Preparation Of Research Report For Interpretation Of Accounting Standards Assessment 3 Answer

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Question :

Assessment 3

Assessment Type: Individual assessment – research report.

Purpose: Assess student's knowledge of relevant accounting standards. Students are required to prepare a research report which evaluates their interpretation of accounting standards. This assessment relates to learning outcomes a, b, c, d and e.

Value: 20% Due Date: Week 10 Topic: Australian accounting standards analysis. Task Details: Students are required to attempt the following questions. Question 1  

On 28 August 2014, Qantas announced an annual statutory loss after tax of $2.8 billion for the 12 months ended 30 June. This result included a massive $2.6 billion write-down of its international aircraft fleet. These losses were the largest in the airline's history and were seen to represent 'one of the biggest clearing of the decks in corporate history' (Bartholomeusz 2014).

In the media release announcing the loss, Qantas CEO Alan Joyce was quoted: 'There is no doubt today's numbers are confronting', yet he remained remarkably optimistic about the future, going on to say 'We expect a rapid improvement in the Group's financial performance — and a return to Underlying PBT profit in the first half of FY15' (Qantas Group 2014).

Required:

1. Summarise the requirements of AASB 136 in relation to indicators of impairment of assets. 2. Explain how such a massive impairment loss could be linked to any improved future performance. 3. Review the 2015 and 2016 annual reports of Qantas to determine if Alan Joyce's optimism was justified.

Question 2
Mags Ltd is an Australian mail-order company. Although the sector in Australia is growing slowly, Mags Ltd has reported significant increases in sales and net income in recent years. While sales increased from $50 million in 2009 to $120 million in 2018, profit increased from $3 million to $12 million over the same period. The stock market and analysts believe that the company's future is very promising. In early 2019, the company was valued at $350 million, which was three times 2018 sales and 26 times estimated 2019 profit.
Company management and many investors attribute the company's success to its marketing flair and expertise. Instead of competing on price, Mags Ltd prefers to focus on service and innovation, including: o free delivery o a free gift with orders over $200.
As a result of such innovations, customers accept prices that are 60% above those of competitors, and Mags maintains a gross profit margin of around 40%.
Nevertheless, some investors have doubts about the company as they are uneasy about certain accounting policies the company has adopted. For example, Mags Ltd capitalises the costs of its direct mailings to prospective customers ($4.2 million at 30 June 2018) and amortises them on a straight-line basis over 3 years. This practice is considered to be questionable as there is no guarantee that customers will be obtained and retained from direct mailings.
In addition to the mailing lists developed by in-house marketing staff, Mags Ltd purchased a customer list from a competitor for $800 000 on 4 July 2019. This list is also recognised as a non-current asset. Mags Ltd estimates that this list will generate sales for at least another 2 years, more likely another 3 years. The company also plans to add names, obtained from a phone survey conducted in August 2019, to the list. These extra names are expected to extend the list's useful life by another year.
Mags Ltd's 2018 statement of financial position also reported $7.5 million of marketing costs as non-current assets. If the company had expensed marketing costs as incurred, 2018 net income would have been $10 million instead of the reported $12 million. The concerned investors are uneasy about this capitalisation of marketing costs, as they believe that Mags Ltd's marketing practices are relatively easy to replicate. However, Mags Ltd argues that its accounting is appropriate. Marketing costs are amortised at an accelerated rate (55% in year 1, 29% in year 2, and 16% in year 3), based on 25 years' knowledge and experience of customer purchasing behaviour.
Required:
Explain how Mags Ltd's costs should be accounted for under AASB 138/IAS 38 Intangible Assets, giving reasons for your answer.
Question 3
Tres Ltd is a listed company that provides food to function centres that host events such as weddings and engagement parties. After an engagement party held by one of Tres Ltd's customers in June 2020, 100 people became seriously ill, possibly as a result of food poisoning from products sold by Tres Ltd. Legal proceedings were commenced seeking damages from Tres Ltd. Tres Ltd disputed liability by claiming that the function centre was at fault for handling the food incorrectly. Up to the date of authorisation for issue of the financial statements for the year to 30 June 2020, Tres Ltd's lawyers advised that it was probable that Tres Ltd would not be found liable. However, two weeks after the financial statements were published, Tres Ltd's lawyers advised that, owing to developments in the case, it was probable that Tres Ltd would be found liable and the estimated damages would be material to the company's reported profits.
Required: 1) Explain the accounting for provisions and contingent liabilities with reference to AASB 137 2) Should Tres Ltd recognise a liability for damages in its financial statements at 30 June2020? How should it deal with the information it receives two weeks after the financial statements are published?
Presentation: 1000 words (+/- 10%); short report format. Title page, executive summary, table of contents, appropriate headings and sub-headings, recommendations/findings/conclusions, in-text referencing and reference list (Harvard — Anglia style), attachments if relevant. Single spaced, font Times New Roman 12pt, Calibri 11 pt or Mal 10pt. In text referencing and reference list are excluded from the word count.
Marking Guide:
Research — extent and application 30% Analysis 30% Recommendations 20% Communication 20%
Total mark will be scaled to a mark out of 20 subject marks

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Answer :

AASB/IAS
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

External sources:-

  • 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 

Internal sources:- 

  • 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

Exercise 8.4

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). 

Conclusion

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.