Background to the case study
Mr. Christopher Sampson
The managing Director
Beachlife Ltd.
Level 7, 927 William Street,
Brisbane QLD 4000
Dear Christopher
Thank for your prompt response that highlighted the issues currently facing by your company to prepare the annual report. The issues mainly related to the compliance of various requirements and interpretations issued by AASB, IFRS and Corporation Act 2001. As we always provide you with the best possible solutions, this time also we are assuring you to provide you with the solutions that will be complied with the AASB and IFRS requirements. The letter will focus on the accounting issues faced by your organization and the possible solutions that can help your board to incorporate the treatment in the annual report. On behalf of Magenta and Associates I thank you for believing us and giving us an opportunity to serve you. The letter will also provide you with the sources and references that will assist you to understand the advices associated with the accounting standards.
You may know that all the companies registered under Australian Stock Exchange are required to follow the accounting standards and interpretations issued by IFRS while preparing their financial statements. Beachlife Limited, being a public limited company must follow the AASB guidelines and requirements of Corporation Act 2001 while preparing their financial statement. Moreover, the company shall follow the relevant statutes, sections and clauses while treating any item in their financial statement. The issues faced by the company at present are related to the treatment of brand recognition and the treatment of contingent liability.
Intangible assets are those assets which do not have any physical existence, for instance, goodwill, patent rights, brand name, license agreements and trademarks. As the intangible assets do not have any physical substance and are not dealt in the regular active market, the valuations of these assets are not very easy. Further, the valuation depends on the fact whether the asset has definite useful life or indefinite useful life. In accordance with Para 63 of IAS 38 and interpretation of IFRS the internally generated assets are not recognised in the balance sheet of the company under the head of asset. Likewise the brand is considered as the intangible assets. As the brand helps the customers to recognize the product and generate their expectations, the valuation of brand cannot be done with any valuation method. Further, various issues created while measuring and valuing the brand. The value of the intangible asset like brand cannot be measured exactly until it is sold. Here in the given case, the directors want to recognize $ 800,000 for the brand ‘Sun n Surf Shirts’, however, at the time of selling they may get only $ 500,000 or $ 600,000,
Technical component 15% for issues and calculations
As per the accounting standard AASB – 138 on recognition of the intangible asset, if the asset’s cost is reliably measured and it is quite possible that the future benefit of the asset will accrue to the company then only it can be recognized. As the brand ‘Sun n Surf Shirts has no definite useful life and the value cannot be measured reliably until it is sold, it cannot be recognized as asset under the financial statement.
We would like you to know that the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IFRS) have led to the issuance of the new standard in relation to revenue that is IFRS 15. IFRS 15 essentially relates to the revenue from contracts with the customers that supersede all the requirements pertaining to the recognition of revenue standards that have been stated by IFRS and GAAP. This particular standard reflects the principles that a corporate entity has to apply for the purpose of measuring and recognizing the revenue and the inflows and outflows of cash associated with it. The sales agreement amount should be recorded by adhering to the IFRS 15 standards. This should be excited by following the five steps that have been listed down below:
- Identification of the contract with the customer
- Identification of the performance related obligations of the contract
- Determining the effective transaction price
- Allocating the transaction price to the performance obligation of the contract
- Recognition of the revenue at the time when the performance obligation has been satisfied
The time when both the parties of the contract have approved to the agreement, the company has to account for the agreement that has been entered with the customer. This means that the company possesses the ability to realize the rights of each party in regards to the items that has to be provided. A particular amount that is put aside for the purpose off meeting up to the estimated obligations pertaining to the future is known as provisions. Even if, the essential features of a provision match with that of savings, the provisions are recognized as current liability in the balance sheet. It is assumed to be expenditure in the income statement. Furthermore, the equity of a company reduces with the creation of a provision. It is also probable that the creation of a provision will result in the outflow of the economic or financial resources.
The contingent liability is the projected liability that may occur on account of happening or non-happening of any event. When the amount of contingent liability can be reliably measured and there is probable certainty that the satisfying the obligation will require economic outflow of the company, it will be recorded as the loss in the financial statement of the company. On the other hand, if the contingent liability is not probable and cannot be reliably measured instead of recording it in the financial statement it will be disclosed through notes to the financial statement. As per the given scenario, Beachlife entered into the sales agreement for $ 90,000 with Goodsports Ltd. As per the agreement, Beachlife is to provide the maintenance of the equipment for 1st 12 months after sales. However, one inclusion in the terms of agreement was that if the purchaser that is Goodsports Limited is not satisfied with the maintenance service of Beachlife, Goodsports will be entitled to 15% refund on the purchase price that is, $ 90,000*15% = $ 13,500. The correct accounting treatment with regard to this transaction that shall be made by your company is to record $ 90,000 as sales revenue in the income statement as the sales is taken place in the accounting year for which payment is to be received in the same accounting period. Further, $ 7,500 shall be recorded as provision in the income statement and under current liability in balance sheet as the maintenance charge is an obligation for the company. However, as the amount of $ 13,500 is the contingent liability for the company and the obligation is not probable it shall be disclosed through notes to the financial statement.
I am expecting a positive response from your end. In case of any doubt or query feel free to contact.
Yours sincerely
Ms. Lisa Magenta
Manager
Magenta and Associates
Copy Alva Johnson
Letter Writing Handout
AASB, C.A.S., 2014. Business Combinations. Disclosure, 66, p.77.
Aasb.gov.au. (2018). [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf [Accessed 16 Jan. 2018].
Aasb.gov.au. (2018). [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB118_07-04_COMPoct10_01-11.pdf [Accessed 16 Jan. 2018].
Adhariani, D., Sciulli, N. and Clift, R., 2017. Quantitative Optimisation Model, Results and Discussion. In Financial Management and Corporate Governance from the Feminist Ethics of Care Perspective (pp. 209-284). Springer International Publishing.
Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairment decisions by Australian firms and whether this was impacted by AASB 136.
Dakis, G.S., 2016. Upcoming changes to contributions and leasing standards. Governance Directions, 68(2), p.99.
Goodwin, J., Atilgan, Y., Simsir, S.A. and Ahmed, K., 2016. Investor reaction to accounting misstatements under IFRS: Australian evidence.
Haider, S., 2015. Exploring the Relationship between Changes in Accounting Policies and Valuation of Australian Banking Firms (Doctoral dissertation, Victoria University).
Sinclair, R.N. and Keller, K.L., 2014. A case for brands as assets: Acquired and internally developed. Journal of Brand Management, 21(4), pp.286-302.
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