Economics management on: Southern Breweries Ltd

Executive Summary

This report has been made on Southern Breweries Ltd and it has experienced a significant reduction in profitability, partly as a result of the current economic downturn, with the profit for the year ended 30 June 2010 being only $2,250,000. This report gives the brief overview about the treatment of the advertising expenditure taken out by the company for the initiation of the new product. It is very clear from the report is treatment of the advertising expenditure is in compliance with the definition and recognition criteria of Assets. It has been viewed that policy change done by the management because they have been motivated by the earnings management. Finally, it is concluded that the computation of the expense has been done in accordance with AASB 103 which highlights the materiality application.

Body

Assets considered as future advantages controlled by business entity as the outcome of past events and transactions. In general, definition of the asset searches 3 essential features. First, there should be future economic advantages, second, the entity should have monitor over future economic advantages like that it is capable for enjoying the advantages and control the others access to the advantages. Lastly, the event or transaction must give rise to control of the entity over future benefits should have occurred. It is very clear that the advertising expenditure incurred by the Southern Breweries Company meet the definition of asset. It has been analysed that expense must be recognized in the financial statement for the period of reporting when it is possible that the loss or consumption of future advantages resulting in minimization of assets and the enhancement in the liabilities that has occurred and the loss or consumption of the future advantages may be calculated reliably.Probability Criterion– For the expenses to eligible for the recognition, it should be possible that the loss or consumption of future advantages has occurred. The term possible means that the possibility of the loss or consumption of future advantages having happened is more possible as compared to less.

Reliability Criterion- For the expenses to eligible for the recognition, it is essential that loss or consumption of future advantages may be calculated reliably. In few cases, the loss or consumption of future advantages shall be apparently evident and shall be competent of the measurement with the great range of the reliability (Louis & Tucker, 1993). In few cases, the loss or consumption of the future advantages shall be the purpose of the estimate for e.g. the anticipated loss of the future advantages producing from the outstanding litigation in respect to entity. In that case, the expense could qualify for the recognition if loss or consumption of future advantages may be calculated reliably. It can be said that the advertisement expenditure incurred by the Southern Breweries Ltd meet the recognition criteria and comes under the category of Reliability Criterion.

The statement of financial position of the Southern Breweries Ltd revealed that the amount of $ 23 million has been treated in this manner in year ended 30 June 2010 and shows this figure under the name of the deferred expenditure. This was the change to the previous policy of writing off advertising as expense when it was incurred. The policy change done by the management because they have been encouraged and motivated by the earnings management. It has been viewed showing expenditure as deferred revenue expenditure, because the advantages from it remain more than one year (Mishra, 2011). Sometimes revenue expenditure might be heavy and its advantages are probably to be accessible for more than 1 year. Sometimes, deferred expenditure is known as prepaid expense because it is the expense that the company pays once but obtains benefits and advantages in the coming time (Akers Giacomino, & Bellovary, 2007). It has been examined that advertising costs were incurred majorly by the Southern Breweries for advertising the new product of the company which is estimated to sell very nicely in upcoming years. It is very clear that management of the company has changed the policy because they have been motivated by the earnings management. Earnings management considered as the attempts taken out by the management for influencing and manipulating the reported earnings by implementing particular methods of accounting, understanding one time recurring items, accelerating revenue or expense transactions and implementing other procedures for influencing the short period earnings (Jerry & Mark, 2010).  Ordinarily amount used on the advertising considered as revenue charge but expense of the advertising taken for the objective of initiating the new line of products & services might be capitalized. Earnings management referred as the strategy implemented by the company management for deliberately manipulating the earnings of the Company so that amount matches the pre-determined target (Mack, 2003). This kind of practice is taken out for the objective of the income smoothing (Magrath & Weld, 2004). Therefore as compared to having times of bad or good earnings, organizations shall try to maintain the amount stable by removing or adding cash from the accounts of reserve. At last, it can be said that the earnings management is appropriate because the advertising expenditure taken for the objective of initiating the new line of services and products could be capitalized.

AASB 1031 MaterialityOn the other side the belief of the materiality persuades whether the items or sum of the items are needed to be measured, disclosed or recognized in relation with the specifications of the Accounting Standard of the Australia. The materiality application has two major features such as it persuade the economic actions of the users and taken on foundation of financial statements and impact the release of the accountability by governing body or management of the entity. 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. Generally, materiality relies on the nature and size of the misstatement or omission evaluated in the situations. It can be said that the treatment of the advertisement expenditure is material in accordance with AASB 1031. The business of the Company should be capable to offer the persuasive proof of future income that advertising cost shall generate. It could be stated that the computation of the advertisement expenditure done by the Company is material in relation with AASB 1031 because the business of the Company will 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 sold very well in coming years and this shall ultimately affect the economic activities of the clients and comes under the application of the materiality. In simple words, showing advertisement expenditure as deferred expenditure comes under the materiality concept because the Company is going to receive benefit for more than one year and persuade the economic action of the users. It can be said that treatment of the advertising expenditure done by the Company is material and fulfills the requirement of AASB 1031.

Conclusion

At last it can be said that the treatment of the advertising expenditure is in accordance with the definition and recognition criteria of assets. It has been examined that the policy changes done by the management because they all have been motivated by the earnings management. Earnings management accelerates expense or revenue transaction for influencing short 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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