ACC510 Financial Reporting Task 2 – Major Assignment, Semester 2

This document presents a comprehensive solution for ACC510 Financial Reporting Task 2, covering various aspects of financial accounting. It begins with a case study analysis based on AASB 116, focusing on fair value measurement of property, plant, and equipment, including considerations for 'highest and best use' and application to aged care homes. The solution then addresses Exercise 7.14, applying AASB 136 to impairment testing, including detailed calculations and journal entries for both 2016 and 2017. Case Study 6.1 is analyzed, differentiating between research and development phases according to AASB 138, and explaining the accounting treatment for research and development costs. Finally, the solution tackles Exercise 9.19, which involves accounting for employee benefits and defined benefit plans, including calculations for the deficit of the fund, net defined benefit liability, net interest, and reconciliation, along with a summary journal entry. References to relevant accounting standards and literature are also provided.

ACC510 - 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................................................................................................................................4
Accounting Justification:................................................................................................................4
Relevant Issues:.............................................................................................................................4
1. Impairment Test 31/12/16....................................................................................................4
a. Calculations:.......................................................................................................................4
b. General Journal Entries 31/12/16:.....................................................................................5
2. Impairment Test 31/12/17....................................................................................................5
a. Calculations........................................................................................................................5
b. General Journal Entries 31/12/17:.....................................................................................6
Question 3.Case Study 6.1.....................................................................................................................7
Accounting Justification:................................................................................................................7
Relevant Issues:.............................................................................................................................7
1. Difference between two phases:...........................................................................................7
2. Accounting for Research & Development:.............................................................................7
3. Decision / Conclusion / Reasons and Justification:................................................................8
Question 4. Ex 9.19................................................................................................................................8
Accounting Justification:................................................................................................................8
Relevant Issues:.............................................................................................................................8
1. Deficit of Fund.......................................................................................................................8
2. Net Defined Benefit Liability..................................................................................................8
3. Net Interest............................................................................................................................8
4. Reconciliation........................................................................................................................9
5. Summary Journal.................................................................................................................10
References...........................................................................................................................................11
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Question 1.Case Study 3.1
Accounting Justification:
AASB 116 outlines the accounting treatment for property, plant and equipment. For the
measurement of fair value of these tangible asset this standards lays down provisions for recognition
and measurement of fair value (AASB 116.Property Plant and Equipment, 2016). The initial cost of
acquiring the asset and the subsequent cost for repairs and maintenance are included in the cost of
the asset for the measurement of fair value. The measurement of any item of plant, property and
equipment is done at cost. The cost of an item will be the cash price paid. For the purpose of
recognition the entity can use the revaluation model or cost model provided by the standard. As per
the cost model the cost of the asset less its accumulated depreciation would be the book value. The
revaluation model measures fair value of any asset at a particular date after considering the market
participants interest in the property.
Relevant Issues:
1. Highest & Best Use
The concept of highest and best use reflects an assumption upon which the fair value
of the asset is based. For the purpose of determining most probable selling price it may
be appropriate to reflect highest and best use. Determination of highest and best use
involves recognizing the motivations of market participants. These motivations are
based up on expectations of benefits that will accrue to property owner.
2. Application to aged care home
When not for profit entities acquire an asset as result of charity, then the cost of the
item will be its fair value measured at the date of acquiring the asset (Collings, 2015). The
initial recognition is done at fair value. For the Not- For- profit entities it is reasonable to
valuate an asset at the cost model, after the initial recognition. The fair value is generally
measured by the market evidence undertaken by professional.
3. Two possible uses
Thus, two possible uses of any asset will be its current use and the highest and the best use.
The physical assets of old aged home are not put to their best use. If the asset is sold to any
market participant, he will use the asset to generate profit. This creates discrepancy in
measuring the fair value.
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Question 2. Ex 7.14
Accounting Justification:
AASB 136 provides provision relating to impairment of assets. Para 58 to 64 of the specified
standard provides specification relating to recognition and measurement of impairment loss
on assets.
Relevant Issues:
Para 104-108 specifies the provision relating to impairment of loss on cash generated unit.
Same provision have been applied in present case in order the ascertain capital loss on cash
generating unit.
1. Impairment Test 31/12/16
a. Calculations:
Impairment loss of Time
Total carried value of Time - Recoverable value of Time = Impairment loss (Liang and Riedl,
2013)
$1244 -$1044
=$200
Allocation of impairment loss to specified asset:
Goodwill
Impairment loss will be provided to goodwill till its value becomes zero (Capalbo, 2013); thus out of
$200, $25 will be allocated to goodwill.
Patent
As fair value of patent at the end of year is individually available i.e. $220; thus the same will
recorded at books at this value. The amount of loss allocated to patent will be $240- $220 i.e.$20
Plant
The remaining amount of impairment loss will be allocated to plant i.e. ($ 200 -$25 -$20) $155. Thus,
the amount at which plant will be recorded in books of accounts will be ($850- $155) i.e. $ 695.
Impairment loss of Leisure
Total carried value of Time - Recoverable value of Time = Impairment loss
=$1002 -$990
=$12
Allocation of impairment loss to specified asset:
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Goodwill
Impairment loss will initially be provided to goodwill till its value becomes zero or till the total
amount of impairment loss is adjusted; whichever is lower. Thus out of $12 will be allocated to
goodwill and the amount at which goodwill will be recorded in books of accounts will be ($20 -$12)
$8.
b. General Journal Entries 31/12/16:
Date Account DR CR
31st December
2016
Impairment Loss A/c 200
To Patent A/c 20
To Goodwill A/c 25
To Accumulated depreciation
impairment loss- Plant
155
(Recognition of impairment loss
relating to time division)
31st December
2016
Impairment Loss A/c 12
To Goodwill A/c 12
(Recognition of impairment loss
relating to leisure division)
2. Impairment Test 31/12/17
a. Calculations
Impairment loss of Time
Total carried value of Time - Recoverable value of Time = Impairment loss (International
Accounting Standards Board, 2014)
$1322-$1502
As recoverable value is higher than carried value; no impairment loss will be recognized in this year .
Impairment loss of Leisure
Total carried value of Time - Recoverable value of Time = Impairment loss
=$1433 -1520
As recoverable value is higher than carried value; no impairment loss will be recognized in this year.
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In accordance with provision specified in Para 9 of AASB 136; it is necessary for an entity to ascertain
whether the carrying amount of an asset exceeds its recoverable amount at the end of each
reporting date . In present case the recoverable value is higher than carried value in case of division
time as well as division leisure; thus no impairment loss is present at the year ended on 31.12.2017
b. General Journal Entries 31/12/17:
Date Account DR CR
No journal entry required as no
impairment exists in present scenario.
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Question 3.Case Study 6.1
Accounting Justification:
According to the AAS 138, an intangible asset can be referred to as a non-monetary
asset that is capable of being identified without physical existence. There are certain cases
where the expenditure incurred for generating future economic benefits for creating intangible
asset does not results in the same even if the asset meets the criteria provided by the standard. This
can be said in case of internally generated goodwill. According to the provisions of the standards of
accounting for goodwill, the internally generated goodwill must not be treated as an asset. This is
because it is difficult or impossible to identify the proceedings or transactions which only add to the
entity’s goodwill. Even if the events are identifiable, their capacity and value of generating future
economic benefits cannot be measured reliably. Thus, if the internally generated intangible is
goodwill, it will not be recognised as an asset and will either be completely unrecognised or be
recognised as an expense.
However, if the internally generated asset in other than goodwill, like patents, research and
development activity, the accounting is done on the basis of initial recognition rather than
subsequent accounting. Thus as per the AAS 138, the entity needs to distinguish between accounting
for initial and subsequent stage particularly when the asset is created over a period of time.
Relevant Issues:
1. Difference between two phases:
The difference between the two phases in that the research phase involve systematic work
for increasing a knowledge and development means the application of the work researched.
The initial and subsequent recognition is also done separately for the purpose of creating a
difference. Cost model and fair value model can be used to recognize the cost associated with
each phase.
2. Accounting for Research & Development:
For the purpose of indentifying the accounting for intangibles that are developed over an
extended period of time, it is important to divide the entire development into the research phase
and the development phase (AASB 138.Intangible Assets, 2016). The costs related to research are
generally treated as an expense being incurred under current AASB and other requirements. This is
because of a majority view that by their very nature the research costs are too inaccessible, to be
regarded as costs that give rise to an asset from their eventual possible outcome. The AASB and
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certain other national standard setting Boards require the costs associated with the development of
intangible to be capitalised if it meets the specific criteria.
3. Decision / Conclusion / Reasons and Justification:
In order to eliminate the issues arising from the difference between acquiring and developing
assets, it is necessary to account for developed asset as per the provisions provided above.
Question 4. Ex 9.19
Accounting Justification:
AASB 119 specifies provision relating to employee benefits. Provision relating to recognition
and measurement of defined benefit plan has been specified in Para 56-60 of AASB 119
(AASB 119. Employee Benefit, 2016). Further, Para 66 of the specified standard specifies
provision regarding recognition and measurement of present value of defined benefit
obligation and current service cost.
Relevant Issues:
In present case present value of defined benefit valuation has been ascertained in
accordance with provision specified in Para 66 of AASB 119.
1. Deficit of Fund
$ 2870000
Working note
Deficit
= Value of defined benefit obligation as on 31-12-16 - Fair value of defined benefit obligation
as on 31-12-16 (FIPA & et.al. , 2017)
= 23000000 -$20130000
=$2870000
2. Net Defined Benefit Liability
$2870000
It has the value equal to deficit.
3. Net Interest
Cost of past service – Interest Income (Hitz, 2013)
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= (20000000+2000000 *10%) -(19000000 *10%)
= = $2200000-$1900000
= $300000
4. Reconciliation
(Amount In $000)
Net defined
benefit
liability
$
Defined
benefit
obligation
$
Plan assets
$
Balance 1 January 2016 1000 20000 19000
Past service cost 2000
Revised balance 22000 19000
Interest @ 10% 2200 1900
Current service cost 800
Contributions received by fund 1000
Benefits paid by fund (2100) (2100)
Return on plan assets excluding interest recognised
*
330
Actuarial loss on remeasurement of DBO 100
Balance 31 December 2016 2870 23000 20130
Working note relating to calculation of return on plan assets excluding interest
Particular Amount in $
value of plan assets as on 31-12-16 $2013000
Opening Balance (19000000)
Interest Income (1900000)
Contribution Received (1000000)
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Benefit paid 2100000
Return on plan excluding interest $330000
5. Summary Journal
(Amount in $000)
Profit or Loss
(Debit)
Other
comprehensive
Income
Bank Net DBL(A)
Balance 1 January 2016 1000
Past service cost 2000
Net interest 300
Service cost 800
Contributions paid to the
fund
1000
Gain on plan assets (ex.
interest)
330
Actuarial loss on DBO (100)
Journal entry 3100 230 1000 1870
Balance 31 December
2016
2870
Journal Entry
31st December 2016 Superannuation Expense A/c $3100000
To Income relating to superannuation A/c $230000
To Bank $1000000
To net superannuation defined benefit plan A/C $1870000
Page 10 of 11

References
Books and Journal
Capalbo, F., (2013). Impairment of Assets.
Collings, S., (2013) Impairment of Assets. Interpretation and Application of UK GAAP: For
Accounting Periods Commencing On or After 1 January 2015, Pp.241-259.
Dinh, T., Eierle, B., Schultze, W. &Steeger, L., (2015). Research and development,
uncertainty, and analysts’ forecasts: The case of IAS 38. Journal of International
Financial Management & Accounting, 26(3). Pp.257-293.
FIPA, M.T.G., Stylianou, M.V., Carey, P., Cooper, B., Tanewski, G. &Mroczkowski, N., (2017).
Accounting of Defined benefit plan. IPA-Deakin SME Research Centre.
Hitz, J.M., (2013). Capitalize or expense? Recent evidence on the accounting for intangible
assets under IAS 38 by STOXX 200 firms. Zeitschrift für Internationale
Rechnungslegung IRZ, 5, Pp.319-324.
International Accounting Standards Board, (2014). International accounting standards IAS
36, Impairment of assets, and IAS 38, Intangible assets. IASCF Publications Dept..
Liang, L. and Riedl, E.J., (2013). The effect of fair value versus historical cost reporting model
on analyst forecast accuracy. The Accounting Review, 89(3), Pp.1151-1177.
Online
AASB 116.Property Plant and Equipment. (2016). (PDF). Available through <
http://www.aasb.gov.au/admin/file/content105/c9/AASB116_07-
04_COMPjun09_07-09.pdf>. [Accessed on 8th October 2017.]
AASB 119. Employee Benefit. (2016). (PDF). Available through <
http://www.aasb.gov.au/admin/file/content105/c9/AASB119_09-11.pdf>. [Accessed
on 8th October 2017.]
AASB 138.Intangible Assets. (2016). (PDF). Available through <
http://www.aasb.gov.au/admin/file/content105/c9/AASB138_07-
04_COMPjun14_07-14.pdf>. [Accessed on 8th October 2017.]
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