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Financial Reporting Questions

Question 1

a) The two major areas of concern while presenting the accounting values of plant property and equipment is the revaluation of these assets, determination of the depreciation and recognition of the losses. Revaluation of asset is usually done to ensure those assets are given their correct value. This is usually done to cater for the principle of historical cost of accounting. Property plant and equipment are affected by depreciation and hence must be calculated and extracted from the original value to ensure correct value is given. There are three methods of calculating depreciation of plant property and equipment. The straight line method, sum of digit method, declining balance method and production method are the four methods of calculating depreciation of equipment. Buildings and other business assets are assumed to depreciate gradually over time but land is not depreciated because it has unlimited useful life.

b) The accounting standards provide for the treatment of the depreciation of the company asset. There are three major areas that the business must deal with to properly account for asset. The first is determination of the revalued items, depreciation and working out acquisition cost of property plant and equipment. In intangible asset the revalued value must be determined. The third issue that must be addressed is the determination of the impairment loss. The accounting standards recognize the fact that historical value of asset cannot be used accurately. There is need to determine the current value of asset. The written down value must also be determined. When the carrying amount is more than the recoverable amount, it must be written down as recoverable amount .The carrying amount is the initial values of the asset or the cost less the accumulated depreciation and the impairment loss while recoverable value is the higher value of an asset less the  cost to sell and the value in use.The value of the asset is expected to decrease as the time of usage of the asset increases. The company should also provide allocation for the depreciation of the asset. The residue value of   assets is determined by getting the accumulated depreciation that is reduced from the actual values. The other issues dealt with are the revaluation of company assets. The correct values of the company’s asset must always be provided. Finally, the impairment of the loss must be determined. When the carrying amount exceeds its recoverable amount, the values must be written down as an impairment loss (Alexander& Britton 1993).

Question 2

The asset in a company can be defined as any resource, either tangible or intangible, controlled fully by the company to produce output and future economic benefits. The economic benefits of any asset owned by the company are expected to flow into the company. The reporting entity should be able to control the economic benefit of the company. Employees are human resource whose future economic benefit does not depend on the company. In addition, transactions that results to control must have occurred and the value or cost of the asset must be measured with reliability. More importantly, employees in a company though they receive instruction from the senior management and follow, the company does not sole control over them. The accounting definition of asset requires that the business be able to whole control them in order to ensure maximum production. The future benefit of an employee can be said with any certainty that it will be enjoyed by the company. Employees have both occupational and geographical mobility and hence may get experience and change their working place. In contrast, the asset that asset are owned by the business and cannot change position without any inflow. Further, accounting standards provides that value of asset in a business should be in a position to be determined with high degree of reliability. The value of employees cannot be determined with any reliability. Employees can only be considered an intangible asset in a company, but according to the accounting standards, an intangible asset is only recognized if the cost is measurable. It is not easy to measure the value of employees in a company. This would mean that company’s employees cannot be treated as asset because they do not meet all characteristics of asset (Wahlen et al.2011).

An overhaul of machinery is the rebuilding of, making repairs to or adjusting the machinery to ensure that it is acceptable again. The definition of liabilities, according to the accounting standards, is an obligation of a firm that results from the past activities, and the settlement leads to the outflow of the company resources (Narasimham& India 1992). The overhaul cost is not a company’s obligation that resulted from past activities but rather it is only a company’s will to restore the value of the company. Another characteristic of the liabilities that overhaul does not meet is that it is not a present obligation. Unlike the liabilities that result from a past transaction, overhaul activities do not result from it. It is the will of any business management to provide for the asset overhaul value but not the requirement of the accounting standards. The obligation created is not necessarily biding as the business may decide to change. The accounting standards further provide that the value of any liability in a business must be in position to be determined with certainty and reliability. However, overhaul is just a provision by the business be management and its value cannot be determined with reliability. A liability is recognized when it is probable that an outflow of resource will result from clearing of the present obligation and the value to be settled is measured reliably (Libby et al. 2011). This condition is not met by overhaul because the amount to be used in overhauling cannot be measured reliably. In addition, a liability, which is an obligation, is considered legally enforceable or constructive. The overhaul does not meet any of this condition and hence cannot be considered as liability in a firm (Scott 2009).

Question 3

a)The business owned by Mrs. Rhonda is managed by the family members and all the shareholders of the company are family members. According to the accounting standards, a reporting company is supposed to be separated from those people who have any economic interest in the business. The financial statement prepared is supposed to be prepared for that user who cannot be able to command is statement from the management. The business that has group of user who cannot be able to command financial statement is a reporting entity. However, Rhoda’s business has just few shareholders who are relatives and hence can be able to command for the financial statements. This disqualifies Rhonda’s business as reporting entity. A business that does not qualify as reporting entity is not required to produce the general purpose financial statements and hence does not necessarily follow financial accounting standards. Further, it is provided that the parties involved should not have any political importance or influence on the day-to-day running of the business activities. The company owned by Rhonda shows that the financial information is of importance to all members of the family and they can specifically demand it. Therefore, the business is not a reporting entity (Alexander& Britton 1993). In addition, this business is not required to comply with accounting standards in preparing financial statements. The financial statements are prepared because of users who cannot command for these statements. However, in Rhonda’s business users are able to access the financial statements. Rhonda’s business has only one employee and under s.45A(1) of the Corporation  Act, the small business whose employees are less than 50 people is not supposed to prepare financial statements. It is further provided under s. 293of Corporation Act that a company shall not comply to the accounting standards if the report is prepared in response to more than 50% vote of shareholders directing this report.

b) Deep Green Company is a reporting company, because according to the accounting standards, the business has many shareholders who cannot command the preparation of financial statements.  The management is separate from the ownership and the members have no economic influence over the financial condition of the firm. The number of shareholders and all the people users of the deep green financial statement are many and cannot all be able to command for financial statement. The accounting standard provides that any business whose statement are required by other users who cannot command must prepare general purpose financial statements and in accordance to accounting standards. In addition, the members have no political importance or influence on the firms (Beaver 1998). Therefore, Deep Green Company is a reporting firm. In addition, Deep Green Company is required to prepare financial statement, as it is a large firm. According to the accounting standards under s.45A(1) of the Corporation Act, it is  stated that a company that has revenue above $25million, gross assets of more than$12.5 million, and the number of employees that are more than 50 people should prepare their financial statements. Deep Green firm has $26 million revenue,$13million in gross assets, and 260 employees;hence, it has met the requirement to prepare the financial statement (Alexander& Britton 1993).

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