Sie sind auf Seite 1von 15

AYN417Topic 3: Company Operations and Financial Statements External

Reporting
Suggested Solutions
[To gain the maximum learning benefit from this learning activity, it is highly
recommended that you have attempted all of the questions, participate in
the tutorial(s) prior to reviewing the solution]
Tutorial questions
Cheaprt3:Q1,478 5P.*,31
Hxynseim-codurta

1.

Discuthedfinoa lrsicfet.Whnoudabrcgis?Hwhletmaurd

The Conceptual Framework (4.4/49.a) 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.
Three essential characteristics can be derived from the definition of assets in the
Conceptual Framework.
(i)
A resource controlled by the entity,
(ii)
future economic benefits,
(iii)
past events.
Refer section 3.1.1 of the chapter and these are discussed further below:
1. Future economic benefit
Possession of a right, or of a physical object, does not constitute an asset in the
absence of future economic benefits (business entitiesgeneration of cash flow, nonbusinessproviding goods or services which satisfy the organisation's objectives). A
machine that produces unwanted output and has no resale value is not an asset.
2. Control
Ownership or title to a physical item is not necessary for that item to qualify as an
asset (for example, a leased asset). The issue is whether the entity can secure the
benefits and deny access to others.
3. Past transaction or event
A past transaction or event ensures that we count as assets only present capacity to
obtain future benefits. Therefore, we exclude items that may provide future benefits
because we have budgeted their acquisition but which are not presently controlled
because acquisition has not yet occurred.
Also note that incurring a cost is not a requirement for an asset. To be recognised
(included in the financial statements) an item must meet the definition and
recognition criteria. The Conceptual Framework states that an asset should only be
recognised when it is probable that any future economic benefit associated with the
item will eventuate and that the asset possesses a cost or other value that can be
reliably measured. It is expected that the notion of a reliable measure will be
replaced by a faithfully representative and verifiable measure in the conceptual
framework.

AYN417Topic 3: Company Operations and Financial Statements External


Reporting
Section 3.3.1 notes various measurement bases for assets. It is important to
understand that the criteria requires a cost or other value, so you do not need to be
able to measure the value of the actual benefits to be received. Initially many assets
are measured at cost, however subsequent to this different rules may apply depending
on the nature of the asset. For example, inventory must be measured at lower of cost
or net realisable value; certain non-current assets may remain measured at cost
(subject to depreciation) or measured at fair value. Accounting standards may specify
the measurement required for particular assets. If a choice of measurement is allowed
this would be an accounting policy choice and hence the measurement chosen should
be one that provides relevant and reliable (representationally faithful) information
(refer section 3.6).
Section 3.1.2 discusses a proposed asset definition as outlined in the discussion paper,
A Review of the Conceptual Framework for Financial Reporting. A new definition has
been developed because of perceived shortcomings of the existing definition. The
definition proposed is:
a present economic resource controlled by the entity as a result of past events.
3.

Whatresnlci ofbty?Whesdulia rcognt eds,awhcniquolbetmsrh?

The Conceptual Framework defines a liability as:


A present obligation of the entity arising from past events, the settlement of
which is expected to result in an outflow from the entity of resources embodying
economic benefits.
Three essential characteristics can be derived from the definition of liabilities in the
Conceptual Framework
(a) present obligation to make an outflow of resources,
(b) future outflows of economic benefits,
(c) past transactions or other past events.
See section 3.1.3 of the chapter.
Discussed further as below: Essential characteristics of liability are:
1. Future outflows of economic benefits
Liabilities can be settled by transfer of assets of any type (cash not the only asset) or
by provision of services and the fact that the amount of the liability is not certain (for
example, warranty obligations, long service leave) does not preclude recognition as a
liability. This actually falls under the reliability of measurement rule.
2. Present obligation to make an outflow of resources
Essential notion is that the entity is presently obligated and cannot avoid settling the
obligationthere is no reasonable alternative other than to settle. The obligation may
be enforceable from legal sources such as contract or legislation administrative
regulation, or it may be constructive.
Also note: This must involve an external party as cannot be obligated to one-self.
Hence setting aside reserves (for example, for major overhauls, renewals of plant,
etc.) does not constitute a liability. Further, decisions to acquire assets in the future do
not give rise to liabilities unless there is an irrevocable agreement.
3. Past event

AYN417Topic 3: Company Operations and Financial Statements External


Reporting
This is required to ensure that only present obligations to make future outflows of
economic resources are included as liabilities.
The Conceptual Framework specifies two criteria which must be satisfied before an
item that meets the definition (such as a liability) can be recognised
(a) it is probable that any future economic benefit associated with the item will
flow to or from the entity; and
(b) the item has a cost or value that can be measured with reliability.
Probable in this context means that the future outflow of economic benefits is more
likely than less likely, i.e. a greater than 50% probability.
It is expected that the notion of a reliable measure will be replaced by a faithfully
representative and verifiable measure in the conceptual framework.
Most liabilities are measured at nominal value, however for particular liabilities like
long service leave entitlements for employees and certain lease liabilities, the
discounted present value method is used. Other possible measurement suggestions
are value to the entity and discharge price. Note measurement may involve the
use of estimates. See section 3.3.2 of the chapter for further discussion of
measurement methods.
See also section 3.1.4 of the chapter which discusses possible changes to the
definition of a liability.
4.Whatresnlic ofquty?
EquityfisdenhCocpalFrmwksetdnuihaofyterdnucgilsb.Eqahotnd-lecpbursia,mtyncegodblisfrm at.

7.

nDisguthbewcrado-nst.Cpey,ladquminbrotsce?If,whn

The distinction between a current and a non-current asset can be found in AASB 101.
Here a current asset is defined as an asset that (a) is expected to be realised in, or is
intended to be sold or consumed in the entitys normal operating cycle (usually twelve
months); or (b) is held primarily for trading purposes, or (c) is expected to be realised
within twelve months after the reporting period; or (d) the asset is cash or a cash
equivalent which is not restricted in its use beyond twelve months. If an asset doesnt
satisfy this definition, then it will be classified as a non-current asset. See section 3.3.1
of the chapter.
An example of an item of property, plant and equipment being reported as a current
asset may be where a particular machine or group of such assets is no longer being
used by the entity in its factory and is being held for sale, which is expected to take
place in the next twelve months. For such non-current assets to be reclassified as
current, it must satisfy the requirements of AASB 5, Non-current Assets Held for Sale
and Discontinued Operations, which states:
Assets classified as non-current in accordance with AASB 101 Presentation of
Financial Statements shall not be reclassified as current assets until they meet
the criteria to be classified as held for sale in accordance with this Standard.
Assets of a class that an entity would normally regard as non-current that are
acquired exclusively with a view to resale shall not be classified as current

AYN417Topic 3: Company Operations and Financial Statements External


Reporting
unless they meet the criteria to be classified as held for sale in accordance with
this Standard.
8.

nDisguthbewcrado-nlits.Cby,whcafiednitofurlby,pentad/orxls-cuenbtiy?Epa.

The distinction between a current and a non-current liability can be found in AASB 101.
Here a current liability is defined as a liability that is (a) expected to be settled in the
entitys normal operating cycle or (b) is held primarily for trading purposes, or (c) it is
due to be settled within twelve months after the reporting period, or (d) the entity
does not have an unconditional right to defer the settlement of the liability for at least
twelve months after the reporting period. If a liability doesnt satisfy this definition,
then it will be classified as a non-current liability. See section 3.3.2 of the chapter.
A long-term interest bearing liability that is due to be settled within twelve months
would satisfy the definition of a current liability. However AASB 101 states that such
liabilities must continue to be reported as a non-current liability where the entity has
discretion to refinance or roll over its obligations for at least twelve months after the
reporting date.
In many cases an entity may report both non-current and current liabilities for an item.
For example, a loan for $100,000 for 5 years with $20,000 of the principal to be paid
annually, would, at inception, be presented as a $20,000 current liability and $80,000
as a non-current liability.
11. How are income and expenses classified in the preparation of a
statement of profit or loss and other comprehensive income? Can income
and expenses appear directly in the Retained earnings account, without
appearing in the current periods profit? Explain.

As discussed in question 10, expenses are classified according to their nature or their
function. For income items, AASB 118 classifies revenue into different categories.
AASB 101 states that all income and expense items must be included in the current
periods profit and loss, unless an Australian standard requires or permits otherwise.
The most common occurrence of this would be when an initial adjustment is made due
to a new or revised standard requiring an alternative application, or a change in
accounting policy or adjustment for a prior period error, usually requiring an
adjustment to Retained earnings opening balance. Chapter 14 discusses accounting
for changes in accounting policies and prior period errors.
Note therefore that, apart from specified exceptions, income and expenses are to be
included in the profit or loss for the reporting period, and not as part of other
comprehensive income or adjusted from Retained earnings directly.
13.

What factors determine the selection of accounting policies?

The overriding factor in the selection of an accounting policy is to determine whether


the policy provides users with information useful for making economic decisions,
hence the qualitative characteristic of relevance. In selecting accounting policies,
AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors establishes
a hierarchy for entities to follow in preparing general-purpose financial statements.

AYN417Topic 3: Company Operations and Financial Statements External


Reporting
First, AASB 108 states that, when an Australian accounting standard specifically
applies to a transaction, other event or condition, the accounting policy or policies
applied to that item shall be determined by applying the Standard.
Second, in the absence of an Australian accounting standard that specifically applies
to a transaction, other event or condition, AASB 108 requires management to use its
judgement in developing and applying an accounting policy that results in information
that is:
(a) relevant to the economic decision-making needs of users; and
(b) reliable, in that the financial statements:
(i) represent faithfully the financial position, financial performance and cash
flows of the entity;
(ii) reflect the economic substance of transactions, other events and
conditions, and not merely the legal form;
(iii) are neutral, that is, free from bias;
(iv) are prudent; and
(v) are complete in all material respects.
(For further discussion of relevance, faithful
completeness, see section 3.6.1 of the text.)

representation,

neutrality

and

Third, in making the judgement described above, AASB 108 requires management to
refer to the following sources in descending order:
(a) the requirements in Australian Accounting Standards dealing with similar and
related issues; and
(b) the definitions, recognition criteria and measurement concepts for assets,
liabilities, income and expenses in the Framework.
Fourth, in making the judgement described above, AASB 108 suggests that
management may also consider the most recent pronouncements of other standard
setting bodies that use a similar conceptual framework to develop accounting
standards, other accounting literature and accepted industry practices, to the extent
that these do not conflict with the sources mentioned.
Finally, AASB 108 requires that the accounting policies selected are applied
consistently for similar transactions, other events and conditions, unless an Australian
accounting standard specifically requires or permits categorisation of items for which
different policies may be appropriate. If an accounting standard permits such
categorisation, then the accounting policy selected shall be applied consistently to
each category.
14.

Underwhatcuims ogpylbechand?Hswtiouefr

See section 3.6.2 of the text. AASB 108 states that changes in accounting policies can
be made only in the following circumstances:

the change is required by an accounting standard


the change results in the financial statements providing reliable and more

relevant information about the effect of transactions , other events and


conditions on the entitys financial position, financial performance or cash flows.

AYN417Topic 3: Company Operations and Financial Statements External


Reporting
Thus, unless a change is prescribed or will result in improved financial reporting, the
same accounting policies should be adopted each year.
Where a new accounting policy is adopted other than as a result of the issue of a new
standard, AASB 108 prescribes that the change arising on adoption is to be applied
retrospectively. Retrospective application is described as:
the entity shall adjust the opening balance of each affected component of
equity for the earliest prior period and the other comparative amounts
disclosed for each prior period presented as if the new accounting policy
had always been applied.
Thus, the company will need to consider the impact of the change of accounting policy
not only on current and future financial periods but also on past financial periods.
Asset or liability accounts may need to be amended. For example, assets raised under
a previous policy of capitalisation must be written off as if the costs included in those
assets had been expensed when incurred.
15.

Discuthenarofv.

The term reserve is not defined in any accounting standard or the Corporations Act.
Guidance on the nature of a reserve can be found by looking at what companies
include as reserves in their annual reports and what accounting standards refer to as
reserves.
In addition to Retained earnings, the most common type of reserves are general,
revaluation and foreign currency translation reserves. Retained earnings is one
category of reserves, according to AASB 101. Retained earnings represent the
balances of the profit and losses (before items of other comprehensive income) which
the company has made since incorporation, which have not been paid as dividends or
bonus share issues to shareholders, transferred to reserves, or used to buy back
shares.
Some other reserves arise as the result of accounting standards requiring amounts of
other comprehensive income to be accumulated in equity (eg. revaluation surplus)
and others arise from transfers from Retained earnings (often known as General
reserves) due to generally accepted accounting principles.
Reserves do not represent cash balances. Reserves are book entries and no cash is
physically transferred or created by these entries. For example, the creation of a
General reserve is a transfer from profit, and profit does not necessarily represent
cash.
What reasons may there be for no definitions being given for a reserve in
the legislation, accounting standards, and the conceptual framework?
Possibly there is no definition given for a reserve in the legislation, accounting
standards and conceptual framework because it is not possible to categorise reserves
according to a homogeneous definition. Reserves may be created in a number of
different ways. It therefore would appear to be a very difficult task to establish a
general definition to include all reserves. Any definition may be too restrictive.
Question 3.1
Account

Dividends and reserve transfers


DR

CR

AYN417Topic 3: Company Operations and Financial Statements External


Reporting
Retained earnings/Interim dividend paid
200,000
Cash
200,000
(Payment of interim dividend) (if use Interim dividend
paid, must close to Retained earnings at EOP)
Retained earnings/Dividend declared
420,000
Dividend payable
420,000
(Declaration of Final dividend) (if use Dividend declared, must close to Retained
earnings at EOP)
Revaluation surplus
General reserve
(Transfer from revaluation surplus to General reserve)

65,000
65,000

Retained earnings
General reserve
(Transfer to General reserve)

120,000

General reserve
Share capital
(Being bonus dividend out of General reserve)

300,000

120,000

300,000

AYN417Topic 3: Company Operations and Financial Statements External


Reporting
Question 3.4
Dividends
A.
Date
2015
5 Aug

2016
11 Jan

Account

DR

CR

Retained earnings/Final dividend paid


306,000
Cash
306,000
(Recognition and payment of Final dividend) (if use Final dividend paid,
must close to Retained earnings at EOP)
General reserve
Cash
(Recognition
and
dividend)

224,000
224,000
payment

of

interim

28 June

There is no entry as the dividend has not been declared (only


determined).

12 Sept

Retained earnings/Final dividend paid


320,000
Cash
320,000
(Recognition and payment of Final dividend) (if use Final dividend paid,
must close to Retained earnings at EOP)

B.
The total amount of dividends recognised for the year ending 30 June 2016 is
$530,000 being:
Final dividend from 2015 of $306,000, and
Interim dividend of $224,000.
C.
There would be no changes as the dividend has not been declared, and so is not
recognised at the date it is determined. Further the 1 July 2016 is not within the
current reporting period.
Question 3.8*
Adjustments and preparation of financial statements
A.
Date
Account
DR
CR
2017
30 Jun
Depreciation - Plant & Machinery
30,000
Accum. depn - plant & mach
30,000
(Depreciation at 20% per annum)
Depreciation - buildings
Accum. depn - blgs
(Depreciation at 5% per annum)

4,000

Income tax expense


Current Tax liability
(Tax of 30% on profit of $16,000 as calculated
below)

4,800

4,000

4,800

Retained earnings/Dividend declared


9,600
Dividend payable
(Final dividend of 8c per share on 120,000 shares declared)
General reserve

10,000

9,600

AYN417Topic 3: Company Operations and Financial Statements External


Reporting
Retained earnings
10,000
(Being transfer from this reserve)
B.

ASTER LTD
Statement of Profit or Loss and Other Comprehensive Income
for the year ended 30 June 2017
$
$
$
Income
Sales
882,680
Dividend revenue
10,000
Interest revenue
1,320
Total revenues
894,000
Expenses
Selling expenses
Cost of sales
694,000
Other selling expenses
82,000
Total selling expenses
776,000
Administrative expenses
Administrative expenses
51,000
Depreciation of plant & machinery
30,000
Depreciation of buildings
4,000
Total administrative expenses
85,000
Financial expenses
Financial expenses
17,000
Total financial expenses
17,000
Total expenses
878,000
Profit before income tax
16,000
Income tax expense (30%)
4,800
Profit for the year
11,200
Other comprehensive income
0
Total comprehensive income for the year
11,200
C.
ASTER LTD
Statement of Changes in Equity
for the year ended 30 June 2017
Total comprehensive income for the year

$
11,200

Retained earnings:
Balance at 1 July 2016
Profit for the period
Dividend declared
Transfer from General reserve
Balance at 30 June 2017

13,000
11,200
(9,600)
10,000
24,600

Share capital:
Balance at 1 July 2016
Balance at 30 June 2017

240,000
240,000

Other reserves:
General
Balance at 1 July 2016
Transfer to Retained earnings
Balance at 30 June 2017

16,000
(10,000)
6,000

AYN417Topic 3: Company Operations and Financial Statements External


Reporting

AYN417Topic 3: Company Operations and Financial Statements External


Reporting
D.
ASTER LTD
Statement of Financial Position
as at 30 June 2017
$
Current assets
Accounts receivable
Allowance for doubtful debts
Inventories
Total current assets
Non-current assets
Government bonds
Shares in other companies
Freehold land
Buildings
Accumulated depreciation
Plant and machinery
Accumulated depreciation
Goodwill
Total non-current assets
Total assets
Current liabilities
Accounts payable
Current tax liability
Dividend payable
Total current liabilities
Non-current liabilities
Bank loan payable
Mortgage payable
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
120,000 ordinary shares issued and paid
to $2
General reserve
Retained earnings
Total equity

54,000
8,000

46,000
46,000
92,000
22,000
75,000
40,000

80,000
(34,000)
150,000
(100,000)

46,000
50,000
30,000
263,000
355,000
30,000
4,800
9,600
44 400
24,000
16,000
40,000
84,400
270,600

240,000
6,000
24,600
270,600

AYN417Topic 3: Company Operations and Financial Statements External


Reporting
Question 3.15
Financial statements
Please note: For Additional information (d) the textbook should read that
the bonus share issue was made in October 2016, not October 2017.
A.
BUDAPEST LTD
Statement of Profit or Loss and Other Comprehensive Income
For year ended 30 June 2017
$
Income
Sales
Less sales returns
Interest revenue
Consulting revenue
Total revenues
Expenses
Selling expenses
Cost of sales
Advertising expenses
Other selling expenses
Salaries and wages
Total selling expenses
Administrative expenses
Financial expenses
Doubtful debts
Interest expense
Total financial expenses
Total expenses
Profit before income tax
Income tax expense
Profit for the year
Other comprehensive income
Total comprehensive income for
the year

3,080,000
79,000

3,001,000
6,000
20,000
3,027,00
0

1,294,500
57,050
152,500
255,000
1,759,050
340,600
9,000
16,400
25,400
2,125,05
0
901,950
84,500
817,450
0
817,450

AYN417Topic 3: Company Operations and Financial Statements External


Reporting
B.
BUDAPEST LTD
Statement of Changes in Equity
for the year ended 30 June 2017
Total comprehensive income for the year
Retained earnings
Balance at 1 July 2016
Profit for the period
Transfer from revaluation surplus
Interim dividend paid
Final dividend declared
Balance at 30 June 2017 (150,050 + 817,450)
Share capital:
Balance at 1 July 2016
Bonus share issue
Balance at 30 June 2017
Other reserves:
Revaluation surplus
Balance at 1 July 2016
Transfer to Retained earnings
Balance at 30 June 2017
General reserve
Balance at 1 July 2017
Bonus share issue
Balance at 30 June 2017

$
817,450
435,050
817,450
75,000
(165,000)
(195,000)
967,500
200,000
40,000
240,000

121,000
(75,000)
46,000
85,000
(40,000)
45,000

AYN417Topic 3: Company Operations and Financial Statements External


Reporting
C.
BUDAPEST LTD
Statement of Financial Position
as at 30 June 2017
$
Current assets
Cash
Inventory
Accounts receivable
Less allowance doubtful debts
Total current assets
Non-current assets
Buildings
Accumulated depreciation
Equipment
Accumulated depreciation
Total non-current assets

$
52,100
300,000

241,500
(7,500)

234,000
586,100

915,000
(55,000)
425,000
(48 100)

860,000
376,900
1,236,90
0
1,823,00
0

Total assets
Current liabilities
Accounts payable
Dividend payable
Bank loan
Current tax liability
Total current liabilities
Non-current Liabilities
Bank loan
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Revaluation surplus
General reserve
Retained earnings
Total equity

65,000
195,000
60,000
84,500
404,500
120,000
120,000
524,500
1,298,50
0
240,000
46,000
45,000
967,500
1,298,50
0

Hynix semi-conductor case


1. Do accounting treatments have a legitimate role in keeping corporations
afloat?
In justifying a view, one needs to consider that what keeps corporations
afloat is managements' ability to steer the corporation through economic
cycles.
It is irrelevant whether the corporation is important. Management is
entrusted with the responsibility of ensuring that it truthfully reports the
companys performance and financial position to stakeholders, including
suppliers of capital.

AYN417Topic 3: Company Operations and Financial Statements External


Reporting
Improper accounting treatment of transactions will mislead suppliers of
capital and induces misallocation of resources.
2. Do you believe that the US$1.7m fine is sufficiently strong disincentive?
The fine of US$1.7 million represents 1 per cent of the total fraud of US$1.7
billion. This does not appear to provide a strong disincentive for corporations
to engage in accounting irregularities.
It should, however, be noted that Hynix had corrected the accounts prior to
the discovery of accounting irregularities.
The capital market reaction is unknown from the case study information. It is
highly probable that capital markets would have punished Hynix via
potential increases in the cost of capital, risk downgrade and loss of market
value via a lower share price.
3. Discuss the role of the Board in ensuring the assets are not overstated.
Directors are under a legal obligation to ensure that published financial
statements present a true and fair view of its financial position and financial
performance.