Discuss about the Financial Accounting for AASB Framework.
In the given case study, Queenslander is guarantor for bank loan of an employee. The loan amount will be considered as liability for the company that needs to be paid if the employees default to pay the loan. According to the AASB framework liabilities are future sacrifices of the economic benefits than an organization is obliged to pay the liability amount (AASB 2, 2007). The liability amount should e recognized in the financial statements when it is probable that future sacrifices of the economic benefits would be required and the liability amount can be reliably measured. Therefore, the bank loan amount will be shown in the liability side of the balance sheet.
The shares received by a company are to be presented in the balance sheet. Queenslander Ltd received 500 shares that are trading currently at $2 per share (Berk and DeMarzo, 2007). According to the AASB the balance sheet should include
The company Queenslander Ltd has received 500 shares as a gift from a customer trading at $2 per share. The share amount will not be included in the financial statements as it is a gift given by the customer (Elliott and Elliott, 2008).
The panoramic views of sunshine coast hinterland from cafe’s windows will help to attract large number of customers. The environment helps to attract customer and it will be consider as asset for the company (Godfrey and Chalmers, 2007). The cafe is the asset that helps to increase sales of the products and increase in profitability. Assets are the futures economic benefits that are controlled by the company. The assets should be recognized in the financial statements of the company only when it is probable that the economic benefits in future embodied in assets would eventuate and asset posses the cost that can be reliably measured (Hillier, 2010). The assets value shows the financial position of the company and ability of the company to pay off the obligations.
In the given case study, the revaluation model has been adopted by the company for the measurement of machinery. The fair value of the machinery has not declined and the director argues that no depreciation expense should be recognized (Holton, 2012). According to AASB, noncurrent assets or fixed assets that have limited lives should be depreciated and to be shown in the balance sheet of the company. The depreciable amount of the assets should allocate on systematic basis over the useful life. The method of depreciation applied to the asset should reflect the patterns in which the future economic benefits of the assets are lost or consumed by the organization (Moles, 2011). The allocation of depreciable amount should recognize as the expense and also includes the carrying amount of the other assets. The estimation of the useful life of the depreciable asset should include the following factors:
The depreciation amount should be allocated from the time when the asset was first put into use. In the given case study, there has been no decline in the fair value of machinery and hence depreciation expense should be recognized. The fair value of machinery has not decreased which means that the value remains same (Oppermann, 2009). Therefore, it shows that the value of machinery remains same and there is no depreciation expense. The AASB standard defines that fair value is the price that will be received after the sale of the asset from a transaction between the market participants. Therefore, while measuring the fair value of the asset a company should take into account the nature of the asset. The depreciation expense is calculated on the fair value of the asset and if there is no difference in the fair value then it means that that there is no depreciation expense (Picker, 2009). The depreciation expense is shown in the income statement and the value of the asset is recorded in the asset side of the balance sheet. The depreciation expense shows the decrease in the value of asset. Therefore, the fair value of machinery does not decline which means there is no depreciation expense.
The company sharks Ltd is growing rapidly in the market and has build its market reputation. Some of the investors have doubts about the organization as they are uneasy with the accounting policies adopted by the company. The cost of direct mailings, marketing costs and purchased customer list are shown as noncurrent assets. Therefore, it would be better for the company to mention the costs under intangible assets (Stittle and Wearing, 2008). Intangible assets are the assets that are not physical in nature. Companies frequently use resources and incur liabilities for the acquisition, enhancement and development of the intangible resources such as technical or scientific knowledge, implementation and design of new systems or processes, intellectual property, trademarks, intellectual property and licenses. The cost of direct mailing should be included in intangible asset as it is not physical in nature and would be considered as current asset not fixed asset (Wild, 2005). It will decrease the risk of the company as because there is no guarantee that the customers would be acquired and retained from the direct mailing.
The company has also purchased list of customers from competitors on July 4, 2016 for an amount of $800,000. It is also shown as noncurrent asset. The company estimates that the list will generate sales for another 2 years. There is a risk of generating sales for the company and it should not be included in the noncurrent assets (Wolf, 2008). The amount should be recognizing as intangible asset under current asset. The intangible can be turned and liquidated into cash.
The marketing cost is also mentioned under the non current asset. The marketing cost does not ensure increase in sales or profitability of the company. Therefore, it should be included in the intangible assets and not in noncurrent assets. The marketing practices of the company can also be replicated easily and therefore it should be recognize as intangible asset.
According to the AASB standards, intangible assets should be shown under current assets and it can be easily converted into cash. The intangible asset should be recognized only if there is a probability of expected economic benefits in future that are attributable to asset would flow to the organization and the asset’s cost can be reliably measures (Berk and DeMarzo, 2007). The recognition of the assets as intangible will help to solve the problems of the investors.
In the given case study, Bird Ltd was responsible for the people who became ill due to the food poisoning from the product sold by the company. The liability for the legal damages should be shown in the balance sheet as at June 30, 2017. The liabilities are the obligations of the organization arising from the past events that is expected to result in the outflow from the organization of resources. The financial statements of the company have been published and it is important to recognize the legal damages in the liabilities account (Elliott and Elliott, 2008). The legal damages can be shown in the next accounting period as because the financial statement has already been released by the company. According to the AASB, the organizations have to prepare their financial statements at the end of the financial accounting year which shows the market value. The increase or decrease in liability will help the debt level of the company. The act was considered as a liability for the company as because it leads to serious illness of 100 people in the event (Godfrey and Chalmers, 2007). The liabilities side in the balance sheet will show the legal damage and it will be represented in the next accounting year. According the AASB framework, liabilities are legal obligations for the companies that need to be paid by the company. The information was received after two week publication of the financial statements and it would not be altered. The financial statements should show the exact value of the company. Liabilities are the obligations that arise from past event and should be an outflow of the economic benefits. The increase in liabilities means increase in debt level of the company (Holton, 2012). The AASB framework explains the liabilities that to be shown in the balance sheet of financial statements.
References
AASB 2. (2007). Melbourne: Australian Accounting Standards Board.
Berk, J. and DeMarzo, P. (2007). Corporate finance. Boston: Pearson Addison Wesley.
Elliott, B. and Elliott, J. (2008). Financial accounting and reporting. Harlow: Financial Times Prentice Hall.
Godfrey, J. and Chalmers, K. (2007). Globalisation of accounting standards. Cheltenham, UK: Edward Elgar.
Hillier, D. (2010). Corporate finance. London: McGraw-Hill Higher Education.
Holton, R. (2012). Global finance. Abingdon, Oxon: Routledge.
Moles, P. (2011). Corporate finance. Hoboken, N.J.: Wiley.
Oppermann, H. (2009). Accounting standards. Lansdowne: Juta.
Picker, R. (2009). Australian accounting standards. Milton, Qld.: John Wiley & Sons Australia, Ltd.
Stittle, J. and Wearing, B. (2008). Financial accounting. Los Angeles: SAGE Publications.
Wild, J. (2005). Financial accounting. Boston: McGraw-Hill/Irwin.
Wolf, M. (2008). Fixing global finance. Baltimore, Md.: Johns Hopkins University Press.
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