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This assessment item relates to the following unit learning outcomes:

Interpret and apply the AASB’s Framework for the Preparation and Presentation of Financial Statements.

Interpret the technical requirements and conceptual aspects of selected accounting standards that address fundamental issues in financial reporting.

Apply the requirements of relevant accounting standards, conceptual accounting knowledge and professional judgement, to solve routine accounting problems.

Journal Entries in the books of White Ltd

Solution-1

Journal Entries in the books of White Ltd.

 (Amount in $)

Date

Particulars

 Debit

 Credit

30 June, 2015

Accumulated depreciation (refer WN-1)

60,000

To Machine

60,000

(To adjust depreciation with cost of asset)

30 June, 2015

Machine (refer WN-1)

45,000

To Revaluation Surplus

45,000

(To record the fair valuation of machine)

30 June, 2016

Accumulated depreciation (refer WN-2)

65,000

To Machine

65,000

(To adjust depreciation with cost of asset)

30 June, 2016

No Journal Entry is required (refer note below)

30 June, 2017

Accumulated depreciation (refer WN-3)

65,000

To Machine

65,000

(To adjust depreciation with cost of asset)

30 June, 2017

Revaluation Surplus

35,000

To Machine

35,000

(To record the fair valuation of machine)

31 Dec, 2017

Depreciation expense

30,000

To Accumulated Depreciation

30,000

(To record depreciation upto date of sale)

31 Dec, 2017

Accumulated Depreciation

30,000

To Machine

30,000

(To adjust depreciation with cost of asset)

31 Dec, 2017

Bank

500,000

To Machine

490,000

To Gain on sale of machine (refer WN-4)

10,000

(To record sale of machine)

 

Note: Since, the carrying value and fair value of the machine is same (i.e. $620,000 (refer WN-2)) as on 30 June, 2016, hence no entry is required.

WN-1

Calculation of value of the machine as at 30 June 2015

Date of Acquisition

01-Jul-14

Cost

$700,000

Useful life

10

Residual value

$100,000

Cost

Cost

$700,000

Less: Depreciation for the year

$60,000

WDV as on 30 June, 2015

$640,000

Fair value

$685,000

Revaluation Surplus

$45,000

WN-2

Calculation of value of the machine as at 30 June 2016

Remaining Useful life

9

Opening WDV

$685,000

Less: Depreciation for the year

$65,000

Closing WDV

$620,000

Fair value

$620,000

Revaluation Surplus

$0

WN-3

Calculation of value of the machine as at 30 June 2017

Remaining Useful life

8

WDV

$620,000

Less: Depreciation for the year

$65,000

WDV as on 30 June, 2015

$555,000

Fair value

$520,000

Revaluation Surplus

($35,000)

WN-4

Calculation of gain on sale of the machine as at 31 December 2017

Remaining Useful life

7

Opening WDV

$520,000

Less: Depreciation for the period

$30,000

Closing WDV

$490,000

Sale value

$500,000

Gain on sale

$10,000

Solution-2

  • As per AASB 137, “Provisions, Contingent Liabilities and Contingent Assets”, the provision are liabilities of uncertain timing and amount. So, the provisions are those liabilities which have present obligations and requires to be settled in economic resources such as cash, or any other financial resource at a later point of time or after the current reporting period.

The Brown’s Ltd obligation to restore the contaminated environment is classified as a provision because the company has accepted its liability by means of public announcements and it involves outflow of resources in coming years. As per para 14 of AASB 137, a provision shall be recognized if it meets the following recognition criteria’s.

  • The company should have present obligation
  • The settlement of obligation requires outflow of resources
  • The amount of obligation can be reliably estimated.

Since, the above criteria’s are met, hence the company should recognize the obligation as provision.

  • As per AASB 137 (2018), the methods that can be used by an entity to estimate the amount to be recognized as a provision are as below:
  • Best Estimate– the first method is to make the best estimate of the amount of expenditure required to settle the present obligation i.e. provision. This best estimate represents the amount that according to the judgement and experience of the management and industry practices best suits to the situation.
  • Present Value– This method is used when there is effect of time. Means this method is based on time value of money. Under this method, the amount of provision is calculated by taking the present value of all the expenditures that are required to settle the involved obligation. This present value is calculated by using the appropriate discount rate which is selected as per the current market situations and assessments.
  • Expected Value– This method is used, because the business operates in environment which consists lots of risks and uncertainties and these uncertainties varies as per the circumstances. This method is also used when the large population of data is available. So, this method calculates the obligation by weighting all possible outcomes with their associated probabilities.
  • The Brown Ltd has accounted for the risk by taking the discount rate of 4% which is after adjusting for the risks specific to this liability. The alternative approach to account for the risk is to adjust the future cash obligations or resources as per the risk. For example, the company instead of taking the discount rate can also increase its cash outflow obligations to account for the inherent risk.
  • Brown Ltd. should recognize the following amount as a provision on 30 June, 2017:

Cost

Probability

Weighted Cost

840,000

20%

168,000

800,000

70%

560,000

600,000

5%

30,000

400,000

5%

20,000

 Total

 

778,000

By taking the discount rate of 4% for a total period of 2 years, the present value of obligation comes at $719,304.73. So, the Brown Ltd. should recognize the amount of $719,304 as provision on 30 June, 2017.

The approach used is the combination of present value and expected value. Due to uncertainties involved, first of all the weighted cost is computed by multiplying the cost with appropriate probabilities and then the present value is calculated as the costs are going to incur in the next two years and hence, the time value of money is involved.

Solution-3

  • As per AASB 138, “Intangible Assets”, an intangible asset is a non-monetary asset which is identifiable and has no physical substance; further the asset should also have future economic benefits for the entity.

Hence, applying the above definition to the master licenses, we conclude that the master licenses are the intangible assets, because they are separately identifiable and further they have no physical substance, i.e. they are intangible and moreover the company has economic benefits in the form of providing security services for 5 years. Since, these master licenses satisfy the definition of intangible assets hence they should be recorded as intangible assets.

“12 An asset is identifiable if it either:

  • is separable, ie is capable of being separated or divided from the entity and sold ,transferred,  licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so; or

(b) arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.”

The master licenses are the legal rights provided under Security Industry Act, 1997, and can be measured and identified separately, hence it is said that these licenses met the identifiability criteria of definition of intangible assets according to which an asset which arises from any legal or contractual right is considered as an identifiable asset.

  • As per AASB 138 para 21, an intangible asset should be recognized when it is certain that the asset has future economic benefits and its cost can be reliably measured.

As per para 72 of AASB 138, after recognition, the entity can choose to measure the asset either as per cost model or as per revaluation model. Under cost model, the asset is recognized at an initial cost and is carried for the remaining life at initial cost less accumulated impairment losses. Under revaluation model, the asset is recognized at initial cost and thereafter its cost is reviewed at each year end and a fair value of the asset is computed and recorded year on year. Hence, the asset is carried at revalued amount.

Hence, the Wilson security services Ltd. can opt for either cost model or revaluation model to measure its master license after initial recognition.

  • As per para 94 of AASB 138, the useful life of an intangible asset which arises from any contractual or legal rights should be the period for which the license or rights were granted and if these rights can be renewed then that renewal period should be included in the useful life only if there is evidences that support the renewal of the rights or licenses.

In the given case, the Wilson Security Services Ltd, was firstly given the master license for 5 years only and this license is renewable after 5 years only if the required conditions are met. Hence, there is no strong evidence as regard to renewal of license, because it totally depends upon the satisfaction of required conditions after 5 years.

From the above, we conclude that the licenses have finite life and that is to the useful life is 5 years which is equal to the time span for which licenses were allowed.

References:

Aasb.gov.au (2018). Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf

Aasb.gov.au (2018). Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf

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