MA601Theory and Current Issues in Accounting- Political Costs

Task

Unit Learning Outcomes Addressed:

a) Explain, describe and demonstrate mastery of the financial accounting standard setting process of Australia.
b) Critically analyse and interpret current issues and developments in accounting theory and financial reporting.
 
c) Evaluate different accounting theories and their implications in policy choice by managers.
d) Synthesize the complex elements of the Conceptual Framework and apply them to accounting activities.
 
e) Apply their knowledge to identify strategies to meet accounting issues and problems in new situations.
 
f) Develop an ethical and social perspective on the use of accounting information.

Part: A

A year ago you bought shares in an investment company. The investment company in turn buys, holds and sells shares of business enterprises. You want to use the financial statements of the investment company to assess its performance over the past year.

Required

1. What financial information about the investment company’s holdings would be most relevant to you? 
2. The investment company earns profits from appreciation of its investment securities and from dividends received. How would the concepts of recognition in the Conceptual Framework apply here?

Part: B

1. What are political costs? How might political visibility influence accounting policy choice?
2. Mandy Ltd made the following disclosure in the notes to its financial statements about how it accounts for insurance premiums:

Required

i. List the four components of an accounting policy decision.
ii. Analyse Mandy Ltd.’s policy for accounting for the insurance premium in terms of each component.

Part: : C

1. As per the following statements eexplain the ‘right to use’ of an identified asset.
 
According to paragraph B9 of AASB 16/IFRS 16, the right to use an identified asset includes:
 
(a) the right to obtain substantially all of the economic benefits from use of the identified asset (as described in paragraphs B21–B23); and
(b) the right to direct the use of the identified asset (as described in paragraphs B24–B30).
 
2. For the following arrangements, discuss in details whether they are lease transactions, and thus fall under    the ambit of AASB 16/IFRS 16. 
 
i. Entity A enters into a contract with Entity B, whereby Entity B will provide 5 SUV vehicles for Entity A to use over the next 3 years. The vehicles have been selected by Entity A from a large pool of similar vehicles and are explicitly identified in the contract. Entity B is only allowed to substitute the vehicles if, and only for the period when, the vehicles are being repaired.
 
ii. Entity C enters into a contract with Entity D, whereby Entity D will provide 2 aeroplanes for Entity C to use over the next 5 years. The aeroplanes have been selected by Entity C from a large pool of similar aircraft, but remain in the airport hangar owned by Entity D when not in use and can be substituted at any time by Entity C.
 
iii. Entity E enters into a contract with Entity F, a shopping centre operator, whereby Entity E will be offered a space for a pop-up shop in one of the centres managed by Entity F. The contract specifies the size of the space to be provided, not the actual location.

Part: D

Wood Delights Ltd (WDL), which is a reporting entity, manufactures office furniture. The management of WDL is concerned about a downturn in the company’s business. Sales have been falling and the company is facing liquidity problems. Management is worried that these factors may mean that shareholders are unhappy with the company’s dividend policy and management bonuses tied to reported profits will not be paid this year. To try to alleviate these problems, WDL enters into an enforceable contract with Castor Ltd. The cost of the inventory to WDL was $ 1 200 000 but its fair value at the time of transaction (signing the contract) was  $ 1 280 000.
 
However, WDL and Castor Ltd have agreed to a selling price of $ 1 310 000 for this inventory, and Castor Ltd agrees to make full payment immediately upon signing the contract. It is also agreed that WDL will not physically transfer the inventory from its ware house to Castor Ltd, as Castor Ltd has no suitable storage facilities.

Required

1. Explain the five-step model adopted by AASB 15 for recognising revenue.
2. Applying AASB15, when should WDL recognise revenue from this contract? Explain.
3. What general journal entry should WDL recognise when cash is received, at the time of signing the contract?
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