Thank you Yannie.

Hello every one, I am Lisa, Yannie has just introduced the facts and
explained the accounting issues, in the next few minutes I will discuss the accounting
standards relevant to the accounting policy issue and briefly explain why they are
relevant to this issue. We believe there are at least five accounting standards should be
considered in this case. They are AASB framework para 49 and 89, the definition and
recognition of the assets, framework para 70 and 94, the definition and recognition of the
expense and AASB 117, para 33, recognition of operating lease. Because to discuss
whether the $12,000 should be recognized as the assets or expense at the end of financial
year we need to follow the definitions. It is clear the initial payment $12,000 was asset, as
it fits the definition of the asset; the machine is controlled by the company as the result of
the payment was made, and by using the machine, the company could achieve the future
economic benefit. However, framework para 70 and 94, the definition and recognition of
the expense are also need to be considered as the payment of cash at first place is a
outflow of assets and we need to determine whether it is in the nature of expense. At last,
according to AASB 117 para 4, the lease in this case is classified as operating lease, as it
fails to meeting the definition of the finance lease that transfers substantially all the risk
and rewards incidental to ownership of an asset. Therefore, in this case we need to
consider the AASB 117 para 33, lease payments under an operating lease shall be
recognized as an expense on a straight-line basis over the lease term unless another
systematic basis is more reprehensive of the time pattern of the users benefits.
Now, Alan will evaluate the accounting policy suggested by the bookkeeper.

Thank you, Lisa. The trainee bookkeeper suggests the initial payment $12000 should be
recognized as expense, which is inappropriate. According to the AASB framework para
70, the definition of expense, expense are decreases in economic benefits during the
accounting period in the form of outflow of assets that result in decrease in equity. Even
though, in this case, there is an outflow of cash, however, it does not result in deduction
of economic benefits, in fact, the payment of $12,000 would result a future economic
benefits, therefore, it cannot be recognized as expense, as is inconsistent with the
definition of expense. Similarly, as lack of a decrease in future economic benefits, the
AASB framework para 94, the recognition of expense cannot be satisfied neither. As time
moves on, the machine hours are consumed and the initial prepayment is expensed. And
the reduction amount is recognized as expanse. AASB 117 para 33, operating lease,
suggests the lease payment shall be recognized as expense on a straight line basis, or
other systematic basis, which is the machine hour usage in this case. Therefore, at the end
of the financial year, the measurement of the lease expense can be either 4,000 if we use
straight line method or 12,000 if the machine hour usage method is applied. And the
closing balance of the prepayment can be either 8,000 or 0 base on the different method.
That is all form us today, thank you for listening, and we are happy to answer any
questions here.