ACC510 Financial Reporting Task 2 - Major Assignment, ATMC, 2017

This document presents a detailed solution to ACC510 Financial Reporting Task 2, a major assignment completed at ATMC in Semester 2, 2017. The assignment addresses four key questions, each exploring crucial aspects of financial reporting. Question 1 examines fair value measurement, its accounting justifications, and its application in an aged care home scenario. Question 2 focuses on impairment testing, including calculations and journal entries for both 2016 and 2017. Question 3 delves into the accounting treatment of research and development costs, differentiating between the two phases. Finally, Question 4 analyzes employee benefit plans, specifically defined benefit plans, including calculations for deficit, net defined benefit liability, net interest, reconciliation, and summary journal entries. The solution provides accounting justifications, relevant issues, and detailed calculations for each question, referencing relevant accounting standards and providing insights into complex financial reporting topics.

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:
Fair value may be defined as the estimated sale price which the willing seller can get from
the willing buyer when both the parties have considerable knowledge of the market
conditions and the asset is being sold in a neutral market at the arm’s length price. This has
been extensively dealt and explained in AASB 13, Para B2 of the standards which deals with
Fair Value measurement (Abbott & Kantor, 2017). The same has also been defined in Para
36 and Para 11 of the conceptual framework of general purpose statements. The
determination of fair value in any transaction is a debatable issue because it is purely based
on the judgements and estimates being taken into consideration. It depends on what is the
best and highest possible use of a particular asset and what are the assumptions being
taken by the valuer. It may fluctuate largely from one user to another. The transaction cost
here can be recognised only when the following 2 circumstances are being met:
1. It should directly relate to the concerned entity.
2. It would not have come into picture had the party not decided to sell the asset or
transfer the liability.
Relevant Issues:
The issue of discussion here is that the fair value being a subjective topic may fluctuate
invariably from person to person based on the assumptions taken. Further, the value of PPE,
if calculated via fair value may be different on different days depending on the assumptions
taken (Alexander, 2016). It may be low for a non-profit organization and it may be fairly high
for the organization which uses it for the commercial purposes. It however, depends on the
best possible use of the asset in question.
1. Highest & Best Use
The term highest and best use is meant in context of the non-financial assets when the fair
value is computed. It is based on the principle that what will be the market value of the
asset when it is sold in the rational market or it is being sold to the market participant who
will extract the maximum benefit out of the asset. During fair valuation, following 3 factors
are kept in to consideration namely the physical existence of transaction and asset, the
financial viability and the legal status of the transaction (Das, 2017).
2. Application to aged care home
The value of an asset depends on the way it is put to use like the same asset mat be valued
less if it’s used for an old aged home whereas it may be fairly high if its used for an
commercial entity dealing in profits. But, in actual sense, the value of the asset should not
change based on the type of entity and it should be based on the price at the time of exit as
on the measurement date.
3. Two possible uses
Fair valuation is used across many situations by the companies. It is used while doing the
impairment assessment for both the tangible and intangible assets, while valuation of the
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inventory as per the IFRS standards, while taking over entity in the course of amalgamation
or merger, etc. Further, it is a basic requirement in some of the IFRS standards as well.
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Question 2. Ex 7.14
Accounting Justification:
The impairment may be defined as the permanent true down in the value of the asset
depending on the indicators existing at that time. The indicators may be internal or external.
The topic of impairment is being dealt with in AASB 136 and Agenda 10F(A) of the
conceptual framework of general purpose financial statements (Dichev, 2017). It discusses
on both the impairment of tangible as well as intangible assets. The assets should not be
carried in the books at more than the recoverable value which is the fair value less the cost
of disposal or the value in use, whichever is higher. The impairment needs to be reassessed
at the end of every accounting year.
Relevant Issues:
In the give case study, it has been asked to do the impairment assessment of the two CGU
of the company namely time & leisure. The company has changed the amount of
depreciation based on the study and the impact of the same on the impairment needs to be
analysed. (Visinescu, Jones, & Sidorova, 2017)
1. Impairment Test 31/12/16
a. Calculations:
As per the calculations shown below, the 2 CGUs, Time and Leisure needs to be impaired by
the amount $ 200 and $ 12 respectively. (Murray & Markey Towler, 2017)‐ As per the IFRS
standards, the impairment loss needs to be first assigned to the Goodwill and then to the
remaining assets. Inventory and receivables being the current assets held for sale need not
be impaired.
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
In the year ended 31st December, 2017 the carrying values of the assets have changed since
the company has changed the depreciation amount for the year. Also, the amount of
impairment in goodwill last year cannot be reversed. 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:
Paragraph 8 of AASB 138 deals with the classification, identification, measurement and
accounting of the research cost particularly in the case of the intangible assets. (Trieu, 2017)
Furthermore, SSAP 13 of the conceptual accounting framework also deals with the issues
research and development costs of intangible assets. Research cost is the initial cost being
incurred by the company when it is not sure of whether the project can be taken to
development or if it will be profitable and feasible to go ahead with it. It is the process
before the development of the asset starts. Development is a post facto activity which is
done once the research is over and the company has decided to pursue with the
development based on the technical feasibility and future economic benefits available. In
the development phase, the company develops the innovative products or the
technologically enhanced product based on the findings during the research phase
(Heminway, 2017). In case there is a classification issue between the research and the
development phase, the same needs to be considered as the research cost entirely in the
absence of the necessary information.
Relevant Issues:
The relevant issue here for discussion is the classification between the research and the
development cost and how the same is to be accounted in the financial books of accounts.
1. Difference between two phases:
Going by the definition, we can find a lot of differences between the research and the
development phase. However, the major difference here is the research phase may or
may not give rise to the intangible asset in the books but once the development is there,
it is certain to give rise to asset in the books. The stage of development always comes
after the research phase and when the technical and scientific feasibility of the same has
been seen. (Raiborn, Butler, & Martin, 2016)
2. Accounting for Research & Development:
The research cost is the cost which may or may not give financial feasibility to the
company and hence the company is not sure to account it as an asset and hence the
same should be charged as expense to P&L as and when it is incurred (Félix, 2017).
However, development of the asset occurs only when the company has checked on the
technical and scientific feasibility and that the development is going to give the future
economic benefits to the entity and should therefore be accounted as intangible assets
in the books. In case any incidental or related costs are incurred during development
phase, the same should also be capitalized.
3. Decision / Conclusion / Reasons and Justification:
The conclusion on the basis of the above study is that the research expenses needs to be
charged off as expenses in the P&L whereas the development expenses needs to be
capitalized to form the intangible asset. However, before accounting the same, few
situations needs to be checked like if it is saleable in the open market, if it is
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commercially feasible, whether there was an intention to create the asset, whether
there will be any future economic benefits out of it and finally if it can be reliably
measured.
Question 4. Ex 9.19
Accounting Justification:
AASB 1056 deals with the employee benefit plans namely the defined benefit plan and
superannuation. These are the benefits which are being offered by the company to the
employees in lieu of their services such that they will receive the amount after retirement
just like in the case of pension. The employee have an option whether to choose for defined
benefit plan where only the employer contributes to the fund or defined contribution plan
where both the employer and the employee contributes towards the plan (Werner, 2017).
In this case study, even though the company has stopped giving this benefit to new
employees, it contributes towards the common fund of the old employees. The returns in
this particular case depends on interest rate prevailing at the time of investment by the
company and other factors too. (Jones, 2017)
Relevant Issues:
In the given case, the value of the asset or liability for the company needs to be determined,
for which the detailed calculation has been 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
Deficit amount in the fund comes to $ 1,100,000 (2,100,000 – 1,000,000)
2. Net Defined Benefit Liability
The net defined benefit liability at period end for the company is $ 23,000,000
3. Net Interest
The net interest (Present value of defined benefit obligation account) as shown above in the
2nd 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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