ACC5215: Corporate Accounting -Australian Listed Company - Report Assessment Answer

November 15, 2018
Author : Ashley Simons

Solution Code: 1FED

Question:Corporate Accounting

This assignment is related to ” Corporate Accounting” and experts atMy Assignment Services AUsuccessfully delivered HD quality work within the given deadline.

Corporate Accounting Assignment

Assignment Task

  1. Board composition:

1) How many independent directors are there?

2) Is there a dual CEO and Chair?

3) What is the number of directors?

4) What is the number of board meetings?

5) Qualification of directors

6) Experience of directors

7) Are they on other boards and if so, what kind?

8) Gender of directors

9) Number of committees and characteristics of committees.

2. Number of

  • Australian subsidiaries
  • Foreign subsidiaries
  • Australian associates
  • Foreign associates

3. Borrowing costs and estimated interest for company with your working

4. Audit report opinion and time from signing of audit report and balance date

5. Number of employees

6. Method of reporting comprehensive income

7. Choose one issue in the Director’s Declaration and state whether you agree with their assessment of the company’s financial wellbeing. Give a reason for your answer from information in the report.

Lease 1A: In 2014, Toowoomba Ltd, which runs a successful chain of sushi restaurants, was experiencing significant cash flow problems. Their accounting consultant advised that all the shop premises owned by the company be sold and either leased back or the businesses moved to alternative leased shops. He then advised that all lease agreements for the shops should be ‘operating’ rather than ‘finance’ leases.

Required

1) Discuss why, at that time, the consultant gave that advice, preferring operating to finance

2) Describe THREE disadvantages to the company of entering into finance lease agreements under the standards operating in 2014.

1B: In 2016, the standards changed to the new accounting Standard for Leases IFSR 16, which will come into operation in 2019. However, companies can begin using these standards now. Toowoomba Ltd are expanding and want to lease some new shops for 10 years. Their Accountant suggests they begin the new leases under the new Standards, so they do not have to change reporting methods part-way through the leases.

Required

1) Explain the differences between the new accounting standard for leases, IFSR 16, and the current accounting standard from the point of view of lessees and lessor. What are the implications for the shareholders and banks and other users of the Annual Report of Toowoomba Ltd?

2) Examine the methods of reporting leases in the Annual Reports of the 3 companies listed under Q.1 above. Choose two companies and explain and compare the way that they are reporting on lease. Describe any changes the companies need to make to meet the new Standard.

3) Do you think this change in the Standards on Leases is an improvement? Justify your answer by referring to examples from the Annual Reports you have read.

Please note, you are required to do research to answer this question. Check PDF documents uploaded on Module 5 of the Study Desk and also FYI click URL to find useful links. Be sure to reference your sources of information correctly.

Consolidations

Emily is the accountant for Springfield Ltd. This entity has an 80% holding in the entity Lambs Ltd. A trainee working with Emily is concerned that the consolidated financial statements prepared under AASB 10 may be misleading and asks Emily why they are not allowed to prepare the consolidated financial statements showing the non-controlling interest in Springfield Ltd in a category other than equity in the statement of financial performance, and for the statement of changes in equity to show the profit numbers relating to the parent shareholders only.

Write an appropriate answer for Emily to give, covering the following issues:

1) How are prime users considered in the preparation of Consolidated Financial Statements?

2 The differences that would arise in the consolidated financial statements of Springfield Ltd if the non- controlling interests were classified as debt rather than equity (Debt vs Equity)

3) The reasons the standard setters have chosen the equity classification in AASB 10.

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Solution:

Answer 1

1. Board composition:

1) There are eight independent directors.

2) There is no dual seat but only a single seat of chairman. Mr. Bob Every is the chairman.

3) There are eleven directors in the board of directors.

4) There were 12 directors meeting during the year.

5) Directors have diversified qualifications. Chairman is BSc, PhD and other directors has B Com, BE, MBA, CPA, and LLB etc. degrees.

6) Directors have diversified experience from 15 years to 30 years(ASX 2016).

7) There are no other boards(ASX 2016).

8) There are 3 female and 8 male directors(ASX 2016).

9) There are four committees, Audit and Risk committee, Nomination committee, Remuneration committee and Gresham Mandate Review Committee(ASX 2016).

2. Number of:

1)There are 287 Australian subsidiaries(ASX 2016).

2)There are 29 foreign subsidiaries(ASX 2016).

3)There are 12 Australian associates(ASX 2016).

4)There is one foreign associates which belongs to USA(ASX 2016).

3.The interest expense is $ 266 million and the interest bearing liabilities are $ 4615 million(ASX 2016). Thus the borrowing cost is 266 X 100 / 4615 = 5.76%.

4.Auditors has provided a clean report and states that the financial report provides a true and fair view of business affairs of Wesfarmers Limited. The audit report has been signed on 17thSep 2015 and the date of financial statements are 30 June 2015(ASX 2016).

5.As per information provided in annual report, there are more than 205,000 employees(ASX 2016).

6.There is a separate “Statement of comprehensive income” to report comprehensive income(ASX 2016).

7.There directors’ declaration states that there are reasonable grounds that company will be able to pay its debts as and when they become due(ASX 2016). I agree with is assertion as the company is earning good profits as evident from income statement and cash flow from operating activities is also positive as evident from cash flow statement.

Answer 2:

1)By entering in to sale and lease back transaction Toowoomba Ltd. can improve its cash flow position. When company sales the assets, its gets a lump sum cash flow. Finance lease recognize the whole lease liability at once, which has to be shown in balance sheet as outstanding liability. While operating lease recognizes the lease payments as period to period rental agreement on a straight line basis, which is better representative of time pattern of company benefits received from leased assets. Under operating lease the substantial risk related to the leased assets remains with the lessor and this is good for the lessee(Leo et al. 2015). Thus operating lease may be a better option for Toowoomba Ltd. as it strengthen the cash position of the company and does not put unnecessary liability burden at the balance sheet. At the moment, the primary objective of Toowoomba is to improve its cash flow position and at the same time retaining its assets in the business. Both these objectives are achievable with the help of sale and lease back transaction and within lease option, it is preferable to go for operating lease due the reasons mentioned above.

2)

  • There may be a decline in the value of leased assets that this has to be reflected in the financial statements.
  • The obligation of financial lease payments has to be shown as liabilities in the balance sheet. This creates a burden on the balance sheet and also this is not aligned with the usage pattern of the leased assets by the lessee company.
  • All the risk related to the leased assets is transferred to the lessee, which is not good for lessee.

1B)

1)IASB has issued IFRS 16 Lease, which will replace existing IFRS 17 Lease. IFRS 16 is the new IFRS, while IFRS 17 is the existing IFRS. IFRS 16 is a paradigm shift from the existing lease accounting policies and requires that all the leases should be classified as finance lease only. Thus the concept of operating lease is eliminated, however concept of non-lease or services contracts has been introduced. Major impact of the IFRS 16 shall be elimination of off balance sheet financing. Some of the operating lease were non-cancellable and practically were finance lease but as these were classified as operating lease, lessee was benefited by not showing any liability(AASB 2016). However, now lessee has to show the liability as all lease are finance lease now. This will increase liability side of balance sheet of Toowoomba Ltd. However, accounting for lease for lessors does not change under IFRS 16 and remains as usual as it was in IFRS 17 regime. In case, Toowoomba also has some lease rental income, it does not worry about the change in the accounting policies in relation to that.

Besides that now users has to be very careful while classifying contracts either as lease contracts or non-lease contracts i.e. service contracts. IFRS 17 was biased towards the lessee for accounting purposes, but IFRS 16, is more transparent and is more aligned toward the other stakeholders such as banks, users of financial reports etc.

In order to apply the new accounting standard, companies needs to make suitable changes in their accounting system. This means that the companies need to incur additional cost for the implementation of the new accounting standards. The companies who find themselves as lessee are more likely to make changes in the accounting system as IFRS 16, impacts the accounting of lease in the books of lessee.

2)All the three companies researched are following the policy of classifying the lease as either operating or as finance lease. This accounting treatment of recording the accounting transactions related with finance lease are in line with the IFRS 17(IASB 2013). However, in order to adopt IFRS 17, companies needs to make changes in accounting system. Now these companies has to classify the contracts as either lease contracts or non-lease contracts. This may require making new accounting policies for the classification of the contracts.

3)Yes, change in the accounting standard is an improvement. New accounting standard is more transparent and thus it will be more useful for various stakeholders such as investors, lenders, banks etc. For example at Wesfarmers Ltd(ASX 2016). has more than $ 2000 million of expense as lease payments, which is a significant amount(IASB 2013). It is expected that in future also, the lease related transactions shall be on the higher side. Thus classifying these value transactions as finance lease will create additional liabilities in the balance sheet. Besides that implementation of the new accounting standard shall require the classification of the contracts either as either finance lease contracts or as service contracts.

Answer3:

1)Prime users of consolidated financial statements are parent company, Non-controlling interest equity holders, banks, users of financial reports, lenders. These users have various purposes to go through the financial statements. This purpose is fulfilled only when the consolidated financial statements are free from internal transaction. The main purpose of the consolidation is that the financial statements of the group eliminates the intragroup transactions and equity(IFRS 2016). As for an outsider, group is a single entity and any transactions within the group needs to be eliminated as one cannot make any profit by selling or purchasing from oneself. Thus, preparation of consolidated financial statements ensures that the group’s performance is correctly presented to the outside stakeholders. In this way the external users can take necessary information from the financial statements.

2)Non-controlling interest is normally classified as equity because NCI better fits in the definition of equity. However there is alternative school of thought and it is argued that NCI should be classified as debt. If NCI is classified as debt then this form of presentation shall provide more information to the parent shareholders(Leo et al. 2015). Thus in this form of presentation NCI should meet the definition of liability, which it does not meet. However, if we assume that the NCI is classified as debt then the calculation of NCI shall be based upon the obligation help by the subsidiary.

3)Equity classification is more suitable for the consolidation purposes. The main purpose of consolidation is to eliminate the effect internal transaction of the group and the non-controlling interest equity. The NCI may be classified as either equity or as debt(Leo et al. 2015). However the standard setters has chosen the equity method as this method is more suited to the definition of the equity. It may be noted that the as subsidiary portion of equity does not meets the definition of liability, it is not prudent to show it as liability. If NCI is classified as equity than, it is considered as part of consolidated equity. In its essence, the non-controlling equity is equity itself. This appears to be a better approach to go for equity classification for AASB 10. That’s why standard setter has used equity classification in AASB 10.

 

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