Accounting For Corporate Entities International Financial Reporting

Question: Discuss about the Accounting For Corporate Entities for International Financial Reporting. Answer: Part A The Australian Governments requirement to adopt International Financial Reporting Standards (IFRS) by the Australian firms for yearly reporting periods starting from 1st Jan 2005 and onwards has put forth several challenges for financial accountants in the country. Though amendments in accounting standards and introducing new standards is a constant phenomenon, however, the complete espousal of an entirely novel set of accounting standards in the country is without any precedent. Many domains of financial reporting have encountered considerable changes. One domain where sizeable impact was seen is intangible assets. Currently, the reporting system in the nation that addresses the disclosure of intangible assets is primarily overseen by AASB 138 Intangible Assets, and AASB 136 Impairment of Assets, that became enforceable from 1st January 2005 (Griff, 2014). The ensuing paragraphs analyze the recognition and disclosure of intangible assets by Australian entities following the introd uction of AASB 138 in 2005. The shift to IFRS in Australia has had material implications for the financial reporting and disclosure treatments pertaining to intangible assets. Before the espousal of IFRS, there was no equivalent standard to the newly formed AASB 138. The only relevant standard addressing the question of reporting and accounting for the intangibles was AASB 1013 Accounting for Goodwill. Together with AASB 1015 Accounting for the Acquisition of Assets, that obligated business acquisitions to be accounted for through the use of purchase method, AASB 1013 established the model to treat this crucial category of intangible (Australian Government, 2005). Quintessentially it necessitated that goodwill emanating during acquisition should be accounted for in the consolidated balance sheet of the company acquiring the other company and later on be paid off against earnings following the straight line method over a period of not more than twenty years (Dagwell, Wines and Lambert, 2011). Though AASB 1013 widely addressed the suitable treatment of goodwill, there did not exist a holistic framework that established the reporting and accounting requirements pertaining to identifiable intangible assets like mastheads, licenses, patents, brand names and so on. Resultantly, the treatment of such assets was not consistent among Australian companies (ICCA, 2012). This new standard applied to assets acknowledged as non-monetary and identifiable having no physical existence, including trademarks, research and development, goodwill, brand names and mastheads. As per AASB 138, only those intangible assets which are acquired at cost get recognition, whereas, intangible assets that are generated internally do not get any recognition. The exception to this rule is goodwill which can be accounted for during its acquisition as a component of business merger (Carlin and Finch, 2010). Besides this, intangible assets like in-process RD obtained through a business merger should be separately recognized from goodwill if they emerge as an outcome of legal or contractual rights or are distinguishable from the business (Steenkamp and Steenkamp, 2016). The AASB 138, deals with defining, recognizing and disclosing intangible assets and mandates financial statements to reveal for every distinctive category of intangible asset: a) useful life, method and rate of amortization, and b) accumulated amortization and the total carrying amount during the start and end of accounting period. AASB 138 has made fundamental changes in the manner in which intangible assets were recognized, accounted and treated in the Australian continent. The IFRS adoption implies that formerly treated intangible assets that were generated internally required being de-recognized. This would also include internally generated mastheads, brand names, goodwill, customer lists, publishing titles and the likes (Cheung, Wright and Evans, 2008). During the pre-adoption era, the likely impact of IFRS on companies reported performance has been frequently discussed in specialized accounting literature. It has been extensively agreed by academics and practitioners that AASB 138 is likely to have a material effect on the financial statements of such companies that would be compelled to derecognize some forms of intangible assets like brand names. Brand names and other such intangible assets may symbolize a considerable fraction of value for the companies, with many asserting that most of their market value pertains to brands (Australian Government, 2004). Ji and Lu (2014) examined the projected impact of the AASB 138 by evaluating the financial reports of a fictitious company. They identified that the fictitious company is likely to witness a fall in its net assets and a rise in its debt to equity ratio. The researchers concluded that one impact of AASB 138 may be a rise in the number of companies facing difficulties in fulfillin g their existent debt covenants, and that these companies are likely to make adjustments in their financial records to satisfy the debt covenant mandates required by banks. AASB 138 allows two grounds for measuring intangible assets post their original recognition. Under the cost model, intangible assets are measured at cost minus accumulated amortization if any and accumulated impairment loss if any. Under the revaluation model, the intangible assets are measured at revalued amount. Para 78 of the standard says that trademarks, patents, mastheads, etc. do not have active markets as each of these assets is unique (Australian Government, 2010). If the revaluation model has to be employed then every asset falling in same category should be measured by the same framework. However, as not many intangible assets possess active market, the applicability of revaluation model will be very rare and hence intangible assets are not likely to be revalued under AASB 138. In conclusion it can be stated that AASB 138 has been introduced in Australia with the aim to set down the treatment of intangible assets that are not specifically addressed in any other standard. The introduction of IFRS norms in the country has altered the state of affairs pertaining to the treatment of intangibles substantially. A wholesale set of standards governing both unidentifiable and identifiable intangible assets are now present. In many instances, this has led to considerably distinct treatment becoming the rule the most apparent being the movement from an amortization based treatment of goodwill to an impairment based regime. Australian companies have shown skepticism regarding the advantages that accrue from the adoption of IFRS and AASB 138 in particular. They have expressed concerned regarding de-recognition of intangible assets generated internally and the restrictions to an entitys capacity to revalue the intangible assets. The reason behind such concern is that AA SB 138 necessitates intangible assets having a fixed useful life to be paid off during such useful life and the intangible assets having an imprecise life are subject to the test of impairment. Part B Journal entries related to issue and forfeiture of share Journal Entries in the books of Gilt Edge Investment Ltd Amount in $ Sr. No. Date Particular Dr. Amount Cr. Amount 1 28.02.2016 Bank a/c Dr. 1800000 To Share Application A/c 1800000 (Being application money received from on shares. (as per working note1) ) 2 28.3.2016 Share Application A/c Dr 1800000 To Share Capital A/c 1000000 To Share Allotment A/c 800000 (Being amount received on share application money transferred to share capital account and remaining amount to share allotment account ) 3 28.3.2016 Share Allotment A/c Dr. 440000 To First Call A/c 40000 To Second Call A/c 40000 To Share Capital A/c 360000 (Being the additional amount received on application adjusted against first call and second call and remaining amount paid back) 5 28.03.2016 First Call A/c 40000 Second Call A/c 40000 To Share Capital A/c (Being amount transferred to capital account) 6 28.3.2016 Preliminary Expenses 20000 To Banks A/c 20000 ( Being share issue expenditure paid) 7 15.4.2016 Bank A/c Dr. 240000 To Share Allotment A/c 240000 (Being amount received by remaining shareholders of allotment) 8 15.05.2016 Share Allotment A/c Dr. 240000 To Share Capital A/c 240000 (Being amount transferred to share capital account) 154000 9 1.06.2016 Bank A/c Dr. 154000 To First Call A/c (Being amount received by remaining shareholders of allotment) 10 1.06.2016 First Call A/c Dr. 154000 To Share Capital A/c 154000 (Being amount transferred to share capital account) 11 15.06.2016 Share Capital A/c Dr. 48000 To Forfeiture Account 48000 (Being shares forfeited and amount transferred to forfeiture account (working note 2)) 12 20.06.2016 Bank A/c Dr 48000 Forfeiture Account Dr. 6000 To share capital account 54000 (Being the discount on reissue adjusted against credit balance of share forfeiture account) 13 30.06.2016 Share Allotment A/c Dr 270000 To Bank A/c 270000 (Being amount refunded to defaulting shareholders) 14 30.06.2016 Preliminary Expenses A/c Dr. 4000 To Bank A/c 4000 (Being expenses paid related to forfieture of shares) Working Notes Working Note for ascertaining shares according to pro-rata basis: Sr. no. Applicants No. of shares allocated Shares 1 100000 100000/500000*400000 80000 2 200000 200000/500000*400000 160000 3 200000 200000/500000*400000 160000 Working Note 1 Calculation of share application money Sr. no. Applicants Amount Paid Amount 1 100000 100000*5 500000 2 200000 200000*4 800000 3 200000 200000*2.5 500000 1800000 Working Note 2 Calculation of balance in forfieture account Sr. no. Particular Amount 1 No. of shares forfeited 12000 shares 2 Amount received on share application 30000 3 Amount received on share allotment 18000 Total amount received 48000 Part C Statement of Profit or Loss and Other Comprehensive Income Statement of Profit or Loss and Other Comprehensive Income in one statement and classification of expenses within profit and loss by function Note (Amount in $) Income Sales 4,50,000 Expenses Cost of Sales 2,28,000 Inventory on hand 1,56,000 Gross Profit 5,22,000 Salary wages 42,000 Other Expenses 9,600 Depreciation 1 82,500 Insurance 19,000 Rent 4,600 Provision of Long Service Leave 8,000 Impairment of accounts receivables 2,000 Profit before Tax 3,54,300 Income Tax Expense (30%) 2 1,06,290 Profit for the year after tax 2,48,010 Notes to Account Note 1. Depreciation Particular Motor Vehicle Plant Equipment Office Furniture Opening Balance 44000 190000 96000 Depreciation as per books 11000 47500 24000 Closing Balance 33000 142500 72000 Total 82500 Journal Entries Sr. No. Date Particular Dr. Amount Cr. Amount 1 30.06.2016 Income Tax expense A/c Dr. 106290 To Current Tax Liability A/c 106290 (b) Assets Carrying Amount Tax Base Taxable Temprory Difference Deductible Temporary Differences Accounts receivable (net) 43000 45000 2000 Motor Vehicle 33000 28000 5000 Plant Equipment 142500 136000 7000 Office Furniture 72000 51000 21000 Provision for LSL 8000 0 8000 Insurance 13200 13200 13200 Rent 13000 0 13000 Total Temporary Difference 23200 46000 Deferred tax liability 30% 6960 13800 Deferred tax asset 30% Beginning balances Increase/(Decrease) 6960 13800 Depreciation as per taxation norms Particular Motor Vehicle Plant Equipment Office Furniture Opening Balance 44000 190000 96000 Depreciation as per books 16000 54000 45000 Closing Balance 28000 136000 51000 Total 115000 Journal Entry Sr. No. Date Particular Dr. Amount Cr. Amount 1 30.06.2016 Deferred Tax Asset A/c Dr. 6960 Provision for Tax Expenses A/c Dr 113130 To Deferred Tax Liability A/c 13800 To Income Tax Payable 106290 References Australian Government. (2004). Disclosing the Impacts of Adopting Australian Equivalents to International Financial Reporting Standards. [pdf]. Available through: https://www.aasb.gov.au/admin/file/content102/c3/AASB1047_04-04.pdf. [Accessed on 6th October 2016]. Australian Government. (2005). Consolidated Financial Reports in relation to Pre-Date-of-Transition Stapling Arrangements. [pdf]. Available through: https://www.aasb.gov.au/admin/file/content105/c9/INT1013_04-05.pdf. [Accessed on 6th October 2016]. Australian Government. (2010). Intangible Assets. [pdf]. Available through: https://www.aasb.gov.au/admin/file/content102/c3/AASB138_07-04_ERDRjun10_07-09.pdf. [Accessed on 6th October 2016]. Carlin, M. T. and Finch, F. (2010). 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