BFA201 Financial Accounting

Question 1

Financial statement disclosures

One of the projects that the International Accounting Standards Board (IASB) is currently undertaking is the Disclosure Initiative project, with the aim of improving communication in financial reports.

The IASB has identified three main concerns about disclosures in financial statements, namely: there is not enough relevant information in the notes, there is irrelevant information in the notes, and there is ineffective communication of the information provided.

The IASB released a discussion paper in March 2017, DP 2017/1 ‘Disclosure Initiative – Principles of Disclosure’ and is currently seeking feedback on the disclosure issues identified and on the Board’s preliminary views on how to address them.

You are an investor who, for years, has struggled to work through and understand all of the note disclosures when analysing and comparing the financial reports of companies that you are considering investing in.

You are currently considering investing in either Westpac Group or ANZ. After reviewing and comparing the note disclosures provided in their 2016 annual reports, you plan to make a submission in response to the IASB’s discussion paper. In your submission, you plan to provide feedback in response to ‘Section 2 – Principles of Effective Communication’ of the discussion paper, given the difficulties that you have faced due to ineffective communication in financial reports.

In section 2 of the Discussion Paper, the IASB has proposed that a set of principles of effective
communication be developed. The seven principles identified in the Discussion Paper are that information in the financial reports should be:

• Entity specific;
• Clear and simple;
• Organised to highlight important matters;
• Linked to related information;
• Free from unnecessary duplication;
• Comparable; and
• In an appropriate format.

The IASB is also of the preliminary view that it should develop non-mandatory guidance on the use of formatting in the financial statements. The IASB suggests that this guidance could help to improve the effectiveness of information communicated in the notes.

Required:

Download and the Discussion Paper DP 2017/1 ‘Disclosure Initiative – Principles of Disclosure’.

Download the 2016 annual reports for Westpac Group and ANZ. Review and compare the notes that form part of each entity’s financial reports.

Prepare a letter to the IASB. In your letter:

• Discuss which of the seven principles of effective communication you feel are lacking the most in the note disclosures contained in the 2016 financial reports of Westpac and ANZ (and hence which principles you think that the IASB needs to put the most work into, in order to make significant improvements to communication in financial reports).
• State whether you think that the guidance on the use of formatting in the financial statements (as discussed in section 2.16 – 2.22 of the Discussion Paper) should be developed, and whether you think that it would improve the effectiveness of information communicated in the notes. Explain why or why not.

Question 2

Accounting for share issues 

The constitution of Harriette Ltd indicates that the company is able to issue up to 5,000,000 ordinary shares and 1,000,000 preference shares. Prospectuses are published on 1 January 2017, offering 1,000,000 preference shares at $2.00 payable in full on application by 31 March 2017, and 2,000,000 ordinary shares at $5.00 with $3.00 due on application by 31 March 2017, $1.50 due within one month of allotment, and $0.50 due on a call to be made by the directors at a later date.

By 31 March 2017, the company has received applications for 800,000 preference shares and applications for 2,200,000 ordinary shares. On 15 April 2017, the ordinary and preference shares are allotted. The ordinary shares are allotted to applicants on a pro-rata basis, and the excess application money is retained and credited against amounts due on allotment. All allotment money is received by 15 May 2017.

The directors make the call on the ordinary shares on 1 August 2017, with amounts due by 1 September. By this date, amounts due on 1,950,000 ordinary shares have been received. On 15 September 2017, the shares on which call money has not been received are forfeited and sold as fully paid. An amount of $4.20 is received for each share sold. Costs of the forfeiture and reissue amount to $7,500, and are paid. The constitution does not provide for refund of any balance in the forfeited shares account after reissue to former shareholders.

Required:

Prepare the journal entries to record the transactions of Harriette Ltd up to and including that which took place on 15 September 2017. Show all relevant dates, narrations and workings.

Question 3 

Accounting for income tax 

Snowstorm Ltd, a ski/snowboard sales and hire business, commenced operations on 1 July 2016 and presents its first Statement of Profit or Loss and Other Comprehensive Income, and first Statement of Financial Position on 30 June 2017. The statements are prepared before considering taxation. The following information is available: 

Extract from statement of profit or loss and other comprehensive income for the year ended 30 June 2017

The draft statement of financial position at 30 June 2017 contained the following assets and liabilities:

Additional information:

• All administration, rent and salaries expenses incurred have been paid as at year end.
• Tax deductions for annual leave, warranties and insurance are available when the amounts are paid, and not as amounts are accrued.
• Tax deductions are not available for doubtful debts. Tax deductions are only available when bad debts are written off.
• Amounts received from sales, including those on credit terms, are taxed at the time the sale is made.
• The equipment is depreciated over five years for accounting purposes, but over six years for taxation purposes (straight-line method, and with an estimated residual value of nil).
• The tax rate is 30%.

Required:

112. i)  Determine the balance of any current tax liability and deferred tax assets and liabilities as at 30 June 2017, in accordance with AASB 112. Use appropriate worksheets and show all necessary workings.
113. ii)  Prepare the journal entries to record the current tax liability, and deferred tax asset and liability balances at 30 June 2017.

iii)  Now assume that ‘Sales revenue – snow/ski equipment’ is actually $576,000 (instead of $686,000), and hence accounting profit/(loss) before tax is ($44,000). In addition, ‘Trade receivables’ is actually $15,000 (instead of $125,000). Determine the balance of any current tax liability and deferred tax assets and liabilities as at 30 June 2017 in this scenario, in accordance with AASB 112. Use appropriate worksheets and show all necessary workings.

Question 4

Revaluation of property, plant and equipment

Snowy Ltd commences operations on 1 July 2015, and on this date, acquires two items of plant:

• Plant A: $150,000
• Plant B: $250,000

Both assets are depreciated on a straight-line basis. Plant A has an estimated useful life of 10 years, and an estimated residual value of $30,000. Plant B has an estimated useful life of 5 years, and an estimated residual value of $0.

At 30 June 2016, Snowy Ltd decides to use the revaluation model for the plant. The fair value of Plant A is $120,000, and the fair value of Plant B is $235,000. The remaining useful life of each item is 9 years for Plant A, and 4 years for Plant B. The estimated residual values remain unchanged.

At 30 June 2017, the fair value of Plant A is $115,000, and the fair value of Plant B is $130,000.

Assume a tax rate of 30%.

Required:

Prepare journal entries for Snowy Ltd at 1 July 2015, 30 June 2016 and 30 June 2017 to record the above (including entries for acquisitions, depreciation, and all revaluation entries). Show narrations and all relevant workings.

Question 5

Impairment of assets

Blizzard Ltd has a division that represents a separate cash generating unit. At 30 June 2017, the carrying amounts of the assets of the division, valued pursuant to the cost model, are as follows:

The receivables were regarded as collectable, and the inventory is measured at the lower of cost and net realisable value. The patent has a fair value less costs to sell of $50,000, and the land has a fair value less costs to sell of $520,000.

The directors of Blizzard estimate that, at 30 June 2017, the fair value less costs to sell of the division amounts to $820,000, while the value in use of the division is $900,000.

Required:

Determine how Blizzard Ltd should account for the results of the impairment test at 30 June 2017, and prepare any necessary journal entries. Show all workings, explanations and provide references to the relevant accounting standard to support your answer.

Rationale

This assessment task is designed to assess your understanding of topics 3 to 7, and your progress towards being able to:

• prepare basic financial statements for reporting entities;
• explain the form and content of financial statements; and
• interpret and apply generally accepted accounting principles and specific financial reporting standards relating to concepts of recognition, measurement, disclosure, revaluation and impairment of key financial statement elements.

Answers: