Issues with Non-Current Assets
Explain Organization Have Discovered Several Require?
This paper discusses about the issues that have been brought forward by the management of Byrne Limited. The directors of the organization have discovered several issues that require clarification. The views of the directors may not be in line with the Australian Accounting Standard, Corporations Act 2001 and thereby not bring out the correct and fair views. Therefore, Mr Bastin Byrne, the managing director of Byrne Ltd has emailed the manager of the accounting practice of Baxter and Associates Ms Pippa Baxter regarding various issues that are seen in his company. Ms Pippa Baxter has therefore asked to mail a draft on behalf of the response of the mail. This draft therefore will explain all the issues that have been asked by Mr Byrne.
It is seen that Mr Ambrose has suggested that there is no longer any requirement to show the non-current assets at their cost value in the balance sheet. According to this statement, it is suggested that it is not necessary to reveal all their non-current assets at the cost value as the various non-current assets shown at different values according to the life cycle of the non-current asset. It is therefore recommended that the life cycle of the non-current assets are understood and thereafter the value that will be showed in the balance sheet will be determined (Yao et al., 2015). It is seen that there are various values that are available in the market namely the fair value, carrying value, cost value, recoverable value etc. The cost value of the non-current asset may not show the actual feature of the asset and that would lead to wrong data. Therefore, it can be said that the suggestion given out by Mr Ambrose can be taken into consideration (Brouwer & Hoogendoorn 2017).
However, there are various other options that are available to the organization of they can value their non-current assets. It is important to understand the stage the non-current assets are going through and then decide what the value that requires to be published. If the non-current asset is going through the acquiring stage, then it needs to be valued at the fair value of the assets that are given up for claiming the non-current assets. During the holding stage the assets are valued with respect to its position like the depreciation, impairment examination and revaluation model (Picker et al., 2016). It is seen that the minor repairs are expensed and huge repairs are capitalised. The carrying value and the cost value are used at this stage. However, it is seen that in case of the disposal stage recovery value is used. Therefore, it is suggested that the assets are valued according to the stage at which the asset lies and thereby helping the organization to publish the true value that will be helpful for the preparation of the balance sheet true and fairly.
This issue discusses about the warranty costs that are incurred or expected by the company for repairing and replacing any product that has been sold by the company. The company earlier used to record their warranty cost by comparing it with their actual value. However, it is seen that in the current meeting they have decided not to do so. The estimation of the warranty expense before the actual cost can be determined with the forecasting ability of the firm. The estimation of the warranty cost before the actual cost is only possible if the accrual takes place in the same accounting period in which the associated sale of the product is recorded (Perreault et al., 2016). In doing so, the financial statements precisely reveals all the related costs that are linked with the sale of the product and thereby revealing the true profitability gained through the process of selling of the product.
The best way to calculate the warranty expense is to compare the expense with the actual cost as the utilization of this process is helpful for understanding the true value that is incurred. The use of this method minimises the chances of any false statements and revealing of the true value. This method is a simple method and is very easy for the accountants to compute and the use of this method reduces the chances of the variances in the warranty costs (Lee & Vetter 2015). However, it is even recommended that the company should even estimate the expenses that have not incurred yet as it has been done a plenty of time in accounting. It is known that accounting requires the use of forecasting as it is done to predict the bad debts so that the company stay prepared for it. In the same way, the estimation of warranty expenses is even important so that the firm can stay ready for such expenses from the beginning of the accounting year and can undertake various actions to mitigate the warranty expenses thereby maintaining their profit level that they desire. The estimation of the expenses earlier than the incurring of the cost can aid the firm preparing contingency steps so that they can avoid their operations from any additional losses. It is recommended that he warranty expenses should be predicted by looking at the past company history of the firm (Walstra et al., 2014). The previous history of the firm can be known by looking at their journal entries and income statement of the firm. In order to predict the warranty expense of the firm, there are three things that requires to be considered. They are as follows:
- The number of units of the products that have been sold during the time period that has been recorded
- What is the total percentage of the of the product sold may require replacement or repairs by looking at the past experiences
- Discovering the average cost of replacement or repairs that are under the warranty period
Employee Leave Expenses
The use of these methods will be useful for the determination of the warranty expenses before the actual cost. Therefore, it is recommended that the new decagons can be implemented by the company as it may improve their business activities and solve the issues that are in consideration.
The third issue that has been given out in the mail is in regards with the posting of the long leave expenses for their employees. An amount of $150,000 has been calculated as the long leave expenses for the employees for the firm. The company usually posts this expense in their Statement of Comprehensive Income when the employees generally take the leave and the amount is paid to them. The problem that has lingers in mind of the firm is that it is very difficult to estimate the time when the employees will take the leave. In such a situation, it is seen that when the employees take leave the expenses gets increased during that month and it has an effect on the profit of the firm. It is even seen that the chances of every employee taking a leave at the same time is impossible (Flannery 2016). However, there is a possibility that a higher percentage of the employees can take leave at the same time. Therefore, it is recommended that the organization creates a contingency liability for the employee leave expenses so that in case of emergency they can make use of this fund to pay off the expenses towards the long leave (Bova 2016). The maintenance of the contingent liability lowers the chances of the firm facing any loss of profit within a financial year and reduces the burden over them for paying additional expenses during a specific time period.
The disclosure of the long leave expenses as a contingent liability is recommended as it provides the firm with knowledge about the expenses they have to bear in the current period or in future and accordingly they strategize their business plan so that they can maintain their profit over their additional expenses (Hall et al., 2014). The contingent liability lowers the pressure over the firm and they can even use this fund for any emergency situation that was unexpected in terms of the company thereby mitigating the problem and maintaining their current business operations
This is a very complex and core issue that is faced by the organization. It is seen that there are various non-cancellable contracts that the firm have gone into for giving out after sales services to their customers. The money for these services are paid by the customers themselves and thereby overcoming any added problems. The problem has been generated with a contract that has been undertaken when a purchaser has paid out $12,000 for an after sales service for a period of 1 year. The amount that requires to be paid for 1 year has been paid together in a lump and the whole amount is paid to the company.
It is seen that the usual practice of the company is to post this revenue in their Comprehensive Income Statement as service revenue (Huang et al., 2016). However, in this meeting Mr. Ambrose, one of the managing directors has discovered a substitute way of recognizing this revenue in the income statement. He feels that the payment given one time is a deferred income and thus should be posted as the service is rendered. Saroo, on the other hand, being other managing director contradicts to this proposal and says that usual practice should be used. According to the present scenario, it is recommended that the proposal given out Mr Ambrose should be adopted. It is due to the fact that even though the contracts are non-cancellable there are chances that there might be discrepancies that might lead to a problem between the firm and the service company. In such situations there are certain clause and situations that can lead to the cancellation of the contract (Feinschreiber et al., 2014). There is another case, in which the client may not require the need of the service in the middle of their service period. In that situation he is likely to ask for refund for the period he does not wish to receive the services (Finke & Pfau 2015). Therefore, it is better to keep the revenue saved as deferred income and the revenue is to be posted as the service is being rendered so that an accurate maintenance of the income can be kept. This process may involve numerous passing of entries, but this process will increase the fairness of the financial statement. In order to reduce any sort of financial mishap within the income statement of the firm, this strategy is suggested (Bohušová & Vávrová 2014).
The next issue that is line is the company has decided to sell one of their divisions to a New Zealand Company as Byrne Ltd does not want to concentrate on this line of product. It is seen that this company wants to pay an additional $300,000 over the fair value that has been agreed upon by both the parties. The extra amount that has been agreed about can be regarded as goodwill by Byrne Ltd it is known that goodwill refers to any amount that has been given over the fair value of the asset (Zhang & Zhang 2017). It is seen that the unrecorded patent that that will be transferred to them will be treated similarly like the intangible assets and thereby can be accounted for in the same way as intangible assets are treated. The unrecorded asset will be accounted namely through initial recording, amortization, impairment and de-recognition (Sinclair & Keller 2017).
The shares issued by the company from New Zealand on account for the division is due to an extra benefit or remuneration to Byrne Ltd. The issue of the shares to Byrne Ltd reveals that the New Zealand Company has made Byrne Ltd as their shareholders and even they possess a part of the business that is operated by the New Zealand Company. Therefore, officially it can be said that Byrne Ltd is a shareholder of the New Zealand Company (Bugeja, & Loyeung 2015). These shareholders can account for these shares by recognizing them as their investment and posting the dividend that is yielded from the shares in their Comprehensive Income Statement.
The conclusion of the paper reveals that all the queries that were emailed by Mr. Byrne have been answered and sufficient evidence and relevance has been provided with the answer so that they terminate the issues that rose from the general meeting. The rectification of these issues will improve the operations of the firm thereby leading to rise in profit and market share of the organization.
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