Question 1
Being an accountant of Himalaya Ltd that has a cafe and gift shop at Mount Tamborine in the Gold Coast hinterland, let us discuss accounting treatment of certain items:
(a) It has been observed that $20,000 cash was stolen from the safe at night. Such theft of cash is a company’s loss and cannot be found back. It is therefore considered as an expense. SAC 4 ‘Statement of Accounting Concepts’ defines expense as “consumptions or losses of future economic benefits” that reduces the assets balance or increases the liability of an organization. Such an expense is to be recognized in the revenue statement for the reporting period if it is probable that such expense has actually occurred and also, such a consumption or loss can be reliably measured (Atkinson, 2012).
So, in the following case, a theft expense account would be created and debited as an expense of value $20,000 in the income statement. On the other hand, it will be shown as a reduction in the asset balance, that is, would be shown as a reduction from cash-in-hand.
(b) The company has been ordered by Court to repair the environmental damage caused by it to the local river system (Berry, 2009). However, the costs to be incurred are unknown. The accounting treatment in such a case could be related with AASB 137 ‘Provisions, Contingent Liabilities and Contingent Assets’. A provision is recognized only when:
- an entity possess such legal or constructive obligation occurring due to some past events ;
- An outflow of resources is probable and reliable estimates can be made of the obligation.
In such a case, where it is probable that the company has to get the damage repaired as it has been ordered to it on legal grounds, reliable estimates are to be made for recognition of provision for environmental damage. Such a provision would be recognized on the balance sheet on the liability side and would be expensed in the income statement. This is simply done to set aside an expected amount from the profits so as to cover the liability in future.
(c) The company received $10,000 as donation. Usually, for the accounting of donation, the purpose of such donations are determined first, that is whether donations have a general purpose or carry some special purpose. In such a case, donations received generally are like an income to the business and are treated as other receivables while donation received for special purposes are treated as capital receipt and treated as an investment to the business (Girard, 2014). In the following case where the purpose is absent, we would be assuming it to be general purpose donation and would credit the income statement with $10,000 as donations. As soon as the amount is received, cash account would be credited and donations account would be debited. In case such an amount has been received instantly, we can omit the donations entry and pass the final entry (Boyd, 2013).
Question 2
AASB 116 relates with Property, Plant and Equipment that has an objective of using appropriate accounting treatment for property, plant or equipment so that the intended users can extract relevant information about the investments made by an entity in such assets or the change in investments (McLaney & Adril, 2016). The common issues that arise in this standard are recognition of the assets, determination of their ending value, depreciation rate and impairment costs. According to AASB 116, if an item qualifies for recognition as an asset, it shall be measured at cost, that is, the costs incurred for acquiring such an asset.
This cost isn’t about only the purchase price but various other costs which can be stated as below :
- Purchase price after providing for discounts and rebates and including taxes or duties ;
- Costs incurred directly onto the asset for bringing it to the site location or such other costs incurred for bringing it into the condition necessary for the asset to operate in the intended manner ;
- If costs have been incurred to remove the previous asset where the acquired asset would be placed or more precisely, costs incurred for preparing the site for installation of an asset (Parrino, 2013) ;
- Any testing costs or installation costs etc.
Such costs are added to the purchase price of an asset so as to obtain a final acquired price. This is also called capitalizing other direct & relatable costs with the cost of the asset. Examples of costs that are directly attributable are site preparation costs, assembly & installation costs, handling costs, delivery costs, cost of testing the functioning of the asset, professional fees, etc.
The following case relates to the Riyaz Ltd who has acquired a new machine which has been installed in its factory. There are several other expenditures incurred by the company for acquiring such a machine and we are required to classify them as which costs are capitalizing costs and should be capitalized into the cost of the building. Let us such three costs one by one:
- Freight costs and insurance costs to get the new machinery at the factory: such costs are directly attributable as they have been incurred to bring the asset into the factory. Therefore, it should be capitalized.
- Costs of renovation of a section of a factory for the arrival of new machine so that all other parts of the factory can have easy access : such costs are like site preparation costs as discussed above and therefore, are directly related to the machine because had the machine not purchased, such costs wouldn’t have been incurred. So, it should be capitalized.
- Cost of cooling equipment to assist in the efficient operation of the new machine: when a cost is incurred to increase the operating efficiency of an asset, it is indirectly incurred to increase the future economic benefits. Thus, such costs are capital expenditures and therefore, should be capitalized with the cost of the machine.
The other costs such as training costs of workers, repairing of factory door damaged during installation, labor & travel costs for inspection of possible new machines aren’t directly related with the asset. They are revenue expenditures and should be treated as an expense and written off in the year in which it has been incurred.
AASB 138 ‘Intangible Asset’ defines an intangible asset as an asset not having a physical existence but is identifiable and non monetary in nature. An entity considers it as an resource which is under the control of it as a result of past events and future economic benefits are expected to happen to the entity (Picker, 2016). According to this standard, an organization shall determine the useful life of an intangible asset and shall accordingly account for it. Useful life of an intangible asset can be definite or indefinite. The asset is suppose to have an indefinite useful life if after the analysis of all the factors that are relevant, it is discovered that there is no limited period of the asset which is expected to generate cash for the entity. In a similar way, in case the useful life is determined, such intangible asset is amortized systematically over the period of useful life (Siciliano, 2015).
Question 3
According to the given case of Harry Ltd., two copyrights have been acquired in 2017 where one has been acquired for $10,500 with a useful life of 5 years while the other one has been purchased for $12,000 and has an indefinite period of time. For reporting in the financial statement, the former copyright would be amortized over 5 years equally and every year such intangible asset would be shown net of amortization expense. In case of the latter asset, it would be shown in the balance sheet at $12,000 and wouldn’t be amortized since it has an indefinite useful life. However, such assets might be impaired every year . Both of the copyrights would be shown under non-current assets under the head of intangible assets in the balance sheet for the period ending 30 June 2018.
AAS 30 ‘Accounting for Employee Entitlements’ defines employee entitlements as benefits that are accrued to the employees as a result of their continuous rendering of services and being not limited to such entitlements includes fringe benefits, sick leave, long service leave, superannuation, wages & salaries, etc. Long term service leave is an unconditional legal entitlement that has to be paid by an employer but only after the employee has successfully served the employer for a qualifying period of time which is usually 10 or 15 years (Taillard, 2013). After this point is reached, the accumulation of long service leave continues until such leave is actually taken. Such accumulated entitlement would increase with the employee’s services and would be recognized as an expense. However, if such expense remains unsettled on the reporting date, it would turn out to be a liability for the entity since the entity would now be having an obligation currently so as to make a future cash outflow due to consumption of employee services.
The given case study relates to Harry Ltd that considers not recognizing long term service as a liability until the employees have rendered a qualifying years of service, that is, 10 years. As per the standard stated, the following approach is acceptable as the liability for long service leave occurs only when services have been continuously rendered by the employees for a qualifying period of time, 10 years in our case. Thus, the accountant shall accept this approach and accordingly, prepare the financial books.
Atkinson, A. A. (2012). Management accounting. Upper Saddle River, N.J.: Paerson.
Berry, L. E. (2009). Management accounting demystified. New York: McGraw-Hill.
Boyd, W. K. (2013). Cost Accounting For Dummies. Hoboken: Wiley.
Girard, S. L. (2014). Business finance basics. Pompton Plains, NJ: Career Press.
McLaney, E., & Adril, D. P. (2016). Accounting and Finance: An Introduction. United Kingdom: Pearson.
Parrino, R. (2013). Fundamentals of Corporate Finance, 2nd Edition. Milton: John Wiley & Sons.
Picker, R. (2016). Australian accounting standards. Milton, Qld.: John Wiley & Sons.
Siciliano, G. (2015). Finance for Nonfinancial Managers. New York: McGraw-Hill.
Taillard, M. (2013). Corporate finance for dummies. Hoboken, N.J.: Wiley.
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