ECONOMICS PERFORMANCE OF AASB DEVELOPMENTS

QUESTION

SOLUTION

1. News Letter

 

The Business Edge- News Letter

Developments and Changes in the Business Environment

Date: 31st march 2012

Australian Economic Performance

Trickle Down Effect

·       The Australian Economic growth is expected to further increase with recovery from the global financial crisis. The strong growth in the Chinese economy is likely to have a trickledown effect on the Australian Economy. As China is the major beneficiary of the Australian mineral exports.

Growth Projections

·       The Australian economy grew at the rate of 2.6% in 2010.The IMF further projects the Australian economic growth at 3.5 % in 2012.

·       The RBA expects the domestic economy to experience major structural change owing to the high terms of trade and exchange rate volatility.

·       Although with improvements in the global financial conditions the RBA is likely to ease the monitory policy in Australia. Thus on 6th March 2012 the lending rate and the cash rate were maintained at an average with no major changes. The cash rate remained unchanged at 6.25%.

(Further information available at RBA – www.rba.gov.au and www.budget.nt.gov.au)

ASIC News Developments

 

New Portal Launch

 

·       The ASIC has introduced a new online portal. The portal enables to search the registers with the ASIC thus enabling ease of operations to all stakeholders.

 

New Challenges 2012

·       In light of the current global economic conditions the chairman of ASIC Greg Medcraft addressing a meeting spelled out the challenges faced by the organization over the next decade. It was also decided to undertake measures to overcome the risks and challenges posed to the organization as soon as possible.

Improvement in Current Schemes

 

·       The ASIC has released a report on ‘Shadow Shopping” examining the financial advice given to people over the past years. The main aim of the report is to help new investors to choose an appropriate retirement plan to maximise returns and minimise misleading. The aim of the report was to provide financial education to investors.

·       The ASIC has also launched a new disclosure scheme for the unlisted property schemes. The scheme would ensure the availability of certain benchmark information to retail investors. The regulation ensures more transparency in the real estate market protecting investor interests.

·       To address the concerns of the overseas regulators a report on the growth of exchange traded funds was released. The ETF’s have experienced considerable growth in 2011 therefore to analyse the market and stakeholder interests an analytical viewpoint has been released.

(More information available at – www.asic.gov.au)

 

AASB Latest Developments

 

The Australian Accounting Standards Board (AASB) issued an invite to remark on the transition to AASB 9 from 2010 onwards. The amendments to IFRS7 and IFRS 9 were introduced in 2011. The AASB has an invite to critique the changes incorporated in the accounting standards in 2011.

The disclosure report is expected to submit by 2012.

(More information available at- www.aasb.gov.au)

 

References

·       “RBA: Minutes of Monetary Policy Meeting of the Board-6 March 2012.” Reserve Bank of Australia – Home Page. N.p., n.d. Web. 1 Apr. 2012. <http://www.rba.gov.au/monetary-policy/rba-board-minutes/2012/06032012.html>.

·       “external economic Environment.” budget.nt.gov.au. N.p., n.d. Web. 1 Apr. 2012. <http://www.budget.nt.gov.au/papers/econ

·       “Australian Securities and Investments Commission.” Australian Securities and Investments Commission. N.p., n.d. Web. 1 Apr. 2012. <http://asic.gov.au>.

·       “News.” Home. N.p., n.d. Web. 1 Apr. 2012. <http://www.aasb.gov.au/News.aspx?newsID=64999>.

2. Panorama Limited.

 

Working Notes

1. 200,000 shares allotted fully therefore amount is 200,000×2 = 1200000

2. 800,000 remaining shares were distributed among 100,000 applications. Thus the ratio 1:8 was applied to the distribution of the shares.

3. 30000 shares were forfeited with a called up amount of 6 therefore 30000 x 6 = 1800000

4. The shares were issued at a discount of 40 cents therefore 30000 x .4 = 12000 is the amount of discount for the re issue of shares.

3. Panorama Limited Specific Case

 

Panorama is a pharmaceutical firm that distributes a wide range of general pharmaceutical products. The pharmaceutical company has massive operations, in the recent years the company’s profitability has been declining subject to large scale expenditures being incurred on research and development.

The following analysis has been done to address the specific concerns of the company before arriving on specific decisions regarding the company.

 

Gross profit                          

$17,600,000

Profit before tax               

1,700,000

Income tax expense                 

500,000

Profit for the period             

1,200,000

 

Total assets: Current Assets 7,300,000 and   Non-current Assets are 11,500,000

3.1 Costs to test a new tamper-proof dispenser pack

 

It is advisable to incur the costs of $ 760,000 to test the new tamper proof dispenser packs. The firm intends to introduce these dispenser packs in 2012 therefore it is important to ensure quality control before the product is realised in the market. Moreover the product is likely to contribute to overall 20% in revenues which is substantially high to be ignored. A good quality product would ensure to conversion into higher revenues. As the business achieves higher revenues in the future it is likely to recover the cost with its expanded scale of operations.

3.2 Experimental costs

 

The Experimental costs $590,000 to test to phase out a current product is fairly high. Ideally the company should not undertake this expense Firstly because it is an extremely high amount to spend on a product which the company intends to phase out .Rather slow phasing out of the product is advisable. Secondly, the expense cannot be justified as a research and development expenditure but would result in becoming a high cost experiment affecting the profitability of the company. Therefore the organization should avoid incurring the expense.

3.3 Quality Control – Law enforcement

 

Quality control is essential for an enterprise to maintain credibility in the market. Research has proven that good quality often translates into high revenues for the enterprise. Moreover quality control measures are often enforced by law to regulate the market and ensure fair trade practices in business. Therefore the expenditure of $750,000 cannot be avoided by the firm as it has been enforced by law. Also it is essential for the firm to ensure quality control to maintain efficient and standardization of products. This expense would not be classified as a research and development expense but can be identified as another cost while accounting in the profit and loss account as it is a mandatory expense.

3.4 Costs to Improve Production Efficiency

 

The firm intends to incur costs of $50000 to redesign plant and equipment to increase efficiency. Considering the expense will improve efficiency and productivity of the business the company can undertake the expenditure in the current fiscal. Moreover the expense is a fairly small amount and will not affect the profitability of the firm. On the other hand improvement in the production process resulting in efficiency will eventually increase the profitability of the firm. It is a one-time expenditure if incurred would benefit the firm for a long period of time. It is an ideal research and development expense as it will contribute to improving the current supply chain and would lead to value edition.

 

3.5 Construction and Testing a Machine

 

The Expense of $200,000 to test should be undertaken, as the expense would enable the business to new technology for production. The current contribution of the needles is merely 1 % of the total revenues however with the acquiring on the machine the contribution is likely to increase. The machine would ensure efficiency and productivity in the current production process. Moreover the expense can be identified as a future investment as the procurement of the machine would enable the firm to penetrate a wider segment of the market and increase its credibility and acceptability in the market.

3.6 Conclusion

 

It is important for the firm to prioritise its expenses and identify those expenses which would eventually lead to long run productivity of the firm. Prioritization would enable the firm to identify its long term goals and strategies and adopting these would result in increasing both current as well as future profitability. Taking the above financial advice the firm would be able to reduce its high expenditure on research and development and undertake the expense most necessary to value addition in the firm. Reduction in unjustified expense would contribute efficient conversion to sales as well increase in the profit margins of the business beneficial to both the business as well as stakeholders.

JD41

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