Discuss About The Australian Tax Manual Suggested Solutions?
Under the current rules, all right-of-use assets are classified same as other non-financial assets and are detailed in the Balance Sheet under Property, Plant and Equipment. The lease liabilities are also treated as other financial liabilities. This allows the lessee to charge depreciation of a right-of-use asset as a deductible expense along with the interest paid on the lease liability. Moreover, as stipulated under IAS 7, the lessee bifurcates the payment and shows it as Principal and Interest Payment in the annual statement of cash flows, assert Ault, Arnold & Gest, (2010).
Although the lessee should treat a lease asset as a right-to-use asset, the system has not been effective in checking this and lessee entities are measuring all lease assets and liabilities on the present value basis, similar to Property, Plant and Equipment. The measurement does not take into consideration the optional lease periods, nor does it explain the options of extending or terminating the lease. In nearly all such cases, the initial value of the lease asset equals the value of lease liability shown in Balance Sheet, as per Wilmot, (2012).
The new IFRS rules suggest a fundamental shift in recognizing lease assets and liabilities through implementation of IFRS 16, which state that a lessee, who has leasing assets, should show such assets and liabilities under a separate head in the Balance Sheet.
IFRS 16 will eliminate the current classification of operating leases or finance leases for the lessee. Instead, the lessee will treat all leases as Finance Leases after applying IAS 17. Leases shall be ‘capitalised’ and shall be shown, either separately as Lease Assets or with Property, Plant and Equipment, details Hanks, (2007).
The lessee shall no longer classify its leases either as operating or finance leases. IFRS 16, which replaces IAS 17 from 1 January 2019, will have the following two provisions:
Lessee using IFRS 16 will not be required to recognise those assets and liabilities which are (a) short-term leases of 12 months or less and (b) leases of low-value assets, such as a personal computer.
The case study of Marvin Co. Ltd. is for the year ended 31 December 2016. Since the transition from the current system to implementing IFRS 16 shall come into force from 1 January 2019, the management is not obliged to use the new guidelines for finalising this Balance Sheet. An analysis of the situation for the current Balance Sheet of Marvin Co. Ltd. has been provided in Appendix – A at the end of this paper.
Currently used Standard IAS 37 has set the criteria for recognising and measuring:
Provision refers to liabilities which are of uncertain timing or amount. Use of uncertain here is of importance because in cases where time and amount become certain, then the payment is not considered as a provision but is referred to either as payable or accrual.
A contingent liability is either a possible obligation which arises from a past event and needs to be confirmed by a future event or is a present obligation, arising from a past event, but either:
With the introduction of IFRS 15 – Revenue from Contracts with Customers, most of the Retail and Consumer Product entities may have to change certain aspects of their accounting principles for revenue, as described by Nethercott, Devos & Richardson, (2010). This new revenue recognition standard, which is being implemented jointly by the International Accounting Standards Board (the IASB) and the Financial Accounting Standards Board (the FASB) is proposing to supersede all previous revenue recognition guidelines under IFRS.
The standard, which shall come into effect for the annual reporting periods starting on or after 1 January 2017 is also allowing an early adoption. IFRS 15 shall be dealing with all revenue which arises from contracts with customers and shall affect all those entities which enter into contracts for providing goods or services to their customers, says Renton, (2012)
IFRS 15 shall be used for all transactions which are common in the retail and consumer products sector, including those controlled by licences and franchise arrangements and which deal with sale of goods which come with right-to-return. Options granted to customers include Material Returns or Consideration Payment and these are some of the areas which may be covered under the new rule. It is in the interest of the entities dealing in consumer goods, which have substantial amounts tied to Warranties should start their preliminary assessment of the affects as early as possible, so that the management and the accounts teams can prepare towards implementation of IFRS 15,explain Deutsch et al, (2011).
Although the impact, both financial and administrative, will vary from entity to entity, it is in the best interest of Marvin to start an evaluation of the requirements needed for implementing IFRS 15. Although the case study of Marvin Co. Ltd. is for the year ended 31 December 2016 and IFRS 15 is to come into force from 1 January 2017, the boards are allowing an early implementation. An analysis of the situation for the current Balance Sheet of Marvin Co. Ltd. has been provided in Appendix – A at the end of this paper.
A revaluation of the fixed assets is such an action which needs to be carried out accurately, so as to give in detail the true value of the capital assets owned by a business. This needs to be distinguished from the planned depreciation process in which the recorded decline in the value of an asset is calculated on the basis of its age, according to Smith & Koken, (2011).
Revaluation reserves are actually Revaluation Surplus Reserves and these arise when value of a capital asset becomes greater than that value at which it was brought forward from the previous balance sheet and it increases the shareholder funds. This gain, derived from the revaluation is known as Revaluation Surplus Reserve. In case the revalued asset is no longer in use in the business, the remaining revaluation surplus is eventually credited to the Retained Earnings Account in the Balance sheet of the entity.
In case the revaluation of the asset produces a decrease in the carried forward amount of the capital asset, then the decrease is reflected through the profit or loss of the entity. However, in case of a credit balance of the revaluation surplus, decrease the comprehensive income in order to offset the credit balance, explain Reimer, Urban & Schmid (ed.), (2011).
The International Accounting Standards Board (IASB) defines fair value of an asset as “an amount at which an asset could be exchanged between knowledgeable and willing parties in an arms-length transaction”.
IAS 16: Property, Plant and Equipment is used for outlining accounting treatment to be given to a variety of property, plant and equipment which are most commonly used in a business. The in-use Property, Plant and Equipment is determined initially at its cost value and is subsequently determined by using either the cost or the revaluation model. This is then depreciated in such a manner that the amount of depreciation is allocated on an equal and systematic basis over the total useful life of the asset. IAS 16 was re-issued with effect from December 2003 and has since been in use for the annual periods beginning on or after 1 January 2005, as detailed by Reimer, Urban & Schmid (ed.), (2011).
The unit of measure, used for recognition of a capital asset has not been defined under IAS 16. Hence, what constitutes as an item under the head of Property, Plant and Equipment in a Balance Sheet is not defined in IAS 16.9, however, each part of an item of Property, Plant and Equipment, having a cost and which is significant in relation to the total cost of that item, needs to be depreciated separately, as explained under IAS 16.43. IAS 16 itself recognises that certain parts of an item, shown under the Property, Plant and Equipment, can be subjected to replacement at regular intervals. Thus, the carrying amount of the item shown under Property, Plant and Equipment, also includes the cost of replacing such a part of the item. The carrying amount of such parts, which have been replaced, is derecognised as per the de-recognition provisions given under IAS 16.67-72, says Wilmot, (2012).
Although the impact, both financial and administrative, will vary from entity to entity, it is in the best interest of Marvin to start an evaluation of the requirements needed for implementing IFRS 16. An analysis of the situation for the current Balance Sheet of Marvin Co. Ltd. has been provided in Appendix – A at the end of this paper.
The first tier of unsecured creditors are those who are entitled to receive money from the company, but their claims are not secured or guaranteed. This group of creditors includes: bank lenders, employees, the government (taxes), suppliers and investors who have unsecured bonds, asper Ault, Arnold & Gest, (2010).
In some cases, the authorities allow the best interest test under which the debtor is required to pay all the creditors in full. In this context, entities use Chapter 11 for paying their debtors and fulfil the best interest test by paying creditors with only a fraction of the outstanding debt, explain Ault, Arnold & Gest, (2010).
Under this standard, entities are required to recognise an allowance of either a 12-month or a lifetime Expected Credit Losses (ECLs) and this depends on the condition if there is a significant increase in credit risk since the initial recognition. However, for assessing if there is a significant increase in the credit risk, new data and processes will be required.
While adopting the ECLs, entities will require to make significant changes in their current system and process. The ECL impairment requirements are to be adopted from 1 January 2018, although early application is permitted, details Renton, (2012).
Although the impact, both financial and administrative, will vary from entity to entity, it is in the best interest of Marvin to start an evaluation of the requirements needed for implementing IFRS 9. An analysis of the situation for the current Balance Sheet of Marvin Co. Ltd. has been provided in Appendix – A at the end of this paper.
References
Ault, H. J., Arnold, B. J. and Gest, G. 2010. Comparative income taxation: a structural analysis. 3rd ed. Kluwer Law International, Amsterdam, The Netherlands.
Deutsch, R., Friezer, M., Fullerton, I., Gibson, M., Hanley, P. and Snape, T. (2011) Australian tax handbook. Thomson Reuters, Pyrmont, NSW.
Hanks, L. W. 2007. The busy family’s guide to estate planning: 10 steps to peace of mind. Nolo, Berkeley, CA.
Marsden, S. J. 2010. Australian Master Bookkeepers Guide, 3rd ed. CCH Australia Limited, Sydney, NSW.
Nethercott, L., Devos, K. and Richardson, G. 2010. Australian taxation study manual: questions and suggested solutions, 20th ed. CCH Australia Limited, Sydney, NSW.
Reimer, E., Urban, N. and Schmid, S. (ed.). 2011. Permanent Establishments. a Domestic Taxation, Bilateral Tax Treaty and OECD Perspective. Kluwer Law International, Amsterdam, The Netherlands.
Renton, N. E. 2012. Family Trusts: A Plain English Guide for Australian Families of Average Means, 4th ed. John Wiley & Sons, Milton, QLD.
Smith, B. and Koken, E. 2011.The Superannuation Handbook. John Wiley & Sons, Milton, QLD.
Wilmot, C. 2012. FBT Compliance Guide 2012. CCH Australia Limited, Sydney, NSW.
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