Accounting Issues: Financial Statements And Long Service Leave

Issue 1: Financial Statements errors and correction

Questions:

Issue 1:

When finalising the financial statements for the year ended 30 June 2014 two significant errors were made and there is debate as to whether we should simply adjust the financial statements in the current year or change last year’s financial statements as well. The IT system of the company was installed 3 years ago at a cost of approximately $3.5 million and was estimated to last 10 years. However the latest technology advancements indicate that this was a very optimistic estimate and that the maximum life span of this equipment will probably be not more than 6 years in total with little or no residual value. It was also discovered in August 2014 that a machine worth $2.2 million purchased in January 2014 was erroneously written off to repairs and maintenance instead of being capitalised.

Deberella the marketing director thinks we should just adjust this year’s figures to account for these problems but Peter indicated that it was slightly more complicated than that. Could you please give us some advice on this?

Issue 2:

A number of employees who work on our strategic management team have been with us for a number of years – at least 12 of them have been with us since the company commenced operations in 2006. In accordance with the Employee Bargaining Agreement (EBA) all employees are entitled to long service leave of 13 weeks if they remain in service for 10 years. They are also entitled to pro rata long service leave after 6 years of service.

Our usual practice is to show the long service leave expense in the income statement when the employee actually takes leave and is paid. Of course we maintain a memorandum record of the number of days each employee is entitled to. Peter has indicated to us that he thinks we should consider treating this expense in a different manner, which seems complicated. The directors are wondering why we should complicate a very simple way of calculating long service leave – why not “stick with” recognising the expense when we pay for it? What do you think we should do and why?

Issue 3:

Peter, the new financial controller, has also informed the board that the company will need to present a statement of cash flows with the financial statements in addition to those statements already being presented, which really attracted a lot of attention. Some of the directors thought it was a waste of time to present this statement as it was merely a summarised cash book. Others were of the opinion that it could be useful but didn’t quite know how they would use it. The structure of the statement of cash flows also came into question with one of the directors suggesting that we merely needed to “get a printout” of the cash account and attach it. Another said that we couldn’t just do that as we needed to show “operating, instigating and financing” cash flows in the statement. Could you please clarify this matter for us?

Issue 2: Recognition of long service leave expense

Many things in the statement of affairs are not measureable with the precision but we can make an estimation, but as a result of uncertainties which are involved in the business activities. The estimation may include the decisions based on the information available. To illustrate, the estimations may be required for:

1. Inventory Obsolescence;
2. Bad debts;
3. financial assets or liabilities and its fair value;
4. The useful life and the consumption of the future economic benefits for the depreciable assets; &

As usefulness of the reasonable estimates is important portion for the preparations of financial statements. Such estimate will need a revision when the changes will arise in the events in which such estimates had been based or as a result of the new data of the company. According the nature of estimate, it may or may not relate with the prior periods and are also not related to the correction of any error.

The ultimate effects of the necessary changes in accounting estimate, and any other type of change to which paragraph applied will be subsequently known by considering the same for computing p&l in:

(a)  Period in which such change has occurred; or

(b) The current period of such changes or any period of future, if such change affects both.

Advice: In this case, we can say that there must be a change in the accounting estimates and hence, the Depreciation part should be deducted from Profit &Loss Account of the relevant  current year. As at the time of finalizing the financial statement of 30 JUNE the expected useful life of the IT system is 6 years out of which three Two years elapse. This is third year end of IT system and hence remaining value of 2.8 ( 3.5-3.5/10 *2) should be depreciated over 4 years including this year  which is  .7 Million (2.8/4). The amount of .7 Million will be debited to Profit & Loss account on 30 June 2014 and 2.1 Million (2.8-.7) will be depreciated over next three years.   

The earlier period mistakes and errors must be made a correction from the retrospective period in the first financial statements after they are found out by:

• Restating the amount of the prior period which shall be shown where the error was caused; or
• Restating the opening balances of the assets, liabilities and equity for the prior years that are presented, if the error which is caused before the earlier prior periods presented.

Hence, by the above statement any error of the prior period must be corrected by the subsequent restatement which can be extended when it was not practical for determining the total effect of error or the specific effects.

According to this Accounting Standard, various disclosures are needed in the financial statements.

Advice: Thus, from the provided case, the machinery worth $22000000 was debited to expense of the machinery repairs and its maintenance erroneously and it must be rectified or solved during the current period of the prior period.

Leave for service of long period

When the non similarity arose between various laws, government Acts and the other Agreements which determine the entitlement for the long leave service in Australia, the following categories of entitlement are common:

(a) An unconditional entitlement to which the payment may arise after some service period (usually 10 or 10+5 years). The combination of the service leave entitlement would be continued from this period, till the leave is actually taken.

(b) In many case (for e.g. early retirement, death or the retrenchment), a legal entitlement for the pro rata payment in place of long leave may arise.

Whilst many employers may provide the service leave advantage to their staff, however many may participate in the same. The employers have the obligation for making the future cash flows due to the long service leave arrangements. Thus, the obligations of employers towards the industry-based leave for the service would be identified as a liability of the employer. In many cases, after remaining stagnant as per the requirements of paragraphs 4.3 and 4.13, the company would recognise the liabilities for the payments which are expected to be made to the employees.

 Advice: Hence, in this case Peter’s contention is correct for treating the expense as different, as the requirement under AASB 1028 is to treat  as liability or separate line of item of liability which depends upon as per the  scheme of service and then which can be charged and same as revenue as per the discussion made above.

The Financial Statements comprises of the following:

• Balance Sheet of current period;
• A revenue statement;
• A statement of changes in equity for the period;
• Cash flows statement;
• Notes, and summaries showing the use of the policy and standards.                     

• Each company who was preparing the financial statement as per described Part 2M.3 of the Corporations Act;

• financial statements; and

• Financial report for common use.

• The cash flow statement gives the information which enables the user to make an analysis of many changes in the current net assets of the entity, (including the solvency and liquidity) and the ability of entity to have an effect on the amount and the time of occurrence of cash flows by adapting to the changing opportunities & situations.
• The data of the Cash flow is used so that the ability for the assessment of the entity and for the generation of the cash and it gives start to the users to develop the model for assessing and comparing the current value of future cash flows of other entities.
• The Transactions in Cash may also be bifurcated into 3 activities and it can be shown in the Cash Flow Statement

Advice: Thus, in the present case looking to the needs of standards set in the AASB 101 and the other standard AASB 107,which gives the  advantages of the preparation of cash flow statement as stated in the above case, it is therefore suggested or advisable to make a cash flow statements which shows day today cash transaction.

References

 AASB, 2011, “Accounting Policies, Changes in Accounting Estimates and Errors” reviewed on 30 January 2015,<https://www.aasb.gov.au/admin/file/content105/c9/AASB108_07-04_COMPmay11_07-11.pdf>

Chartered Accountants, 2013, “Accounting Policies, Changes in Accounting Estimates and Errors” reviewed on 30 January 2015, <https://www.charteredaccountants.com.au/Industry-Topics/Reporting/Australian-accounting-standards/Analysis-of-AASB-standards/AASB-108–Accounting-policies-changes-in-accounting-estimates-and-errors?standard=%7B846095B1-DF0D-4BAD-967E-FFBB46D5F8AE%7D>

AASB, 2001, “Employee Benefits” reviewed on 30 January 2015,< https://www.aasb.gov.au/admin/file/content102/c3/AASB1028_06-01.pdf>

AASB, 2011, “Presentation of Financial Statements” reviewed on 30 January 2015, <https://www.aasb.gov.au/admin/file/content105/c9/AASB101_09-07_COMPsep11_07-12.pdf>

AASB, 2007, “Cash Flow Statements” reviewed on 21 January 2015, <https://www.aasb.gov.au/admin/file/content105/c9/AASB107_07-04_COMPjul07_07-07.pdf>

Chartered Accountants,N.D.,” FAQs AASB 119” Reviewed on 30 JANUARY 2015,< https://www.charteredaccountants.com.au/Industry-Topics/Reporting/Publications-and-tools/FAQs-Reporting/FAQs-on-Analysis-of-AASB-standards/AASB119 >

Chartered Accountats,N.D.,”AASB 101 Presentation of Financial Statements”, Reviewed on 30 January 2015,< https://www.charteredaccountants.com.au/Industry-Topics/Reporting/Australian-accounting-standards/Analysis-of-AASB-standards/AASB-101–Presentation-of-financial-statements >.

JEMMA HOLMES,N.D.”Disclosure- Presentation of Financial Statement”, reviewed  30  January 2015, Available at  https://www.johnwiley.com.au/highered/leo8e/content019/images/Ch11_8e.pdf >

Chartered accountants, n.d.,” faqs aasb 107,  Reviewed on 30 January 2015, https://www.charteredaccountants.com.au/Industry-Topics/Reporting/Publications-and-tools/FAQs-Reporting/FAQs-on-Analysis-of-AASB-standards/AASB107

COMLAW, 2014,”AASB 107- Cash Flow Statement “  reviewed o 30 January 2015, https://www.comlaw.gov.au/Details/F2005B01541

Charterd Accountatnts, “Aasb 108 Accounting Policy, Change In Accounting Estimate And Errors” Reviewed on 30 January 2015,< https://www.charteredaccountants.com.au/Industry-Topics/Reporting/Australian-accounting-standards/Analysis-of-AASB-standards/AASB-108–Accounting-policies-changes-in-accounting-estimates-and-errors?standard=%7B846095B1-DF0D-4BAD-967E-FFBB46D5F8AE%7D >