Accounting Issues: Year Ending 31 December 2018 – Response Letter

Issue 1.

From:

To:

Dear ..

Thank you for the discussion that we had on the issues that we had with reporting of accounting standards and accounting policies. To help with the decision-making process we have made the necessary suggestions for the company and all the necessary accounting disclosures with respect to the accounting standards, with respect to each specific issue is provided. All the issues are discussed in detail and we have also made proper suggestion with regards to accounting so that the users have the correct information about the financial statements of the company and in case there is any contingencies the users should be informed about the same. Few of the issues that are discussed here includes – issues with relation to the AASB 136/IAS 36 Impairment of Assets, AASB 118/IAS 18 Revenue Recognition and IAS 37 deals with disclosures of contingent assets and liabilities in the financial statement of the company. Hope these discussions will help you to understand these issues and in case there are any suggestions then please provide the same and we shall take them into consideration for the annual disclosures. Also let us know if you have further issues with respect to any of the accounts and that shall also be considered going forward.

The directors believe that the books of the company need to be prepared as per the Corporation Act, however in case the company opts for AASB 136/IAS 36 Impairment of Assets to disclose the same then that will not lead to accurate results. In case of AASB 101/IAS 1 the standards do not allow any deviation from the accounting standards even though the managers of the company are of the view that the overall compliance will not be accurate, and it may lead to a status where the financial statements of the company are not correctly represented. Thus, in such situations it is important that the managers should provide necessary disclosures to support the same and mitigate any kind of misleading items and information for the users. The disclosures will include-

• The accurate title of the accounting standard and its name and in this case the title is AASB136/IAS 36 that is Impairment of Assets.
• That there is a requirement that impairment loss should be recorded to the extent the carrying value is exceeding the recoverable value of the asset and proper accounting of the same must be done(Abdullah & Said, 2017).
• That the management is stating that this impairment is not permanent, and it is temporary and hence its application is misleading for the users.
• That as per the management, to achieve a fair representation of the accounts, the overall carrying value should be increased by $80,000 and the overall expenses of the asset should be reduced by that.
• That there should be proper audit in case of such complex transactions and proper accounting for the same should be done in the audit report.

To avoid any kind of complication, the effect of taxation has been ignored in this solution, however in case it is taken into consideration at the tax rate of 30%, the tax amount being 80,000*30% = 24000. This amount of tax should increase the overall tax expense and the deferred tax liability will also increase by $24,000. The overall issue with respect to the adjusted tax shall be analyzed further (Boghossian, 2017).

Issue 2.

The second issue deals with revenue recognition where in the first place the managers were recording the revenue and calculating the profits based on the AASB 118/IAS 18 Revenue Recognition. As per the given standard the revenue should be recognized with the completion of each stage of contracts in case of work contract services. In the given case the company is providing internal and external services reporting systems to facilitate the integration of various forms of technical equipment into the business models of their clients.  In such a situation following revenue recognition as per IAS 18 is less suitable as it ends up  in balancing the overall expenses of the company which is for completion of the contract and providing misleading results as revenue is being recognized based on methods of completion contracts based on stages (Cayon, et al., 2017). The company is facing issues with the new changes that has been proposed with respect to the method as per which the revenue should be recognized.  The finance director of the HiTech Production wants that revenue should be recognized based on methods of AASB15//IFRS 15 Revenue from contracts with customers, in this case the revenue cannot be recognized till full completion certificate is giving to the customer with relation to recording the revenue after the contract is totally completed. This means that till 18 months for the period of the contract the company will not be able to record any revenue, but the expenses will keep on increasing and because of that the overall profit will decrease. If the company is making the switch there will be a 30% reduction in revenue and a 50% reduction in profit in the year of adoption of the new Standard (Charles H, et al., 2015). But this will having a clear clarity and will help in making sure that over disclosure of profit is not there. This will be misleading for the investors as no revenue is getting recognized and only the expenses are being accounted for, so they will think that the overall profit of the company is very low and then the investors will not invest in the company. So, based on following points the company should make the switch and provide necessary disclosures with respect to recognizing the revenue from these contracts in their annual reports-

• That change in the overall methods based on the two standards will mislead the investors and they will have an opinion that the overall profit of the company is very low.
• That the change in method is required given that the amount of work and the cash inflows will remain stable, hence it is needed that reduction in overall profit is shown by the company by adopting the changed method.
• That the company is providing necessary disclosures in the annual reports of the company and hence the users can access the same and gain knowledge based on that whether they want to invest in the company or not.
• That the main aim of the management is to maintain overall transparency and hence that should be taken into consideration, given the intent is a major factor when it comes to taking decisions based on such assumptions of the company(Cundill, et al., 2017).
• That in case there is any change in the method of revenue recognition the company shall make necessary disclosures in the notes of accounts of the company so that the users have knowledge about the same.

In the given case we see that HiTech Production has suffered a case where the company must bear losses of about $500,000 and it was mentioned that the company needs to disclose these contingent losses of $5million in the annual report of the company. The company is in such a situation as one of the electrical products of the company was not working and there was a failure on part of the company because of that, but there are no proper grounds on which the company must pay the claims. There is a legal battle that is going on and there are high chances that the company might have to pay of these claim of $5million, in case they lose the battle and so there is high uncertainty involved in this so this gives rise to contingent liabilities on part of the company. IAS 37 deals with disclosures of contingent assets and liabilities in the financial statement of the company. In case there is any contingent liability then same needs to be reported in the annual reports of the company (Johan, 2018). A contingent liability is something where there is an uncertainty of the loss to occur due to the nature and the timing. The liability may be the legal obligation or a constructive obligation hence in this case also we see that there is an uncertainty that the company might suffer losses in case they lose the case, so in that case the company needs to discuss the same in their annual statements as per IAS 37.

So, in case we see that there is an uncertainty even though there is no actual outflow of resources then the company needs to disclose the same in their annual reports under the notes section. So, in this case also we see that to deal with this situation the company needs to do the same-

• That the company needs to disclose the accurate title of the accounting standard and its name and in this case the title is IAS37 Provisions, Contingent Liabilities and Contingent Assets.
• That the company needs to state that the company is involved in a legal battle and disclose the same in the notes to account of the annual report of the company with respect to the financial statement of the company. It is important that necessary disclosures should be there in the financial statements of the company(Kang, et al., 2016).
• That there is a need to record the contingent losses in case there is uncertainty of occurring of some events that cause flow of funds and the company might suffer losses because of that and the same is applied in this case also.
• That the company needs to give proper details and information should be transparent for the users so that they can have clear understanding about the same and take decision about the company based on that.
• That the company needs to make a disclosure that the going concern assumption about the company will not be hampered because of this legal case and the company is taking necessary decisions based on the same(Kaufmann, 2017).
• That in case the company suffers such loss in actual in the future then same must be recorded in the financial statements of the company and necessary disclosures should be given in the notes of the company.
• That the disclosure in the notes should be given as per the AASB 101/IAS 1 that deals with representation of the financial statements of the company and the notes should be disclosed according to that.

References

Abdullah, W. & Said, R., 2017. Religious, Educational Background and Corporate Crime Tolerance by Accounting Professionals. State-of-the-Art Theories and Empirical Evidence, pp. 129-149.

Boghossian, P., 2017. The Socratic method, defeasibility, and doxastic responsibility. Educational Philosophy and Theory, 50(3), pp. 244-253.

Cayon, E., Thorp, S. & Wu, E., 2017. Immunity and infection: Emerging and developed market sovereign spreads over the Global Financial Crisis. Emerging Markets Review.

Charles H, C., Giovanna, M., Dennis M, P. & Robin W, R., 2015. CSR disclosure: the more things change…?. Accounting, Auditing & Accountability Journal, 28(1), pp. 14-35.

Coate, C. & Mitschow, M., 2017. Luca Pacioli and the Role of Accounting and Business: Early Lessons in Social Responsibility. s.l.:s.n.

Cundill, G., Smart, P. & Wilson, H., 2017. Non?financial Shareholder Activism: A Process Model for Influencing Corporate Environmental and Social Performance. International Journal of Management Reviews, 20(2), pp. 606-626.

Johan, S., 2018. The Relationship Between Economic Value Added, Market Value Added And Return On Cost Of Capital In Measuring Corporate Performance. Jurnal Manajemen Bisnis dan Kewirausahaan, 3(1).

Kang, D., Yu, G. & Lee, S., 2016. Disentangling the effect of the employee benefits on the employee productivity. The Journal of Applied Business Research, 32(5), pp. 1447-1458.

Kaufmann, W., 2017. The Problem of Regulatory Unreasonableness. First ed. New York: Routledge.

Pamela, K. & Tamara, Z., 2013. Attaining legitimacy by employee information in annual reports. Accounting, Auditing & Accountability Journal, 26(7), pp. 1072-1106.

Sinclair, R., Leo, M. & Wright, C., 2007. Benefit System Effects on Employee Benefits Knowledge, Use, and Organizational Commitment. Journal of Business and Pyschology, 20(1), pp. 3-32.