ASSIGNMENT 7 Theory in Action 6.2: An interesting area Question: 1.

Has the AASB adopted a costs attached perspective in the area of interest accounting approach required by AASB 6? 2. 3. Identify the potential problems associated with allocating costs to an area of interest. Why is the decision to expense or capitalise expenditures so important to the costs attach principle which underlies the historical cost system? Can you see a problem with objectively applying the capitalisation criteria outlined in AASB 6? 4. Is the comparability argument put forward by the AASB sufficient justification for the effective grandfathering of the previous accounting treatment? Should international comparability also be a consideration?

Answer: AASB6 requires Australians entities to apply area of interest accounting to their exploration and expenditures. An area of interest is defined as an individual geological area which is considered to constitute a favourable environment for the presence of a mineral deposit or an oil or natural gas field, or has been proved contain such a deposit or field. Where these conditions are satisfied and an exploration and evaluation asset recognised, AASB6 allows both direct (topographical, geological, geochemical) and indirect cost (depreciation of equipment used in exploration and evaluation serviced and general administrative cost) that specifically relate to an area of interest to be included in the assets cost. In allocating costs to the area of interest, no distinction is made between costs incurred within the entity and the cost of services performed by outside contractors or consultants on behalf the entity.

1.

2.

In allocating cost to the area, the problem maybe arise especially in determined the indirect cost to an area. Different with direct cost which is more clear and easy to determined, allocating indirect cost which is including depreciation and other activities related to the

activities in area of interest are more difficult because to do that, we must use suitable allocation method in order to determine the actual cost of this indirect cost.

3.

Based on the text, AASB6 outline two criteria in capitalizing an expenditure which is, first, the right to tenure of the area of interest are current and second, the expenditures are expected to be recouped or the expectation and evaluation activities have not reached a stage where a reasonable assessment of economically recoverable reserve can be made. If these two criteria can be fulfil, so the expenditure can be capitalized. The first criteria is easy to determined while the problem was arise in second criteria which is, its not easy to recouped and evaluate whether the activities have not reached a stage where a reasonable assessment of economically recoverable reserve can be made. It needs a further judgement before it can be determined.

4.

The area of interest accounting approach applies only to Australian entities and is achieved by the inclusion of Australia-specific paragraphs in AASB 6 Exploration for and Evaluation of Minerals Resources the Australian equivalent of the international standard (IFRS6). The AASB justified its approach as follow: IFRS 6 provides entities with discretion to determine the treatment of their exploration and evaluation cost. By adopting IFRS 6 with the inclusion of additional paragraph that require the treatment of exploration and evaluation cost to be consistent with the area of interest approach prescribed by the previous standard , the AASB has retained the existing level of comparability between Australian reporting entities engaged in exploration and evaluation activities. The reason why AASB adding the Australia-specific paragraphs to AASB 6 is to focused on comparability between Australian entities. Because of that reason AASB allowing an effective grandfathering and international comparability.

Theory in Action 6.5: Improvement yes, but short well perfection. Question: 1. Discuss the impact of AASB 136 and the new discounting requirements on the objectivity and usefulness of accounting information prepared in accordance with the new standard. 2. In estimating the discount rate to be used for present value calculations, how does an entity assess the risk associated with specific assets? 3. 4. Do you agree with the statement that the value in use concept is flawed? Current Australian accounting standards allow for a number of different measurement bases (including fair value and value in use) to be employed to different degrees and in varying combinations on the financial reports. What are the implications for the users of financial reports of this mix of approaches?

Answer:

1.

Assets held at either cost or fair value are subject to the requirements of AASB 136 Impairment of Assets. AASB 136 prescribes the procedures that an agency must apply to ensure that their assets are carried at no more than their recoverable amount. It also requires
the discounting of future cash flows in assessing the recoverable amount of an asset. The most significant improvement is the effective mandating of the use of present value. This new improvement has said will be improving the usefulness of accounting information but at the same time there are other problem will be arise which is consist of difficulties in determining future

cash flows and appropriate discount rates.

2.

According to AASB 136 external indicator, an increase in market interest rates or other market rates of return on investments that are likely to increase the discount rate included in the cash flow calculation when determining value in use (this will impact for-profit agencies and not-for-profit agencies with CGUs). The problem arises in estimating the risk
associated with specific assets when asset-specific rate is not directly available from the

market.

3.

An asset or cash generating unit (CGU) is considered impaired if its carrying amount is greater than its recoverable amount. An asset or CGUs recoverable amount is the higher of its value in use and fair value less cost to sell. In standard, Value in use is the present value of the future cash flows expected to be derived from an asset or CGU (cash generating unit). Although the value in use ignoring tax effect, however, value in use is viewed as a right step in improve the Australian Accounting Standard Board.

4.

There is no a specific method that recommended by AASB in way in determining certain amount such as historical cost, current cost, realizable (settlement) value and present value and until then, the calculation of this thing will depend on the method realibility and suitability.