Financial Accounting Issues - Assignment Example

Re: Answers to Accounting Issues – year ending 30 June 2012 From MMitcham@ntresources.com.au Sent: Friday, 20 April 2012 at 7.30am To: pkelly@Richardsons.com.au Dear Kelly, In response to your letter dated 20th April 2012, please find the suggested recommendations for the various accounting issues you had put forward relating to the financial year ending 30th June, 2012. I carried out compressive research, and I believe the suggestions will aid in decision making process. Issue 1 A proprietary company under the Australian laws is defined under section 45A (1) of the corporations Act. The Acts puts some restrictions such as barring such companies from having more than 50 members and engaging in fundraising. A proprietary company should not engage in fundraising that would require disclosure of documents such as prospectus, profile statement or offer any information statement (section 113 (3)). NT resources Limited and its subsidiaries close its books on 30 June of every year. However, taking note that the organization prepares its budget within which it operates at the beginning of the year, the firm could not factor in the suggested expansion as this investment needed commitment of a significant amount which was not provided for. James is right by rather pushing the idea of carrying out the expansion to July 2012, which is after the close of the current financial period. Based on the reported profits, the management may decide to issue lower dividends if not any and instead utilize the earning in funding the proposed expansion. Alternatively, the firm may comfortably fund the proposal as one of the projects earmarked for the financial year 2012/2013 as will be stipulated in the budget. Issue 2 The Generally Accepted Accounting Principles (GAAPs) requires reporting of most assets at the historical cost. GAAPs focus much on the reliability of data shown on the balance sheet rather than the speculated market value. As such, historical cost will work well for assets that are not deemed to be sold soon but rather are for long-term use. Land should be recorded on the balance sheet based on the historical cost rather than the market value. Basically, historical cost concept states that transactions should be recorded based on the amounts originally paid rather than market values. Though, many years may have elapsed whereas the market value may be quite different from the cost, the figure to be reported in the balance sheet should still reflect the amount paid for the property. Assets should be reported at their costs when acquired- not at their market value or replacement cost. Basically, it is worth noting historical costs are objective and can be easily traceable and audited (Jones 380). Market value is rather subjective as different people may suggest different amounts for property in question. Although accountants and other users of financial statements however, advocate use of market price when reporting, it may be relevant, but fails the reliability test. The reliability principle stipulates that, accounting transactions captured it the accounting system should be easily verified and with objective evidence. However, land is not subject to depreciation, but a write-down may occur due to impairments. For instance, impairment to land may occur due to the establishment of toxic waste site. Therefore, with the exception of impairments, land should remain on the balance sheet at the original cost paid by the company. Issue 3 Sales refer to the amount already collected or that has higher chances of being collected for services or goods already provided. However, payment is not quite necessary for sales to be recognized in the company books of accounts. The basic accounting principles say that sales can only be recognized when the transaction has taken place. Australian Accounting Standard (AAS) 118 defines revenue as the proceeds from the business transaction. I t goes further to state that revenue should be recognized in the books of accounts when earned. This means that delivery of services or goods should have taken place and it should not necessarily be that the monetary proceeds have been received. As such, the sales director is right by suggesting that sales on which revenue is earned should be recognized once we receive an order for this show that the buyer has accepted to acquire the products from us and thus highly probable that payment will be received. However, for the sale process to be complete, we should raise a proper tax invoice based on the order placed by the customer and the delivery note for the commodities sold on which the client will acknowledge receipt of the items delivered. Further, the contract states that, the client can either accept or reject the supply within thirty days from the day of supply. This clause should at all not prevent recognizing the sales but should the client reject the supplies made within the stipulated duration, then we should reverse the original transaction by raising a credit note. Government grants are assistance by the government in kind or cash for either past or future compliance with certain conditions (Haswell and Jade 15). It is important to note that any receipt of government grant should be treated carefully as the business needs to show the extent to which it has benefitted from the grant when reporting. This will facilitate comparison of the firm’s financial statements with those of other industry players and also with those of the prior years. The $ 500,000 government grant has been allocated for a specific purpose of export market development which should be accomplished in two years time and audited statement of expenditure submitted to the government at the expiry of the stated period. Government grants should only be recognized when reasonable assurance exist that the business will abide to the conditions stipulated by the grant (AAS 20.7). As such, the enterprise will have accepted the grant based on its will to comply with the stipulated conditions and intent of meeting the envisaged stipulations. Moreover, the net proceeds after netting the related expenses basically known as profits are subjected to income tax. For this case where grants are treated as revenue, it should not be an exception and therefore the balance of the amount should be taxed and remitted to the tax authorities. This approach of recognizing grant further requires grants to be recognized in profit and loss account on rational and systematic basis over the necessary period to match the associated expenses. However, this income approach of recognizing government grants fails to comply with the accrual accounting assumption which requires businesses to recognize income when earned regardless of the date of payment and also to record expenses when they are actually incurred regardless of whether paid in cash or credit terms. As one of the conditions, the amount which remains unutilized should be refunded to the government at the expiry of the two year period. The grant amount that is refundable is treated as an extra ordinary item. This refundable amount will first be applied against any unamortized deferred credit remaining in respect of the grant. However, to the extent that the refundable amount is more than the deferred credit, or if no deferred credit exists, the amount will be charged immediately to the profit and loss statement. Nonetheless, the accounting policy adopted for government grants including presentation in the financial statements should be disclosed. Issue 4 Having known of the intended renovation work earmarked for the following financial year, the idea of providing for it can be considered as wise and prudent. Basically, a provision refers to expenditure relating to a certain accounting period but not falling due on the date of the financial statement (Ball and Gill 205). AAS 37 requires a provision to be recognized if it is highly probable that an outflow of financial resources embodying economic gains will be incurred to settle the obligation. Moreover, based on the expectations of profitability growth, the business having provided for the pending renovations will report lower profits. The amount to fund the expected major renovations will be netted before arriving at taxable amount thus leaving a small amount if any for taxation purpose. However, the expense to be allowable is the one that promotes carrying out of the business but any other expense incurred for any other purpose will be subject to tax. As such, repairs to the ceiling and office general maintenance expense will form the allowable expense whereas the specialized work will be taxable. Also important to note is that, costs that neither prolong the building useful life nor significantly add to its permanent value should be expensed. Such cost includes preservation/restoration, maintenance and projects costs that are below the company’s capitalization threshold. However, the claim by the graduate accountant that reporting increased profits will make the shareholders ask for higher dividends may not necessarily be right as the dividend to be given is determined by the board of directors based not only on the reported profits but also on the company’s future plans. As such, the board can decide to issue low dividend and explain to the shareholders of the intended commitment of part of the profits generated on the major renovation work, but the major disadvantage with this approach is that the company will not enjoy the tax advantage as it will end up having higher tax liability based on the higher profits reported. I hope everything is clear, please contact the undersigned for any clarification or further research. Regards, Mary, Xxxxxxx Work cited Ball, Richard and Foster Gill. “Corporate financial reporting: a methodological review of empirical research.” Journal of Accounting Research. 20. 5 (1982):161–234. Print. Haswell, Solomon and McKinnon Jade. “IASB standards for Australia by 2005: catapult or Trojan horse?” Australian Accounting Review. 13.7 (2003): 8–16. Print. Jones, Sydney. “Harmonization and the conceptual framework: an international perspective.” Australian Accounting journal. 39. 2 (2003): 369–381. Print. Read More