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Halides Ltd: Issues Raised By The Board Of Directors

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Questions: Issue 1: When finalising the financial statements for the year ended 30 June 2014 two significant errors were made and there is debate as to whether we should simply adjust the financial statements in the current year or change last year’s financial statements as well. The IT system of the company was installed 3 years ago at a cost of approximately $3.5 million and was estimated to last 10 years. However the latest technology advancements indicate that this was a very optimistic estimate and that the maximum life span of this equipment will probably be not more than 6 years in total with little or no residual value. It was also discovered in August 2014 that a machine worth $2.2 million purchased in January 2014 was erroneously written off to repairs and maintenance instead of being capitalised. Deberella the marketing director thinks we should just adjust this year’s figures to account for these problems but Peter indicated that it was slightly more complicated than that. Could you please give us some advice on this? Issue 2:  A number of employees who work on our strategic management team have been with us for a number of years - at least 12 of them have been with us since the company commenced operations in 2006. In accordance with the Employee Bargaining Agreement (EBA) all employees are entitled to long service leave of 13 weeks if they remain in service for 10 years. They are also entitled to pro rata long service leave after 6 years of service. Our usual practice is to show the long service leave expense in the income statement when the employee actually takes leave and is paid. Of course we maintain a memorandum record of the number of days each employee is entitled to. Peter has indicated to us that he thinks we should consider treating this expense in a different manner, which seems complicated. The directors are wondering why we should complicate a very simple way of calculating long service leave – why not “stick with” recognising the expense when we pay for it? What do you think we should do and why? Issue 3: Peter, the new financial controller, has also informed the board that the company will need to present a statement of cash flows with the financial statements in addition to those statements already being presented, which really attracted a lot of attention. Some of the directors thought it was a waste of time to present this statement as it was merely a summarised cash book. Others were of the opinion that it could be useful but didn’t quite know how they would use it. The structure of the statement of cash flows also came into question with one of the directors suggesting that we merely needed to “get a printout” of the cash account and attach it. Another said that we couldn’t just do that as we needed to show “operating, instigating and financing” cash flows in the statement. Could you please clarify this matter for us?   Answers: Handy Halides Managing Director,Halides LtdSuite 55123, Level 42, Arcade Building16 256 Giles StreetDocklands Victoria 3008 Dear Mr. Handy Halides I really appreciate your concern mentioned in your email dated 15th December 2014 and would be delighted to assist you in resolving the issues that have been raised by the board of directors of the company. The response to the issues along with the reference to AASBs, Corporations Act, reference books, journal articles, and/or websites clearly mentioned in the discussion for each of the issue.  I have tried to bring down the key points related to the accounting standards related to each of the issue so that the brief understanding with respect to the issues that have been mentioned is developed. Issue 1 The first issue that is being faced has two parts. These are Change in the estimated life of the assets Prior period errors related to treatment of cost associated with machine The treatment is different for both the cases. However both these cases are covered under accounting standard AASB 108, “Accounting Policies, changes in accounting estimates and Errors”. According to paragraph 32-40 of AASB 108, if the change in the accounting estimate results in change in assets, liabilities or the equity, these changes must be recognized by making adjustments for the carrying amount of that asset, liability or equity in the period of change. Further the net effect is recognized prospectively by considering it as profit or loss. This profit or loss is considered either in the period of change or change in every period in future where the impact will be there. In this case as a result of change in the life of the asset the depreciation will be higher. Since earlier lower depreciation has been considered additional depreciation amount will be considered as loss in the current period. Further the impact on the profitability in future has to be estimated and mentioned in the current year financial statement. No adjustments or change in last year’s financial statements has to be done. It is important to note that disclosure will have to be made for this with the complete details of the change in the accounting estimate and the impact it is having on the profitability in the current period. Further the expected on the profitability in future periods has to be disclosed. The treatment for prior period errors is mentioned in paragraph 41-49 of AASB 108. According to this aspect of the AASB 108, material prior period errors are to be corrected retrospectively in the first financial report by restating the comparative amounts for the prior periods presented in which error occurred or restatement of the opening balance of the asset, equity or the liability for the earliest prior period presented in case the error occurred before the earliest prior period. In the present case error occurred in the prior period the restatement of the comparative amounts in the prior period will have to be done. Further since this is the material error, it must be corrected by retrospective restatement. The disclosures that have to be made in this respect includes the nature of the error, effec
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