Overview of Gazal Corporation Limited
You have been randomly assigned an Australian publicly listed company. Using the financial reports for your company, you are required to prepare an essay that addresses several requirements, such as discussing the recognition, classification and presentation requirements applicable to items in the company's financial reports.
Gazal Corporation Limited has its operations in Europe and Australia. The company is listed on the Australian Stock Exchange. It is the public company and is a leading Australian clothing brand. GCL is located in Banksmeadow. Banksmeadow is in the Australian state of New South Wales. The company together with the subsidiaries are engaged in the manufacture, design, retail, wholesale and importation of the men’s, ladies and children’s clothing and accessories. Formal shirts, school uniform, casual wear, undergarments, etc are the few clothing and accessories are the main forte of the company. The company imports brands like Nautica, Calvin Klein Underwear and holds the license for Orotonunderwear. Mambo Graphics, Bisley Workwear, and Davenport are few brands the company owns. In the year 2015, Saban Brands purchased Mambo (Gazal, 2017).
It can be said that with the resources outflow having economic benefits the obligation is to be settled and a reliable estimation might be evaluated of the obligated amount with the provisions that are taken into recognition when the company contains a legal or other obligations of constructive nature that pertains to the event of the past. The current obligation reflected in the company’s balance sheet is required to be settled with the management’s present value and the best budgeting of the expenses for the measurement of the provisions (Carmichael & Graham, 2012). The present market evaluations of the time value of money and the vulnerbility associated to the liability are reflected by the discount rate that is utilized to ascertain the present value. Finance cost recognizes the rise in the provision accounting with the due passage of time.
An organization does not measure its financial asset at a fair value through profit or loss, transaction costs instead measures it at its fair value except in the case of certain trade receivables. For measuring of debt instruments at their fair value one must consider profit or loss, amortized cost, or fair value through other income of comprehensive nature, their cash flows of contractual nature and the model of business under which such debt instruments are held. For measuring equity instruments, FVTPL is taken into consideration. The financial assets are allowed initial recognition to be designated as FVTPL by means of fair value option. This reduces or completely eliminated the risks of mismatch in accounting (Gazal, 2017). To represent alterations in the fair value of nontrading methoods in other income of comprehensive nature without other reclassification to profit or loss the companies have an option that is irrevocablein nature on an instrument by the basis of instrument. It is required for the OCI to project the alterations in the FV of financial liabilities designated as FVTPL using the FVO that which is due to the changes in credit risk. Unless the presentation in other comprehensive income of the FVC for liability’s credit risk does not create or maximize mismatch in accounting in its profit or loss, the left over changes in the FV is required to be projected in profit or loss (Parrino et. al, 2012).
Provisions in Financial Reports
The revenue generated is evaluated as stable and fair till it is seen that the enterprise handling the business from which it is generated is getting advantages from it and then it can be said that the company can depend on the generated revenue (Brigham & Daves, 2012). The evaluation of fair revenue can be marked if these key points are met with:
- After cutting off the returns, settlement, discounts, rebates that see that the item delivered to the company’s customer is fault free and the presented item is a reward to the risk that the particular customer has taken and the item is of the best quality from the company. After the cutoff of all these revenues going to the company must be profitable (Gazal, 2017).
- After the application of the effective interest method, it is seen that the company has been on a high as per the interest generated revenue.
If there is a possibility of loss or probability is present or if the condition exist where the loss amount does not pertain to a reasonable estimation then the disclosure in the financial statement is vital instead of the actual recognition. When the contingency is of the state where the loss is remote then it can be omitted from the financial statements (Needles & Powers, 2013). However, as per the standards there is little details as concern to probable, reasonable or remote loss. However, there are many scenarios where the adverse impact that will happen in the future are dealt in a manner that no actual amount are provided. The guidelines in regard to this are not clear and hence, accounting standards are not always theoretically correct.
It is mandatory for all the leases to be accounted by lessees within a single on-balance sheet model similarly to finance leases under AASB 117 leases. It is applicable to all the lessees except in the case of short-term leases( leases for a term of 12 months or less ) and leases of low-value assets( like personal computers ). A lessee is required to ascertain a lease liability and the use of asset at the beginning of a lease. The internet expense on the lease liability and the expense in the form of depreciation on the right of use asset are required by the lessee to be separately recognized (Gazal, 2017). Owing to various scenarios like an alteration in the lease term, a change in future lease payments, etc, lessees might be required to evaluate the lease liability (Berk & DeMarzo, 2016). It is required for the lessors that leases should be classified construing upon the same classification as provided in AASB 117.
The company utilizes machine in the process of manufacture. If the entire machine are sold then it will be considered as a sale of fixed assets and the difference that appears between the sale proceeds and the FA NBV will be considered as a gain or loss on sale of fixed asset that will be treated as other income.
Financial Assets and Liabilities
The Intangible assets that the company is maintaining includes both the produced and on the way to produce goods. There are different segments in which the cost of a totally finishes and produced good can be divided into. Produced good’s cost caters to labor cost and production material cost. Duty, freight, and other charges are the ones that are put on the imported good segment. The evaluation of the stock expenses can be done on the basis of net realizable value. This term can be defined as one which holds the price with which a certain product must come up in the market to get the maximum gains.
In a case where the indefinable asset has been seen to generated revenue then this is the best implementation of the income structure. It is also seen that a wise income structure can convert the asset into future revenue generating projects which will increase the profits of the company. Capitalizing benefits of a single period or discounting a benefits of future is the two options that are available for business if one follows the traditional techniques (Peirson et. al, 2015). Differentiation between the revenue generated from the indefinable asset and the one generated from the company as a whole is a hard task to carry on. The rate of discount can be evaluated from these techniques:
- Weighted Average Cost of Capital (WACC).
- Weighted Average Return on Assets (WARA).
- Internal Rate of Return (IRR) to the investor.
Trademark and Patent are the two indefinable assets to the company that can be put into the royalty structure whose revenue generation can be assumed to an extent. The revenue generated from a quick earning structure can be evaluated if the profits earned from the definable and the indefinable assets are removed promptly (Bodie et. al, 2014). Methods based on income method are usually employed to value intangibles that are customer-related, trade names, and various agreements. These are some of the key points that must be paid attention to:
- The demarcation between revenue streams and associative costs.
- The span in which the indefinable assets cane prove to be beneficial.
- Others sources of revenue generation.
- Bringing the revenue generated from the indefinable asset into use.
- The rate of royalty structure which can be advanced by the income from the indefinable asset.
- Direct capitalization methods.
- Residual value consideration.
Bodie, Z., Kane, A. and Marcus, A. J. (2014) Investments. McGraw Hill
Berk,J and DeMarzo, P. (2016) Corporate Finance, Global edition, 4th ed. Pearson
Brigham, E. & Daves, P. (2012) Intermediate Financial Management. USA: Cengage Learning.
Carmichael, D.R. and Graham, L. (2012) Accountants Handbook. Financial Accounting and General Topics, John Wiley & Sons.
Choi, R.D. and Meek, G.K. (2011) International accounting. Pearson .
Davies, T. and Crawford, I. (2012) Financial accounting. Harlow, England: Pearson.
Gazal. (2017). Gazal annual report and accounts 2017 [online]. Available from: https://www.gazal.com.au/ [Acccessed 21 May 2018]
Needles, B.E. & Powers, M. (2013) Principles of Financial Accounting. Financial Accounting Series: Cengage Learning.
Parrino, R, Kidwell, D. and Bates, T. (2012) Fundamentals of corporate finance. Hoboken, NJ: Wiley
Peirson, G, Brown, R., Easton, S, Howard, P. and Pinder, S. (2015) Business Finance, 12th ed. North Ryde: McGraw-Hill Australia
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