Accounting Management assignment essay writing help on: AASB financial reporting – New Zealand

The motive behind the ASRB is to provide financial reporting of high quality in New Zealand. The ASRB has undertaken a range of activities in order to monitor changes in financial reporting in New Zealand. According to the review of the NZICA, the ASRB is a statutory independent body that allows the standard of financial reporting in pursuance with the act of Financial Reporting Act of 1993.The main purpose of the ASRB is to ensure good quality of financial reporting in New Zealand. The ASRB board has undertaken a number of steps for monitor the financial reporting. These steps are as follows first, adequate submissions to standard setting bodies, second, analyzing qualified reports of audit for any standard accounting issue, third, focusing the reports, which are issued by the Securities Commission. Nowadays, financial reporting of events started to give more preference from a historical cost to a fair value basis. The fair value based method not only affects the valuation of the non financial assets but also the valuation of the financial instruments. For e.g. Investment properties and Intangible Assets (accounting standard review board, 2010)

The relevant financial reporting standards that relate to the reporting of assets in general and to intangible assets

ENIAS 38: Intangible Assets

From January 1, 2007 NZIAS 38, this standard is same as IAS 38.This standard was issued by the FSRB in 2004 in accordance with the IASB’s yearly Improvements project.

The accounting standard NZIAS 38 defines the treatment for intangible assets. This standard allows an asset to be intangible if it is satisfied the following criterion. An asset must be separable, that means it should be capable of being divided from the entity, licensed, rented either combined or individually with a contract like asset or liability.

An intangible asset shall be recognized if, an entity can demonstrate the following criteria.

The feasibility of completion of intangible assets, so that it can be used for sale

The ability to sell or use the intangible asset

To see how the intangible asset will produce relevant economic benefits or not

The presence of adequate financial and technical resources to complete the development and its ability to measure the expense that is attached with the intangible asset

 ENIAS 16: Property, Plant and Equipment

From January1, 2007, NZIAS 16, this standard is same as IAS 16.This standard was issued by the FSRB in 2004 in accordance with the IASB’s Yearly Improvement projects

(a) Identifies the requirement for measurement before recognition, measurement after recognition, and under the recognition of land &building.

(b) Identifies the requirement for amortization and depreciation of land & building.

(c) Identifies disclosure with respect to plant, land & building.

Issues faced by the Company

Andrew Matheson was the managing director of a manufacturing group of companies, Consolidated Plastics Ltd. He asked for some detailed advice on accounting for some items in the financial statements.

The land was recorded at its historical cost. The Managing Director of the company thinks that the Balance Sheet would look more impressive if the land was recorded at an updated value but he was concerned at what effect this would have on the net profit.

Historical cost is an accounting principle where all financial statements based on the original cost. Most of the researchers have analyzed that it is not the right method to calculate the fair value of the asset. This shows that the company has bought a land, and it was recorded on historical cost in the balance sheet. It means, it is not recorded on the basis of fair market value, which means company could sell the land in the open market. Nowadays most of the companies follow updated value method which helps them in increasing the profitability.

Over a period of time, it has been observed that historical cost has subject to various criticisms, as it finds out the purchase expense of the asset, not recognize the market value of the asset. It is clearly stated that historical cost helps in the allocation of the cost, but not in market value of an asset. The historical cost method tells the purchaser, the cost of the land and the depreciation of the land in the coming years but it does not calculate the market value of the asset which can be higher or lower in the future. If the company follows updated value method, then it would have a positive effect on net profit and which leads to increase in company’s profitability (Thompson, 2007).

The updated value method will help the company, to know the current value of the asset based upon the market condition. There are various advantages which can prove that updated value is superior to historical cost. Market value method is more appropriate to the company, because it shows the today market price of the asset and liability. This method provides clear idea to the users. According to the researchers it is observed that if financial statements are estimated on the basis of updated value then it provides a clear picture to the depositors and rational investors of the company about the market discipline.

According to the IASC discussion paper in 1997, recording assets and liabilities in the balance sheet at the updated value, gives an idea to the company about the exposure of the risk, and the profitability of the company.

It is seen that if the company has an idea about the updated value of the assets and liabilities, and information about the risks attached to the assets and the liabilities, then it helps them to evaluate the expectations of the market.

According to the opinion of the Shim ET all 1998, he said that the updated value of the assets and liabilities gives economic reality and provide more accurate information that is not in the case of the historical cost. He said that the environment of the business is changing rapidly, and become volatile, so according to his opinion, financial statements should be recorded on updated value method this method will help the company to get to know, its financial viability. At last he said that the goal of the financial reporting is to provide relevant data and information to the company, and existing historical method needs to be changed according to the market value financial reporting.

According to the Chairman of the Board thought that goodwill was an intangible item, with no substance, and should therefore be written off immediately. A fellow director maintained that this thinking was outdated and that a business would be worthless without goodwill. The Sales Director maintained that the goodwill from the acquisition should be kept on the balance sheet indefinitely and, in addition, Consolidated Plastics should bring in all the goodwill they had built up during ten years of successful trading. In addition, Consolidated Plastics is a strong brand name and this should be recognized in the financial statements.

Goodwill should be taken into consideration, because without recording of goodwill business would be worthless. The company should record the acquisition goodwill on the balance sheet, because it helps the company in estimating future benefits from non identifiable assets (Henis, Lewis & Shaw, 2000).

It is observed that when goodwill is bought in a business acquisition, the trade deal enables the company to calculate goodwill value reliably. There are a number of methods for calculating acquisition of goodwill. These methods will help the company to classify the goodwill as an asset or expenditure. The first method where, purchased goodwill shows future benefits bought in a trade deal which should be recognized as an asset. The second accounting method, where purchased goodwill is treated as an expense at the time of purchase, and it does not work because it fails to recognize the future profit resulting from the non identifiable assets acquired. Purchased goodwill comprises of future benefits, from non identifiable assets, because of their nature (Henis, Lewis & Shaw, 2000).And non identifiable assets help the company, in maintaining market incursion, and relationship with the labor. According to the AASB,3 goodwill is defined as future benefits arise from assets that will not capable of  separately identified and recognized. It is observed that goodwill and other acquired intangible assets have indefinite useful lives, it should not be amortized but it should be evaluated for annually repairment.

There are a number of benefits according to the IFRS goodwill treatment of accounting. First, the motive lying behind for removing the old amortization method, because it was based on a straight line basis and did not contain any information value for using those financial reports. In comparison, to the amortization method, goodwill impairment test will help the company in calculating decline value of the goodwill. The second advantage is that goodwill impairment test; provide the accurate and relevant information about the intangible assets to users of the company.

Conclusion

The managing director of the consolidated plastics company ltd was in a dilemma about the two issues, first issue to record the acquisition goodwill on the balance sheet or not, and second the company has purchased the land and recorded it on the basis of historical cost. But managing director was thinking to record the land on the updated value but he was concerned what effect this would have on net profit. If the company follows updated value method, this would help the company in increasing the net profit. Because when company records assets and liabilities on the basis of updated method this would give an idea to the entity about the risk attached with the assets and liabilities and the profitability of the company. The updated value of the assets and liabilities gives economic reality and provide more relevant information to the company that is not in the case of the historical cost. The environment of the business is changing rapidly, and become volatile, so according to this, financial statements should be recorded on the basis of updated value method this will help the company to get to know, its financial position. If the company follows updated value method this would have a positive effect on the net profit of the company. And if there is positive effect on net profit, company would have financial stability and viability.

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