ACC510: Financial Reporting Task 2 - Major Assignment, Semester 2

This document presents a comprehensive solution for ACC510 Financial Reporting Task 2, covering key aspects of financial reporting. The solution addresses four main questions, including a case study on fair value measurement and the "highest and best use" principle, with detailed accounting justifications and relevant issues. It also includes an exercise on impairment testing, providing calculations and journal entries for both 2016 and 2017. Furthermore, the assignment explores accounting for research and development, differentiating between research and development phases and providing accounting treatments. Finally, the solution tackles an exercise on employee benefits, focusing on a defined benefit plan, calculating the net defined benefit liability, net interest, and a reconciliation of the defined benefit obligation and plan assets, along with the summary journal entries. The document references relevant AASB standards throughout the solution.

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................................................................................................................................4
Accounting Justification:................................................................................................................4
Relevant Issues:.............................................................................................................................4
1. Impairment Test 31/12/16....................................................................................................4
a. Calculations:.......................................................................................................................4
b. General Journal Entries 31/12/16:.....................................................................................4
2. Impairment Test 31/12/17....................................................................................................4
a. Calculations........................................................................................................................4
b. General Journal Entries 31/12/17:.....................................................................................4
Question 3. Case Study 6.1....................................................................................................................5
Accounting Justification:................................................................................................................5
Relevant Issues:.............................................................................................................................5
1. Difference between two phases:...........................................................................................5
2. Accounting for Research & Development:.............................................................................5
3. Decision / Conclusion / Reasons and Justification:................................................................5
Question 4. Ex 9.19................................................................................................................................6
Accounting Justification:................................................................................................................6
Relevant Issues:.............................................................................................................................6
1. Deficit of Fund...........................................................................................................................6
2. Net Defined Benefit Liability......................................................................................................6
3. Net Interest................................................................................................................................6
4. Reconciliation............................................................................................................................6
5. Summary Journal.......................................................................................................................6
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Question 1.Case Study 3.1
Accounting Justification:
As per the provisions of Para 6.21 of the AASB conceptual framework, the fair value means
the price that is agreed between the buyer and seller in the ordinary course of business. The price of
assets or liability is determined by the mutual agreement between the market participants acting in
their best economic interest (AASB, 2015).
Further, the AASB-13 provides guidance on the use of fair value in the valuation of assets and
liabilities. As per Para-27 of AASB-13, while determining the fair value of non-financial assets, it is
crucial to take into account the market participant’s ability to use the asset to generate highest and
best benefits (AASB 13, 2012).
Relevant Issues:
1. Highest & Best Use
The highest and best use principle entails the use of property being valued at its highest
capacity. The highest capacity of the property is determined with reference to three
dimensions such as physical, legal and financial. The physical dimension means the
characteristics of the asset to be taken into account while valuing the asset such as
location and size. The legal dimension means that the property under valuation must not
have any legal issues. Financial dimension relates to assessing that whether the property
being valued can provide the required rate of return to the market participants. The
highest and best use principle values the property in accordance with its maximum
capacity disregarding the current use of the property (AASB 13, 2012). This means that if
as per the current use the property is valued at $100 but it’s capacity is more and at its
highest capacity it can be valued at $300, then the fair value of the property would be
$300.
2. Application to aged care home
The value of aged care home arrived at as per the highest and best use is $10 million.
The aged care home is currently being used for altruistic purposes and there is no
intension to knock it down to build flats. However, there is no intension to knock down
the aged care home, but it could be done and it suits physically and permitted legally.
Thus, if aged care home is used to its best, the market participants could reap out the
value of $10 million.
3. Two possible uses
The two possible usages of Highest and Best use principle are given below:
1.) In Valuation of the non-financial assets such as property, plant and equipment.
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2.) In the valuation of non-current liabilities (AASB 13, 2012).
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Question 2. Ex 7.14
Accounting Justification:
As per Para-6 of AASB 136, the impairment loss is booked on an asset when the
realizable value of the asset goes below its carrying amount. In the case of cash generating
unit, the impairment loss is computed with reference to the assets comprised in the cash
generating unit collectively (AASB 136, 2010). The carrying amount of the cash generating
unit is determined by adding the carrying amounts of the individual assets together. The
recoverable amount of the cash generating unit is assessed collectively for all the assets.
Further, the impairment loss is also calculated for all the assets of a cash generating unit
collectively and then it is allocated to the individual assets based on their carrying amounts.
However, the impairment loss is allocated to goodwill in full first and then to the individual
assets in proportion to their carrying amounts. The impairment loss of the year is charged to
the statement of profit and loss immediately (AASB 136, 2010).
In the case of CGU, the impairment loss is allocated to the assets comprised in the
CGU based on their carrying amounts. Further, the impairment loss of CGU is reversed in
accordance with the provisions of AASB-136. It is to be taken care of that while reversing the
impairment loss, the carrying amount of the asset does not go below of what it has been
had not impairment loss been recognized (AASB 136, 2010).
Relevant Issues:
1. Impairment Test 31/12/16
a. Calculations:
A. Carrying amount of cash generating unit
including goodwill (2016)
Time Leisure
Plant less Accumulated
depreciation 850.00 825.00
Receivables 75.00 82.00
Patent 240.00 -
Inventories 54.00 75.00
Goodwill 25.00 20.00
Total 1,244.00 1,002.00
B. Recoverable amount 1,044.00 990.00
C. Impairment Loss (A-B) 200. 12.
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00 00
Allocation of impairment
loss
Time Leisure
Goodwill 25.00 12.00
Plant 136.47
Patent 38.53
b. General Journal Entries 31/12/16:
Date Account DR CR
31/12/16 Impairment loss 212.00
Goodwill-Leisure 12.00
Goodwill-Time 25.00
Plant 136.47
Patent 38.53
31/12/16 Profit and loss 212.00
Impairment loss 212.00
2. Impairment Test 31/12/17
a. Calculations
A. Carrying amount of cash generating unit
including goodwill (2017)
Time Leisure
A. Carrying amount 1,322.00
1,433.0
0
B. Recoverable amount 1,502.00
1,520.0
0
C. Impairment Loss (A-B) Nil Nil
D. Reversal 180.00 87.00
Reversal of impairment loss
Time Leisure
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Goodwill - -
Plant 136.47 -
Patent 38.53 -
b. General Journal Entries 31/12/17:
Date Account DR CR
31/07/2017 Plant 136.47
Patent 38.53
Impairment loss 175.00
31/07/2017 Impairment loss 175.00
Profit and loss 175.00
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Question 3.Case Study 6.1
Accounting Justification:
According to the conceptual framework, to be able to recognize a financial
transaction as asset, it should be a resource under the entity’s control which arose as a
result of past events and from which economic benefits are expected in future (AASB, 2015).
Further, AASB 138, “Intangible assets” makes it clear that only the paid intangibles
are to be accounted for as asset in the books. The internally generated goodwill or patent is
to be accounted as asset only when it meets the recognition criteria (AASB 138, 2014).
Relevant Issues:
1. Difference between two phases:
The expenditure incurred on the development of an intangible asset is divided into two
phases such as research and development. The research phase is the initial phase in
which activities on the development of intangible assets initiates (AASB 138, 2014).
Further, the development phase starts after completion of the research phase. The
activities in the research phase do not give rise to any asset and therefore entire
expenditure of the research phase is expensed in the profit and loss account. However,
the activities of the development phase may give rise to the intangible asset. Whether
the intangible asset is being created or not will depend upon the satisfaction of the
prescribed criteria. If the prescribed criterion is met, the expenses incurred in the
development phase after meeting the prescribed criteria will be capitalized as asset
(AASB 138, 2014).
The activities of the research phase are aimed at exploration of the new knowledge. On
the other hand, the activities of the development phase focus on the design,
construction and testing (Dagwell, Wines, & Lambert, 2015).
2. Accounting for Research & Development:
The accounting for research and development expenditure depends upon the nature
and substance of the financial transactions. The expenses incurred in the research phase
which is the initial phase of the research project are necessarily to be expensed to the
profit and loss account. Thus, the research expenditure is charged to the income
statement in the year in which it is incurred. At the research phase, there are no
indications that the intangible asset would arise therefore capitalization of the
expenditure is not permissible as per the accounting rules (AASB 138, 2014).
However, as the development starts, substantial activities on the project under
development start taking place. There are certain conditions such as completion of
technical feasibility, measurement, and valuation which need to be satisfied for
capitalization of the expenditure of the development phase. If these conditions are met,
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the expenditure of the development phase would be capitalized and recognized as asset
in the balance sheet which will be amortized over the period of time (AASB 138, 2014).
3. Decision / Conclusion / Reasons and Justification:
The internally generated goodwill or patent would be recognized only when the
prescribed recognition criteria is met. The research expenses would be charged to the
profit and loss account and the expenses of development phase would be capitalized in
the books as asset.
Question 4. Ex 9.19
Accounting Justification:
As per Para 4.24 of the conceptual framework, a liability is a financial item that
requires outflow of the resources (AASB, 2015). It is an obligation on the company the
settlement of which will require outflow of the resource embodying economic benefits.
Further, the conceptual framework provides that a liability should be booked when there
arises on obligation and the amount is fairly measurable (Horngren, et al. 2012).
The AASB 119 contains provisions in regards to accounting treatment of the
employee benefits plans (AASB 119, 2011). As per this standard, the post employee benefit
plans are divided into two categories such as defined contribution and defined benefit
plans. Under the defined contribution plan the entity does not bear the risk of changes in
the market conditions but under the defined benefit plan the risk of the entity. The liability
under the defined benefit plan is recognised upon service being performed by the employee
based on the actuarial estimates (Dagwell, Wines, & Lambert, 2015).
Relevant Issues:
1. Deficit of Fund
Deficit of the fund
Present value of the defined benefit obligation 31 December
2016
23,000,000.0
0
Fair value of plan assets 31 December 2016
20,130,000.0
0
Deficit
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2,870,000.00
2. Net Defined Benefit Liability
The company would recognize the net defined benefit liability of $2,870,000.
3. Net Interest
Net interest
Interest of liability
component
220000
0
($20000000+2000000)*1
0%
Interest of plan assets
190000
0
($19000000*10%)
Net interest 300000
4. Reconciliation
Reconciliation
Defined benefit
obligation Plan assets
Balance on 1st Jan 2016 20,000,000.00 19,000,000.00
Past service cost 2,000,000.00
Balance 22,000,000.00
Interest 2,200,000.00 1,900,000.00
Current service cost 800,000.00
Contributions received during the
year - 1,000,000.00
Benefits paid (2,100,000.00)
(2,100,000.00
)
Return on plan assets - 330,000.00
Actuarial loss 100,000.00
Balance on 31st Dec 2016 23,000,000.00 20,130,000.00
Return on plan assets
20130000-(190000000+1900000+1000000-2100000)
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5. Summary Journal
Debit Credit
Superannuation Expense
310000
0
Superannuation Income 230000
Bank
100000
0
Net Superannuation
liability
187000
0
Page 11 of 12

References
Horngren, C. et al. 2012. Accounting. Pearson Higher Education AU.
Dagwell, R., Wines, G., & Lambert, C. 2015. Corporate Accounting in Australia. Pearson
Higher Education AU.
AASB 13. (2012). Fair value measurement. Retrieved August 15, 2017, from
http://www.aasb.gov.au/admin/file/content105/c9/AASB13_09-
11_COMPdec12_07-13.pdf
AASB. (2015). Conceptual framework. Retrieved August 15, 2017, from
http://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf
AASB 136. (2010). Impairment of assets. Retrieved August 15, 2017, from
http://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-
04_COMPjun09_01-10.pdf
AASB 138. (2014). Intangible assets. Retrieved August 15, 2017, from
http://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-
15_COMPoct15_01-18.pdf
AASB 119. (2011). Employee Benefits. Retrieved August 15, 2017, from
http://www.aasb.gov.au/admin/file/content105/c9/AASB119_09-11.pdf
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