Financial Accounting and Reporting: Accounting Policies and Estimates

This report provides a comprehensive analysis of accounting policies and estimates, focusing on AASB 108 and its application to Property, Plant, and Equipment (PPE). The report examines the criteria for selecting accounting estimates, the impact of professional judgment, and the recognition of PPE for CSL Limited, a biotechnology company. It explores the use of the cost model and straight-line depreciation. The report also offers recommendations for improving accounting policies and estimates, suggesting the potential use of the revaluation model and reducing balance depreciation. The conclusion emphasizes the importance of adhering to AASB 116 for fair accounting and consistency in applying accounting policies, while also considering any updates from the AASB.

Accounting and Financial Reporting
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Executive Summary
In this assignment, the criteria which are needed for changing and selecting the accounting
estimates as per AASB 108 Accounting Policies, Changes in Accounting Estimates and
errors has been examined in detail. The impact of the professional judgement on the estimates
and accounting policies have been analyzed. The accounting estimates and policies which
have been applied to recognize the property, equipment, and plant of the company have been
discussed. The recommendation has been suggested for improving the accounting policies
and accounting estimates applied in PPE.
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Table of Contents
Executive Summary...................................................................................................................1
Introduction................................................................................................................................3
Answer a)...................................................................................................................................3
Answer b)...................................................................................................................................3
Answer c)...................................................................................................................................6
Answer d)...................................................................................................................................6
Recommendation........................................................................................................................6
Conclusion..................................................................................................................................7
References..................................................................................................................................8
Appendices.................................................................................................................................9
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Introduction
In this paper, the selection criteria for the accounting policies as per the rules of AASB 108
have been studied. The effect of professional judgement on accounting policies has been
evaluated. The recognition criteria of PPE of CSL limited which is a biotechnology company
in Australia has been scrutinized. CSL involves researching, manufacturing, and developing
market products to prevent human beings from serious diseases. It is located in Melbourne
and was founded in the year 1916. CSL Limited is listed on the Australian securities
exchange. Suggestions have been provided for any relevant changes in the methods or
policies applied for the accounting of PPE.
Answer a)
Accounting policies mean the rules, specific principles, bases, and conventions that are used
by an organization for preparing their financial statements so that they can present it to their
stakeholders. AASB 108 applies to any events, transactions of any entity and the accounting
policies which are relevant to that items or transactions shall be critically examined by
applying AASB 108. This standard applies only to transactions that are reliable and relevant
and provides material information about the impact of the transactions. According to Handley
et al. (2018, p-251), the accounting policies will not be used if the effect of the accounting
policies is immaterial. An organization can change the policies of accounting only if it is
demanded by AASB. If it is not possible to apply the policies of AASB 108 then professional
judgement can be applied to those transactions which are significant to the users of financial
position so that they can make an economic decision. If the judgement is not used carefully
by the management of CSL limited then it can impact the profits of CSL limited and it also
affect other policies such as depreciation policies of CSL limited. The policies used to impair
the assets or certain policies applied in the recognition of foreign currency of CSL can also be
affected by the professional judgement. The company has used the policy of SLM basis to
compute the depreciation of its non-current assets. Professional judgements are also used by
certain entities in developing accounting policies on that financial statements which are
prudent, neutral, complete and which reflect true financial information an financial
performance of the entity. While making professional judgement the management of the
entity can also refer to the pronouncement of similar bodies.
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Answer b)
After analyzing the audited financial position of CSL LIMITED for the year ended 30 June
2018, it has been identified that the PPE of the company is recognized at original cost minus
total deprecation minus the value of impairment in assets. The cost of the assets includes
those amounts of expenditure which can be identified directly for the purchase of assets.
According to Alan et al. (2017, p-19), if there is a possibility that the company will be able to
receive future cash flows from the acquired assets and the original cost of the assets can be
reliably measured than the subsequent cost which is a part of the carrying amount should be
shown as a separate asset. The expenditures of the company which are related to any
leasehold property are added to the cost of the assets and are written off over the periods
which are unexpired or the expected useful life, whichever is less. The accountant of the CSL
limited at each date of reporting reviews the useful life and the residual values of the assets. If
the recoverable amount is less than the carrying amount then the carrying amount of the
assets is reduced to the assets recoverable amount. When the assets are sold by CSL then the
losses and gains on assets are evaluated by comparing the carrying amount of the assets as on
the date of sale with the proceeds of the assets. The profit and losses on the assets sold are
transferred to the statement of profit and losses. Company follows the policies of SLM basis
for depreciating its assets and the depreciation begin from the date when the assets are ready
for use. The depreciation period which is used for equipment and plant is 3 to 15 years and
for Building, useful life of 3-5 years has been taken. The maintenance and repairs on assets
are measured on the profit and loss account immediately on the period when the expenditures
are incurred by the entity.
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Figure no. 1 Recognition of PPE (Source: Anon, 2019)
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Answer c)
The professional judgement which has considered by CSL LIMITED in accounting estimates
and also in accounting policies is appropriate and also reasonable. The company has followed
the provisions and rules of ASSB108 and AASB 116. To initially measure the assets of the
organization the company has used the cost model which is relevant as per the industry
norms. The management has CSL LIMITED has recognized the PPE as separate assets only
when there was a probability that certain amount of cash flows will flow to the entity in
future. This judgement is also appropriate as most of the entities in Australia such as AMP
limited, Appen limited, etc uses this policy of classifying the assets of company as separate
class of assets. According to Hu et al. (2015, p-930), it is also reasonable to transfer the loss
or profit which arises on the sales of any assets of the company to Profit and loss account.
CSL LIMITED does not apply the method of revaluation model because if the company
applies revaluation model then each year the company has to revalue its assets which can also
incur additional cost for the company. The company follows the policies of adjusting the
useful life of their assets which are also considered reasonable as the estimation of useful life
is based on the changes in the industry norms and policies. The company has applied the
policy of straight line to depreciate its asset which is considered appropriate according to the
rules and policies of the industry.
Answer d)
Recommendation
After evaluating the Accounting policies applied in CSL LIMITED it has been seen that the
company has applied the cost model to initially recognize its assets. The company can also
use the revaluation model instead of cost model. The revaluation model allows the entity to
measure the PPE at its carrying amount which shows the fair value of the asset. In revaluation
model, the profits on the asset will be transferred to OCI instead of P&L. Diminishing
method has been used to depreciate the PPE of CSL LIMITED. The accountant of CSL
LIMITED can also use the reducing method instead of SLM method as the annual
depreciation on assets reduces every year with the diminishing balance. The net profits of the
company will reflect at a higher value as compared to SLM method.
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Conclusion
It has been concluded that for fair accounting of PPE the company should adhere to the rules
and provisions of AASB 116. It is also found that for similar transaction the company should
select the same accounting policies every year. The entity shall account for any change in
their accounting policies when there is any notification issued by the AASB for the required
significant changes.
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References
Alan, L., Manicka, K.M. and Har, T.W.L., (2017). Effective Depreciation Model for
Commercial Vehicles in Malaysia. Management & Accounting Review (MAR), 16(1), pp.119-
136.
Anon, 2019. Annual Reports. [online] Available at: https://www.csl.com/investors/financial-
results-and-information/annual-reports [Accessed 24 Sep. 2019].
Handley, K., Wright, S. and Evans, E., (2018). SME Reporting in Australia: Where to Now
for Decision‐usefulness?. Australian Accounting Review, 28(2), pp.251-265.
Hu, F., Percy, M. and Yao, D., (2015). Asset revaluations and earnings management:
Evidence from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.
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Appendices
Figure 1: PPE (Source: Anon, 2019)
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