Regulations & accounting essay in Australian finance.

1. Explain the regulatory framework that governs financial reporting in Australia with emphasis on the Conceptual Framework for financial reporting

2. Apply accounting principles and standards when accounting for non-current assets, revenue and liabilities and recognise the judgements required in a range of diverse business contexts

3. Differentiate between shares and debentures and apply appropriate accounting procedures

Overview of Regulatory Framework for Financial Reporting in Australia

The journal entries have been shown below:

ChiHerbal Ltd.
General Journal
Date	Particulars	Dr./Cr.	Amount ($)	Amount ($)
2017
1-Aug	Cash Trust	Dr.	2,300,000
	To Share Application	Cr.		2,300,000
	(Cash received on application)

15-Aug	Share Application	Dr.	1,500,000
	Share Allotment	Dr.	1,250,000
	To Share Capital	Cr.		2,750,000
	(Being 500000 shares alloted)
	Cash	Dr.	2,300,000
	To Cash Trust	Cr.		2,300,000
	(Being money received transferred)
	Share Application	Dr.	800,000
	To Share Allotment	Cr.		550,000
	To Calls in Advance	Cr.		250,000
	(Allocation of Application money received amongst allotment and calls in advance)
	Share Issues Costs / (Share capital)	Dr.	36,000
	To Cash	Cr.		36,000
	(Being prospectus, legal and stamp duty costs paid)
30-Aug	Cash	Dr.	700,000
	To Share Allotment	Cr.		700,000
	(Being cash received on share allotment)
2018
1-May	Call 1	Dr.	750,000
	To Share Capital	Cr.		750,000
	(Being call 1 of $1.5 per share done)
	Calls in Advance	Dr.	150,000
	To Call 1	Cr.		150,000
	(Being Calls in Advance adjusted for 100000 shares)
15-Jun	Cash	Dr.	577,500
	To Call 1	Cr.		577,500
	(Being call 1 received)
1-Jul	Call 2	Dr.	500,000
	To Share Capital	Cr.		500,000
	(Being call 2 of $1.5 per share done)
	Calls in Advance	Dr.	100,000
	To Call 2	Cr.		100,000
	(Being Calls in Advance adjusted for 100000 shares)
30-Jul	Cash	Dr.	385,000
	To Call 2	Cr.		385,000
	(Being call 2 received)
1-Sep	Share Capital	Dr.	120,000
	To Call 1	Cr.		22,500
	To Call 2	Cr.		15,000
	To Forfeited Shares Liability	Cr.		82,500
	(Being 15000 shares forfeited)
15-Sep	Cash	Dr.	90,000
	Forfeited Shares Liability	Dr.	30,000
	To Share Capital	Cr.		120,000
	(Being reissue of shares made)
	Share Issues Costs / (Share capital)	Dr.	4,000
	To Cash	Cr.		4,000
	(Being brokerage costs paid)
30-Sep	Forfeited Shares Liability	Dr.	52,500
	To Cash	Cr.		52,500
	(Being balance returned to the former shareholders)

The journal entries and the requisite workings in regard with the same has been shown below:

Workings
Sl. No	Particulars	Amount
1	Cost of Truck A	90,000
	Residual Value	10,000
	Depreciable Value	80,000
	Depreciable life	5
	Depreciation each year	16,000
2	Cost of Equipment	140,000
	Residual Value	-
	Depreciable Value	140,000
	Depreciable life (Years)	10
	Depreciation each year	14,000
	Depreciation till 01st Sep	2,333
	Carrying Value as on 01st Sep	137,667
	Fair value of the equipment	115,000
	Downward Revaluation	22,667
	Remaining Life (years)	8
	Depreciation per year	14,375
3	Depreciation on Truck till 01st March	14,667
	Carrying Value as on 01st March	75,333
	Selling Value	59,000
	Loss on Sale of Truck	16,333
4	Depreciation on Equipment	11,979
	(from 01st Sep'17 to 30th Jun'18)
	Depreciation on Equipment	2,333
	(from 30th Jun'17 to 01st Sep'17)
	Total Depreciation for the year	14,313
5	Carrying Value of Equipment as on 30th Jun'18	100,688
	Fair value of the equipment	120,000
	Upward Revaluation	19,313

ChiHerbal Ltd.
General Journal
Date	Particulars	Dr./Cr.	Amount ($)	Amount ($)
2017
1-Apr	Vehicle - Truck A	Dr.	90,000
	To Cash	Cr.		90,000
	(Being cash paid for truck)
30-Jun	Depreciation on Truck A	Dr.	4,000
	To Accumulated Depreciation on Truck A	Cr.		4,000
	(Being depreciation on truck charged)
30-Jun	Equipment	Dr.	140,000
	To Cash	Cr.		140,000
	(Being cash paid for equipment)
31-Aug	Repair and Maintenance	Dr.	2,500
	To Cash	Cr.		2,500
	(Being transmission repairs and oil change for Truck A
1-Sep	Revaluation Loss (WN -2)	Dr.	22,667
	To Equipment	Cr.		22,667
	(Being equipment revalued at fair value)
2018
1-Mar	Depreciation on Truck A	Dr.	10,667
	To Accumulated Depreciation on Truck A	Cr.		10,667
	(Being depreciation on truck charged)
1-Mar	Cash (WN- 3)	Dr.	59,000
	Accumulated Depreciation on Truck A	Dr.	14,667
	Loss of sale of Truck A	Dr.	16,333
	To Vehicle - Truck A	Cr.		90,000
	(Being truck sold at loss)
30-Jun	Depreciation on Equipment (WN -4)	Dr.	14,313
	To Accumulated Depreciation on Equipment	Cr.		14,313
	(Being depreciation on equipment charged)
30-Jun	Equipment (WN -5)	Dr.	19,313
	To Revaluation Loss (WN -5)	Cr.		19,313
	(Being equipment revalued at fair value)

The journal entries, workings and the schedule of the lease payments and receipts for the entire lease term has also been shown below:

Inputs for the question
Economic Life of Asset (in years)	7
Lease term (in years)	5
Interest Rate	9%
Fair value (cash cost) of asset	35322
Annual lease payment	8000
Carrying value of asset	31000
Estimated Residual value of asset	3000
Guaranteed Residual value at end of lease term	2160
Workings for the lessee
Present Value of Minimum lease payments	33918
(n=5 years, I=9%)
Present Value of Guaranteed residual value	1404
(n=5 years, I=9%)
Total Lease Liability	35321
Workings for the lessor
Carrying value of asset	31000
Present value of the estimated Residual value of asset	1641
(n=7 years, I=9%)
Guaranteed present residual value by lessee	1404
Amount to be recovered from lessee	31237
First install met amount	8000
Amount to be recovered in 4 instalments	23237
PV factor of annuity due (I=9%, n=4 years)	3.2397
Annual Payment Required	7173

Lease Schedule: ChiHerbal Ltd.
Date	Lease Payment	Interest Expense	Reduction in Liability	Lease Liability
1/7/2017				35,321.38
1/7/2017	8,000.00	-	8,000.00	27,321.38
30/06/2018	8,000.00	2,458.92	5,541.08	21,780.31
30/06/2019	8,000.00	1,960.23	6,039.77	15,800.54
30/06/2020	8,000.00	1,422.05	6,577.95	9,322.58
30/06/2021	8,000.00	839.03	7,160.97	2,161.62

ChiHerbal Ltd.
General Journal
Date	Particulars	Dr./Cr.	Amount ($)	Amount ($)
2017
1-Jul	Leased Machine under capital lease	Dr.	35,321
	To Lease liability	Cr.		35,321
	(Being lease liability Booked)
1-Jul	Lease Liability	Dr.	8000
	To Cash	Cr.		8000
	(Being lease instalment paid)
2018
30-Jun	Lease Liability	Dr.	5,541.08
	Interest Payable	Dr.	2,458.92
	To cash	Cr.		8,000.00
	(Being lease instalment paid)
2019
30-Jun	Lease Liability	Dr.	6,039.77
	Interest Payable	Dr.	1,960.23
	To cash	Cr.		8,000.00
	(Being lease instalment paid)

Lease Schedule: Cessnock Ltd.
Date	Lease Payment	Interest Expense	Reduction in Liability	Lease Liability
1/7/2017				31,237.22
1/7/2017	8,000.00	-	8,000.00	23,237.22
30/06/2018	7,172.64	2,091.35	5,081.29	18,155.92
30/06/2019	7,172.64	1,634.03	5,538.61	12,617.31
30/06/2020	7,172.64	1,135.56	6,037.09	6,580.22
30/06/2021	7,172.64	592.22	6,580.42	(0.20)

Cessnock Ltd.
General Journal
Date	Particulars	Dr./Cr.	Amount ($)	Amount ($)
2017
1-Jul	Lease Receivable	Dr.	31,237
	To Leased Machine	Cr.		31,237
	(Being lease receivable recorded)
1-Jul	Cash	Dr.	8,000.00
	To Lease Receivable	Cr.		8000
	(Being lease instalment received)
2018
30-Jun	Interest Receivable	Dr.	2,091.35
	To Interest Revenue	Cr.		2,091.35
	(Being interest revenue recorded)
30-Jun	Cash	Dr.	9,263.99
	To Interest Receivable	Cr.		2,091.35
	To Lease Receivable	Cr.		7,172.64
	(Being lease instalment received)
2018
30-Jun	Interest Receivable	Dr.	1,634.03
	To Interest Revenue	Cr.		1,634.03
	(Being interest revenue recorded)
30-Jun	Cash	Dr.	8,806.68
	To Interest Receivable	Cr.		1,634.03
	To Lease Receivable	Cr.		7,172.64
	(Being lease instalment paid)

In the given case, the company ChiHerbal Ltd has undertaken a project for the online sales team under which the all the sales representatives of the company will be equipped with special hologram projecting equipment which would be able to project the accurate image of the item ordered by the customers. But the same is still under progress in spite that the company expected it to go live by the end of 2017. Errors have been detected during the experimental testing phase and therefore the application for patent has been delayed. The company is now considering to sell it to other company in the marketplace but the marketing department of the company has confirmed that there is no conclusive evidence of existence of for such a market for new product now. The question here is whether this expenses can be capitalised in the books of company as developmental expenses or should be charged off to expense.

As per AASB 138, Para 51 on the intangible assets, an internally generated asset can qualify for recognition only if it has identifiable future economic benefits flowing to the entity and where the cost of generating the asset can be determined reliably. As per Para 52, All the expenses can be broadly classified into two parts: the research phase and the development phase. If the entity is not able to distinguish between the research and the development phase, the entire thing is treated as research cost and charged off to the profit and loss account. As per Para 57, any expense can be categorised as development expense if it satisfies all the following criteria’s namely:

The technical feasibility of the use of the asset has been done.
The intention to develop such an asset is clear.
The ability to sell or use the intangible asset is established.
It is capable enough of generating future economic benefit
The cost incurred to develop it can be reliably measured
Adequate technical, financial and other resources are there to use or sell it.

In the given case though the intension and the use of the asset us clear and also the cost incurred to develop the same is available but adequate research has not been made to check if the market for same exists or not and hence it does not qualifies as an asset. Therefore, in case the technology is not being used by the company, it should be charged off to profit and loss account as the research expense.

Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.

Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, 4(3), pp. 103-112.

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