Financial Reporting: Asset Recognition, Depreciation, and Errors

This document presents a memorandum and a comprehensive solution to an accounting assignment. It addresses the recognition of assets in relation to government allowances, referencing the Australian Accounting Standards Board (AASB) conceptual framework. The solution explains the criteria for asset recognition, including control, future economic benefits, and measurability, and applies these principles to government-provided carbon emission allowances. Furthermore, the assignment includes a statement of profit or loss and other comprehensive income for Capricorn Holdings Ltd, detailing financial performance and comprehensive income components. It also analyzes the treatment of prior period errors, particularly changes in depreciation estimates due to revised production units and asset useful lives, as per AASB 108, providing calculations and required disclosures in notes to accounts. References to AASB standards are also included, providing a complete accounting solution.

Question-1
Memorandum
DATE: 22 August 2017
TO: Chief Accountant
FROM: Advisor
SUBJECT: Recognition of Asset in Respect of Government Allowances
Hi!
We have prepared our response in accordance with the guidelines and provisions of
conceptual framework issued by the Australian Accounting Standard Board. The query in
regards to recognition of assets against the government allowances is addressed as below:
(a)
An item of financial statements is called asset when three qualities such as control, future
economic benefits, and past events are found. This implies that a financial transaction is
recognized as asset when a resource comes under the control of the entity as a result of past
events from which economic benefits are expected in future (AASB, 2014). The criteria for
recognition of asset as provided in the conceptual framework states that an asset should be
recognized in the statement of financial position if the following conditions get fulfilled:
 It is ascertainable with reasonable certainty that the economic benefits in future will
flow to the entity and the entity will be benefited.

 There must not be any ambiguity in the measurement of the asset’s value. This means
that the value of assets should be measurable with clarity (AASB, 2014).
Question-1 (b)
Oris Engineering Ltd produces emissions of carbon dioxide (CO2) as by product which
are causing hazard to the environment. The Australian government wants to reduce emissions of
carbon dioxide and for this it has brought emission right scheme. Under this scheme the
companies producing carbon dioxide are given free allowances which they can use against the
production of carbon dioxide. These allowances are in the form of license or right. The company
can use these allowances to set off the liability against the carbon emissions. If the allowances
fall short, the company will have to purchase from the market and the same way if the company
has excess allowances it can sell it in the market.
Therefore, Oris Engineering Ltd has two types of allowances on hand, one is given by the
government for free and another is purchased from the market. Both the types of allowances are
asset of the company. Both the types of allowances are under the companies control, future
economic benefits are expected from both, and both are the result of past event (carbon
emission). Thus, merely because the allowances given by the government are free of charge does
absolve them to be recognized as asset. There is established market for trade of allowances and
hence the value of allowance can be determined at any point in time. The free allowances could
be valued with reference to the market rates and these could be shown in the books as asset on
the market value (AASB, 2014).

Question-2 (a)
Capricorn Holdings Ltd
Statement of Profit or Loss and Other Comprehenisve Income for the Year
Ended 30 June 2016
Particulars Note $'000 $'000
Sale 50,000.00
Other income 5,000.00
Net revenue and other income 55,000.00
Cost of goods sold (30,000.00)
Other operating expenses (1,500.00)
Operating profit/loss 23,500.00
Distribution expenses (5,000.00)
Occupancy expenses (3,500.00)
Administrative expenses (3,000.00)
Earnings before interest and tax 12,000.00
Finance costs (2,000.00)
Profit before tax 10,000.00
Income tax expense (3,000.00)
Profit for the year 7,000.00
Loss for the year from discontinued
operations (2,000.00)
(Loss)/profit after taxation from
Continuing and Discontinued
operations 5,000.00
Other comprehensive income
Items that may be reclassified
subsequently to profit or loss
Exchange differences on translation of
foreign operations 4,500.00
Unrealized losses on cash flow hedges (1,000.00)
Tax on above items (1,500.00)
Total 2,000.00
Items that will not be reclassified
subsequently to profit or loss
Revaluation of property, plant and
equipment 6,000.00
Loss on investments in equity
instruments (2,000.00)
Tax on above items (1,000.00)

Total 3,000.00
Total comprehensive (loss)/income 10,000.00
Question-2 (b)
30 June 2017 Line item description: Amount ($):
Profit or loss Gain on sale of financial assets 0.00
Other comprehensive income Valuation gains/(losses) taken to equity 80,000.00
Total comprehensive income 80,000.00
30 June 2018 Line item description: Amount ($):
Profit or loss Gain on sale of financial assets 800,00.00
Other comprehensive income Valuation gains/(losses) taken to equity 0.00
Total comprehensive income 80,000.00

Question-3 (a)
As per AASB 108, the prior period errors are the omissions and misstatements in the
financial statements of prior periods of an entity that are detected in the current period. Thus, for
being treated as prior period error it is essential to have omission or misstatement there in the
financial statements of prior periods. If there was no omission or misstatement, the financial
items can not be treated as prior period error though it may be change in the accounting policy or
accounting estimate (AASB 108, 2011).
In the case of Nelson Ltd, the change in depreciation arising due to change in the number
of production units or reassessment of the useful life of the asset can not be treated as the prior
period error. Rather, it will be treated as the change in accounting estimate. The change in the
unit of production and the useful life is the matter of accounting estimate. Thus, the treatment
given by the company is not correct (AASB 108, 2011).
Question-3 (b)
Year
ended
Depreciation
expense Supporting calculations
30-Jun-15 80,000.00 (280000-30000)*40000/125000
30-Jun-16 50,000.00 (280000-30000)*25000/125000
30-Jun-17 84,000.00 (280000-0)*30000/100000
30-Jun-18 84,000.00 (280000-0)*30000/100000
30-Jun-19 56,000.00 (280000-0)*20000/100000

30-Jun-20 56,000.00 (280000-0)*20000/100000
Question-3 (c)
As per the provisions of AASB 108, the entity is required to make proper disclosures in
regards to changes in the accounting estimates in its financial statements. The entity is required
to disclose the nature and amount of change, therefore, Nelson Ltd should disclose the change in
estimation of units of production and change on the useful life of machinery. Further, it should
also disclose the effect of such changes on the profit and loss of the year (AASB 108, 2011).
Question-3 (d)
Notes to Accounts: Financial Year 2016-17
The company’s policy is to charge depreciation on machinery based on the units of
production method. Initially, it was estimated that the machine will produce a total of 125,000
units over its life span of 5 years. However, after charging depreciation for two years, these
estimates have been revised in the current financial year. The useful life of machine is revised
from 5 to 6 years. The remaining useful life of machinery now will 4 years with the total
estimate production of 100,000 units. Further, the salvage value of the machine is also estimated
to be zero. The new charge of depreciation in the year 2017 arrived at based on revised estimates
is $84,000.00. If the estimates were the same, the depreciation would have been $50,000 which
implies that the profits of the current year are lowered by $30,000.

References
AASB 108. 2011. Accounting Policies, Changes in Accounting Estimates and Errors. Retrieved
23 August 2017, http://www.aasb.gov.au/admin/file/content105/c9/AASB108_07-
04_COMPmay11_07-11.pdf
AASB. 2014. Framework for the Preparation and Presentation of Financial Statements.
Retrieved 23 August 2017, http://www.aasb.gov.au/admin/file/content105/c9/Framework_07-
04_COMPjun14_07-14.pdf