BAO2202 Financial Accounting Assignment

BAO2202 Financial Accounting Assignment

ABSTRACT

In this research we have discussed Australian financial accounting standards related to liabilities (including provision and contingent liabilities), revenue reception and lease transition. Foremost requirement in preparation of financial statements is compliance with applicable accounting standards. Accounting standards are applicable on preparation and presentation of accounting transaction.  There are different type’s measures in accounting standards that needs to be followed by companies. Apart from these measures there are some disclosure requirement also exists that needs to be followed. Each and every company is required to follow accounting standards for better presentation and for uniformity in preparation and presentation of financial statements of company. Financial statement of any company includes balance sheet, income statement, and statement of change in equity during the reporting period.

INTRODUCTION

This research is about Australian accounting standards that are applicable on companies working or operating in Australia. We have conducted research on impact, measurement of items and disclosures requirement from items of financial statement. In this research report, Altona Mining Limited is an Australian company are reviewed in terms of its compliance with accounting standard and disclosure requirements. We have conducted research on terms related to lease transaction and what are possible impacts of lease in financial statement.  There are many accounting standards that every company needs to be followed. We have conducted research on Altona Mining Limited on its compliance of lease transactions, recording of liabilities and revenue recognition were identified and stated in this report. Altona Mining Limited has huge customer base and has transacted with many transactions during the year. Accounting standards are established by its governing body that has enacted accounting standards. Financial statement shall be presented in order to maintain uniformity in presentation of financial information.

PART 1: LEASING

A: Critically discuss the measurement and recognition requirements of the relevant financial accounting standard using research literature.

Lease can be define as the process in which one person let another person to his or her asset or property for agreed consideration. There are two parties involved in lease agreement i.e. lessor and lessee. Lessor is the person who is the owner of assets or property and lessee is the person who takes asset on leases there are two types of lease i.e. operating lease and financial lease. Financial lease is the lease in which all risk and rewards are transfers to lessee. It means profit or arising from the lease property will be of lesser and this transfer includes transfer of ownership also. Lease considerations are decided in advance and they are called lease payments. Operating lease is the lease which does not have financial lease characteristics. On the other hand there is another type of lease i.e. non-cancellable lease (Garnaut, 2008). Non-cancellable lease cannot be candled but on some predefined events it can be cancelled.

Measurement Criteria Following are some measurement criteria have required in lease:
  •  Minimum Lease Payment: These are those payments that lessee is required to make over and above lease terms. These payments includes
  • For lessee: amount guaranteed by lessor
  • For lessor: residual value guaranteed by lessee, lessee’s related party and any other third party.
  • Fair Value: It can be define as the arm length price at which asset can be exchanged and settlement of liabilities can be done (Earl, 2003).
  • Unguaranteed Residual Value: It is the amount of leased asset that is not sure to be recovered from residual value of asset.
  • Gross Investment: It is the sum total of minimum lease payments from lessor point of view and unguaranteed residual value to lessor.
  •  Net Investment: It is the gross investment after inflation effect or discount factor effect.
  • Unearned Financial Income: It is difference between gross investment and net investment.
Recognition Requirements Recognition under lease is done in two parts i.e. initial recognition and subsequent recognition. Initial Recognition: Lessee shall recognise lease as asset or liability in financial statement. Asset or liability shall be recorded at the lower of following amount: Fair value of lease asset or * Present value of minimum lease payment from lessee’s point of view. *Minimum lease payment from lessee’s point of view = Agreed lease rentals and guaranteed residual value by lessee. Discount factor used to calculate present value of minimum lease payment shall be implicit interest rate (Bryman, 2007). Subsequent Recognition: Minimum lease payment shall be divided into financial charges and outstanding liabilities at the end of each year during lease duration. Lease rents shall be charged as expenses at the year end. Thereafter financial charges shall be allocated to each year and charged to income statement.

B: Critically analyse the measurement and recognition disclosure provided by Altona Mining Limited

Altona Mining Limited is an Australian stock exchange listed company, involve in extraction of mini in Finland. They have taken asset on lease and had applied provisions related to Australian accounting standard issued on lease. They have applied many provision related to lease. They have outstanding lease term and have financial charge that they are charging to income statement (Heath, Pearce, & Shotter, 2004). They have disclosed financial lease liabilities related to financial year 2014 and 2013. Australian accounting standard related to lease had specified following disclosures requirements:

This disclosure requirement is to be followed by lessees and has to make following disclosures:

  1. Net carrying amount for each asset
  2. Reconciliation shall be made between present value of asset and total of future minimum lease payments.
  3. Lasses shall break its lease payment in following way:
  • Not more than one year,
  • More than one year but not more than five years and
  • More than five years
  1. Disclosure related to non-cancellation sublease at the year end and minimum sublease payments.
  2. Description related to lease agreement. Any changes or alteration or modification made in lease terms.

Following are some outlines of disclosure that Altona Mining Limited had made:

  • They have followed complete set of disclosure and had followed correct set of disclosure format as stated in Australian accounting standard.
  • They have made disclosure of future minimum lease payments, interest charges and present value of minimum lease payments for 2014 and 2013.
  • They have also made disclose related of new lease undertaken by them during the year.
  • Another disclosure requirement that has to be made is to disclosure net carrying value of lease asset and Altona Mining Limited had disclosed same (Hanani, 2008).

C: Suggest improvements to accounting standard and firms’ reporting practice by using your arguments.

Improvements in reporting practice adopted by Altona Mining Limited can be improved by adopting some new methodologies in its lease transactions. Altona Mining Limited shall differentiate its lease in terms of type of lease they have not classified the same. Modifications made in lease agreement shall be reported in financial statement. After modification if there is any impact on financial statement then it needs to be disclosed.  Life of lease asset shall be disclosed in disclosure section of financial statement.

PART 2: LIABILITIES

A: Critically discuss the measurement and recognition requirements of the relevant accounting standard using research literature.

Objective of accounting standard related to liabilities including provisions and contingent liabilities is to analyse recognition criteria and accurate calculation of liabilities of company. There are many definitions related to liabilities which needs to be considered and they are as follows:

  1. Provision can be defined as the liability that relates to future uncertain amount.
  2. Present obligation of company is known as liabilities. Liabilities are arises from past events that has been undertaken by company. Liabilities requires outflow of cash of company when it is paid off or settled (Hatch, 2005).
  3. Obligation can be define as the compulsory payment of company which is established under laws or legal obligations.
  4. Contingent liability can be can be define as the possible liability that may or may not occur in future. Base of contingent liability is established when there is any past event has taken place and company is expected to insurer any cash outflow in future. Contingent liability is different from provision although they are based on same assumption that there are some events on the basis of which it is established and happening of that event is not certain. As per Australian accounting standard provision and contingent liabilities are two different things.  Present Obligation can also be termed as liabilities of company.
Measurement Criteria

Provision shall be measured as best estimation of amount that needs to be settled in future as a liability at that time. Best estimation can be made by taking base of present obligation having same nature as of provision that need to be settled in future date. Best judgements of management sis need to be made for estimation of provision (Fisher, Hughes, Griffin, & Pustay, 2005). Management needs to take influence or be influenced by some previous transactions that have taken place. This estimation needs experience. Provision need to be measured by taking all possible circumstances into account that will influence or impact amount of provision or future liability. Any changes shall be presented in financial statements when there is any change in future economic benefit.

Recognition Requirements

On following basis provisions or contingent liabilities is recognised:

When there is possibility of cash outflow or occurrence of liability because of past event then flowing measures needs to be taken:

When present obligation exists i.e. outflow of companies’ resources is certain but timing of outflow is not certain then provision is recognised. Above transition needs to be disclosed for the reporting period. When possible obligation exists and there is change of occurrence of present obligation i.e. present obligation may or may not occur then no provision is required to be made because there is no present obligation exists (Pedler, Burgoyne, & Boydell, 2005). This situation is required to be disclosed in financial statement as a foot not and it is termed as contingent liability for reporting period. Under next situation there is possible obligation and change of present obligation is very few or minute and no outflow or company’s resource is required to be made then in this situation no provision and no contingent liability is to made. Therefore there is no need of disclosure.

B: Critically analyse the measurement and recognition disclosure provided by the firm. Discuss the firms’ disclosure to Liabilities including provisions and contingent liabilities.

Disclosure of Provision:   Following disclosures needs to be made at the end of reporting period:
  1. Amount of provision i.e. opening and closing amount
  2. Increase in amount of provision during the reporting period.
  3. Amount changed during the reporting period to provisions i.e. decreased amount of provision as compared to last year’s provision.
  4. Amount of provision reserved during the reporting period.
  5. If there is any change in inflation rate and discounting factors that shall be specified disclosure section of company.
  6. Another important disclosure is nature of provision and any change in negative or positive manner is to be reported as disclosure.
  7. Change in future economic benefit shall be disclosed.
  8. Assumption if any related to uncertainties of provisions shall also be disclosed and better presentation is to be made.

 In present case of Altona Mining Limited they have made various provisions that belong to many items of financial statement. There is no set format for the disclosure that needs to be followed so that uniformity can be maintained in presentation of financial statements. But Altona Mining Limited has used acceptable format of presentation. They have presented or disclosed openingbalance of provision; provisions made during the year and unwind of discount i.e. application of discount factor on future cash payments (Cyert & March, 2009). They have presented by bifurcating two items on which provision has been made i.e. employee benefits and rehabilitation and restoration.  They have also made disclosure related to contingent liabilities in terms of royalties. All companies related t same industry has to make royalty payment to state government therefore it needs to be disclosed as contingent liability. Another disclosure made is of for license for exploration.

C: Suggest improvements to accounting standard and firms’ reporting practice by using your arguments.

Altona Mining Limited shall make more detailed disclosures in terms of provisions. One important disclosure that shall be made that we will recommend is of sources of funds that will be used for the payment of contingent liability or provisions. Accounting standard shall explain in more details difference between provision and contingent liability.

PART 3: REVENUES

A: Critically discuss the measurement and recognition requirements of the relevant financial accounting standard using research literature.

Revenue can be defined as the increase in economic benefit during the year. There shall be inflow in terms of cash or economic benefit of company. Revenue can also be called income that is earned in the ordinary course of business. Revenue can be recognised by different names like sales, interest income, royalty income and many more names. There is Australian accounting standard 118 for preconisation of revenue by company (Effective Compliance with Accounting Standards, 2003). In this accounting standard recognition, definition and many other points related to revenue of company is stated.

Measurement of Revenue:

Revenue is consideration that is received by selling products to customers or providing services to customers. Revenue can be in terms of received or received. Fair value concept is followed to calculate revenue. Consideration of any selling or services is desisted by both buyer and seller and both shall be agreeing on same. Revenue shall include rebates and trade discounts that are available to company. Cash or cash equivalents is form of revenue. While calculating revenue that will be received in future shall be discounted by using discounting factor or inflation adjusted rate and then fair amount that will be receivable is calculated. When there is exchange transaction between buyer and seller then this will constitute revenue in terms of fair value of good received in exchange at the time of exchange of product.

Interest can be defined as the financial income earned during the reporting period due to company. Royalty can be defining as the amount received for letting use long term asset to other person. Dividend can be defined as the distribution of profit to equity shareholders of company (Bryman, 2007).

Recognition Requirements

Revenue shall be recognised when some conditions are fulfilled i.e. when there is satisfaction of certain condition. Following are some recognition criteria that need to be fulfilled:

 Sale of Goods Consideration received in terms of sales shall be recognised when following conditions are fulfilled:
  1. All risk and rewards shall be transferred to buyer of product from seller.
  2. There shall be no control on product with selling company.
  3. Consideration shall be reliably measured.
  4. All benefits related to consideration or economic benefit shall be available to seller only.
  5. Cost of product and cost of sales shall be reliably measured.
Interest, Royalty and Dividends
  • Common requirement that needs to be followed is reliably measurement of interest, royalty and dividend and consideration shall be received or receivable to company only.
  • Interest method used to calculate interest shall be effective.
  • For recognition of royalty income accrual basis shall be followed (Bryman, 2007).
  • Dividend income shall only be recognised when right is established with shareholder.
  • When there are uncertainties in measuring revenue from the transaction then revenue shall be recognition shall be made on the basis of cost or expenses that are recoverable.

B: After reviewing the most recent financial statements of an Australian firm, critically analyse the measurement and recognition disclosure provided the firm. Discuss the firms’ disclosure to revenue to explore firms’ compliances.

Disclosure requirements
  1. Revenue recognition shall be on the basis of accounting policy that company has adopted. Transaction shall be measured on stage of completion method. These two points shall be disclosed in financial statement.
  2. Category of revenue that sis to be recognised during the year shall be disclosed. Category of revenue scan is revenue from sales, revenue from interest income, revenue from dividend income, revenue from royalty and other income i.e. indirect income.
  3. Consideration or revenue from exchange of goods shall be disclosed in financial statement.

Altona Mining Limited has been engaged in selling products, extraction of copper concentrate, gold concentrate, silver concentrate, zinc concentrate and many more products. Altona Mining Limited has made due consideration on making best estimation related to revenue expected to be received. These revenues recognised on the basis of market and all other related consideration has been taken into account (Hatch, 2005). Apart from sales revenue other financial income is also received by Altona Mining Limited during the reporting period. Altona Mining Limited has disclosed its interest income in financial statement. Other than financial income they had received foreign exchange gain also.

C: Suggest improvements to financial accounting standard and firms’ reporting practice by using your arguments.

It has been seen that are different sections that needs to be focused on in terms of measuring and recognition and revenue (Earl, 2003). Accounting standard made for revenue recognition shall be more focussed towards other revenues and incomes that modern business has been receiving like derivative income, share trading income, etc. son the other hand Altona Mining Limited shall concentrate on recognition standards or conditions that are required to be fulfilled.

CONCLUSION

After making this research we can conclude that accounting standards shall be followed by each company operating in Australia.  There are some penalties if standards are not followed. We can conclude that revenue recognition is the main accounting standard that needs to be followed and it is most common accounting standard i.e. applicable to almost all companies. Another important accounting standard is recording of liabilities. Concepts related to liabilities are provision and contingent liabilities that need to be taken care. Compliance with leasing transaction requires due consideration. We can conclude that accounting standard of lease is more complex and requires due consideration for its compliance. There are many concepts related to lease and needs to be understand for its better compliance. It is required from all item of financial statement, due consideration is to be given. Altona Mining Limited has followed all accounting standards that we have examined. There are some measurement criteria and disclosure requirements that shall be complied with. Accounting standards required to be followed for better presentation of financial statements.

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