Accounting management report on: Southern Breweries Ltd
Executive Summary
This report has been designed on the Southern Breweries Ltd and it has faced a considerable reduction in the profitability as the outcome of the recent economic downturn with the profit for the year ended 30 June 2010 being only $22, 50000. This report provides the brief explanation about the treatment of advertising expenditure taken out by the Company for the introduction of new product. It has been evaluated from the report is that treatment of the advertising expense is in compliance with the definition and recognition criteria of the assets. At last, it can be said that the policy change by the management of the Company because they have been encouraged by the earnings management.
Body
In general, Assets referred as the upcoming advantages monitored by the business entity as the result of previous transactions and events. Generally, assets definition identifies 3 mandatory characteristics. First, there must be future economic benefits; second, the business entity must have control above future economic benefits such as that it is able for enjoying the benefits and monitor the others access to benefits (Louis & Tucker, 1993). Lastly, the transaction or event should give rise to control of the business entity above future benefits must have occurred. It is clear from the case study that the advertising expense incurred by the Southern Breweries Company fulfils the definition of the asset. It has been evaluated that the expense should be recognized in the financial statements for the reporting period when it is probable that the consumption or loss of the upcoming benefits resulting in assets minimization and the increase in the liabilities which has prevailed and the consumption or loss of the upcoming benefits might be measured and calculated reliably.
Probability Criterion– For the expenditures to become eligible for the recognition, it must be probable that the consumption or loss of the future benefits has prevailed. The word probable means that the occurrence of the consumption or loss of the future benefits having happened is more in comparison to less.
Reliability Criterion- For the expenditures to become eligible for the recognition, it is mandatory that consumption or loss of the upcoming benefits might be computed reliably. In some cases, the consumption or loss of the future benefits shall be evident clearly and shall be competent of the measurement with the high range of reliability (Jones, 1991). In some cases, the consumption or loss of the upcoming benefits might be the aim of the prediction for e.g. the estimated loss of the upcoming benefits generating from the outstanding litigation in concern to the business entity. In that case, the expenditure could eligible for the recognition if consumption or loss of the upcoming benefits might be computed reliably (Mack, 2003). It can be stated that the advertisement expenses incurred by the Southern Breweries Ltd fulfils the criteria of the recognition and comes throughout the class of Reliability Criterion.
The financial statement of the Southern Breweries Ltd indicated that the sum of $23 million has been showed under the name of deferred expenditure on year ended 30 June 2010. This was the alteration to the previous policy of setting off advertising as the expense when it was occurred. The change in the policy has been done by the management of the Company because they have been encouraged by the earnings management (Cornett, Marcus & Tehranian, 2008). It is very clear that showing expenditure as deferred revenue expenditure, because the benefits from it last more than one year. Sometimes, revenue expense could be heavy and its benefits are likely to be available for more than 1 year. In few cases, deferred expense is called as prepaid expense because it is the expense which the company gives once but gets advantages in the future time. It can be said that the advertising cost was incurred mainly by the Southern Breweries Ltd for the introduction of the new product of the company that is predicted to sell nicely in future years. The motive, to change the policy was because the management wanted to have the benefits of earnings management. Earnings management referred as the attempt carried out by the management of the Company for persuading and manipulating the reported earnings by utilizing specific procedures of accounting like recognizing one time recurring items, increasing expense or revenue events and transactions and utilizing other techniques for persuading the shorter period revenues. Generally, sum used on the advertising treated as revenue charge but expenditure of the advertising carried out for the purpose of introducing new line of services and products that might be capitalized. Earnings Management considered as the strategy utilized by the management of the Company for deliberately manipulating the earnings of the Company so that the sum matches the pre-determined target (Akers, Giacomino & Bellovary, 2007). This type of practice is carried out for the purpose of the smoothing of the income. Hence, in comparison to having times of good or bad earnings, companies will try to maintain the sum constant by adding or eliminating cash from the provision and reserves account. At last, it could be stated that the earnings management is sufficient because the advertising expenditure carried out for the purpose of introduction of new line of goods and services would be capitalized.
On the other side, the materiality belief influences whether the items or summation of the items are required to be recognized, disclosed, measured in association with the specification of Accounting Standards of the Australia. In general, when items or summation of items are not material, then materiality application does not show that those item could not be disclosed, measured or recognized, but that business entity could not be needed to disclose, measure or recognize those item in relation with the specifications of the Accounting Standards of the Australia. The application of the materiality has 2 main features like as it influence the economic activities of the clients and carried out on basis of the financial statement and effect the release of the accountability by the management and governing body of the business entity (Li1, Zhang & Largay, 2011). It could be stated that the computation of the advertisement expenditure is material in relation with AASB 1031. In fact, the business of the Company must be able to provide the persuasive evidence of the upcoming revenue that the advertising expenditure will create. It has been observed that the new product of the Southern Breweries Ltd known as Lite Lager, that is estimated to be sell very well in coming years and this shall ultimately effect the economic activities of the clients and comes under the application of the materiality.
Conclusion
At last, it can be concluded that the computation of the advertising expense has been done in accordance with the definition and recognition criteria of assets. It is clear that the management of the Company alter the policies because they have been encouraged by the earnings management. Normally, earnings management increases transactions and events of revenue or expense for persuading the shorter period earnings. Finally, it is concluded that the computation of the expense has been done in accordance with AASB 103 which highlights the materiality application.
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