Questions:
Issue 1.
When finalising the financial statements for the year ended 30 June 2014 two significant errors were made and there is debate as to whether we should simply adjust the financial statements in the current year or change last year’s financial statements as well. The IT system of the company was installed 3 years ago at a cost of approximately $3.5 million and was estimated to last 10 years. However the latest technology advancements indicate that this was a very optimistic estimate and that the maximum life span of this equipment will probably be not more than 6 years in total with little or no residual value. It was also discovered in August 2014 that a machine worth $2.2 million purchased in January 2014 was erroneously written off to repairs and maintenance instead of being capitalised. Deberella the marketing director thinks we should just adjust this year’s figures to account for these problems but Peter indicated that it was slightly more complicated than that. Could you please give us some advice on this?
Issue 2.
A number of employees who work on our strategic management team have been with us for a number of years – at least 12 of them have been with us since the company commenced operations in 2006. In accordance with the Employee Bargaining Agreement (EBA) all employees are entitled to long service leave of 13 weeks if they remain in service for 10 years. They are also entitled to pro rata long service leave after 6 years of service. Our usual practice is to show the long service leave expense in the income statement when the employee actually takes leave and is paid. Of course we maintain a memorandum record of the number of days each employee is entitled to. Peter has indicated to us that he thinks we should consider treating this expense in a different manner, which seems complicated. The directors are wondering why we should complicate a very simple way of calculating long service leave – why not “stick with” recognising the expense when we pay for it? What do you think we should do and why?
Issue 3.
Peter, the new financial controller, has also informed the board that the company will need to present a statement of cash flows with the financial statements in addition to those statements already being presented, which really attracted a lot of attention. Some of the directors thought it was a waste of time to present this statement as it was merely a summarised cash book. Others were of the opinion that it could be useful but didn’t quite know how they would use it. The structure of the statement of cash flows also came into question with one of the directors suggesting that we merely needed to “get a printout” of the cash account and attach it. Another said that we couldn’t just do that as we needed to show “operating, instigating and financing” cash flows in the statement. Could you please clarify this matter for us?
The case law is related to AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors and Changes in Accounting Estimate
There are certain items in financial statements that cannot be ascertained with perfect prediction. Such things can only be forecasted or estimated. The reason behind this is that the behind this is that the business is conducted in an uncertain environment. Nothing can be accurately predicted so we see the use of probability over here. There are various items of financial statements where estimation is required. These are as follows
(a) Debtors becoming bad;
(b) Inventory becoming outdated or obsolete;
(c) Fair value of the financial assets or liabilities;
(d) The useful lives of, or the expected pattern of the consumption of the future economic benefits in the depreciable assets; &
(e) The obligations of warranty.
An entity cannot ignore the use of accounting estimate. The management has to select the estimates with high degree of precision. There are certain statutory requirements regarding estimation of certain items of financial statements. The management is at its discretion to change the estimate but the change should be disclosed and should be supported be facts. With respect to the nature of accounting standard, revising any estimate that was related to the prior periods is also not a correction of any error.
Any change in accounting estimate has to be recognized in the financial statements. Such changes have to be recognized prospectively i.e. the past data on financial statements should not change. The changes will effect only current year’s financial statements. These are as follows
(a) The period of such change, if such change affects that period only; or
(b) The period of such change and the future periods, if such change affects both.
There is an exception to the above. A particular change has a retrospective effect. Any change in accounting estimates that affects assets and liabilities or any aspect related to equity is has to be given a retrospective effect
Error and Omission
The items stated in the financial statements shall be given a retrospective effect for the following corrections
But in case that it is not possible to determine the exact cumulative effect of the change then the error is corrected from the beginning of that period from where it is possible to give effect in monetary terms with perfection and not estimation.
Conclusion 1
An entity cannot ignore the use of accounting estimate. The management has to select the estimates with high degree of precision. There are certain statutory requirements regarding estimation of certain items of financial statements. The management is at its discretion to change the estimate but the change should be disclosed and should be supported be facts.
Our case represent the aspect of change in accounting estimate and hence the effects of depreciation shall be shall be adjusted for the financial statements relating to the current year
Conclusion 2
The machine having value of $2.2 million was debited to repairs and maintenance by mistake. Such mistake should be rectified by passing rectification entries
Long Service Leave
The following are the entitlements which are common for all the Acts and Awards
1. An entitlement which is legal and unconditional. Further the payment to such employee will arise only when he or she completes certain years of service i.e. 10years or 15 years. The Accumulation of the long service leave entitlement shall continue after this point, up till the leave is actually taken.
2. In certain situation like death, retrenchment, etc a legal entitlement to the pro rata instead of in place of long leave may arise.
Any employer to whom the provisions of AASB 1028 apply can have employees falling in more than one mentioned above categories
In some cases the employer provides the facilities of leave entitlement and the other cases they participate. This creates an obligation upon the employer to provide for future outflows that he or she may have to incur. Therefore he need to provide and recognise liability of an employee.
Conclusion
The statement of Peter is absolutely correct for treating the expense in a different manner. It is the requirement of AASB 1028 by treating it as liability or separate liability depending upon the scheme of long service and then charging the same to revenue as discussed above.
There are certain benefits of cash flow
1. This statement helps the users of financial statement in evaluating the changes occurred net assets of any entity, the financial position of the company and the capability of the company to affect the changes in the cash flow in the form of timings to adopt to the changing situation and opportunities
2. This statement is helpful to the management as it helps in knowing the capability of the company in generating the cash flows. These cash flows can be discounted at cost of capital which is weighted average and thus one can determine the future profitability of a business
3. A proper bifurcation is provided by the cash flow statement regarding the financial statements and the inflow and outflow of cash. These three bifurcated activities are
a. Financing activities shows changes in the capital part of financial statements i.e. those activities are recorded here which shows changes in the size and composition of the contributed equity and borrowings of the entity.
b. Investing activities shows changes in fixed assets. Newly purchased fixed assets or any asset discarded are recorded here. Fixed assets are those which are purchased not for resale but for production and providing the goods and services or equivalent items.
c. Operating activities shows changes in those activities which are carried out by the company to earn revenue. One can say them the principal activities carried out to earn revenue. These activities exclude financing and investing activities.
4. One can use past years cash flow statements to conduct some statistical analysis. Based on this statistical analysis one can predict the future outflow and inflow of cash. It is also helpful in measuring the accuracy of the past assessments of the future cash flows and also examining the bonding between the net cash flow and profitability and the effect of changing prices.
This Standard applies to:
Cash includes the following items
The cash flow statement shall be prepared in accordance with the statutory requirements and should be presented in a statutory manner.
Conclusion
The company should prepare cash flow statement. Complying the requirements of accounting standards is the statutory and mandatory requirement of AASB 101 and AASB 107.
References
AASB, 2011, “Accounting Policies, Changes in Accounting Estimates and Errors” reviewed on 28th January 2015, https://www.aasb.gov.au/admin/file/content105/c9/AASB108_07-04_COMPmay11_07-11.pdf
Chartered Accountants, 2013, “Accounting Policies, Changes in Accounting Estimates and Errors” reviewed on 28th January 2015, https://www.charteredaccountants.com.au/Industry-Topics/Reporting/Australian-accounting-standards/Analysis-of-AASB-standards/AASB-108–Accounting-policies-changes-in-accounting-estimates-and-errors?standard=%7B846095B1-DF0D-4BAD-967E-FFBB46D5F8AE%7D
AASB, 2001, “Employee Benefits” reviewed on 28th January 2015, https://www.aasb.gov.au/admin/file/content102/c3/AASB1028_06-01.pdf
AASB, 2011, “Presentation of Financial Statements” reviewed on 28th January 2015, https://www.aasb.gov.au/admin/file/content105/c9/AASB101_09-07_COMPsep11_07-12.pdf
AASB, 2007, “Cash Flow Statements” reviewed on 28th January 2015, https://www.aasb.gov.au/admin/file/content105/c9/AASB107_07-04_COMPjul07_07-07.pdf
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download