ACC510: Financial Reporting - Finance Accounting Assignment

Internal Code: MAS5002

Financial Reporting

Assignment Criteria: The assignment will be marked according to the rubric and allocation list which encompasse aspects such as:

• Logical application of concepts to situations, with adequate justification/support for choice made;
• Professional presentation (word template provided), correct spelling, grammar and the use of the American Psychological Association (APA 6 th Edn.) referencing method.

Question 1: Anne Lockwood FCA, audit partner with accounting firm Crowe Horwath, says one of the main problems with fair value is that too much judgement is involved in its use. ‘Lots of judgement goes into determining fair value. The volatile global economy causes fair value to continually move. So it’s very confusing to report against,’ says Lockwood. The way fair value requires unrealised gains and losses to be treated does not necessarily reflect what an asset means to a business. ‘Financial institutions use fair value to value financial instruments as part of everyday business. But when it comes to valuing property, plant and equipment, you get swings and roundabouts and changing valuations. On top of this there are inconsistencies in the way individual businesses use fair value to account for plant and equipment, which is a problem,’ she adds. Lockwood explains that AASB 13 directs financial account preparers to use the market price of an asset, taking into account the highest and best use of an asset to determine fair value. But this poses problems for not-for- profit groups. ‘If you take the example of an aged care home, if you knocked it down to build a block of flats, which might be the highest and best use, you are going to get an inflated figure because no-one’s going to knock it down because it’s being used for altruistic purposes. So you might carry a value of $10 million for the asset in the accounts, but this value isn’t realistic to the entity or the users of the financial statements because there is no intention by the organisation to realise the value of the asset determined under a highest and best use scenario.’ The problem is this inflation of asset valuations, especially for not-for- profits, makes valuations more complex and requires accountants to use too much judgement when applying fair value. Required: Discuss the highest and best use principle and the relevance of the information provided by its application. Question 2: Last Ltd has two divisions, Time and Leisure. Each of these is regarded as a separate CGU. At 31 December 2016, the carrying amounts of the assets of the two divisions were: The receivables were regarded as collectable, and the inventories’ fair value less costs of disposal was equal to its carrying amount. The patent had a fair value less costs of disposal of $220. The plant at Time was depreciated at $300 p.a., and that at Leisure was depreciated at $250 p.a. Required: Determine how Last Ltd should account for the results of the impairment tests at both 31 December 2016 and 31 December 2017. Question 3: On 29 April 2014, Lockheed Martin posted an announcement on its website in relation to achieving a significant milestone in research and development for unmanned technologies. The announcement inclued the following: Three systems acquired by Lockheed Martin [NYSE: LMT] have progressed from their research and development phase to operational readiness. The Indago vertical take-off and landing (VTOL) quad-rotor, accompanied by its handheld ground control station (GCS) will offer a robust, mobile surveillance application. Additionally, a new Commercial Avionics Suite delivers the same performance and reliability that customers have enjoyed with the previous products but at a new low price. ‘After two years of developing these capabilities, we will now be able to deliver affordable and effective products to both military and commercial customers,’ said Kevin Westfall, director of unmanned solutions at Lockheed Martin’s Mission Systems and Training business. ‘The Indago VTOL, handheld GCS and advanced Commercial Avionics Suite will provide mobility and high accuracy for a range of missions – now and in the future.’ Required: In accounting for internally generated intangible assets it is necessary to distinguish between the research phase and the development phase of a project. Discuss the difference between these two phases, and the accounting for outlays incurred in the two phases. Question 4: Some years ago, Wattle Ltd established a defined benefit superannuation plan for its employees. The company has since introduced a defined contribution plan, which all new staff join when commencing employment with Wattle Ltd. Although the defined benefit plan is now closed to new recruits, the fund continues to provide for employees who have been with the company for a long time. Required: 1. Determine the surplus or deficit of Wattle Ltd’s defined benefit plan at 31 December 2016. 2. Determine the net defined benefit asset or liability that should be recognised by Wattle Ltd at 31 December 2016. 3. Calculate the net interest and the return on plan assets for the year ended 31 December 2016. 4. Present a reconciliation of the opening balance to the closing balance of the net defined benefit liability (asset), showing separate reconciliations for plan assets and the present value of the defined benefit obligation. 5. Prepare a summary journal entry to account for the defined benefit superannuation plan in the books of Wattle Ltd for the year ended 31 December 2016.