ACCT2201 CORPORATE ACCOUNTING

Tutorial 1 Week beginning 4th of March

REVIEW QUESTIONS Chapter 1 3. Distinguish between a large and a small proprietary company. What are the implications of being classified large rather than small? A small proprietary company is defined in Section 45A of Corporations Act 2001, as amended, as one which meets 2 of the following three criteria: *consolidated annual revenue less than $25 million# *consolidated gross assets at the end of the financial year is less than $12.5 million# * the companies and the entities it controls have fewer than 50 employees^ at the end of the financial year. #These figures must be determined in accordance with accounting standards ^ Part-time employees measured at appropriate fraction of full-time If these criteria are not met the company will be a large proprietary company. Small proprietary companies do not have to prepare formal financial statements or have them audited. However, they must keep sufficient accounting records to allow preparation and audit of accounts if either 5% of their voting shareholders or ASIC request this to be done. Large proprietary companies, must prepare financial reports in accordance with accounting standards, have them audited, send them to shareholders and lodge them with ASIC (Section 292) 11. Does a company have to comply with accounting standards in order to show a true and fair view of its financial affairs? Discuss. Before the early 1990s, the directors of a company could elect not to comply with an accounting standard issued by the AASB if they believed the particular standards would cause the accounts not to present a true and fair view. This 'true and fair override' no longer exists and directors must now comply with applicable accounting standards and add any additional information in the notes to the financial statements if they believe adherence to the standards does not present a true and fair view. Compliance with standards therefore has become the norm, resulting in an increased interest, both positive and negative, in the requirements of accounting standards by different lobby groups, particularly among those required to prepare financial statements.

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Chapter 3 2. Foxy Ltd was going through some difficult trading times and was barely breaking even. In attempting to improve sales, the company spent $500 000 on an advertising campaign during the current year in the hope that sales would improve in the new year. Management decided that the cost of this campaign should be recorded as an asset in order that the small current profit for the firm would not become a loss. Discuss whether managements decision is justified. Advertising costs may be treated as an asset only if they satisfy the definition of an asset. Do they have the essential characteristics of an asset? Do they provide controlled future economic benefits flowing to the entity from a past event or events? Do they satisfy the proposed definition of an asset put forward by the IASB and FASB? See section 3.1.2 of the chapter. It is not sufficient to treat them as an asset merely to show a better profit figure. If advertising costs are not assets, then managements decision is not justified. If they are assets, then the decision to treat them as an asset in the records will only be justified if the advertising costs satisfy the recognition criteria, i.e. is it probable that the advertising expenditure will lead to future economic benefits flowing to the entity, and can the costs be measured reliably? Discuss the meaning of probable. Note that in this case, there is a cost which can be reliably measured (i.e a faithfully representative and verifiable cost).

5. As maintenance costs on equipment have been steadily rising every year, Scotch Ltd has been setting aside regularly a provision for plant maintenance at an increasing amount. The provision has been recorded as a liability, and as an expense. Discuss whether Scotch Ltds treatment is correct. The Conceptual Framework 2010 s definition of a liability provides that there must be a present obligation. Furthermore, a provision must firstly be a liability for it to exist. See Section 3.1.3 of the chapter. As the recording of future maintenance costs is merely a book entry involving a future selfsacrifice by Scotch Ltd itself, with no present obligation, no liability for maintenance costs exists under the Frameworks definition of liabilities. Nor can there be an expense as there has been no outflow or depletion of assets or incurrence of a liability in Scotch Ltd.

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Chapter 12 1. What do the terms financial performance and financial position mean and how do they relate to the objective of general-purpose financial reporting?

Financial performance is discussed in the Conceptual Framework, paragraph OB16 as relating to the return that the entity has produced on its economic resources. Profit is frequently used as a measure of financial performance (Conceptual Framework paragraph 4.24). Information about income and expenses during a financial period plus changes in assets, liabilities and equities will enable users to assess past performance and make reasonable predictions about the ability of a company to continue to generate profits from its operating activities. Information about financial performance is largely contained in the statement of profit or loss and other comprehensive income and notes thereto. Its content is regulated by AASB 101 Presentation of Financial Statements. Financial position is discussed in paragraph OB12 of the Conceptual Framework as relating to the entitys economic resources, the claims against the entity and the effects of transactions and other events that change an entitys economic resources and claims. Information about financial position is largely contained in the statement of financial position (or balance sheet) and notes thereto. Its content is also regulated by AASB 101 and provides information concerning: Resources controlled. Predictions about the ability of an entity to continue to operate and generate positive cash flows are enhanced by information about assets. Financial structure. Details of how the entity is financed through debt or equity help users determine future distributions of cash flows and the capacity of the entity to attract resources in the future. A debt-laden company has more of its future cash flows committed to interest and principal repayment than does a company largely financed by its shareholders. Such an entity will also have a more limited capacity to borrow additional funds should this become necessary. Capacity to adapt. Information about the realisable value, current state of repair and any restrictions on use of assets enables users to assess the capacity of the entity to adapt to economic or environmental change. Liquidity The availability of cash in the near future after taking into account any financial commitments due over this period. Solvency. Availability of cash over the longer term in order to meet debts when they fall due.

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PRACTICE QUESTIONS Chapter 12 12.9 MOUSEDEER LTD A. ALLOWANCE FOR DOUBTFUL DEBTS Details $ Date Details Accounts receivable* 17 600 1/7/14 Balance b/d Balance c/d 17 800 30/6/15 Bad debts expense** 35 400 1/7/15 Balance b/d

Date 30/6/15 30/6/15

$ 12 000 23 400 35 400 17 800

*$17 600 bad debts written off ($12 000 + $5 600) **$23 400 = $17 800 + $5 600

Balance date adjustment entry DATE DETAILS 30/6/15 Bad debts expense Allowance for doubtful debts (Balance date adjustment) Dr 23 400 Cr 23 400

B. AASB 108, paragraph 36 requires that the effect of a change in an accounting estimate shall be recognised prospectively by including it in profit or loss in the period of the change. New information in the form of debts which actually went bad during the year ended 30 June 2015 proved that the estimate of doubtful debts as at 30 June 2014 (last year) was inadequate and should have been $17 600 rather than $12 000. The amount of $5 600 ($17 600 - $12 000) in bad debts written off that was more than allowed for last year has been added to bad debts expense for the current year (i.e. prospectively) in accordance with paragraph 36. The balance of the bad debts expense for the current year, $23 400, is comprised of $17 800 (allowance for doubtful debts as at 30 June 2015 based on an analysis of outstanding account receivable balances) plus $5 600 (adjustment for underestimation of allowance for doubtful debts as at 30 June 2014).

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C. The key issue here is whether or not the change in the way Mousedeer Ltd estimates its doubtful debts is a change in an accounting policy. AASB 108, paragraph 35 states A change in the measurement basis applied is a change in an accounting policy, and is not a change in an accounting estimate. When it is difficult to distinguish a change in an accounting policy from a change in an accounting estimate, the change is treated as a change in an accounting estimate. The asset here is Accounts Receivable, a financial asset which is measured at the lower of nominal value and recoverable amount. Where a debt is not expected to be collected in full it is disclosed in the financial statements at its expected amount via the allowance for doubtful debt adjustment. The change in the way this recoverable amount is estimated does not change the measurement basis and is therefore not a change in accounting policy. Mousedeer Ltd should disclose the nature and amount of any change in an accounting estimate (according to AASB 108 paragraph 39), usually in its accounting policy note.

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