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AF314 Corporate Accounting
Flexi-School – 2016
Individual Assignment (20%)
1. Due Date: Thursday 5th January (by 4pm) at the SOAF office. Penalty at 10% per day.
2. Must be word-processed, not hand written, word size 12 with ‘Times new roman’ font type and double-spacing.
3. Each answer must be clearly marked by the designated question to which it corresponds.
4. Please list any references (books, articles, web-based material) you use at the end of your assignment in alphabetical order, using the referencing style seen in academic articles (i.e. with in text references and bibliography, as in the Harvard referencing style).
Background Information
On 1 August 2015, you have recently been appointed as the new financial accountant of Perpetual Pty Limited (“the company”), a large proprietary company that is incorporated in Australia. The company has a year end of 30 June. The current year (June 2015) draft financial statements are attached as Appendix B and are due for issue on 30 September 2015.
The company has been in operation for approximately Sixty years and has acquired an entity during the year ended 30 June 2015 to help diversify its operations, as the market in which they operate is becoming stagnant. The acquired entity is a holiday resort, offering hotel accommodation, food and beverage and entertainment. The name of this entity is Hotelier Pty Limited, and its acquisition date was 31 August 2014. The entity is 100% controlled by Perpetual Pty Limited.
The Financial Controller, Karen Grant, your boss has recently been appointed to Perpetual Pty Limited and wants to ensure that the reporting and disclosure in the financial statements is accurate and reflects what best practice is for a mature large proprietary company. She has heard that you are a recently qualified CPA and would like to enlist your expertise to ensure some areas that are new for the current year’s financial statements are reflected correctly.
She is seeking the following information from you in a report:
1. Identification of the impact(s) of the five key items identified in Appendix A by the Financial Controller on the June 2015 financial statements. You should also clearly outline all aspects of the disclosure required in the financial report, as appropriate. Explain your decision with reference to the current financial reporting framework, citing relevant accounting standard references where appropriate;
2. A review of the attached draft June 2015 financial statements (Appendix B), highlighting five key financial reporting and disclosure issues that are missing and/or incomplete, other than the five items identified in point 1 above. The report should clearly highlight the issue(s), the impact on the financial statements and the additional information required with reference to the relevant accounting standards, as well as the recommendation to the Financial Controller on how to resolve the issue(s). When referring to the standards, do not quote directly; you should summarise the important points to show your understanding; and
3. Identification and brief discussion of three key financial reporting challenges in the preparation of the completed financial report for June 2015, given the changing nature of the company in the current year.
Appendix A
Five Key Items Identified by the Financial Controller
Your new boss, Karen Grant, has noted the following five key items that have arisen in this current financial year that still need to be resolved from a reporting and disclosure viewpoint. These items are yet to be reflected in the draft financial statements attached as Appendix B:
1. The following two events have taken place during the year:
(a) Hotelier Pty Limited has been involved in a dispute with a customer who had food poisoning while dining in the restaurant. The incident occurred on 25th June. Hotelier Pty Limited has obtained legal advice that the company was to be responsible for the incident and damages could amount to $250,000.
(b) On the 31 July 2015, Hotelier Pty Limited received notification that a customer owing $85,000 had gone into liquidation. The liquidator advised that unsecured creditors are likely to receive a distribution only 15c in the dollar. The liquidation was caused by a flood in Apr 2015.
2. Hotelier Pty Limited purchased an investment on 1 July 2014 for the value of $1.5 million. The investment is in a property trust fund and, although not highly liquid, the fair value of the shares as at 30 June 2015 was $1.1 million.
3. Hotelier Pty Limited acquisition generated a goodwill value of $350,000. What is the impact of this goodwill on the balance sheet as at 30 June 2015 and what are the tax consequences relating to this goodwill value?
4. During the preparation of Perpetual Pty Limited financial statement for the year ended 30 June 2015 it was discovered that a fraud has taken place in the previous financial year. An employee who left in May 2014 has taken $10 million from the business to his offshore bank account when making online global payments.
5. Perpetual acquires loan stock in another entity on 1 October 2014 and is entitled to receive fixed interest annually until the loan stock is redeemed in 5 years time. It is the intention of the company to hold this investment for the full 5 year term.
Appendix B – Financial Statements of Perpetual Pty Limited 30 June 2015
Financial Statements – Perpetual Pty Limited
Income Statement as at 30 June 2015
Note 2015 2014
A$’000 A$’000
Accommodation revenue 109,294 83,455
Flights and other revenue 9,526 5,589
Interest received and receivable 2,486 4,952
Total revenue 121,306 93,996
Advertising and marketing expenses 11,670 9,986
Business development expenses 10,758 5,751
Operations and administration expenses 36,686 29,306
Total expenses 59,114 45,043
Profit before income tax 62,192 48,953
Income tax expense 2 18,665 14,501
Net Profit 43,527 34,452
Total Other Comprehensive Income – –
Total Comprehensive Income 43,527 34,452
The accompanying notes form part of these financial statements.
Financial Statements
Balance Sheet as at 30 June 2015
Note 2015 2014
A$’000 A$’000
Current Assets
Cash and cash equivalents 4 101,761 57,197
Bank term deposits 5 0 2,962
Trade and other receivables 6 4,276 5,206
Total Current Assets 106,037 65,365
Non-Current Assets
Deferred income tax asset 9,623 8,321
Other receivables 134 107
Available for sale investment 939 833
Property, plant and equipment 9,157 629
Intangible assets and goodwill 87,825 87,284
Total Non-Current Assets 107,678 103,898
Total Assets 213,715 169,263
Current Liabilities
Trade and other payables 7 134,385 103,874
Interest bearing liabilities 105 109
Income tax payable 3,745 5,119
Provisions 8 1,125 1,051
Total Current Liabilities 139,360 110,153
Non-Current Liabilities
Interest bearing liabilities 146 233
Deferred income tax liabilities 2,678 2,678
Provisions 364 233
Total Non-Current Liabilities 3,188 3,144
Total Liabilities 142,548 113,297
Net Assets 71,167 55,966
Equity
Contributed Equity 9 22,890 22,321
Retained Earnings 43,531 32,270
Reserves 4,746 1,375
Total Equity 71,167 55,966
The accompanying notes form part of these financial statements.
Financial Statements
Cash Flow Statement as at 30 June 2015
Note 2015 2014
A$’000 A$’000
Cash Flow from Operating Activities
Receipts from Customers 1,083,717 811,716
Payments to Suppliers and Employees (984,427) (755,962)
Interest Received 2,480 5,035
Income Taxes Paid (20,318) (14,510)
Borrowing costs (41) 0
Net cash flow from operating activities 81,411 46,279
Cash Flow from Investing Activities
Payments for plant and equipment (3,631) (2,242)
Payment for intangibles (38) 0
Purchase of investment (7,403) 0
Secured loan advanced 0 (55,849)
Secured loan repayment received 0 257
Net cash flow from investing activities (11,072) (61,739)
Cash Flow from Financing Activities
Proceeds from share issue 569 916
Dividends paid (32,266) (28,731)
Proceeds from borrowings 0 94
Lease payments (109) (61)
Net cash flow from financing activities (31,806) (27,782)
Net increase in cash held 38,533 (43,242)
Cash and cash equivalents at beginning of year 60,159 104,363
Net foreign exchange differences 3,069 (962)
Cash and cash equivalents at end of year 101,761 60,159
The accompanying notes form part of these financial statements.
Financial Statements
Notes to the Financial Statements As at 30 June 2015
Perpetual Pty Limited is a company limited by shares incorporated in Australia. The Company’s operations and principal activity is the provision of accommodation and travel services.
Note 1 – Summary of Significant Accounting Policies (a) Basis of Accounting
The Financial Report is a general purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001 and applicable Australian Accounting Standards and other mandatory professional requirements. It has been prepared on a historical cost basis, except for available-for-sale investments, which have been measured at fair value. The Financial Report is presented in Australian dollars and all values are rounded to the nearest thousand dollars (A$’000) unless otherwise stated under the option available to the Company under ASIC Class Order 98/0100. The Company is an entity to which the Class Order applies.
(b) Statement of Compliance
The Financial Report complies with Australian Accounting Standards, which include Australian equivalents to International Financial Reporting Standards (AIFRS). Compliance with AIFRS ensures that the Financial Report, comprising the financial statements and notes thereto, complies with International Financial Reporting Standards (IFRS).
(c) Revenue Recognition
The principal business of the Company is the earning of a margin from the sale of accommodation and travel services. When travel bookings are made they are paid for immediately by customers using their credit cards as verified by an online merchant facility. The Company recognises the revenue when customers have commenced their travel.
(d) Intangible Assets
IT development costs that relate to the acquisition of an asset to the extent that they represent probable future economic benefits controlled by the Company that can be reliably measured, are capitalised and amortised within the period of expected benefit, usually within 3 years. In the reporting period, all IT Development Costs have been capitalised and amortised within the reporting year.
IT costs incurred on research, advertising, marketing management, maintenance, and day-to-day enhancements of all IT applications are charged as an expense in the period that they are incurred.
Financial Statements – Perpetual Pty Limited
Notes to the Financial Statements As at 30 June 2015 (cont’d)
(e) Taxation
i. Income tax
Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognised for all taxable temporary differences except:
• where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
• in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.
The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.
Income taxes relating to items recognised directly in equity are recognised in equity and not in the income statement.
ii. Other taxes
Revenues, expenses and assets are recognised net of the amount of GST/VAT except where:
• the GST/VAT incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST/VAT is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and
• receivables and payables are stated with the amount of GST/VAT included.
The net amount of GST/VAT recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet.
Cash flows are included in the Cash Flow Statement on a gross basis and the GST/VAT component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified as operating cash flows.
Commitments and contingencies are disclosed net of the amount of GST/VAT recoverable from, or payable to, the taxation authority.
Financial Statements – Perpetual Pty Limited
Notes to the Financial Statements As at 30 June 2015 (cont’d)
(f) Property, Plant and Equipment
Plant and equipment is stated at cost less accumulated depreciation and any impairment in value.
Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows:
Plant and equipment – over 5 to 15 years
Impairment
The carrying values of plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.
For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount.
The recoverable amount of plant and equipment is the greater of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
(g) Employee Benefits
A provision is made for employee entitlement benefits accumulated as a result of employees rendering services up to the reporting date. These benefits include wages and salaries and annual leave.
Liabilities arising in respect of wages and salaries, annual leave and any other employee entitlements expected to be settled within 12 months of the reporting date are measured at their nominal amounts.
Employee entitlement expenses arising in respect of the following categories:
• wages and salaries, non-monetary benefits, annual leave, sick leave and other leave entitlements; and
• other types of employee entitlements, are recognised against profit on a net basis in their respective categories.
Financial Statements – Perpetual Pty Limited
Notes to the Financial Statements As at 30 June 2015 (cont’d)
(h) Investments
All investments are initially recognised at cost, being the fair value of the consideration given and including acquisition charges associated with the investment.
After initial recognition, investments which are classified as available-for-sale are measured at fair value.
Gains or losses on available-for-sale investments are recognised as a separate component of equity until the investment is sold, collected or otherwise disposed of, or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the Income Statement.
Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured (and linked derivatives) are measured at cost.
For investments carried at amortised cost, gains and losses are recognised in income when the investments are de-recognised or impaired, as well as through the amortisation process.
For investments where there is no quoted market price, fair value is determined by reference to the current market value of another instrument that is substantially the same or is calculated based on the expected cash flows of the underlying net asset of the investment.
(i) Cash and Cash Equivalents
Cash and short-term deposits in the Balance Sheet comprise cash at bank and in hand and shortterm deposits with a maturity of 3 months or less.
For the purpose of the Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents as defined in the paragraph above.
(j) Provisions
i. Provision for dividends
A provision for dividends is not recognised as a liability unless the dividends are declared and determined on or before the reporting date.
ii. Provisions – general
Provisions are recognised when there is a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.
(k) Contributed Equity
Issued and paid up capital is recognised at the fair value of the consideration received by the Company.
(l) Comparative Information
Where necessary, comparatives have been reclassified and repositioned for consistency with current year disclosures.
Financial Statements – Perpetual Pty Limited
Notes to the Financial Statements As at 30 June 2015 (cont’d)
(m) Recoverable Amount of Assets
The Company assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Company makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of its fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets and the asset’s value in use cannot be estimated to be close to its fair value. In such cases the asset is tested for impairment as part of the cash-generating unit to which it belongs. When the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, the asset or cash-generating unit is considered impaired and is written down to its recoverable amount.
In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses relating to continuing operations are recognised in those expense categories consistent with the function of the impaired asset unless the assets are carried at revalued amount (in which case the impairment loss is treated as a revaluation decrease).
(n) Trade and Other Receivables
Trade and Other trade receivables are recognised and carried at the original invoice amount.
An estimate for doubtful debts is made when there is objective evidence that the Company will not be able to collect the debts. Bad debts are written off when identified.
(o) Trade and Other Payables
Trade payables and other payables are carried at amortised costs and represent liabilities for goods and services provided to the Company prior to the end of the reporting period that are unpaid and arise when the Company becomes obliged to make future payments in respect of the purchase of these goods and services.
(p) Significant Accounting Judgment Estimates and Assumptions i. Significant accounting judgments
In the process of applying the Company’s accounting policies, management has considered if there are judgments, apart from estimates, which will have a significant effect on the amount recognised in the financial statements and management has concluded there was one significant judgment made.
ii Significant accounting estimates and assumptions
There was a change in accounting estimate for the amortization period of the IT Development Costs. In the prior year the amortization period was 5 years.
Note 2015 2014
A$’000 A$’000
2. Income Tax
The major components of income tax expense are:
Income Statement
Current Income Tax
– Current income tax charge 19,184 14,514
– Adjustments in respect of current income tax of previous year (54) (67)
Deferred Income Tax
– Relating to origination and reversal of temporary differences (465) 54
Income tax expense reported in the income statement 18,665 14,501
Note 2015 2014
A$’000 A$’000
3. Dividends Paid or Provided
Dividend Paid
Fully franked dividend paid 32,266 28,731
Franking Account Balance
The amount of franking credits available for the subsequent financial year are:
– franking account balance as at the end of the financial year at 30% 13,807 8,647
– franking that will arise from the payment of income tax as at the end of the period
3,856
4,216
17,663 12,863
No dividends have been proposed for 2015
4. Cash and Cash Equivalents
Cash at Bank 81,839 47,952
Bank Term Deposit at Call 2,480 0
Client funds account 17,442 9,245
101,761 57,197
5. Bank Term Deposits – Current
Bank term deposit maturing after 3 months and within 6 months 0
2,962
6. Trade and Other Receivables
Trade debtors 3,591 4,562
Prepayments 685 644
4,276 5,206
Note 2015 2014
A$’000 A$’000
7. Trade and Other Payables – Current
Deferred Revenue 81,297 71,983
Trade creditors and accruals 53,088 31,891
134,385 103,874
8. Provisions
Employee benefits 1,125 1,051
9. Contributed Equity
20,000,000 fully paid shares 22,890 22,321
Notes to the Financial Statements As at 30 June 2015 (cont’d)
Note 2015 2014
A$ A$
10. Segment Information
The company operates in one business segment, being that of accommodation and travel services. For the purposes of the segment information revenue is determined by the location of the accommodation and travel destination rather than the residency of the customer. Expenses are determined by the location in which they are incurred. The Company operates in numerous geographical locations.
11. Auditors’ Remuneration
Amounts received or due and receivable by the auditors: 60,000 39,000
– an audit of the financial statements of the entity
– other services provided by the audit firm 11,665 25,744
71,665 64,744
12. Contingent Liabilities
At balance date the Company had bank guarantees of A$ 2,500,000 in respect of banking arrangements.
2015 2014
A$000 A$000
13. Commitments for Expenditure
The Company has a lease commitment with an unrelated party expiring on 31 August 2015.
Remuneration commitments for the payment of salaries and other remuneration under long-term employment contracts in existence at the reporting date, but not recognized as liabilities, payable as follows:
– Total 2,600 1,000
14. Events After Balance Date
On 28 July 2015, the Company entered into an exclusivity agreement with a travel provider, Happy Holidays.
Notes to the Financial Statements As at 30 June 2015 (cont’d)
15. Financial Risk Management Objectives and Policies
Interest rate risk:
The Company’s exposure to the risk of changes in market interest rates relates primarily to its’ cash at bank and short term deposits. The Board has resolved that the risk of the rate change should not be hedged.
Foreign currency risk:
The Company has transactional currency exposure. This exposure arises from the margin achieved on sales in currencies other than the Company’s functional currency being Australian dollars. This risk is not considered to be material. The Board has resolved that the risk of exchange rate risk should not be hedged.
Credit risk:
The Company trades only with recognized, credit worthy third parties. The principal trade receivables are amounts owing from credit card companies, which typically settle within 5 days. Receivables balances are monitored on an ongoing basis with the result that the Company’s exposure to bad debts is not considered to be significant.
There are no significant concentrations of credit risk within the Company.
The fair value does not differ from the carrying amount of assets and liabilities within the Company.