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ACC203 Financial Accounting Proof Reading Services
Letter in response to mail received from client
Mr, Con Pewter
Managing Director, Pewter Ltd
Level 6, 510 King William Street,
Adelaide SA 5000
Date: 12th September, 2016
Re: Accounting Issues: Year Ending 30 June 2016
Received your mail regarding the accounting issues discussed. I considered the issues addressed by you in line with the accounting objectives and financial and accounting framework for your company and with the view to assist your accounting team in the decision making process of your company, I hereby present my advice in respect of those issues along with the references of relevant sources including AASB, Corporations Act and relevant websites:
1. Calculation and recognition of Long service leave expenses
Issue – The current practice followed by your company is to recognise long service leave expenses in the income statement when the employees of your company takes leave and are paid. The Senior Accountant of your company has suggested a different method which is complicated. The issue is to decide about how to calculate the long service leave expenses and when to recognise them and why.
Rules - As per AASB 119, when a company incurs long service costs for paying employment benefits to its employees, the expected present value of the long service leave liabilities shall be recognised by such company in its balance sheet as a liability. The accounting standard states that the value of liabilities shall be calculated on the basis of an actuarial technique such as projected unit cost method. The employee salaries and accrued long term service expenses are projected. The present value of these costs is calculated by using an appropriate discount rate and the accrued liability is recorded. The current liability includes the long service leave expenses that are likely to be paid within next 12 months. Every year the calculation is revised considering the expectancy of death, retirement, incapacity and withdrawal of employees (Kim, 2011).
Recommendation - Therefore in order to comply with the requirements of AASB, the method suggested by your senior Accountant shall be followed. Even if the method is complicated it has to be followed as it is mandatory to follow under Accounting Standards. Hence your accounting team shall recognise the expected value of long service expenses calculated using projected unit cost method as liability in the balance sheet rather than recognising the expenses as and when they occur and paid.
2. Revenue recognition
Issue – Your Company entered into an agreement with several retailers in Australia under which the company will ship items to them at the start of each quarter which will be displayed by them in their stores. For this fees of $600 will be paid on monthly basis. The stores will transfer the revenue for products sold after deducting the fees and will return the unsold products at end of quarter. The issue is whether the recognition of sales revenue at the start of each quarter and making adjustments and reversals on return of good will simplify the matters or not. Also shall the company record the net revenue after deducting the cost of sales.
Rules – As per AASB 118 ‘Revenue’ and AASB 15 ‘Revenue from contracts with customers’, an entity shall recognise revenue likely to arise from an agreement only when the performance obligation is satisfied after the transfer of promised goods or services to the customer or when the customer gains the control of the asset (Paragraph 31-45 of AASB 15).
Recommendation – In accordance with the compliance of accounting standards issued by the Australian Accounting Standards Board, it is recommended that your accounting team shall recognise the revenue at the end of each quarter when the revenue fees and unsold goods are returned by the retailers rather than recognising the revenue at the start of each quarter since at the end of each quarter the performance obligation is satisfied. The method of making adjustments when the unsold goods are returned by reversing the sales revenue cost of sales and inventory is not correct. Also the decision to recognise the net revenue will n0ot simplify the matter since the fees is incurred for the business and shall be included in the cost of sales and shall be recognised separately from the total sales revenue ( Meade, 2012).
3. Accounting for Deferred Tax Assets and Deferred Tax Liabilities
Issue – The Company is currently spending too many man hours on recognising the future tax consequences and reporting DTA and DTL. The argument that relates to this matter is that since the company is not cheating in its tax returns and tax man are happy therefore why shall the company waste money in recognising DTA/DTL. The issue is whether the company can just account for current tax liability without accounting for DTA and DTL.
Rules - Paragraph 71-88 of AASB 112 requires that every reporting entity shall recognise and disclose tax expense at the face of balance sheet where the tax expense include current tax liability as well as future tax liability in the form of Deferred Tax Assets and Deferred Tax Liabilities.
Recommendation – Your Company is a reporting entity, therefore it is mandatory for the company to disclose DTA and DTL on the face of balance sheet along with the current tax liability of company. Hence in order to comply with the accounting standards the company shall account for DTA and DTL also apart from the current tax liability even if the same involves huge expenses for the company in the form of high man hours. If the compliance of accounting standards is not made the company will have to face sincere consequences and as the auditors of the company we will have to qualify our audit report (Tran, 2015).
The advice sought by you regarding the accounting issues has been given after the research and analysis of applicable regulations and legislations. Kindly consider the above mentioned advice for effective decision making process by your accounting team.
Mc Kenzie and Associates
777 South Terrace,
Adelaide SA 5000
Kim, S.H. & Taylor, D. 2011, "Labour cost disclosures: have IFRSs made a difference?",Journal of HRCA : Human Resource Costing & Accounting, vol. 15, no. 2, pp. 127.
Meade, J. 2012, "Revenue recognition - another chance to comment", Charter, vol. 83, no. 1, pp. 50.
Paul, J. 2012, "Income recognition for NFPs - new proposed requirements", Charter, vol. 83, no. 9, pp. 46.
Tran, A. 2015, "Can taxable income be estimated from financial reports of listed companies in Australia?” Australian Tax Forum, vol. 30, no. 3, pp. 569-594.