Individual Case Study Halides Ltd

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 years 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 years figures to account for these problems but Peter indicated that it was slightly more complicated than that. Could you please giv e 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 w hy? 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 didnt 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 couldnt 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: Issue 1 AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors Changes in Accounting Estimates Various items in the financial statements may not be measured with the precision but only can be estimated, because of the uncertainties in the activities of business. This estimation includes the judgements based on the available information. Say for example, the estimates may be needed for:(a) Bad debts;(b) Obsolescence of Inventory;(c) Fair value of the financial assets or liabilities;(d) The useful lives of, or the expected pattern of the consumption of the future economic benefits in the depreciable assets; (e) The obligations of warranty.The usage of reasonable estimates is a relevant part for the financial statements preparations. This estimate may require the revision if the changes may arise in the situations in which the estimates were based or as a result of the new data. As per its nature, the revision in an estimate may not relate to the previous periods and is also not a correction of any error.The effects of a changes in the accounting estimate, other than a change to which paragraph applies, would be prospectively recognised by including the same in the profit or loss in:(a) The period of such change, if such change affects that period only; or(b) The period of such change and the future periods, if such change affects both.Advice: Hence, in the given case it is clearly a change in accounting estimates and thus the effect of Depreciation (whether surplus or deficit) shall be charged to Profit Loss Account of current year and the figures shall be adjusted as such. Errors and Omissions The Material prior period errors shall be retrospectively corrected in the first financial report after their discovery by: Restating the comparative amount of the previous periods that are to be presented in which the error has been caused; or Restating the opening balances of liabilities, assets and the equity for the earlier previous years presented, if the error has been caused before the earlier previous periods presented.Thus, a material prior period error must be corrected by retrospective restatement except to the extent it is impracticable for determining either the cumulative effect of the error or period-specific effects. If it is impracticable to determine the cumulative effect of the error at the beginning of the current period, then the error is corrected prospectively from the earliest date that is practicable.As per this Accounting Standard, certain Disclosures are also required in the financial statements .Advice: Hence, in the given case the machine worth $2.2 milli on which was erroneously charged to repairs and maintenance in the prior period shall be rectified in the current period and shall be capitalized thereof. Issue 2 AASB 1028 Employee Benefits Long Service Leave While the differences arise between the various Awards, Acts and the Workplace Agreements that specifies the entitlements of the long service leave in Australia, the following categories of entitlement are common:(a) A legal unconditional entitlement to which the payment arises after a certain period of service (usually 10 or 15 years). The Accumulation of the long service leave entitlement shall continue after this point, up till the leave is actually taken. (b) In various situations (for e.g. death, early retirement, or retrenchment), a legal entitlement to the pro rata payment in place of long leave may arise. At any point in time, an employer could have employees in more than one of the above categories.Whilst most of the employers provide the long service leave benefits to its employees, some employers may participate in same. The employer has an obligation to make the future outflows due to the long service leave arrangements. Accordingly, an employers obligations to the indust ry-based long leave service schemes shall be recognised as liability of the employer.Various industry-based schemes of long service leave operate such that the employers meet their obligations for long service leave to the employees, and receive the reimbursement subsequently from the scheme. In such cases, consistent with the needs of the paragraphs 4.3 and 4.13, the employers shall recognise the liabilities separately for the amount of payments which are expected to be made to the employees.Advice: Thus, in the given case the contention of Peter is correct to treat the expense differently, since it is the requirement of AASB 1028 by treating it as liability or separate liability depending upon the scheme of long service and then charging the same to revenue as discussed above. Issue 3 AASB 101 Presentations of Financial Statements Complete Set of Financial Statements shall comprise of the following statements: (a) A statement of financial position as at the end of the period;(b) A statement of profit or loss for the period;(c) A statement of changes in equity for the period;(d) A statement of cash flows for the period ;(e) Notes, comprising a summary of significant accounting policies and other explanatory information; AASB 107 Cash Flow Statements This Standard applies to : (a) Every entity which is required to prepare the financial reports as per the Part 2M.3 of the Corporations Act;(b) The general purpose financial reports of every reporting entity; and(c) The financial reports that are held to be general purpose financial reports. Benefits of Cash Flow Information The statement of cash flow provides the information that enables the users in order to evaluate the changes in the net assets of entity, its financial positions (including the solvency and liquidity) and the entitys ability to affect the timing and amount of cash flows to adapt to the changing situations and opportunities. Cash flow information is helpful for the assessment of the ability of the entity for generating the cash and cash equivalents and it enables the users to develop the model for assessing and comparing the present value of future cash flows of various entities. Cash Transactions can be bifurcated into 3 activities and are to be shown in Cash Flow Statement , , The historical information of cash flow is also used as the indicator of the timing, amount and the certainty of the future cash flows. It is also helpful in measuring the accuracy of the past assessments of the future cash flows and also examining the bonding between the net cash flow and profitability and the effect of changing prices.Advice: Hence, in the given case considering the requirements of AASB 101 and AASB 107, and also the benefits of preparing the cash flow statement as discussed above, it is advisable to prepare the cash flow statements depicting the cash transactions occurred during the year. References AASB, 2011, Accounting Policies, Changes in Accounting Estimates and Errors reviewed on 21 January 2015, https://www.aasb.gov.au/admin/file/content105/c9/AASB108_07-04_COMPmay11_07-11.pdf Chartered Accountants, 2013, Accounting Policies, Changes in Accounting Estimates and Errors reviewed on 21 January 2015, https://www.charteredaccountants.com.au/Industry-Topics/Reporting/Australian-accounting-standards/Analysis-of-AASB-standards/AASB-108--Accounting-policies-changes-in-accounting-estimates-and-errors?standard=%7B846095B1-DF0D-4BAD-967E-FFBB46D5F8AE%7D AASB, 2001, Employee Benefits reviewed on 21 January 2015, https://www.aasb.gov.au/admin/file/content102/c3/AASB1028_06-01.pdf AASB, 2011, Presentation of Financial Statements reviewed on 21 January 2015, https://www.aasb.gov.au/admin/file/content105/c9/AASB101_09-07_COMPsep11_07-12.pdf AASB, 2007, Cash Flow Statements reviewed on 21 January 2015, https://www.aasb.gov.au/admin/file/content105/c9/AASB107_07-04_COMPjul07_07-07.pdf