Professional Documents
Culture Documents
13. Distinguish between the following organisations and their roles in the
regulation of financial reporting in Australia:
the Financial Reporting Council (FRC)
the Australian Accounting Standards Board (AASB)
the International Accounting Standards Board (IASB)
the IFRS Interpretations Committee
the Australian Securities and Investments Commission (ASIC)
the Australian Securities Exchange (ASX)
the Financial Reporting Panel (FRP)
the Asian-Oceanic Standard Setters Group (AOSSG).
Financial Reporting Council (FRC)
The main role of the FRC is to act as an overseer and advisory body to the standard
setter, the AASB. The main functions of the FRC under the ASIC Act 2001, s. 225,
are to:
oversee the process for setting accounting standards and give the Minister
reports and advice on that process
appoint AASB and AUASB members (other than the chair)
approve and monitor the AASBs and AUASBs priorities, business plan,
budget and staffing arrangements
determine the AASBs and AUASBs broad strategic direction
1
14.
5. How should a company account for the legal costs of formation? Should the
accounting treatment be the same as that for underwriting and other share
issue costs?
Legal costs of formation were traditionally treated as an asset and then systematically
amortised over an arbitrary period. However there are no future economic benefits to
be gained from these costs and they should be written off to expense, as per AASB
138 Intangible Assets. Underwriting and other share issue costs are discussed in
AASB 132 Financial Instruments: Presentation, paras. 35 and 37, and the appropriate
treatment is to regard these costs as a reduction of the share capital being raised. The
rationale for the different treatment is that share issue costs and the raising of capital
is viewed as a single transaction and as such, the increase in equity is the net amount
the company receives from the issue of shares (after considering any tax effect on the
share issue costs).
8
PRACTICE QUESTIONS
Question 2.1
CHILLI LTD
General Journal
2014
Mar 31 Cash Trust
Dr
Application
Cr
(Money received on application 560 000 x $2)
1 120 000
1 120 000
Application
Cash Trust
(Refund to unsuccessful applicants
for 10 000 shares)
Dr
Cr
20 000
Application
Share Capital
(Issue of 500 000 shares fully
paid to applicants for 550 000 shares)
Dr
Cr
1 000 000
Application
Cash Trust
(Refunds of excess application
money to successful applicants)
Dr
Cr
100 000
Cash
Cash Trust
(Transfer on allotment of shares)
Dr
Cr
1 000 000
Dr
Cr
12 000
20 000
1 000 000
100 000
1 000 000
12 000
10
CHILLI LTD
GENERAL LEDGER
Cash Trust
31/03/14
Application
Application
20 000
Application
100 000
Cash
1 120 000
1 000 000
1 120 000
Application
31/03/14
Cash Trust
Share Capital
Cash Trust
20 000 31/03/14
Cash Trust
1 120 000
1 000 000
100 000
1 120 000
1 120 000
Share Capital
31/03/14
Application
1 000 000
Share Issue
Costs
12 000
Balance c/d
988 000
Cash
12 000
Cash
31/03/14
Cash Trust
1 000 000
Balance b/d
1 000 000
988 000
11
Question 2.2
PARSLEY LTD
General Journal
2014
March 31
June 30
Sept 30
Oct 31
Call - Ordinary
Call - Preference
Share Capital - Ordinary
Share Capital - Preference
(Call of $2 on ordinary shares
and $1 on preference shares)
Dr
Dr
Cr
Cr
400 000
50 000
Cash
Dr
Call - Ordinary
Cr
Call - Preference
Cr
(Receipt of $2 call on
200 000 ordinary shares and $1 call
on 49 000 preference shares)
449 000
400 000
50 000
400 000
49 000
Dr
Cr
Cr
2 000
Cash
Forfeited Shares Liability
Share Capital - Preference
(Reissue of 1 000 preference
shares for $1.80, paid to $2)
Dr
Dr
Cr
1 800
200
Dr
Cr
500
Dr
Cr
300
1 000
1 000
2 000
500
300
12
10. How are income and expenses classified in the preparation of a statement of
comprehensive income? Can income and expenses appear directly in the
Retained Earnings account, without appearing in the current periods
profit? Explain.
As discussed in question 9, expenses are classified according to their nature or their
function. For income items, AASB 118 classifies revenue into different categories by
source. See question 8 above.
Paragraph 88 of AASB 101 states that all income and expense items must be included
in the current periods profit and loss, unless an Australian standard requires or
permits otherwise. The most common occurrence of this would be when an initial
adjustment is made due to a new or revised standard requiring an alternative
application, usually an adjustment to retained earnings.
Note therefore that, apart from specified exceptions, income and expenses are to be
included in the profit or loss for the reporting period, and not as part of other
comprehensive income.
13
14
See section 3.6.2 of the text. AASB 108 paragraph 14 states that changes in
accounting policies can be made only in the following circumstances:
Thus, unless a change is prescribed or will result in improved financial reporting, the
same accounting policies should be adopted each year.
Where a new accounting policy is adopted other than as a result of the issue of a new
standard, AASB 108 paragraph 19(b) prescribes that the change arising on adoption is
to be applied retrospectively. Retrospective application is described in paragraph 22
thus:
the entity shall adjust the opening balance of each affected
component of equity for the earliest prior period and the other
comparative amounts disclosed for each prior period presented as if
the new accounting policy had always been applied.
Thus, the company will need to consider the impact of the change of accounting
policy not only on current and future financial periods but also on past financial
periods. Asset or liability accounts may need to be amended. For example, assets
raised under a previous policy of capitalisation must be written off as if the costs
included in those assets had been expensed when incurred.
14. Discuss the nature of a reserve. What reasons may there be for no definitions
being given for a reserve in the legislation, accounting standards and the
Conceptual Framework 2010?
The term reserve is not defined in any accounting standard or the Corporations Act.
AASB 101 describes the equity of a company as consisting of issued capital and reserves
(para.54(r)). In addition to retained earnings, the most common type of reserves are
general, revaluation and foreign currency translation reserves, all of which can be
considered as direct adjustments to equity. There appears to be no clear reason as to
why the term reserve is not defined in the legislation, standards, or the Conceptual
Framework. Retained earnings is one category of reserves, according to AASB 101.
15
PRACTICE QUESTIONS
RACTICE QUEST
IONS
QUESTION 3.13
SNAPDRAGON LTD
A.
Statement of Profit or Loss and Other Comprehensive Income
for the year ended 30 June 2013
Income:
Sales
$624 000
Less sales returns
1 080
$622 920
Debenture interest revenue*
720
Total revenues
623 640
Expenses:
Selling expenses
Cost of sales
265 320
Advertising
18 000
Sales salaries
72 000
Total selling expenses
355 320
Administrative expenses
Administrative salaries
75 000
Office expenses
15 900
Vehicle running expenses
2 000
Depreciation of furniture & fittings*
3 900
Depreciation of motor vehicles*
14 000
Total administrative expenses
110 800
Financial expenses
Interest expense on debentures*
1 260
Rent expense
19 600
Bad debts*
4 290
Total financial expenses
25 150
Total expenses
491 270
Net profit before income tax
132 370
Income tax expense
72 000
Profit for the year
60 370
Other comprehensive income
0
Total comprehensive income for the year
$60 370
16
Dr
Cr
360
360
90
90
(b) Interim dividend paid has already been debited to retained earnings as there is no
separate account in the trial balance; hence, the beginning balance of retained earnings
= $18 600 + $16 000 = $34 600
(c)
(d)
(e)
(f)
(g)
Dr
Dr
Cr
Cr
14 000
3 900
Dr
Cr
1 950
Dr
Cr
8 000
Dr
Cr
72 000
Dr
Cr
Cr
15 000
14 000
3 900
1 950
8 000
72 000
10 000
5 000
17
Dividend interim
16 000 1/07/12
Opening balance
34 600
60 370
30/6/13
Dividend payable
final
Transfer to plant
replacement reserve
Transfer to deb.
redemption reserve
30/06/13 Balance c/d
10 000
5 000
55 970
94 970
94 970
1/7/13
Balance b/d
55 970
18
$203 200
$71 000
3 600
9 000
70 000
(34 000)
26 000
(15 900)
Current liabilities
Trade creditors
Debenture interest payable
Current tax liability
Dividend payable
Total current liabilities
Non-current liabilities
7% debentures
Loan payable to bank
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
80 000 ordinary shares issued at $2
Less, Share issue costs
Other reserves:
Plant replacement reserve
Debenture redemption reserve
Retained earnings
Total equity
67 400
360
5 400
276 360
36 000
10 100
30 000
85 100
361 460
22 000
90
72 000
8 000
102 090
18 000
14 000
32 000
134 090
$227 370
160 000
3 600
10 000
5 000
156 400
15 000
55 970
$227 370
19