000) = $ 84,000
30 June 2018 45,000 (150000-0)*(30000/100000) = $ 84,000
30 June 2019 30,000 (150000-0)*(20000/100000) = $ 56,000
30 June 2020 30,000 (150000-0)*(20000/100000) = $ 56,000
Kindly note that $ 150,000 is the value to be depreciated after $ 130,000 (accumulated
depreciation in FY2015 and F2016) has already been depreciated from a total of $ 280,000.
c) Since the change in depreciation expense is on account of change of accounting estimates,
hence as per paragraph 39 and 40, AASB 108, a disclosure note should be included which
would indicate the change in depreciation in the current year and the respective future
changes in depreciation and also the residual value need to be objectively outlined.
d) The relevant disclosure note is presented below.
Note 2: Depreciation Expense
At 30 June 2017, due to higher than expected demand of the product, the company has
decided to reassess the expected output from the machine and accordingly alter the
residual value of the machinery. The production for the current year has been increased to
30,000 (previously 25,000 units) and similar changes have been made in the future years.
The production from the machine is expected to continue till June 30, 2020 (previously
June 30, 2019) and the residual value of the machine would be zero (previously $ 30,000).
As a result of the above changes in accounting estimates, for the current year, the
depreciation expense has been decreased by $ 5,000 (previously $ 50,000, now $ 45,000).
Changes in depreciation till FY2020 are also expected with depreciation expense
decreasing till FY2019 and increasing in FY2020.

Financial Reporting