Financial Accounting and Reporting Retrospective Restatement

Question: Describe about the Financial Accounting and Reporting for Retrospective Restatement. Answer: As per request our accounting team will provide you the relevant information, which is necessary for the benefit of the company, based on the issues, which you have mentioned in your email. It is to assure you that the team will follow the rules and regulations of AASB and the other relevant act. The overall material misstatement that is identified by the directors could be evaluated in term of the AASB 108, paragraph 5. Moreover, this article mainly states that if the material misstatement is less than 5% then the company could ignore the adjustments. In addition, could adjust the misstatement in next financial statement. However, if the misstatement is more than 10% then the company has to conduct the adjustment and provide retrospective restatement of the prior financial report. In addition, if the misstatement that is being identified in McCarthys Cafes Ltd is higher than 10% then the following adjustments could be conducted in financial report of the company. Conversion of private limited-to-limited company: In this case the organization McCarthys Cafes Ltd, was earlier incorporated as private limited but later on the company decided to convert itself as limited company. The company can do so after making necessary changes to the management of the company. According to sec.162 of the act, the following companies are allowed for conversion: (1)Private company, which is limited by shares, can be converted into unlimited public/proprietary company or public company, which is limited by shares (Aasb.gov.au 2016). (2)Unlimited proprietary company can be converted into proprietary/public company which is limited by shares or unlimited public company. (3)Public company, which is limited by shares, can be converted into unlimited public/proprietary company or no liability company. The company McCarthys Caf was a proprietary company, which is limited by shares. Therefore, the company can convert itself into unlimited public company. For this, the company has to make necessary changes like by passing special resolution in the meeting and filing form 205 and 206 regarding conversion of the company to ASIC (Aasb.gov.au, 2016). After receiving the forms and other documents, the Corporations Act ASIC will issue its notification within a period of one month about the conversion. As per ASIC there is no maximum limit of members in case of public limited company. The company can easily raise its capital by issuing equity in the market and can improve its financial position for the year (Macve 2015). Issue 1: As defined Goodwill can be termed as an intangible asset because it is created when one company purchases another company at a premium. It gives the difference between the fair market value of an asset and the sale value of an asset. In accounting, tangible assets have a useful life of more than one year and they are depreciated at a certain rate over their useful lives whereas goodwill can be amortized more than a period of forty years and no depreciation is required on these assets. The company creates goodwill to highlight their reputation in the market because goodwill generally represents the premium paid by the company and about its technology and so on (Aasb.gov.au 2016). The following equation can be used to determine goodwill: Goodwill= (consideration transferred+ amount of non controlling interest+ fair value of previous equity interest- net asset recognized) In the given case, the company purchased a business from Karens Coffee Ltd worth $950,000. The value of net assets of Karens Ltd is $620,000. The company seeks an advice regarding the record of this transaction. The advice given by Margaret in this issue is correct the excess amount can be shown separately under the head Goodwill. In this case the ascertained value of goodwill= 950000-620000=$330000 However, according to the issue arose by Kate the transaction results in impairment. Impairment means deduction of the value of asset below its carrying amount. In the given case, goodwill impairment occurs when a company pays more than the book value of an asset. If a revalued asset is eventually valued below cost due to wreckage, than in this case the loss is to be adjusted before making any other adjustment against any balance, which is available in the revaluation surplus. If the amount of loss exceeds the revaluation surplus than the difference between the amounts is to be charged to income statement under the head impairment loss. In the given case, the calculated amount of goodwill is $330000. Since no further information regarding loss was provided in the given case it is to assume that, the full amount of goodwill can be used for impairment in case if the business suffers any loss in the near future. The overall AASB 138 paragraph 48 mainly helps in depicting the goodwill valuation, which might be stated in the financial report of the company. In addition, the company might effectively use the standard mentioned in AASB 116 to revaluate the acquired asset of the company. In addition, the extra payment is not valued under the goodwill section as stated in AASB 138 the internal goodwill is not valuated in the financial statement. Furthermore, the loss from assets revaluation could be effective depicted in equity section under revaluation surplus. The journal entry for the following transaction is: Particulars McCarthys caf Karens coffee ltd Revaluation Account Reason Personal asset Sale of personal asset Loss on sale of asset Amount (Dr) $950000 Amount (Cr) $620000 $330000 Again, for goodwill the journal entry is Particulars Revaluation surplus Goodwill Reason Upward adjustment of asset Amount (Dr) $330000 Amount (Cr) $330000 Issue 2: Revaluation of an asset is the technique, which is used to describe the actual value of capital goods. The person adopts different method to calculate the revalued value of an asset. The different methods are: Indexation method, CMP (Current Market Price) method, Appraisal method, and so on. The company can revalue its asset based on the following reasons: (1) To discover the rate of return on capital employed. It is necessary for the firm to ascertain the rate of return on capital employed so that they can have an idea about the profitability of the company. (2) To absorb the adequate fund which occurs while replacing fixed asset at the end of their useful lives? (3) To ascertain the fair market value of assets. It gives us the idea of the actual value of assets like the building, which a person bought as an investment. The market value can be calculated easily by revaluing it. (4) To negotiate the fair value of the asset before merger or acquisition (5) To discover internal and external reconstruction of the asset (6) Becomes easy to sale an individual asset or group of asset (7) To reduce the leverage ratio. With the help of revaluation, a company can ascertain the amount of capital, which comes into the company in the form of loan to meet the financial needs of the firm (Aasb.gov.au, 2016). The revaluation of the assets according to the AASB 116 paragraph 15 is mainly calculated under the cost. Moreover, the revaluation is mainly conducted based on the revaluation model or cost model as depicted in the AASB 116 paragraph 29. Thus, the accountant of McCarthys Cafes Ltd could effectively depict the correct asset valuation in the balance sheet in the equity section under revaluation surplus. In the given case the directors of the company are of the opinion that the value of land which was purchased by the company long ago should be increased to cover up the loss of the financial statement. The company has purchased two blocks of land in the year 1960. The actual value of land was very high as stated in the balance sheet. In the given case, it was not mentioned whether the land was used for business purpose or for domestic purpose, we would assume that the whole land was used for business purpose only. Therefore, the rate of depreciation will be the full amount. Now in this case the company budgeted profit was $ 1,250,000 and the revalued amount of land was $ 250 000. Therefore, the journal entry for the following transaction will be: Particulars Land Revaluation Reason Profit on sale Downward adjustment of asset Amount (Dr) 250,000 Amount (Cr) 250,000 Issue 3: As per AASB, sec. 14 of the act defines Depreciation as the method of account, which is used to allocate the cost or amount of tangible assets over its useful life. There are different ways to calculate depreciation like straight-line method, diminishing balance method, and sum of the years digit method. It is necessary to ascertain depreciation for the tangible assets to get the current or market value of an asset during the assessment year (Aasb.gov.au 2016). In this mentioned case, the company discovered that the plant and machinery was wrongly depreciated. It is necessary to revise the actual amount of depreciation. The advantages of providing depreciation are as follows: It helps in ascertainment of actual value of an asset: as the market value of an asset keeps on fluctuating, it is necessary to present the absolute amount of an asset in the financial statement. For example if a person, purchase a machine for $10,000 during the year. He cannot write this amount in his balance sheet because he has to deduct the usage value of the machine from the actual value. Suppose he charge depreciation @10% and he used the machine for six months. Therefore, the calculated amount for him will be $9,500. In this way, it keeps on reducing the amount of asset and at the end of the lifetime of asset; we can easily ascertain the profit or loss on sale of asset. It helps in saving tax: as the amount of depreciation decreases the value of asset so it helps the person to save the amount of tax to the government (Pratt 2013) After analyzing the given case, the ascertained percentage of depreciation for plant and machinery is 18% (20-2). Since the amount of plant is not given in the problem, it is necessary to assume some value for calculation purpose. For example, suppose the company has a plant, which cost them $100. In this case, the calculated value of depreciation will be $ 2 as per companys policy but actually, the value of depreciation will be $20, which makes a huge difference of $18 (20-2). The company has to pay the excess amount of tax on the plant; moreover, it is difficult to calculate the profit or loss on sale of the asset. Again, in case of buildings the company made the same mistake i.e. instead of 5% the company calculated the amount @ 0.5% so here also the company needs to make necessary changes. The company maintains it financial account for the year ending 31 December. During May they discover that the amount was wrongly, charge so the company has two options either it can calculate the full amount for the year and delete the previous amount or else the company can change the amount until May and then calculate the full amount. Therefore, it is advisable for the company to revise the amount of depreciation on the relevant assets. In addition, with the help of AASB 116 paragraph 73-79 the overall change in deprecation value of the company could be effectively depicted. In addition, these paragraph mainly help in stating that revaluation model could be used by the company to detect the change in depreciation. Furthermore, the incremental valuation is mainly needed for identifying the accurate deprecation. Thus, this accurate depreciation is mainly deducted from the accumulated surplus, which is mentioned in equity section of the balance sheet. In addition, the change in depreciation valuation could be effectively shown in the report and depict the correct financial statement of the company. In case of computers, the lifespan of computer is three years but by mistake, the company calculated it as five years. Therefore, in this case the company has to revise the value to earn the benefit of tax from the government. Therefore, from the above discussion it can be said that the company McCarthys Caf can take the above-mentioned advice for the issues raised by the members of the company. References: Aasb.gov.au. (2016).Australian Accounting Standards Board (AASB) - Home. [online] Available at: https://www.aasb.gov.au [Accessed 7 Sep. 2016]. Barth, M.E., 2013. Measurement in financial reporting: The need for concepts.Accounting Horizons,28(2), pp.331-352. Barth, M.E., 2015. Financial Accounting Research, Practice, and Financial Accountability.Abacus,51(4), pp.499-510. Deegan, C. and Ward, A.M., 2013. 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