Financial Accounting And Reporting - Good Ltd -Assessment Answer

Financial Accounting And Reporting Assignment

Case Scenario

On 1 January 2016, Good Ltd acquired a block of land for $100,000 cash, and on the same day Better Ltd purchased the adjacent block, which was virtually identical to the block purchased by Good Ltd, also for $100,000 cash. Both companies intended to construct industrial warehouses on these properties. For the next 2 years, the property market went through a boom period and by coincidence, on 30 June 2018, both companies obtained independent valuations of $180,000 for their blocks of land.

Good Ltd has decided to adopt the revaluation model for land in the accounts on the last day of the year ended 30 June 2018 by following the requirements of IAS 16/AASB. Better Ltd decided to use the cost model.

On the 30 April 2019, each company sold its block of land for $200,000 cash.

Assignment Task

What profit would Good Ltd have made for the year ended 30 June 2019 if the revaluation of land occurred on 29 April 2019, instead of on 30 June 2018? Compare this with the profit made by Better Ltd in the same year, and explain whether you regard the differences as satisfactory reporting. ?

Introduction

AASB 116 contains the provisions regarding initial measurement and subsequent measurement of an asset. This standard states that an asset is initially recognized at the cost of purchase whereas it can be recognized following the principles of cost model or revaluation model whichever is adopted by the company as per its accounting policy. The method adopted should however, be consistent and it should be followed in the subsequent years. The method can only be changed in subsequent years if there is reasonable justification for the same for the better presentation of financial statements else the method that is adopted remains consistent.

Since the revaluation occurred on 30 June 2018, the increase in the value of the asset would be credited to equity under the revaluation surplus and would be included in the other comprehensive income for the same financial year. Next year on the disposal of the asset at $200000 the revaluation surplus balance of $80000 would be credited to retained earnings and the income statement would be credited by $20000.

However, if the revaluation would have occurred on 29 April 2019 and the asset was sold on 30 April 2019, then revaluation surplus have been credited by $80000 on 20 April 2019 and other comprehensive income would also be credited by $80000. However, on the sale of the asset at $200000, the net income (Sale Proceeds – Carrying Value) (200000-180000) of $20000 would be credited to the income statement of the company and the revaluation reserve related o the surplus would be transferred to the retained earnings of the equity.

For Better Ltd the carrying amount of the land would be $100000 as the company is following the cost model. Therefore, no revaluation reserve would be present for the asset in this case at the time of sale. The entire income of $100000 (200000-100000) would be credited in the Profit and Loss or Income Account of the company in the given case.

In the above case, we can observe that both the companies have reported a profit of $100000 on the asset. Since, Good Ltd. followed the revaluation model $80000 of its profit is included in Other Comprehensive Income and $20000 of its profit is getting reflected in Income Statement. However, for Better Ltd the entire amount of profit is getting reflected in its income statement as it has adopted the cost model for the purpose of revaluation.

Both the companies have earned the same amount of profit on the disposal of the asset. However, the income is being presented in the income statement in different manner because they have followed different method for the valuation of the asset. Both cost and revaluation model are prescribed by the Standard therefore, it is at the discretion of the company to select the method for the valuation of the asset.

Therefore, the differences that have been noticed in the financial reporting is satisfactory as it has arose due to differences in the asset valuation method of accounting and did not arise as a result of inconsistency or deviation from following the accounting principles that has been prescribed by the Board.