class test sample q

Question 1

difference between Australian Accounting Standards and IFRS?

Answer 1

• IFRS developed for profit-seeking entities, AAS applied by not for profit entities in public and private sectors
• AAS also cover additional matters, such as disclosure requirements on matters not covered by IFRS
• difference introduced easily identified in text

Question 2

define equity and explain why conceptual framework does not prescribe any recognition criteria for equity?

Answer 2

equity is the residual interest of asset after deducting all its liabilities
no need for recognition criteria as applied to other elements (assets and liabilities)

Question 3

Purchase orders:
An airline places a non-cancellable order for a new aeroplane with one of the major commercial aircraft manufacturers at a fixed price, with delivery in 30 months and payment in full to be made on delivery.
1. Under the conceptual framework, do you think the airline should recognise any asset or liability at the time it places the order?

Answer 3

• airline should not recognise any asset or liability when order as transaction not taken place. Accounting recognises purchase transactions when delivery takes place and title passes. Should be disclosed in notes to financial statements

Question 4

Purchase orders:
An airline places a non-cancellable order for a new aeroplane with one of the major commercial aircraft manufacturers at a fixed price, with delivery in 30 months and payment in full to be made on delivery.

2. One year later, the price of this aeroplane model has risen by 5%, but the airline had locked in a fixed, lower price. Under the conceptual framework, do you think the airline should recognise any asset (and gain) at the time when the price of the aeroplane rises? If the
   price fell by 5% instead of rising, do you think the airline should recognise any liability (and loss) under the conceptual framework?

Answer 4

2. under current accting standards, such gains/losses are not recognised
   treats commitments to purchase financial assets differently from commitments to purchase property. If airline agreed to purchase foreign currency at fixed price for delivery at future date, and exchange rate goes up or down, it is required to recognise a gain/loss

Question 5

Glenelg Accounting Services has just invoiced one of its clients $3600 for accounting
services provided to the client. Explain how Glenelg Accounting Services should recognise this event, justifying your answer by reference to relevant conceptual framework definitions and recognition criteria. Would your answer be different if the services had not yet been provided; that is, the payment is in advance?

Answer 5

ASSET
The conceptual framework defines an asset as a resource controlled by the entity as a result of
past events and from which future economic benefits are expected to flow to the entity. (all 3 characteristics present in this case)
Under the conceptual framework an asset must be recognised when it is probable that the future economic benefits will flow to the entity, and the asset has a cost or value that can be reliably measured. (YES)

INCOME
The conceptual framework defines income as increases in economic benefits during the period in the form of inflows or enhancements of assets or decreases in liabilities that result in increases in equity, other than those relating to owners’ contributions.
Under the conceptual framework income must be recognised when an increase in future economic benefits, related to an asset increase or liability decrease, has arisen that can be measured reliably.

Question 6

As maintenance costs on equipment have been steadily rising every year, Lila Ltd has been setting aside regularly a provision for plant maintenance at an increasing amount. The provision has been recorded as a liability, and maintenance cost as an expense. Discuss whether Lila Ltd’s treatment is correct.

Answer 6

liability requires present obligation. there is none of this in this case.
nor can there be expense as there has been no outflow or depletion of assets or incurrence of liability

Question 7

Identify two enhancing qualitative characteristics of financial information and explain how these two qualitative characteristics are related to the objectives of general purpose financial reports.

Answer 7

objective of GPFR to provide financial info about reporting entity that is useful to present and potential lenders, investors and creditors in making decisions about providing resources to entity.

Question 8

You are deciding whether to sell shares that you have held for more than a decade in a cattle farming business. The business’ only significant item of Property, Plant and Equipment (PPE) is the farmland that it purchased over 100 years ago in an area that is now surrounded by the financial centre of a rapidly developing emerging economy.
Using your knowledge of cost and revaluation model for PPE, explain which model will provide more relevant information for decision usefulness and why.

Answer 8

• revaluation model = periodic re-measurement of land at fair value will relfect its highest and best use and investor have more relevant info about resources of entity to assess performance and management
• cost model = investor may lack all info relevant to hold or sell decision/management

Question 9

Ria who is a sole trader, rents a small shop which sells chocolates and lollies. Ria paid $6,000 for shop fittings and inventory, which are her only assets, and she pays cash for everything else including the purchase of chocolates and lollies. Ria has a relatively small number of customers. She makes average sales of $50,000 per year and earns an average profit of $35,000 per year.
Required:
Determine if the business outlined above is a Reporting Entity, stating the criteria (factors) used and your reasons. Also provide a conclusion.

Answer 9

a) separation of Ownership from Management (the greater separation more likely reporting entity)
b) Economic and/or Political Significance/Importance (greater significance, more likely reporting entity)
c) financial characteristics (assets, liabilities, equity, income, expense)

conclusion - does not meet/satisfy three factors so not reasonable to expect existences of users who depend on GPFR for decision making. therefore not reporting entity.

Question 10

The law in your community requires store owners to shovel snow and ice from the pavement in front of their shops. You failed to do that, and a pedestrian slipped and fell, resulting in serious and costly injury. The pedestrian has sued you. Your lawyers say that while they will vigorously defend you in the lawsuit, you may expect to lose $25 000 to cover the injury party’s costs. A court decision, however, is not expected for at least a year.

What aspects of the Conceptual Framework might help you in deciding the appropriate accounting for this situation?

Answer 10

criteria for liability:

1. present obligation
2. past event
3. settlement must involve giving up resources in future

does not meet it so treated as contingent liability and disclosed as note as outflow of resources based on outcome of court’s decision

Question 11

Accounting is a highly regulated practice. Discuss two benefits and two disadvantages of accounting regulations.

Answer 11

Advantages:

1. uniformity
2. public confidence (investors need protection against misleading info)

Disadvantages:

1. regulation difficult to reverse
2. communication restricted
3. encourages lobbying

Question 12

Referring to the two fundamental qualitative characteristics of useful financial information (relevance and faithful representation) as defined in the Conceptual Framework, discuss whether the cost or the revaluation model for property, plant and equipment provides more useful information for the users of general purpose financial reports.

Answer 12

relevance - quality that makes a difference in decision of economic nature made by users; helps predict past, present or future events

faithful representation - complete, neutral and free from material error

revaluation model provides users more relevent info as carrying amounts of revalued PPE are closer to current values. Under cost model, user cannot find info about appreciated PPE.
Revaluation model superior to cost model - current market value closer to ‘real-world economic phenomenon’ than historic cost.

Question 13

Do you believe deferred tax assets are assets? Critically discuss this issue on the basis of the Conceptual Framework definition of an asset

Answer 13

asset - resource controlled by entity, past event from which future economic benefits expected to flow to entity.

tax consequences of positive nature lead to future economic benefits (tax saving)
also based on past events
but questionable whether controlled by entity.

Question 14

Do you believe deferred tax liabilities are liabilities? Critically discuss this issue on the basis of the Conceptual Framework definition criteria of a liability

Answer 14

liability - present obligation, past events, settlement result in outflow from entity of resources embodying economic benefits

future tax consequence does lead to future outflow and is based on past events.
questionable whether present obligation - argued they are constructive obligation.

Question 15

Discuss why the standard setter requires companies to test and account for impairment of assets. In your discussion, refer to the two fundamental qualitative characteristics of useful financial information (relevance and faithful representation) as defined in the Conceptual Framework.

Answer 15

If an asset was not tested and accounted for impairment, the asset could be overstated. The carrying amount of an asset reflects the future economic benefit of the asset. Users would wrongly predict the future economic benefits of an asset if it was overstated.
Therefore, without impairment, financial information would be less relevant. An overstated asset would also be an unfaithful representation of the economic reality.

Question 16

Walker Resort Pty Ltd is a proprietary company that operates holiday resorts in Central Coast. It has 49 shareholders and 28 employees. According to internal accounting records, Walker Resort Pty Ltd has total assets of $14 million and total liabilities of $2 million. Its revenue for the current year was $27 million. Neither ASIC nor shareholders have made a direction for the preparation of a financial report.
Is Walker Resort Pty Ltd required to prepare a financial report? Give reasons to support your answer.

Answer 16

Walker Resort Pty Ltd is required to prepare a financial report in accordance with s. 292 of the Corporations Act because it is a large proprietary company.

WalkerResort Pty Ltd fails to satisfy the definition of a small proprietary company because it does not meet the minimum of two of the three criteria specified in s. 45A(2) of the Corporations Act. The company has less than 50 employees, but its total revenue is more than $25 million and total assets are more than $12.5 million.

Question 17

Explain how intangible assets are initially measured, and whether the measurement differs depending on whether the assets are acquired in a business combination or internally generated by an entity.

Answer 17

Para 24 states that an intangible asset must be initially measured at cost - when internally generated cost is based upon capitalisation of development costs.
For other identifiable intangibles like brand names, publishing titles etc are not recorded if internally generated
When acquired in a business combination cost is measured as the fair value of the asset at acquisition date.

Question 18

Tourist Ltd has acquired a new building. Which of the following items should be included in the cost of the building? (3 marks)

(a) Stamp duty
(b) Real estate agent’s fees
(c) Architect’s fees for drawings for internal adjustments to the building to be made before use
(d) Interest on the bank loan to acquire the building, and an application fee to the bank to get the loan, which is secured on the building
(e) Cost of changing the name on the building
(f) Cost of changing the parking bays
(g) Cost of refurbishing the lobby to the building to attract customers and make it more user friendly

Answer 18

everything except f

Question 19

Once an entity has selected a depreciation method to use to depreciate an asset, it must use that same method for the entire useful life of the asset.
Explain the above statement.

Answer 19

The statement is false. AASB 116 Property, Plant and Equipment requires entities to review the depreciation method chosen at least at the end of each financial year. If there has been a change in the pattern of benefits such that the current method is inappropriate, the method should be changed to one that reflects the changed pattern of benefits.

Question 20

List two key players (organisations) in financial reporting regulation in Australia and discuss the roles of these two key bodies involved in accounting regulation in Australia. You are required to discuss only ONE role for each body in your answer.

Answer 20

Financial Reporting Council (FRC)

• advises government on standard setting;
• appoints members to AASB;
• monitors AASB and gives direction

Australian Accounting Standards Board (AASB)

• Transforms International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) into Australian standard
• develop conceptual framework

Question 21

Considering the objective of financial information and the enhancing qualitative characteristic ‘comparability’ from the Conceptual Framework, do you believe the different accounting treatment of brands if internally generated (AASB 138) or acquired in a business combination (AASB 3) is justified

Answer 21

A comparison between reporting entities proves difficult if one entity has a history of growing through acquisitions and the other through internal growth. The former entity would recognise acquired brands whereas the latter would not be able to show their internally generated brands as assets. The financial statement of the latter cannot reflect the real economic value clearly.

Question 22

Difference between cost and revaluation model

Answer 22

Cost model, the asset is carried at cost less accumulated depreciation and impairment.
Revaluation model asset is carried at revalued amount, being its fair value at date of revaluation less subsequent depreciation and impairment provided it can be measured fairly.

Question 23

Differences of cost and revaluation model

Answer 23

Cost model less complication
Revaluation provide more accurate figure
Cost only carried out once/ revaluation carried out regular interval
Cost less costly