Re:                  Accounting Issues: Year Ending 30-Jun-2020

From:             Graduate Accountant (Avatar Limited)

Sent:               16-Jun-2020

To:                  Mike Dixon (Managing Director, Dixon Limited Ltd)

Subject           Accounting Standard AASB 138 intangible assets

Dear Mike Dixon,

Thank you for writing the letter and trusting us to guide you on the organization’s accounting issues faced by Dixon Limited.

Accounting Standard AASB 138 Intangible Assets

Regarding your letter dated 15-Jun-2020 marked to Ms. Julia Roy related to accounting issues in a few scenarios. I want to discuss the issues related to the acquisition of Nemo Limited and its related matter in light of the Accounting Standard AASB 3 Business combination under section 334 of the Corporation Act, 2001 for acquired brand Salty taste of along with Accounting Standard AASB 138 intangible assets under paragraph of internally generated goodwill under the brand of Ocean Fish. Further, Panama’s impairment in light of Accounting Standard AASB 136 Impairment of Assets under section 334 of the Corporations Act, 2001. Besides impairment, discussing capitalization of expenditure and its pre-requisites will be shared for your necessary implementation.  This letter will help the accounting professional related AASB 1048 Interpretation of Standards related to preparation and presentation of Financial Statements and Accounting Standard AASB 116 Property, Plant, and Equipment recognisation of subsequent cost paragraph # 7

Dixon Limited has purchased the brand of Nemo Limited. As a result of this acquisition, Dixon has taken over the organization’s operation, assets, and liabilities. Under Accounting Standard AASB 3 Business combination, Dixon Limited shall consider the criteria and method to recognize and measure the liabilities, its assets non-controlling interest (AASB., 2014). These assets and liabilities shall meet the criteria of definition prescribed in AASB 1048 Interpretation of Standards related to preparation and presentation of Financial Statements. These acquisitions will remain part of a single business exchange transaction shall be based on a fair value calculated at the date of acquisition. Further goodwill shall be calculated by subtracting the net acquisition amount of assets and liabilities from the consideration amount transferred and non-controlling interest value. Accounting Standard AASB 138 intangible assets under paragraph of internally generated goodwill under the brand of Ocean Fish. Dixon shall review that internally generated goodwill under brand of Ocean is not capitalized as an intangible asset. It is due to the reason that it is not an identifiable resource under control by the organization that can be measured reliably at cost.

Marketing manager believe related to increasing goodwill related to repair, and maintenance of Panamax ship, the accounts department of Dixon Limited shall review the case in light of accounting Standard AASB 136 Impairment of Assets under section 334 of the Corporations Act, 2001 (AASB.,2004). The following are the pre-requisites to consider the rise in organizational goodwill.

1. The value undergoing concern assumption designates that the organization has the potential to boost profits by applying accessible capital on Equipment, human resources, administration, and resources efficiently.
2. The surplus company profits imply that a corporation is earning extra income due to the occurrence of its goodwill.
3. The overall organizational worth-added increases when prospects for economic expansion added to the organizational equity.
4. An organization is predictable to create a center of attention to new clientele and generate more products, resulting in collective prosperity.

Therefore the belief that environmental reputation by expense on Panamax increases the goodwill from the financial point of view seems invalid. Further, the marketing manager has mixed the concept of capitalizing of expenditure over Panamax and its brands.  Under Accounting Standard AASB 116 Property, Plant, and Equipment recognisation of subsequent cost paragraph # 7, an organization cannot recognize day to day services expenditures in carrying amount of assets (Herrmann., 2006). These costs will account for profit and loss expenditure when they are incurred. The parts of assets may be required to replace after a certain interview of time. Under the recognization principle in paragraph 7 of AASB 116 Property, Plant and Equipment, there are certain criteria of recognition of expenditure as capital, which are,

1. Prospect economic benefits linked with the asset will probably surge to the organization after the expenditures.
2. The expense of the item can be measured reliably.

However, the day-to-day outlay is not incorporated in the asset’s cost but shall be treated as expenditure in the profit or loss statement. Further, the subsequent spending acquires succeeding to recognition are not documented in the carrying amount of the asset (AASB. 2015).

1. Expenses are carried out to reorganize an asset once it is transported into the site and state intended.
2. Expenses carried out while a thing able to operate in the way proposed by the administration have yet to be fetched into utilization or a function less than full capacity.
3. Losses based on Initial operations of an asset.
4. Re-location or restructuring expenses incurred on partial or all of the entity’s operations.

Finally, the marketing manager has claimed that the organization balance sheet footings will be increased, which will have no impact on its profit and loss statement. Considering the manager’s concept, if the expense has been converted to the asset, then the same would have impact as the expense will be balanced off by an increase in balance sheet item assets. However, such treatments will be considered a violation of the recognisation principle in paragraph 7 of AASB 116 Property, Plant, and Equipment (AASB, 2015). Further, the marketing expenditure will be considered an expense under the AASB 101 Presentation of financial statements.  The fundamental bookkeeping regulations necessitate advertising expenses to be scheduled as operating expenses on a company’s profit and loss statement (Mansi, 2020). From the accounting point of view, such a concept is a violation of AASB 101 Presentation of financial statement (AASB. 2004)

Based on the above discussion, it is concluded that before deciding on the light of the marketing manager’s claims, the executive management team shall consider this letter as guidance before implementation and consideration of financial impact over the balance sheet. Further, the Board of directors is authorized to take the decision related to disclosure related to the adoption of AASB standards

Regards

Team of Graduate Accountants

Avatar Group Limited

777 Avenues, Melbourne, VIC 3000

Australia. 

Reference List

1. AASB, C.A.S., 2014. Business Combinations. Disclosure, 66, p.77.
2. AASB, C.A.S., 2004. Impairment of Assets. Disclosure, 126, p.133.
3. AASB, C.A.S., 2015. The property, Plant, and Equipment.
4. AASB, C.A.S., 2004. Presentation of Financial Statements. Balance Sheet, 68, p.73.
5. Mansi, S., Qi, J. and Shi, H., 2020. Advertising and tax avoidance. Review of Quantitative Finance and Accounting, 54(2), pp.479-516.
6. Herrmann, D., Saudagaran, S.M. and Thomas, W.B., 2006, March. The quality of fair value measures for property, plant, and equipment. In Accounting Forum(Vol. 30, No. 1, pp. 43-59). No longer published by Elsevier.