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Christchurch Ltd. Memo: AASB Standards

    Assessment Task 2 — Written Assessment Part B

    Objectives

    This assessment item relates to the following unit learning outcomes:

    • Interpret the technical requirements and conceptual aspects of selected accounting standards that address advanced issues in financial reporting.
    • Exercise professional judgement to apply the requirements of relevant accounting standards and conceptual accounting knowledge to solve advanced accounting problems.
    • Justify and communicate accounting advice and ideas in straightforward contexts to influence specialists and non-specialists.
    • Reflect on performance feedback to identify and action learning opportunities and self-improvements.

    Question 120 marks

    Christchurch Ltd is a large Australian retail company. The management of Christchurch Ltd are currently evaluating a number of investments that could be made by the company in the near future. These investments are:

    • Purchase 10% of the issued shares of Greymouth Ltd as a long-term investment. Greymouth Ltd is a successful company that has been very profitable over the past five years. Because it is expected that profits will continue to increase in the future, Greymouth Ltd’s share price has been steadily increasing along with dividend payments.
    • Purchase 40% of the issued shares of Wellington Ltd as a long-term investment. Wellington Ltd is also expected to be profitable in the future and its share price is expected to increase.
    • Purchase the assets and liabilities of Nelson Ltd for cash. Nelson Ltd has developed new digital technology that it has patented. Christchurch Ltd believes that obtaining this patented technology would give it a significant competitive advantage.
    • Purchase 80% of the issued shares of Hastings Ltd as a long-term investment. Hastings Ltd has a number of very valuable customer contracts. In addition, access to Hastings Ltd’s retail outlets would benefit Christchurch Ltd’s proposed plans for expansion.

    Required

    The management of Christchurch Ltd has asked you, as one of the company’s accountants, to prepare a memorandum to be distributed to the company’s shareholders that explains the accounting requirements for each of these investments. You are also asked to make any necessary references to the relevant accounting standards. An example of the memorandum format is included at the end of this assignment.

    Word limit: approximately 800 words.

    Question 25 marks

    The latest versions of Australian accounting standards issued by the AASB are available on the AASB website: http://www.aasb.gov.au/Pronouncements/Current-standards.aspx.

    Review the current accounting standards on the AASB website and select two accounting standards that are not examined in this unit and which you consider might be important for you to have some knowledge about in your future role as a professional accountant.

    Required

    1. For each of the two accounting standards, explain why you selected that particular accounting standard. That is, explain why knowledge of the requirements of that particular accounting standard might be important or relevant to you as a professional accountant.
    2. Identify and explain at least four activities that you could undertake once you have graduated to learn about the requirements of these two accounting standards.

    Word limit: approximately 200 words.

    Assignment Information

    Assignment presentation

    You do not need to include a title page or a table of contents.

    Use the question numbers to indicate which question you are answering. You do not need to include the question as part of your answer.

    You should number all of the pages and include your name and student number (as either a Header or a Footer) on each page.

    You should use a consistent font throughout your assignment. Suggested fonts include Calibri or Arial.

    Referencing

    Your assignment should include references (both in-text and in a reference list) that conforms to the American Psychological Association (APA) style.

    However, you can adopt a simplified approach to the in-text referencing of accounting standards. Your first reference (within a question) to an accounting standard should be in full. For example, ‘according to paragraph 27 of AASB 101 Presentation of Financial Statements (Australian Accounting Standards Board [AASB], 2015), financial statements should be prepared using …’.

    Subsequent references to this accounting standard can be abbreviated. For example, ‘it is a requirement of paragraph 36 of AASB 101 that …’.

    The reference list nomenclature depends on whether you obtained the accounting standard directly from the AASB web site or from the ACCT19062 Intermediate Financial Accounting Moodle website.

    Australian Accounting Standards Board (AASB). (2015). AASB 101 Presentation of Financial statements.

    Retrieved from http://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf

    Australian Accounting Standards Board (AASB). (2015). AASB 101 Presentation of Financial statements. Retrieved from CQUniversity e-courses, ACCT19062 Intermediate Financial Accounting, http://moodle.cqu.edu.au

    Memorandum format

    Question One requires you to write a Memorandum. An example of a Memorandum, which you can use as a template, is shown on the following page.

    MEMORANDUM

    DATE:1 June 2018

    TO:Students in Advanced Financial Accounting

    FROM:..............

    SUBJECT:Format for a Memorandum

    A Memorandum is a  formal written document that, as in this example, is headed at the top by

    MEMORANDUM in bold and centered. Below this are: (1) the date in full; (2) the person to whom the Memo is addressed; (3) the name of the person sending the Memo; and (4) a subject line that indicates the subject matter.

    The body of the Memorandum begins with an introduction that identifies the subject and provides an overview of the contents. The length of the introduction should be no more than one paragraph but it depends on the needs of the reader: how much do they already know about the subject? This is followed by the discussion which moves through the points to be made in a logical order. At the end is a conclusion that reinforces and reiterates the main points made in the discussion.

    Heading

    The body of the Memorandum consists of a series of paragraphs that begin flush with the left-hand margin. One-and-a-half line spacing should be used and paragraphs should be separated by a space. A Memorandum does not contain a salutation (for example, ‘Dear Rebecca’) or a complimentary close (for example, ‘Yours Sincerely’ or ‘Regards’). Headings can be used to organise the material but these should not be overused. Headings should, as the example above indicates, be in bold so that they clearly stand out.

    Answer

    Memorandum

    to:the management, Christchurch Ltd.
    from:Name of the Student
    date:7 september 2018
    subject:AASb Standards and accounting requirements for investment alternatives

    This memo is in reference to the potential investments that the management of Christchurch Ltd. is planning to involve in future. The memo explains the accounting requirements for each of the potential investment options along with their relevant accounting standards as per AASB.

    The Australian Accounting Standards Board (AASB) is an Australian Government agency that develops and maintains financial reporting standards applicable to entities in the private and public sectors of the Australian economy. 

    As we know that the management has 4 potential options to invest in future. Let us examine each of them and their accounting requirements individually to understand which one is the best suited for the organization.

    1. Buying 10% of the issued shares of Greymouth Ltd as a long-term investment- According to paragraph 12 and 27 of AASB 134 - Presentation of Financial Statements (Australian Accounting Standards Board [AASB], issued 2015, operative Jan, 2018), there are two ways in which the management can invest in the shares of Greymouth Ltd., either by purchasing the call option or by purchasing the put option on shares.  

    As we know that Greymouth Ltd. has been a successful company in the past 5 years Not just revenue and profits, but dividend payout ratio of the company has also been increasing in past few years, and is expected to increase in future as well.

    According to AASB 134 - Presentation of Financial Statements, it is required by standards that the management has to disclose every relevant transaction involved in buying of shares. The method of buying the shares- either put or call, the offer price of buying the shares, the actual buying price as on the date of transaction, date of redemption and any other information which is material and required to be known to the users of financial statements.

    1. Buying 40% of the issued shares of Wellington Ltd as a long-term investment- This situation is very similar to the Greymouth Ltd., as the percentage of share proposed to be bought is 40% which is a very substantial percentage but not enough to make the company the individual decision maker. 

    According to paragraph 12 and 27 of AASB 134 - Presentation of Financial Statements (Australian Accounting Standards Board [AASB], issued 2015, operative Jan, 2018), it is required by standards that the management has to disclose every relevant transaction involved in buying of shares. The method of buying the shares- either put or call, the offer price of buying the shares, the actual buying price as on the date of transaction, date of redemption and any other information which is material and required to be known to the users of financial statements.

    In addition to this, as per the principle of contingency, the management should forecast the anticipated costs and revenues related to both of these projects to make required provisions for any future contingencies.

    1. Purchase the assets and liabilities of Nelson Ltd for cash. According to paragraph 4 to 39 of AASB 3 – Business Combinations (Australian Accounting Standards Board [AASB], issued 2015, operative Jan, 2018). Purchasing the entire assets and liabilities of any company results in acquisition of the company. The AASB 3 of Australian Standards state the guidelines involving all the stages of acquisition which includes identifying the costs of acquisition, determining the date for acquisition, recognizing and measuring the identifiable assets to be acquired, the liabilities to be assumed and any non-controlling interest in the acquiree’s business. 

    As per paragraphs 11 and 12, as on the acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in Wellington Ltd. As per para 9, the date on which the acquirer obtains control of the company is generally the date on which the acquirer legally transfers the consideration, acquires the assets and assumes the liabilities of Wellington Ltd. —the closing date. However, the acquirer might obtain control on a date that is either earlier or later than the closing date. 

    Apsrt from this, the management also needs to recognise and measure a liability (or asset, if any) related to the Wellington’s employee benefit arrangements in accordance with AASB 119 Employee Benefits. Further, the management will record acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received. However, the costs to issue debt or equity securities shall be recognized in accordance with AASB 132 and AASB 9.

    1. Purchase 80% of the issued shares of Hastings Ltd as a long-term investment- This is a similar case of investment in shares of another company but as the purchase comprises of 80% of the equity, it will result in domination of ChristChurch Ltd. in Hastings Ltd. board of directors, voting rights, profit share and  business decisions. It will not be wrong to say that the company will become a dominant owner with the maximum share of equity amongst the shareholders. 

    As per AASB 10- Consolidated Financial Statements and AASB 12- Disclosure of Interests in Other Entities, once the company decides to invest and get the ownership of majority of equity in Hastings Ltd. , it has to be treated as an associate firm and the financial statement of Hastings need to be disclosed along with the Churchchrist financials. 

    Thanks,

    Name of the student

    Q.2.

    The accounting standards that have not been examined in the unit but I consider them important to understand and implement in future as an accountant are-

    1. AASB 133 (Earning per share)- This accounting standard states the basis of calculation and presentation of earning per share, to analyze the company’s performance in the current reporting period as compared to the company’s performance in the previous reporting periods as well as to analyze company’s performance with other competitor firms in the ame industry. Moreover, this standard is very important because the shareholders of the firm are the most interested in the earnings of the company on the basis of which they will be paid the dividend. Not just the shareholders, but for all the users of accounts to know the performance of the firm in a period is of utmost importance and EPS is one of the ways to represent that performance through ratio or percentage.
    2. AASB 123 (Borrowing Cost)- This standard comprises of one of the most important aspect of financial costs of the firm. Borrowing cost are the costs related to the funds borrowed by the company for production, acquisition, trading or investment purposes. This is one of the major cost that company incurs in its operations. Thats why it is really important for an accountant to understand the standards to calculate and record this cost.
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