Preparation of Research Report for Interpretation of Accounting Standards Assessment 3 Answer
Answer to question no- 1
AASB 136 – Impairment of assets
1. AASB 136 in relation to indicators of impairment of assets
The entity implement the impairment test to assess the true value of the recorded assets. Impairment of assets refers that the value appearing in the statement of financial position is higher than the value can be recovered from selling in the open market (Li, 2019).
If there is any indication that assets of the company may be impaired then it is required to calculate the asset’s recoverable amount. The entity has to check the indications reflecting the chances of impairment of any asset (Tahat, Dunne, Fifield, & Power, 2016). Indication of impairment can be from external sources and internal sources. These sources are categories as below;
Indication of Impairment
- Declines in the market value
- Changes in the market, tax laws, economy, and technology
- Changes in the interest rate
- Net assets and market capitalization difference
- Physical damage and obsolescence in the assets
- Idle assets, restructuring in the assets, or disposal
- Economic performance is not as per expectation
- The investment made in a subsidiary, Joint venture or associate, the dividend recognized by the investors from the investment and the available evidence is that:
- recorded at the carrying value
- (ii) Dividend amount increased by the comprehensive income (Pawsey, 2017).
Improvement in future performance
The company has written off the massive impairment loss in the financial statement of the company. It results that a true and fair view of the financial statements and it also increases the belief of investors in the company. After writing of the massive loss the value of assets is decreased and it results in better assets turnover ratio and other financial ratios (Costa, Correia, Machado, & Lucena, 2017).
2. Alan Joyce’s optimism
As the financial loss reflecting in the financial statement of the company are just because the company has charged heavy impairment loss. The quote made by Alan Joyce is depending upon the future performance of the company as the company is presenting its true and fair view. The company has improved its financial situation as the correct value is represented (Ogilvy, et al. 2018).
Answer to question no-2
AASB 138 / IAS 38 – Intangible assets
Recognition of cost under AASB 138 or IAS 38 –
- Direct mailing cost (capitalized and amortized) - according to the AASB 138 the customer list which is internally generated shall not be recognized as intangible assets hence Mags limited should write off this cost and treat it as expenses.
- Purchased list of the customer for $800000- this list of customer is covered under the definition of assets as well as intangible assets. This will also generate future economic benefits for the company and the company can also sell it. Hence the treatment made by the company is correct by following the cost model (Mookdee, & Bellamy, 2017).
- Cost of conducting phone surveys- the company should consider these expenses and should also capitalize on the books of the company (Wang, 2019).
- Marketing cost - this cost is not covered in the definition of the assets and it is not any legal right for the company and there is no control over the future economic benefit of the company hence the company should write off this capitalized cost and should consider it as expenses and charge to the profit.
Answer to question no-3
AASB 137 - Provisions, Contingent Liabilities, and Contingent Assets
Chapter 8: Provisions, contingent liabilities, and contingent assets
Recognizing a provision
After assessing all the evaluating the annual report of the company, it could be inferred that the all the assets and liabilities are recorded at the value after implementing the impairment testing procedure following IAS 138. In this case, Tres limited is liable to make the compensation to the customers who had suffered loss due to the offer made to them. The contingent liabilities provisions and contingent assets are recorded by the company when the company is uncertain about the payment to its clients. In this case, lawyer has given the fact that company may be liable to pay off the compensation to the clients he company fails to win the case.
Obligation of the result to Tres Company
It is observed that after when the financial statements are approved then the company would not be having any liabilities or obligation for the past events. Tres Ltd does not have a present obligation. Even if Tres Ltd did have a present obligation,
All the provisions recognized in the books of accounts of the company is disclosed in the contingent liabilities account in the balance sheet side of the accounts. These accounts are disclosed as liabilities which may arise at any time and company would be liable pay these liabilities (Peach., & West, 2017).
After assessing all the details and given case data of the company, it could be inferred that company is having the economic benefits and any of the contingent liabilities of the company would be paid by the company as contingent liabilities. Nonetheless, provision of the contingent liabilities will also be done. However, as per the legal report of the lawyer, company does not have any legal contingent liabilities in the given case and there is no requirement of keeping the contingent liabilities accounts in its books of accounts (Sugiyama, & Islam, 2016).
A provision should be recognized for the best estimate of the amount to settle the obligation. However, Tres Ltd has already issued its financial statements. The fact that the expected damages are material to the reported profit means that Tres Ltd, being a listed company, will be most likely to have a continuous disclosure obligation to disclose the new information. Depending on the laws of its jurisdiction it may have to rescind the financial statements and issue new ones, updating the disclosures about the contingent liability and recognizing the provision as required by paragraphs 19 and 20 of AASB 110/IAS 10 Events (Kota, 2018).
The Company should consider it as a contingent liability unless the probability of any future cash outflow is created. Therefore, company should make the provision for contingent liable after meeting the possible chances of occurring the obligation on the company. The company should disclose in the continuous disclosure obligation and new financial information because the company has already issued financial statements.