Statement of Advice 1

Statement of Advice
Prepared by Manager KBS
Prepared for CBL Directors
Date 6th February 2023
 Statement of Advice 2

Executive Summary
The statement of financial advice analyses the recognition of different items as advised by the
manager of KBS Ltd to the board of directors of CBL Ltd. The statement of advice addresses the
recognition of assets and expenses, the recognition of the value of orders for a new product as an
asset, the distinction between accounting losses and positive cash flows, accounting for damages
and accounting for depreciation, revaluation of non-current assets, and recognition of loss. The
report also contains recommendations and conclusions that summarize the recognition of
different items.
 Statement of Advice 3

Table of Contents
Executive Summary.....................................................................................................................................2
Asset and Expenses Recognition.................................................................................................................4
Recognition of the value of orders for a new product as an asset..............................................................5
Recognition of the value of orders for a new product as an asset………………………………………………………....5
The distinction between Accounting Losses and Positive Cash flows……………………………………………………..5

Accounting for Damages……………………………………………………………………………………………………………………….6

Accounting for depreciation, Revaluation of non-current assets, and Recognition of loss……………………..6

Conclusion…………………………………………………………………………………………………………………………………………….7

References……………………………………………………………………………………………………………………………………………9
 Statement of Advice 4

Asset and Expenses Recognition

According to Australian accounting standards, an asset is recorded in the statement of financial
position when economic benefits are likely to flow to the company in the future and the asset is
characterized by a valuation or an expenditure that can be reliably measured. When it is deemed
unlikely, the financial benefits would flow to the company beyond the present accounting period,
an asset is not recognized on the balance sheet (Agustika and Jasmadeti, 2018). However, the
transaction leads to the reporting of expenditure in the income statement. On the other hand,
based on the same Australian accounting standards expenditures are reported on the income
statement when there is a reduction in future financial benefits due to an increase in a liability or
a decline in an asset that can be reliably determined.

The method by which a company decides to record the expenditures incurred during the
development of a new item is a critical decision for every company. Based on the context, the
expenses could be classified as either assets or expenses (Budiyono 2022). Based on the context,
the costs might be classified as either expenses or assets. In this context, the expenses totaling $
105000 possess the requirements stipulated by the Australian Accounting Standards, these are
the costs incurred that lead to the purchase of a qualifying asset that is likely able to result in the
accumulation of economic benefits to the company. As a result, the company's board of directors
incurred costs worth $105,000: $55,000 to develop new a prototype and $50,000 to find new
materials. The directors did a fantastic job in categorizing the amount of $105,000 as an asset in
the balance sheet since all these expenditures adhere to the requirements established inside the
Australian Accounting Standards. Upon that, this asset could be depreciated for the duration of
the item's expected life span, or till it is determined that the product cannot be financially feasible
and that it could no longer be salvaged (Kaplan 2022). It is important to understand that even
though the executive board is confident that the new item would be a success with customers,
there is no guarantee that this will actually be the fact. Therefore, the company must maintain a
keen track of the product's quality and, if required, make necessary changes to the asset's
accounting treatment.
 Statement of Advice 5

Recognition of the value of orders for a new product as an asset

Fair value is a market-based evaluation, and not an entity-specific metric. Visible economic
transactions or price information could be accessible for various liabilities and
assets. Alternatively, liabilities and assets may lack visible market information and economic
transactions. Nevertheless, the goal of fair value estimation in both instances is the same: to
determine the cost for which an orderly transaction to dispose of the asset or transfer the
obligation between players in the market at the reporting date could occur within current
conditions (Tulvinschi 2019). For example, an exit price at the measurement date from the
standpoint of a market member who holds the asset or is obligated to pay the debt. When a value
for an equivalent liability or an asset is not accessible, a company calculates fair value using an
alternative valuation approach that enhances the utilization of essential measure inputs while
minimizing the application of unmeasured elements. Given the fact that fair value is a market-
based metric, it is computed by using considerations that traders and investors could employ
when evaluating the item or liability, particularly risk factors (Tulvinschi 2019). As a
consequence, while computing fair value, a company's intention to pay or retain an asset or
otherwise meet a responsibility is irrelevant.

The expenditure of producing a new product, like the driver XCLBR, is referred to as research
and development (R&D). R&D expenditure is accounted for as an expense in the period when it
is incurred under Australian Accounting Standards (Press, Sacui, and Sala, 2012). However,
when the product is developed and sold effectively, any resultant intangible asset, for instance, a
patent, is recorded on the balance sheet. The valuation of contracts for a new product would be
recognized as an asset if the firm has a legally enforceable contract with both the retail
outlets and if the company has the means to deliver the orders and the anticipation of receiving
compensation for products.

The distinction between Accounting Losses and Positive Cash flows

The Australian accounting standards (AAS) act has shed light on how to handle different cash
flows depending on the activities the company engages in. For instance, both the payments and
cash receipts on behalf of clients, the cash flows representing the client's operations instead
of those of the company, and payments and cash receipts for products with high turnover (big
sums with short maturities) are reported on a net basis (Pattnaik, Kumar and Burton, 2021).
 Statement of Advice 6

Furthermore, cash transactions and payments for the adoption and payment of fixed-term
deposits; withdrawal from other financial firms; cash payments and credit granted to clients,
deposit placement with financial institutions, as well as payback of such loans and advances, are
also recorded on a net basis.

The disparity between cash flow and net income can be attributed to a variety of accounting and
finance procedures carried out by a company. The major difference between cash flow and net
income is that the first is a measure of the sum of cash a firm generates or invests during a
specific time period whereas the second is an accounting estimation of revenue (Kordestani,
Biglari and Bakhtiari, 2011). In the company's case, all expenses involved during the stage of
product development led to substantial financial losses over the past three years. The assumption
that now the company has achieved positive net cash flows while posting losses suggests the
company has been able to generate funds through its operations. The Australian Accounting
Standards (AAS) establish guidelines for the presentation and preparation of financial
statements. The correct accounting treatment for each item will be based on the particular
company conditions and the relevant accounting guidelines. To properly depict the company's
financial position and performance, it is critical to understand the differences between positive
net cash flows and accounting losses, together with the accounting approach to various
components.

Accounting for Damages,

Provisions, according to the AAS, could be separated from other liabilities (for example, accruals
and trade payables) since there is uncertainty about the time or value of future spending
necessary for a settlement. Generally, all provisions are dependent since their time or quantity
is unpredictable (Roux and Bouchard, 2013). Nevertheless, the word 'contingent' is often used
under IAS 37 for assets and liabilities which are not recorded since their validity will be verified
only by the existence or non-existence of more or one unknown upcoming event which is not
entirely well within company control. IAS 37 enables a provision to be recorded when all of the
following conditions are met: an entity has a present duty (constructive or legal) as a
consequence of a previous occurrence (Zeff and Nobes, 2010). Second, it is likely that an
outflow of resources including financial benefits will be necessary to pay off the debt. Third, the
sum of the obligation may be accurately estimated. Provisions are calculated as the best
 Statement of Advice 7

estimate of the expenses necessary to pay the current obligation at the financial quarter. This
usually includes any uncertainty and risk factors, the time value of the money, and future events
whenever there is enough empirical proof that they might occur, with the exception of gains from
the anticipated sale of assets. Provisions must be examined and revised at the conclusion of each
reporting period to match the most recent accurate estimates.

Based on the circumstances, $1,200,000 in damages should be recorded as a liability in the

balance sheet at the period when the court matter was resolved (23rd July 2022), and as an
expense in the profit and loss account.

Accounting for depreciation, Revaluation of non-current assets, and Recognition of loss

According to AAS each component of plant, property, or equipment having a value that is
considered in regard to the total value of the item should be depreciated independently. The
depreciation method adopted must represent the manner that the company expects to utilize the
asset's future financial benefits (Howieson, 2017). In the event of a main variation in the
estimated consumption behavior of the foreseeable financial benefits essential in the asset, the
depreciation technique used for the asset should be evaluated at most each financial year and
altered to conform to the new pattern (Yao, Percy, and Hu, 2015). AASB 108 specifies how such
a revision should be noted as a modification to an accounting method.

The depreciable amount of an asset can be steadily spread over the progress of its useful life
exhausting a variety of depreciation procedures. These approaches consist of the unit-of-
production approach, the diminishing balance approach, and the straight-line approach. If the
asset's carrying amount maintains the same throughout its expedient life, straight-line
depreciation leads to a constant charge (Barbier 2014). A declining charge during the useful life
is the effect of the diminishing balance method.

A plant, equipment, or piece of property, which can be best measured for fair value must be
carried at a revalued cost after being recognized as an asset. This value is equivalent to the fair
value of the asset during the reappraisal date subtracting the amount of successive accumulated
depreciation and subsequent accrued impairment losses (Jana and Jitka, 2014). Revaluations
should be performed often enough to avoid a main change between the carrying value and what
would be computed using fair value at the end of the financial period.
 Statement of Advice 8

Therefore, adjusting the depreciation technique from a straight line to a diminishing balance has
no effect on the return on assets ratio, but it does alter the asset turnover and profit margin. A
non-current asset's revaluation will affect the return on assets ratio, as well as the profit margin
and asset turnover. Recognizing a loss due to the obsolescence of particular inventory goods has
an impact on the quick ratio, the profit margin, and the return on assets ratio

Conclusion
In conclusion, an asset is recorded in the statement of financial position when economic benefits
are likely to flow to the company in the future and the asset is characterized by a valuation or an
expenditure that can be consistently measured. Fair value is a market-based evaluation, and not a
company-specific metric. Visible economic transactions or price information could be accessible
for various liabilities and assets. Alternatively, liabilities and assets may lack visible market
information and economic transactions. The goal of fair value estimation in both instances is
similar that is to determine the cost for which an orderly transaction to dispose of the asset or
transfer the obligation between players in the market at the reporting date could occur within
current conditions. During the recognition of cash flows both the cash receipts and payments on
behalf of clients, cash flows representing the client's operations instead of those of the company,
and payments and cash receipts for products with high turnover (big sums with short maturities)
are reported on a net basis. The major difference between cash flow and net income is that the
first is a measure of the amount of cash a company generates or invests during a specific period
whereas the second is an accounting estimation of revenue. According to AAS each component
of plant, property, or equipment having a value that is considered in regard to the total value of
the item should be depreciated independently. The depreciation method adopted must represent
the manner that the company expects to utilize the asset's future financial benefits. A plant,
equipment, or piece of property, which can be best measured for fair value must be carried at a
revalued cost after being recognized as an asset. This value is equivalent to the fair value of the
asset during the revaluation date subtracting the amount of succeeding accrued depreciation and
subsequent accrued impairment losses. A plant, equipment, or piece of property, which can be
best measured for fair value must be carried at a revalued cost after being recognized as an asset.
 Statement of Advice 9

References

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Atlantis Press. Sacui, V. and Sala, D. (2012). Economic Properties of Intangible Assets. The Value
Paradox. Revista de Management Comparat International, 13(5), p.793.
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Barbier, E.B., (2014). Economics: Account for depreciation of natural capital. Nature,
515(7525), pp.32-33.

https://faunalytics.org/counting-both-the-incomes-and-outcomes-of-nature/

Budiyono, A. (2022) March Expense Recognition Dispute: A Case of Coal Mining Companies in
Indonesia. In 7th Sriwijaya Economics, Accounting, and Business Conference (SEABC 2021)
(pp. 274-283). DOI 10.2991/aebmr.k.220304.036

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Howieson, B. (2017) The phoenix rises: The Australian accounting standards board and IFRS adoption.
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Jana, H. and Jitka, Z. (2014) Comparison of Approaches to Financial Reporting of Non-current

Assets According to the IFRS for SMEs and IAS/IFRS. Procedia Engineering, 69,
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nancial_Reporting_of_Non-
current_Assets_According_to_the_IFRS_for_SMEs_and_IASIFRS
Kordestani, G. Biglari, V. and Bakhtiari, M. (2011) ABILITY OF COMBINATIONS OF CASH FLOW
COMPONENTS TO PREDICT FINANCIAL DISTRESS. Business: Theory & Practice, 12(3).
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 Statement of Advice 10

Pattnaik, D. Kumar, S. and Burton, B. (2021) Thirty years of the Australian accounting review: A
bibliometric analysis. Australian Accounting Review, 31(2), pp.150-164.
https://doi.org/10.1111/auar.12332

Roux, E. and Bouchard, P.O. (2013) Kriging metamodel global optimization of clinching joining
processes accounting for ductile damage. Journal of Materials Processing Technology, 213(7),
pp.1038-1047. DOI:10.1016/j.jmatprotec.2013.01.018

Tulvinschi, M. (2019) Recognition and assessment of identifiable and unidentifiable intangible assets.
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Yao, D.F.T. Percy, M. and Hu, F. (2015). Fair value accounting for non-current assets and audit
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Statement of Advice 11