Académique Documents
Professionnel Documents
Culture Documents
Financial
Accounting and
Reporting
Assignment 1
Contents
Introduction................................................................................................................ 2
Part 1: Summary......................................................................................................... 3
Part 2: Information gaps............................................................................................. 3
Part 3: Formulate Questions....................................................................................... 3
Part 2.......................................................................................................................... 5
Conclusion.................................................................................................................. 9
References.................................................................................................................. 9
Introduction
Accounting is the most important activity of part of any given company.
Accounting practices involve and include everything from the realization and
recognition of financial and accounting items to the measurement, reporting,
evaluation etc. One thing that is extremely important in accounting in
organizations is the appropriate measurement and recognition of different
elements and items in the financial statements. As financial statements are
extremely crucial to represent the financial strength of a company, their
preparation is also important according to the given standards. But in
addition to the financial measurement and recognition, one more thing that
is
of
importance
is
the
communication.
Appropriate
and
effective
aspects
of
communication
in
accounting
and
reporting
to
Part 1: Summary
The situation here presents the case of Topper Consultants Ltd. that bought
large numbers of plant and equipment and also bought or leased warehouses
from a liquidating company. The impairment of assets of the liquidating
company as per AASB (Australian Accounting Standards Board) standard
AASB 136 led to lower selling price of its assets as compared to the value
recorded on books (Australian Government, 2007). As Topper Consultants
Ltd. saved over $2.2 million via the purchase of impaired assets, goodwill
was also earned. In accordance with AASB 1013 (Australian Government,
1996), goodwill is earned when a company purchases assets of other
company at subsidized rates as done by Topper Consultants Ltd. The goodwill
that was thus purchased externally can be recorded as non-current assets in
the balance sheet of Topper Consultants but the director is concerned about
its impact on the profit and loss statement of the firm.
and can also present the time period for which the benefits can be extended
and divided in the books for realizing higher profits.
Part 2
Stealth Trick and Associates
76852 Germy Road, Surry Hills
NSW
23 January 2014
Mr. Edward Boucher
6
when the costs that are incurred in the provision of sales can be measured
reliably (Australian Government, 2009).
Hence, in the present case it is better to only recognize revenues that are
received from the customers. The initial 15% that is charged to the
customers can be recorded as revenues in the profit and loss statement of
Arpeggios Ltd. but the rest of the amount should be realized when the cash
for the sales proceeds is received. Though the company is incurring costs,
whether the economic benefits will flow to it or not is not sure and the
expected returns and profits also cannot be estimated. Hence, it is advisable
to recognize revenues only when the cash is received for the same (Easton
et al. 1992).
With respect to the second issue, I notice that you have observed various
differences in the tax incurrence and reporting of taxes in your financial
statements. The first difference that has been observed is with regards to
income expense and the actual tax paid. Please remain assured that the
actual tax paid is not hidden and is clearly represented in the financial
statements. Income tax expense that is recorded in the profit and loss
statement and the income tax that is actually paid are two different things.
Income tax expense is what a company must pay as per the calculations by
accounting standards (Guenther et al. 1997). The standard business
accounting guidelines define different elements that can be adjusted in this
expense and hence the income tax expenses are generally low. Whereas the
income tax that is paid is calculated on the basis of ATO (Australian Taxation
office) guidelines that define rules and standards for calculating taxes
(Woellner et al. 2012). Thus, the tax expense in the income statement is
generally lower than the income tax that is actually paid by a company.
It is also possible to have current tax liability to be lower than the tax that is
actually paid. This is because of two reasons, first being that the tax liability
in the balance sheet includes all forms
3
23 January 2014
8
Edward Boucher
of taxes in addition to the income tax such as sales tax, property tax etc. And
also, the recognition of any form of accrued tax also increases the tax
liability of the company but the actual taxes that are paid are less. So, it is
completely alright to have tax liability and tax expenses to be lower than the
actual taxes paid and it does not mean that the company overpaid or
underpaid taxes. However in order to make this clearer for future references,
a separate tax accounting can be done to demonstrate the way different tax
expenses etc. are recognized and recorded in the financial statements
(Woellner et al. 2012).
The deferred tax assets result when a company can make use of some asset
to reduce the overall income tax expense of the accounting period. For
example, if a company makes a tax loss in one year, the amount can be
carried forward in the next year as a deferred income tax asset and a
deferred tax liability is recorded when a company pays extra tax in one year
and the extra amount can be deducted in the next year (Norton and Abacus,
1995). As shown in Lowes 2010 annual reports, deferred tax and assets are
recorded because of the variations observed in previous year (Lowe, 2010).
This could have also been caused due to the conversion of the company from
a proprietary to public company because usually the tax liabilities and rates
of a public company are lower and hence this could have led to the creation
of deferred tax liabilities or assets. It is also possible that the company
recorded revenues before the cash was actually received and hence a
deferred tax situation arose in the accounts (Richardson and Lanis, 2007).
The last issue is regarding the reporting of long service leave expense by the
company. Since all employees working for more than ten years are entitled to
long service leave, the payments made to them is recorded as expense when
it is actually incurred. But in addition to the same, the company must
recognize this as the long service liability. According to paragraph 4.4.9 of
AASB 1028, the company must identify all its liabilities in terms of long
9
10
Conclusion
The study thus highlights and helps in understanding the communication
guidelines and protocols that must be followed. It demonstrated that
obtaining right, relevant and complete information is the most essential part
of accounting because it helps in making appropriate decisions with regards
to reporting and analysis. The use of all information helps in choosing
between accounting and reporting options and also helps in better decision
making for business entities.
References
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D.(2012),
Australian Taxation Law. CCH Australia, North Ryde
Guenther, D.A., Maydew, E.L., and Nutter, S.E.(1997), Financial reporting, tax
costs, and book-tax conformity, Journal of Accounting and Economics, vol.23,
no.3, pp.225-248
Easton, P.D., Harris, T.S. and Ohlson, J.A.(1992), Aggregate accounting
earnings can explain most of security returns, The case of long return
intervals, Journal of Accounting and Economics, vol.15, no.2-3, pp.119-142
Dechow, P.M.(1994), Accounting earnings and cash flows as measures of firm
performance: The role of accounting accruals, Journal of Accounting and
Economics, vol.18, no.1, pp.3-42
Hayn, C., and Hughes, P.J.(2006), Leading Indicators of Goodwill Impairment,
Journal of Accounting, Auditing & Finance, vol.21, no.3, pp.223-265
Hooks, J., Coy, D. and Davey, H.(2002), The information gap in annual
reports, Accounting, Auditing & Accountability Journal, Vol. 15 Iss: 4, pp.501
522
11
[online]
government
(1996),
Commonwealth
Accounting
of
for
Goodwill,
AASB
Australia
1013,
[online]
http://www.aasb.gov.au/admin/file/content102/c3/AASB1013_6-96.pdf
, accessed on 01/22/14
Australian
government
Commonwealth
(2007),
Impairment
of
Assets,
of
Australia
AASB
136,
[online]
available
at
http://www.aasb.gov.au/admin/file/content102/c3/AASB1028_06-01.pdf,
accessed on 01/22/13
Lowe
(2010),
Notes
to
Financial
Statements,
[online]
available
at
http://www.lowes.com/AboutLowes/AnnualReports/annual_report_10/financial
s/notes_to_consolidated_financial_statements.pdf, accessed on 01/22/13
12