Case Study: Accounting Policies & AASB Compliance for Lotus Flower

This case study delves into the accounting policies of Lotus Flower Limited, an Australian company, focusing on its compliance with Australian Accounting Standards (AASB) and the Corporations Act 2001. The study highlights the importance of disclosing significant accounting policies as per AASB 101 and AASB 108, which cover the presentation of financial statements and changes in accounting policies, respectively. Specific accounting policies discussed include the issuance of debentures, employee benefits (wages, salaries, annual leave, and long service leave), receivables, property, plant, and equipment (including depreciation methods), cash management, inventory valuation, credit notes, and contingent liabilities. The analysis emphasizes the need for Lotus Flower Limited to provide a true and fair view of its financial position through proper disclosure, ensuring complete compliance with AASB provisions and the relevant act. This case study provides a comprehensive overview of the practical application of accounting standards in a real-world business scenario.

RUNNING HEAD: ACCOUNTING
Accounting Policies

Accounting 2
Accounting policies are the predetermined and specific rules, principles and procedures
which are implemented by the management of a company and are used to prepare the
financial statements. These policies clearly states the treatment of several business
transactions happened during a fiscal year. The policies basically include methods,
measurement and procedures for presenting the disclosures. It is very important to understand
them as it identifies that whether management is conservative or aggressive at time of
reporting its earnings. Also they provides an idea about the fact that company truly and
completely complies with the required standards (Legislation.gov.au. 2018).
Lotus Flower Limited being an Australian company, has to comply with all the Australian
accounting standards and has to prepare its financial accounts as per those standards and
corporation Act 2001. The company’s financial statements must truly reflect the compliance
of necessary AASB. In order to give a proper disclosure of its accounting policies it must
present its statements as per AASB 101 and AASB 108.
The accounting standard AASB 101 defines the basis for presenting the financial statements
in a manner that they can be easily comparable over the different time period and with the
different companies. It provides overall requirements that include disclosure of accounting
policies also. According to this standard, the company must disclose its significant
accounting policies that includes the measurement basis used in preparation of financial
statements. In addition to this, it must also include other accounting policies that are relevant
to company’s financial statements (Aasb.gov.au. 2015). AASB 108 is basically the standard
framed for accounting Policies, changes in accounting estimates and errors. According to
this, the company must disclose any change in accounting policies and the nature of change
along with transitional provisions. In addition to this, it has to mention a relevant reason for
the change in accounting policy (Aasb.gov.au. 2015).

Accounting 3
Lotus Limited is required to give a proper and significant disclosure of its accounting policies
as per AASB 101 and 108. The following accounting policy is prepared by the company
which is to be included in its financial statements for the year ended 30 June 2017. The
company prepare its general purpose financial statements in accordance with Corporation Act
2001 and AASB standards and interpretation.
Note: Summary of Significant accounting policies
1. issue of debentures
The company will issue 20,000 10% debentures at $100 each. The bifurcation will be like
$50 on application and $50 for allotment.
2. Employee benefits
Lotus Flower limited recognize the liabilities and expenses of for employee benefits
according to AASB 119. The recognized liabilities are wages and salaries, annual leave and
long service leave. No sick leave is been there and leave liabilities are calculated on the basis
of employee’s remuneration at estimated salary rates applied at time of taking leaves
(Aasb.gov.au. 2011).
3. Receivables
They are been recorded at the amount after deducting the provision for doubtful debts. Also
bad debts are written off as and when they incurred. 60 days are been given as credit period.
4. Property, Plant and Equipment
Historical cost concept is followed for reporting the amount of plant and equipment. On the
other side, land and building are recorded at their fair values which are revised and evaluated
every year.

Accounting 4
Depreciation on building, plant and equipment is written off on straight line basis. The
depreciation rates and residual values or methods are reviewed each year at time of their
reporting. The assets are depreciated on following rates:
 Building – 6%
 Plant – 12%
 Equipment – 25%
5. Cash
The amount of cash flow includes all the cash in hand and the demand deposits. It is
recognized as a nominal accounts and does not include long term cash or term deposits. All
the assets and liabilities included in cash are recognized at their nominal amounts.
6. Valuation of inventories
Inventories of the company are valued at lower of cost and net realisable values. The cost of
raw materials including purchase cost is determined as per the specific costing method that is
First-in-First out.
The cost in relation to work in progress and finished goods is determined using weighted
average cost method which takes into account direct materials, labour and proportion of
manufacturing overheads.
7. Credit notes
Company made a sale of faulty goods worth $50,000 which were returned by its customers.
In compensation to that it issued a credit note of the same amount in July 12, 2007.
8. Contingent liabilities
The company has made provisions for the situation which can arrive in near future and will
require outflow of resources. On September 30, 2017 one of its customer had gone into

Accounting 5
liquidation who owned $200,000. As a result of which, as per the advice of liquidator will
distribute 30 cents in dollar to its unsecured creditors.
The disclosure of all these significant policies will help Lotus Flower Limited to provide a
true and fair view of their financial position as required by Corporation Act 2001. Accounting
policies disclosure indicates that the company reflect the fair and true view and completely
comply with all the provisions of AASB and the act.

Accounting 6
References
Aasb.gov.au. (2015). AASB 108 Accounting Policies, Changes in Accounting Estimates and
Errors. [Online] Available at:
http://www.aasb.gov.au/admin/file/content105/c9/AASB108_07-04_COMPjan15_07-15.pdf
[Accessed 21 May 2018].
Aasb.gov.au. (2015). AASB 101 Presentation of Financial Statements. [Online] Available at
http://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf [Accessed 21 May
2018].
Aasb.gov.au. (2011). AASB 119 Employee Benefits. [Online] Available at
http://www.aasb.gov.au/admin/file/content105/c9/AASB119_09-11.pdf [Accessed 21 May
2018].
Legislation.gov.au. (2018). Corporations Act 2001. [Online] Available at:
https://www.legislation.gov.au/Details/C2018C00131 [Accessed 21 May 2018].