Regulatory Framework For Financial Reporting In Australia

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

A first call for $1.66 was made on 1 February 2018 with money due by 1 March. All money was received by the due date. A second and final call for $2.11 was made on 1 June with money due by 18 June. All money was received by the due date.

1. a) Prepare the journal entries to record the above transactions of ChiHerbal Ltd.
2. b) Prepare the equity section of ChiHerbal’s statement of financial position once the above transactions have been recorded.

The lease is non-cancellable. ChiHerbal Ltd is responsible for maintaining and insuring the equipment. ChiHerbal Ltd returns the equipment to the lessor at the end of the five year lease period. The economic life of the equipment is six years at which time it will have no scrap value. ChiHerbal Ltd has a financial year ending 31 December.

1. a) Explain whether ChiHerbal Ltd should classify the lease as finance lease or an operating lease.
2. b) Prepare the lease repayment schedule.
3. c) Prepare the journal entries of ChiHerbal Ltd in respect for the lease for all years assuming it is a finance lease.

In accordance with the IFRS and the AASB 16, the lease will be regarded as the operating lease if the asset is transferred to the lesser by the leases on specific terms for a particular period. In the operating lease, the losses and gains from the assets will be borne by the lesser. In this lease after the expiry of the term, the lease will be transfers to the lease (Minsky, 2016).

The accounting of the operating lease are treat as the right to use of the asset but the ownership is not transfer. Further, the asset are not qualified to show in the balance sheet. In addition to that, the liabilities of rent or other in associate with the lease cannot be treated as the liability. In the current case, it is an operating lease.

In this section, a detailed discussion is provided regarding the treatment of various expenses related to intangible Assets. ChiHerbal Ltd is working on developing a technology that is supposed to help to grow and improve the business of the company. This assessment is being created to analyse the financial statement of the company and identify the intangible assets. Presently the company is working on to develop filter regarding the heavy iron emitting problem from the bore made by the company which are causing trouble to its customer by leaving brown stain in the paths and garden edges. As the product is still under development, there is some error constantly being observed by the supervisors of the project for which it cannot be launched in the market. There is another fact that is delaying the launch of the product that the market is not developed enough yet for this product. For further analysis, provision of AASB 138 must be revised to configure that if the cost included in the development of this project can be regarded as intangible assets or not.

Like any other product produced by ChiHerbal Ltd, this technology is also expected to help the company to increase the generated revenue. The expenses in this project should meet all requirements of provisions of AASB 138 to be considered as intangible assets.

According to the provisions of AASB 138, an intangible asset cannot be physical in nature. Apart from this, according to the provisions, the asset should also prove itself beneficial to the manufacturing or selling company economically. The production and research cost of the asset should also be measured significantly in order to identify it as an intangible asset. The main motive to develop the technology by ChiHerbal is to increase the sales of the company (Damodaran, 2016). The cost regarding the development of the asset can be capitalised or it can be identified as an intangible asset. Any research work made for improving, researching or planning of a product, asset or item can be considered as a development cost. The product, asset or item should also have an economical influence on the business in order to recognise itself as the same. The cost regarding the production or research work for the object should also be considered in accordance with the provisions of AASB 138.

The selective capitalization method is used to recognize the development expenses. This method is divided into two parts. In the first part, the expenses must be treated as capitalized or as an intangible asset.  As of the other one, the other costs must be counted as the general expenses of the business. So it is necessary for ChiHerbal Ltd to distinguish between the capitalized costs and general expenses regarding the production of the asset. It is the responsibility of the management to identify those expenses separately to be able to identify an intangible asset. It is also necessary to disclose several data in the financial statement of the company regarding the development and research of the asset. According to the provisions of AASB 138, the total amounts spend in the research and development of the product should be mentioned in the financial report of the company in order to recognise the asset as an intangible asset. If any types of consultant expenses are included in developing in the project, the expenses should also be disclosed in the financial report of the company.

In this case, as shown in the report, the cost of the research conducted to develop the filter, design and construction of the prototype, testing of models, fees for preparing patent application, research for modification of the design and the legal fees to protect the patent against cheap copies is fulfilling all the requirements stated in the provisions of AASB 138. Such as, these expenses are not materialistic, these are being capitalised and these are being disclosed in the financial statement of the company (Härdle et al., 2017). Thus theses expenses can be called as intangible assets in terms of the provisions AASB 138.

The above analysis clarifies that the expenses regarding the development of the asset has fulfilled each of the requirements stated in the above. The capitalization amount and the general expenses regarding the development of the project both are disclosed in the financial statement of the company. As the asset is qualified in every criteria of provision of AASB 138, there is no doubt that it can be considered and identified as an intangible asset of the business. As it is, the management must follow all the regulation regarding to the accounting standards on assets described on provisions of AASB 138.

Damodaran, A. (2016). Damodaran on valuation: security analysis for investment and corporate finance (Vol. 324). John Wiley & Sons.

Härdle, W. K., Hautsch, N., & Overbeck, L. (Eds.). (2017). Applied quantitative finance (Vol. 2). Springer.

Minsky, H. (2016). Can" it" happen again?: essays on instability and finance. Routledge.