Week 2 Tutorials

Chapter 1: Decision making and the role of accounting

2. Accounting is described as the language of business, and everyone is affected by the
business world. Discuss if everyone should be required to study accounting.

Suggested topics of discussion:

 Adults are affected by business activity but not all adults carry on a business.
 ‘Accounting is the process of identifying, measuring, recording and communicating
economic information to permit informed judgements and decisions by users of the
information.’ The ‘language of business’ is the communication of accounting information,
not the identifying, measuring and recording of accounting information that all adults may
not necessarily deal with. Language includes the terminology (jargon) used by accountants in
accounting and business reports. Communicating accounting information consists of
preparing of financial reports and other interpretative disclosures necessary to make the
accounting data understandable. It is up to the accountant to communicate in a language that
the client can understand.
 Part of an accountant’s role is to communicate financial information to adults. It is not
necessary for everyone to study accounting as it is part of the duty of an accountant to
communicate.

4. ‘Accounting is irrelevant in decision making because the information it provides relates

only to the past.’ Evaluate this remark.

Accounting is relevant to the decision-making process as it helps provide financial information

as to the most efficient use of available economic resources. Although accounting provides
financial information based on past financial transactions, it is useful in giving details on how
efficiently an organisation has been using its available resources. For example, what profit has
the accounting entity reported based on the assets used? A reported profit of $50 000 where an
entity has total assets of $200 000, appears more favourable when compared to an entity which
has total assets of $1 000 000. Accounting information is useful in providing decision makers
with information about the outcomes of their past business decisions. Past performance also
gives insight to the future trends for the entity. Accounting information is also used as part of the
budgeting process of a business entity.

8. List some emerging technologies that are currently influencing the accounting
industry.

Suggested topics for discussion include:

 Artificial Intelligence (includes machine learning, natural language processing). The
applications are various and include management accounting, finance, tax, financial
accounting and auditing.
 Robotic Process Automation
 Distributed Ledgers and Blockchain
 Automation
 Mobile Accounting. Accessing data and managing business transactions on portable
devices (e.g. Xero, MYOB)

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 Cloud Accounting. Internet based computing that allows for shared computer processing
resources and data on demand. This technology allows accountants to access files and
data remotely.

A useful resource is the IFAC Knowledge Gateway that includes many relevant articles related
to the accounting profession. Refer to https://www.ifac.org/knowledge-gateway

Chapter 10: Regulation and the Conceptual Framework

4. Briefly explain the nature of the Conceptual Framework for Financial Reporting, and
discuss the perceived advantages and disadvantages of having a conceptual framework.

A conceptual framework of accounting theory should enable standard setters to develop

standards which are consistent and logically formulated, provide guidance to accountants in
areas of accounting where standards have not been established, and enable standard users to
better understand standards and proposed standards.

The IASB and FASB are currently undertaking a joint project to amend the conceptual
framework. The overall objective of this joint project is to develop a common conceptual
framework that is both complete and internally consistent. The Boards want to develop a
framework which will provide a sound foundation for developing future accounting standards
that are principles-based, internally consistent, internationally converged, and that lead to
financial reporting which provides the information needed for investment, credit, and similar
decisions. That framework, which will deal with a wide range of issues, will build on the existing
IASB and FASB frameworks.

Are there any disadvantages in having a conceptual framework? Consider the cost of developing
the framework versus the benefits. Also, since it is not compulsory for standard setters to follow
the conclusions of the conceptual framework, will it be ignored?

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Exercise 10.10

Assets and asset recognition

For several seasons, Megan Gale and Jennifer Hawkins have been employed by David
Jones Limited and Myer Limited respectively in order to attract more fashion-conscious
customers to their stores. This strategy has met with some success and their continued
employment at fashion events in the future for their respective companies appears assured.

Required
(a) Discuss whether Megan Gale and Jennifer Hawkins should be regarded as assets of
David Jones Limited and Myer Limited respectively. Discuss also whether they should
have been recognised on the statement of financial position/balance sheet of the
respective companies as assets.
(LO6 and LO7)

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(a) An asset is defined in the current Framework as ‘a resource controlled by the entity as a
result of past events and from which future economic benefits are expected to flow to the entity’.

It is proposed to amend the definition of an asset to the following.

 An asset of an entity is a present economic resource to which, through an

enforceable right or other means, the entity has access or can limit the access of
others.

Do Megan Gale and Jennifer Hawkins satisfy the definition of an asset? Under their contracts,
they are both being paid over $1 million cash, plus share options. Are they both ‘resources’
containing future economic benefits to the respective companies? If you believe so, are those
resources ‘controlled’ by the entities concerned, as a result of past events? This is doubtful.

After they have performed their modelling duties for each company, do the future economic
benefits ‘linger on’? Or do the remunerations paid to them merely represent part of advertising
expenses?

Under the ‘proposed’ definition of an asset, do the two models represent present economic
resources to the two companies, over which they currently have rights that others do not have?
Whether the two entities have rights to the exclusion of others is doubtful.

If you believe they are assets of the two companies, can they be recognised as such in financial
statements?

Recognition criteria for an asset are:

 it is probable that the future economic benefits will flow to the entity and the asset has a cost
or other value that can be measured reliably.

Hence, is it ‘probable’ that benefits will flow to the entity? Can the cost or other value be
measured reliably. What cost/value do you place on share options given to the two models?

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Problem 10.21

Revenues and expenses

Celebrity Monthly is a glossy monthly magazine that has been on the market for nearly 2
years. It currently has a circulation across several countries of 1.6 million copies per
month. Currently, negotiations are under way for the company that produces the
magazine, among other publications, to obtain a loan from a bank in order to upgrade
production facilities. The company is currently producing close to capacity and expects to
grow at an average of 15% over the next 3 years.

After reviewing the financial statements of the company, the bank loan officer, Joe Teller,
has indicated that a loan could be made if the company is able to improve its debt–equity
ratio (non-current liabilities divided by equity) and current ratio (current assets divided by
current liabilities) to a specified level.

The company’s marketing manager, Jess Smith, has devised a plan to meet these
requirements. Smith indicates that an advertising campaign can be initiated immediately to
increase the company’s circulation. The campaign would include:
an offer to subscribe to Celebrity Monthly at 75% of the normal price for 1 year
a special offer to all new subscribers to receive another of the company’s publications, Age
of Discovery, at a guaranteed price of $8; Age of Discovery usually sells for $15.95 and
costs $11 to produce
an unconditional guarantee that any subscriber will receive a full refund if dissatisfied with
the magazine.

Although the offer for a full refund is risky, Smith claims that very few people ask for a
refund after receiving half of their subscription issues. Smith also claims that other
magazine companies have tried this sales campaign and have had great success, with an
average cancellation rate of only 25%. Overall, these other companies increased their
initial circulation threefold, and in the long run increased circulation to twice that which
existed before the promotion. Furthermore, 80% of the new subscribers are expected to
take up the Age of Discovery offer. Smith feels confident that the increased subscriptions
from the campaign will increase the current ratio and reduce the debt–equity ratio to the
required levels. The managing director agrees.

You are the accountant for the company, and must give your opinion of the accounting
treatment for the proposed campaign.

Required
(a) In light of the Conceptual Framework, explain:
i. how you would treat the costs of the advertising campaign
ii. when revenue should be recognised from the new subscriptions
iii. how you would treat sales returns stemming from the unconditional guarantee
iv. how the extra $8 received per Age of Discovery should be recorded.
(LO6 and LO7)

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a)(i) You must define an asset and determine whether advertising costs meet definition. You
must discuss whether there are future economic benefits, control (2 aspects) and past
transactions or events. If it is an asset, what should we call it? [Is it an ‘intangible’ asset?
If so, can it be recognised under IAS 38/AASB 138? No.]

If it is an asset, you must then state the recognition criteria and determine whether the asset
meets these:
(a) Probability — on basis of other companies’ experience, not a problem.
(b) Reliable (faithfully representative) measurement — advertising campaign would have a
cost or other value capable of measurement, e.g. estimated/invoiced amount incurred for
the campaign, predicted gross sales from campaign, and so on.

(ii) State the essential characteristics of income: (a) an inflow or enhancement; (b) an increase in
assets or reduction in liabilities; (c) an increase in equity apart from a contribution by owners In
addition, revenue under IAS 18/AASB 118 must be from (d) part of ordinary activities. Discuss
when revenue exists using the facts of the case.

State the recognition criteria — probability of inflow having occurred and reliable measurement
plus the criteria in IAS 18/AASB 118 See text p. 744).

Discuss when to recognise the revenue, including a discussion of the probability of the revenue
being received and of a reliable (faithfully representative) measure of the amount, given the
average return rate of 25% and the anticipated doubling of circulation.

Furthermore, is there a liability from an unconditional guarantee? Discussion of this aspect either
here or in the next section.

(iii) Discuss whether sales returns are to be treated as an expense, or as a reduction of revenue.
Outline the definition of an expense.

(iv) What about the cost of $11 to produce Age of Discovery? If the cost of advertising is treated
as an asset, should this include the $11 cost of producing Age of Discovery? Then, how should
we treat the $8 recoupment? If $11 cost is capitalised as part of the costs of the advertising
campaign, the $8 recoupment should be credited to the asset as a reduction in advertising costs.
If advertising costs are expensed, and the $11 cost of producing Age of Discovery is an asset,
then we treat the $8 recoupment as revenue, making a loss of $3.