ACC203 Financial Accounting

Reply for Query 1 – Goodwill of Pewter Ltd

Sir, as stated that Pewter Ltd is having concerns regarding the accounting transactions and financial recording of certain expenses of the company. Pewter Ltd the leading market shareholder in the field of frozen and canned fishery products. In order to regain and remain sustainable with the market share of the company certain accounting policies are discussed which can help the company reduce volatility (Caparrós et al. 2017). The company have followed different growth strategies in order to align growth and prosperity in the operations of the company (Gaffikin and Aitken 2014). The company has tried both methods of growing organic and inorganic growth. The southern part of the Australian water company’s operation is carried on by Artic Fresh which is an example of organic growth done by the company in the due course of their business. However, the northern part of the Australian water is captured by the Fishy Tales Ltd where the company sales products under the brand name Tropical Taste. The company Fishy Tales ltd was acquired by the Pewter Ltd as a inorganic growth approach. The company has now tried to increase the brand value and recognition by several marketing and environmental friendly strategies in order to get a positive direct influence of company’s brand power and goodwill in the market (Khan 2015). The efforts of Steve Irwin for reducing the efforts and disruptions of Japanese whalers in the southern ocean could cost the company in terms of repairs of damages for doing the same. AASB 138 – defines intangible assets of the company as assets which are identifiable and that have no physical occurrence or substance (Lev 2018). The accountability for these expenses are very crucial as these could be done as a marketing strategy along with an initiative of environmental responsible. The expenses incurred during the process could be transacted and recorded in different approaches (Mazzi et.al. 2018). The cost incurred for the same will be treated as an asset since the carrying and economic benefits for the same will be enjoyed by the company over an define period of time. The expense laid down for the same will be treated as a capitalisation expense for creation of intangible asset to the company i.e., Goodwill for the company (O'Connell, AbuGhazaleh and Kintou 2018).

Reply for Query 2- Accounting for Expenses.

As per the accounting standard that is AASB 137 a contingent liability arises out from past events and which will validated after a series of happening or non-happening of one or more events (Rutherford 2016). The company should also observe and make accounting transactions and adjustments according to the financial accounting standard guidelines and principles laid down. The expenses could be treated as an expense depending upon the choice of certainty of economic benefits created. The classification and grouping of expense whether to capitalize or show it as a part of income statement in the form of expense. If expense is expected to create value for the company in the defined term period and the probability for the same is higher than the company should capitalize the expenses as an asset (Schwartz 2017). Expenses incurred by the company where the generation of value of creation for the company is not certain then the company should classify the expense in the income statement of that financial year itself. The accounting for the same could be done by the following method if expense is accounted as an expense then the income statement will show the whole amount spent (Tai and Chuang 2014). The other way possible for the same could be elaborated in the following ways in an example format. The company for example spends $10,000 on such costs, the accountability of recoverable amount if certain then the company should define a term plan where the expenses classified as an asset will provide benefits to the company. The term period or serviceable period of asset is decided as three years in our example. The financing cost or the discount rate to be used will be same as the net borrowing costs paid by the company suppose 10% in our example. The value generation for the company in the form of goodwill of the company an extra revenue for the company suppose brings out $5,000 for the company in each of the year of three year horizon period of the asset. The following idea could be well elaborated if the above example and concept of project financing approach are used. The initial amount will be the expense amount which will be paid and amortised or capitalised in the balance sheet of the company. The increase in the market share of the company and goodwill and brand recognition of the company will be quantified by the increase in the revenue of the company (Zhou, Birt and Rankin 2015). If the Net Present Value or the Internal Rate of return for the project investment is qualitative in nature the company should go for such investments. The example details are as follows:

Present Value of Economic Benefits Created/Asset Value Today=	Return on 1st Year	+	Return on 2nd Year	+	Return on 3rd Year
	(1 + Interest Rate)		(1 + Interest Rate)		(1 + Interest Rate)
12,434	5,000	+	5,000	+	5,000
	1.10		(1.10)^2		(1.10)^3

 

Particulars	NPV		IRR
Net Return from the Project Investment	2,434		23.38%

Every investment should be done on cost benefit analysis for the company. The accounting procedure along with the accounting transaction and nature should be clearly represented in a transparent form. The key accounting decision also lies with the management of the company for the judgemental analysis of the same. The company should also oversight the intangible assets of the company and periodical review of the same would be done to see if the asset value for producing the return is efficient or not. Periodical Impairment and review of Intangible assets of the company could turn out the fair value of the assets. As an act for Corporate Social Responsibility the company should deliver back and not degrade the resources it uses, exploitation of these resources could affect and influence the operations and margins of the company. The audit committee should periodically review these assets and should be subject to impairment. However it should also be noted that the company’s initiative for the same will directly have a positive influence on the company financial reports and growth. The financial accounting standards and guidelines must govern all accounting transaction done in order to avoid conflict of interest.

References

Caparrós, A., Oviedo, J.L., Álvarez, A. and Campos, P., 2017. Simulated exchange values and ecosystem accounting: Theory and application to free access recreation. Ecological Economics, 139, pp.140-149.

Gaffikin, M. and Aitken, M. eds., 2014. The Development of Accounting Theory (RLE Accounting): Significant Contributors to Accounting Thought in the 20th Century. Routledge.

Khan, M., 2015. Accounting: Financial. In Encyclopedia of Public Administration and Public Policy, Third Edition-5 Volume Set (pp. 1-6). Routledge.

Lev, B., 2018. The deteriorating usefulness of financial report information and how to reverse it. Accounting and Business Research, 48(5), pp.465-493.

Mazzi, F., Slack, R., Tsalavoutas, I. and Tsoligkas, F., 2018. Country Level Corruption and Accounting Choice: Research & Development Capitalization Under IFRS.

O'Connell, V., AbuGhazaleh, N. and Kintou, A., 2018. The impact of R&D programme success on the decision to capitalise development expenditures in European firms. Technology Analysis & Strategic Management, 30(1), pp.15-30.

Rutherford, B.A., 2016. Articulating accounting principles: Classical accounting theory as the pursuit of “explanation by embodiment”. Journal of Applied Accounting Research, 17(2), pp.118-135.

Schwartz, M.S., 2017. Corporate social responsibility. Routledge.

Tai, F.M. and Chuang, S.H., 2014. Corporate social responsibility. Ibusiness, 6(03), p.117.

Zhou, T., Birt, J. and Rankin, M., 2015. The value relevance of exploration and evaluation expenditures. Accounting Research Journal, 28(3), pp.228-250.