Financial Reporting for Company Book of Account

Describe about the Financial Reporting for Company Book of Account.

1. Loan guarantee to a staff should be treated as a liability in the company books of accounts. Paragraph 60 of AASB 101 defines liability as a duty to honour future commitments which are outstanding. Paragraph 82 of the standard gives clear criteria for recognising elements in the financial statements. The two core criteria entail determining whether there is a probability   of occurrence of an economic advantage outflow in the future and if the item regarded as probable can be measured with certainty. Therefore, an issue on bank guarantee fully meets this criterion since there is evidence that the employee may default and the loan balance outstanding can be accurately determined. Paragraphs 82, 86 and 91 are fully attained by the item on bank guarantee (AASB, 2016)

The 500 shares received from the customer should be recognised as a financial asset in the company financial statement. Paragraphs 53-59 defines an asset as an item which has an ability to bring economic advantage to an entity and they give criteria which an item must meet to be termed as an asset. Shares meet this classification since they can be sold, earn dividends and appreciate or depreciate in value. Paragraph 59 particularly addresses the issue of classifying donations which meet the criteria of an asset which is the case in this transaction. In paragraphs 89 and 90, an item should be recognised as an asset if it has a chance of contributing an economic advantage to an entity. Shares have the ability to generate returns to the company and they can be valued with certainty (AASB, 2016) 

The location of the café which attracts customers cannot be recognised as an item of financial statements. Paragraphs 53 to 59 specifies the definition of an asset. An item will be termed as an asset if it has the ability to generate future cash inflows to the company. The view meets this definition to some extent like in terms of contributing to cash inflows into the organisation through increased sales. However, it does not meet the requirements stipulated by paragraph 83 (b) which identifies one of the key aspects of reliability in getting its value (AASB, 2016).

2. The proposal by the director not to depreciate the asset should be guided by the provisions of relevant chapters of AASB 116 which deals with plant , property and equipment. According to the chapter 31, when an asset is revalued upwards, the carrying amount reported in balance sheet should be the revalued amount. Also ,an income element should be reported in the profit and loss account  and  revaluation reserve should be increased with the revaluation gain. According to chapter 35, the depreciation charge for the revalued asset should be based on the revalued carrying value of such assets (AASB, 2009).

An asset should be depreciated so long as its scrap value does not exceed the net book value ( Chapter 52 and 53). Also, chapter 54 of the standard stipulates that an asset whose net book value is less than the scrap value is assumed to have been fully used and is not liable to depreciation. Even if the residual value is revalued upwards due to may some changes in the market to make it of higher value, such assets should still not be depreciated. Therefore an asset whose useful life has expired should not be depreciated after the lapse of its useful life even if it’s revalued higher (AASB, 2009).

Other scenarios when an asset cannot be depreciated is when it's been held for disposal as per chapter 55 and the held for sale status of the asset has been recognised  . Also, when the method of depreciation employed by the firm is the usage method, then depreciation charge will be zero when the asset is idle. However, depreciation should always be charged on an asset even if the asset is not in active use but it has to remain useful life (AASB, 2009).

Therefore, to answer the question on whether the asset in question should be depreciated or not, the directors should consider the following.  First, establish whether the asset has a remaining useful life. If the asset useful life is on, then depreciation should be provided for using the new net book value after re-valuation and if the asset useful life has lapsed, then no depreciation should be charged on the asset even if it’s revalued. Finally, if their depreciation policy is to depreciate the asset on the basis of usage and it’s idle, they can charge zero depreciation for the year even if the asset is revalued and if this is false, then, subject the asset to depreciation (AASB, 2009).

3. An item should be recognised as an intangible asset if it meets the basic criteria of identifying intangible asset assets as stipulated by chapter 21 and 22 of AASB 138. The criteria involve the ability to ascertain their cost or fair value , the chance of generating cash flows in future dates and ability to be controlled by the company (AASB, 2015).

The direct mailing cost can be obtained through the relevant cost incurred, the company can control who assesses their customer database and finally, the prospective clients might start purchasing their products in future. Therefore, direct mailing cost qualifies to be treated as an intangible assets of Sharks limited. The value to be  reported in sharks books as intangible assets relating to direct mailing  includes ,the actual cost attributable to its development as stipulated by section  66 of the standard. Also, as per section 85, 86 and 87, Shark can revalue the direct mailing to potential client’s  if there is an indication of an increase in fair value due to market changes (AASB, 2015).

When direct mailing cost are revalued, a provision for should be made in the revaluation reserve and profit or loss recognised in profit and loss account. Also, the assets should be amortised yearly based on their useful life of three years and such amortisation is written off in the Profit and loss account as per section 104. If there exists an indication that the useful life of the direct mailing cost is extendable, a review should be done as per section109 to reflect the new useful life (AASB, 2015).

The customer list from competitors meets the criteria for recognition as intangible assets in sharks books of accounts. The cost paid to acquire the list should be capitalised as per section 25-31 of the standard which talks about a separate acquisition. This asset should be revalued based on the active market in existence after the acquisition as per section 75- 84. Also, the acquired customers list asset should be tested for impairment at every close of the financial year to establish whether there is impairment loss. If an impairment loss is realised, it should be reported in the statement of financial statements as per the provisions of AASB 136 (AASB, 2015).

Marketing cost of sharks limited should not be capitalised although incurred to bring future cash inflows to the company. As per section 69, they should be categorised as expenses when used on existing Shark  customers since there is no asset creation hence should be expensed in the books of accounts. However, some marketing cost qualifies to be capitalised if they are part of the asset creation as per section 68 (a) . Therefore, Shark accountant should categorise the marketing cost into two categories. The marketing cost relating to new customers shark company  is looking for should be capitalized and treated as an intangible asset. The second category of marketing costs relating to existing customers should be expensed in the profit and loss account of Shark limited  (AASB, 2015)

4. The case of Bird limited is that pertaining a contingent liability as stipulated by AASB 137 in chapter 10. A contingent liability is an item with a chance of generating cash outflows in an entity but cannot be valued with accuracy.  Since they don’t meet the specific criteria of classifying liabilities as per the AASB 101 on the conceptual framework, then Bird limited should not recognise contingent liabilities as an item of financial statement (AASB 137, section 27). However, section 86 of requires firms to disclose details of a contingent liabilities provision in the notes in the annual reports hence Bird Ltd should give information pertaining the aspect (AASB, 2014).

Birds limited should make the necessary disclosures relating to the contingent liability which includes the expected outcome of the issue with all supporting reasons. The expected effects to the business continuity should be discussed in the notes to show what can happen if the contingent liability materialises in future . This is important because some contingent liabilities are material in nature and if omitted could have adverse economic effects to the users of the financial statement (AASB, 2014). This is important aspect to ensure that quality of financial disclosure is attained as per the conceptual framework (AASB, 2016)

The company should not update the information on the new developments as given by the lawyer. This is because the information is  not a post balance sheet item since the annual reports had already been authorised and issued to the shareholders. Section 3 (b) of AASB 110 defines a post balance sheet event as an occurrence between the date of announcement of financial reports and the date they are authorised and issued to the shareholder. In the case of Bird limited, this time, had already elapsed hence cannot be included as a post balance sheet item (AASB, 2007)

References

AASB, 2007. Events after the balance sheet date. Australian Accounting standards board, xiv(14), pp. 1-13.

AASB, 2009. The property, plant and equipment. Australian accounting Standards board, x(10), pp. 1-34.

AASB, 2014. Provisions, Contingent liabilities and Contingent Assets. Australian Accounting Standard Board, xiv(14), pp. 1-45.

AASB, 2015. Intangible Assets. Australian accounting standard board, i(1), pp. 1-30.

AASB, 2016. Framework for preparation and presentation of the Financial statement. Australian Accounting Standard Board, v(5), pp. 23-110.

 

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