Capitalisation On Financial Statements Ratios: A Study Of Barra Resources Limited

Contingencies in Accounting Statements

Discuss About The Capitalisation On Financial Statements Ratios.

The essay focuses on highlighting the issues to be identified after careful assessment of Barra Resources Limited in order to determine whether the accounting statements are prepared in compliance with the prevailing standards so that the overall reliability could be identified. The latest annual report of the organisation is dissected to shed light on the important aspects discussed in the paper. Thus, the aim of this paper is to provide a thorough insight and assessment of the various accounting statements prepared on the part of Barra Resources Limited.

The contingencies that are disclosed in the accounting statements of the corporate entities are segregated into different elements. In this regard, Abbott et al. (2016) cited that some assets and liabilities are reported under contingencies that are yet to be accounted, as emergency situation led to their occurrence. The main items that are considered under contingencies in an organisation include guarantees, commitments related to capital expenditure, contingent liabilities and others. Guarantees are defined as those financial contracts, which are realised as liabilities in the characteristics of finance at the time of issuing the financial guarantee. Commitments related to capital expenditure are the expenses where the parent organisation needs to enter into agreements for the fully owned subsidiaries related to acquisition of fixed assets such as plant, property and equipment. However, these two items are not mentioned in the annual report of Barra Resources Limited in 2017.

The only contingency mentioned in the annual report of the organisation is contingent liabilities, which have direct association with the terminated contract. As per the latest annual report of the organisation, no contingent liability has been recognised in 2017.

For provisions, the significant items that are recognised in the annual report of Barra Resources Limited in 2017 include rehabilitation expenses and long service leave provision. These are realised at the time the organisation has a current obligation due to a past event, the likelihood of future compromise of economic benefits and reliable measurement of the provision amount is possible. The provision amount that is reported in 2017 is $130,793 in contrast to $111,635 in 2016.

Certain recognition criteria and measurement issues for contingencies as well as provisions are inherent for the business organisations in Australia. For the mentioned contingent liabilities, no amount has been recognised in both the years 2016 and 2017. On the other hand, the realisation of provisions is made when the entity has existing constructive or legal obligations and it is probable that the outflow of economic benefits would be required to settle the obligations.

Provisions in Accounting Statements

It could be evaluated that contingent liability is the only disclosed contingency in the financial report of Barra Resources Limited in 2017. The contingent liabilities are realised as a part of liability and they are incurred at the time of issuance. The fair value approach is used mainly for recording the contingent liabilities. This contingency is not possible to be used for other contingent liabilities, since they would not be identical and as a result, the treatment of accounting elements would be represented wrongly (Crawford, Lont and Scott 2014). As a result, impact would be severe on the qualitative characteristics pertaining to the financial statements. In other words, the important qualitative features like understandability, comparability and reliability aspects of these statements would be affected. The first aspect signifies the extent to which it is possible for the investors to gain an overview and analyse the financial statements. Lastly, the comparability aspect denotes whether the preparation of the financial statements is made in line with the right standard designed by the accounting authorities (Carey, Potter and Tanewski 2014).

As per the annual report of Barra Resources Limited in 2017, plant, property and equipment are recorded in the form of financial leases and they are valued at $11,991 million in 2017 compared to $28,357 in 2016. Moreover, the rental expenses that are identified from its annual report have been $68,684 in 2017, which were $64,941 in 2016. However, it has not disclosed or recognised lease liabilities in both the years 2016 and 2017 (Barraresources.com.au 2018). In order to recognise leases in the annual report, the operating lease payments are reported in compliance with “AASB 16 Leases”.

The particular accounting standard available for lease treatment in accounting constitute of AASB  16 and the financial statements associated with leases are developed in compliance with the depicted standard (Henderson and O’Brien 2017). Moreover, the recognition of interest is made depending on the lease term. The exceptions included in the annual report comprise of leases, which have lower values and timeframes.

Plant, property and equipment are recorded in the form of financial leases and they are valued at $11,991 million in 2017 compared to $28,357 in 2016. However, no lease liabilities have been deemed to occur in 2016 and 2017 and thus, they are not reported as a separate item in the balance sheet statement of Barra Resources Limited (Xu, Davidson and Cheong 2017).

A hypothetical scenario has been assumed, in which property, plant and equipment is treated as a lease item, which is ought to be reclassified. The following list of examples would help in describing this particular situation:

• The lessee takes over the asset ownership as soon as the lease term is completed (Holland 2016).
• The lessor provides the lessee with an option, in which the latter could buy the item from the former at a price, which is lower than the market value.
• It is easy for the lessee to use the item due to certain in-built features, which eradicate the need for further changes (Joubert, Garvie and Parle 2017).

Treatment of Financial Assets in Accounting Statements

For this situation, a specific item is chosen from the non-current assets represented in the balance sheet statement of Barra Resources Limited and thus, the significant descriptions are given regarding that item. In this case, the item chosen is the financial assets, which are reported in the balance sheet statement of the organisation and supporting notes regarding their treatment are disclosed in the annual report. The balance sheet statement of the organisation clearly states that the value of financial assets has been $91,249 in 2017, which was $114,000 in 2016. In this regard, Martínez?Ferrero, Garcia?Sanchez and Cuadrado?Ballesteros (2015) advocated that financial assets denote those assets that occur from contractual agreements on future cash flows or from owning equity instruments of another organisation. However, there is a significant difference between property, plant and equipment and financial instruments, which is the presence of counterparty.

For Barra Resources Limited, it has been evaluated that the recognition or de-recognition of investments is made at the trading date, in which the sale or purchase of an investment is in a contract. The terms need legal transfer of investment within the time limit developed by the concerned market, which are gauged initially at fair value, net of transaction costs (Wong and Joshi 2015). The organisation classifies the financial assets into various categories and they are identified as follows:

• Financial assets at fair value via profit and loss
• Available-for-sale financial assets
• Loans and receivables

An alternate method that could be used for valuing the financial assets is the equity method. This is because this method would be extremely beneficial for important influence investments or joint ventures, in which the voting interest is owned between 20% and 50% (Nobes 2014). The investment account could rise or fall under the equity method depending on profit earnings and payment of dividends. The accurate accounting treatment would be to consolidate the financial statements of the investors and the subsidiary into a sole group of financials (Robb, Rohde and Green 2016). This could be illustrated better with the help of a particular example.

On 1^st July 2017, Barra Resources Limited acquired 10,000 shares of Mt Thirsty, its joint venture partner representing 30% of the shares of the latter organisation. For the period ended 30^th June 2018, Barra Resources Limited earns net profit of $300,000. On 1^st July 2018, Mt Thirsty declares a dividend payment of $20,000 to Barra Human Resources Management Limited. In this case, investment in Mt Thirsty would be debited and bank would be credited having an amount of $10,000 on 1^st July 2017. Moreover, investment in Mt Thirsty would be debited and investment income would be credited with an amount of $90,000 ($300,000 x 30%) on 30^th June 2018. Finally, bank would be debited and investment in Mt Thirsty would be credited with an amount of $20,000.

Conclusion:

The above essay provides a clear understanding of the different items disclosed in the annual report of Barra Resources Limited in 2017. After careful evaluation, it has been found that the company has conformed to all the AASB norms in order to account for different items in its financial report. This denotes that the financial statements are prepared with full care. Moreover, the accounting statements of the firm signify that further disclosures might be needed so that the financial reporting quality could be improved in future.

References:

Abbott, L.J., Daugherty, B., Parker, S. and Peters, G.F., 2016. Internal audit quality and financial reporting quality: The joint importance of independence and competence. Journal of Accounting Research, 54(1), pp.3-40.

Barraresources.com.au., 2018. [online] Available at: https://www.barraresources.com.au/wp-content/uploads/2017/10/BAR-Financial-Report-June-2017-FINAL-Clean-for-ASX.pdf [Accessed 20 May 2018].

Carey, P., Potter, B. and Tanewski, G., 2014. AASB Research Report No.

Crawford, L., Lont, D. and Scott, T., 2014. The effect of more rules?based guidance on expense disclosure under International Financial Reporting Standards. Accounting & Finance, 54(4), pp.1093-1124.

Henderson, D. and O’Brien, P.C., 2017. The standard-setters’ toolkit: can principles prevail over bright lines?. Review of Accounting Studies, 22(2), pp.644-676.

Holland, D., 2016. Simplifying income recognition for not-for-profit entities. Governance Directions, 68(11), p.666.

Joubert, M., Garvie, L. and Parle, G., 2017. Implications of the New Accounting Standard for Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance Sheet. The Journal of New Business Ideas & Trends, 15(2), pp.1-11.

Martínez?Ferrero, J., Garcia?Sanchez, I.M. and Cuadrado?Ballesteros, B., 2015. Effect of financial reporting quality on sustainability information disclosure. Corporate Social Responsibility and Environmental Management, 22(1), pp.45-64.

Nobes, C., 2014. International Classification of Financial Reporting 3e. Routledge.

Robb, D.A., Rohde, F.H. and Green, P.F., 2016. Standard Business Reporting in Australia: efficiency, effectiveness, or both?. Accounting & Finance, 56(2), pp.509-544.

Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial statements and key ratios: Evidence from Australia. Australasian Accounting Business & Finance Journal, 9(3), p.27.

Xu, W., Davidson, R.A. and Cheong, C.S., 2017. Converting financial statements: operating to capitalised leases. Pacific Accounting Review, 29(1), pp.34-54.