Australian Accounting Essay

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Australian Accounting

Accounting Questions

This part of the assignment is worth a total of 12 marks (details are provided below). It requires you to provide a written response to the questions listed below.

When answering the provided questions you must ensure that your answers address the questions, that your answers have an accounting/financial reporting focus, that your answers are internally consistent and that the individual components of your answers provide a well-rounded argument that is easy to follow.

The Chief Financial Officer (CFO) of Large Mart has been unable to find answers for two accounting problems. He has asked you to investigate the following questions and to write a report (including relevant references to source materials and accounting standards) that will provide him with answers to these questions and help him to understand how you have developed your answers.

(5 marks) Large Mart has recently purchased and installed a filter system through which all exhaust fumes that are created when PCs are produced in the Large Mart factory are passed before being released into the atmosphere. The filter system was installed because the Australian Environmental Protection Agency (EPA) threatened to close the factory unless all exhausted fumes were filtered.

The Chief Operating Officer (CEO) has asked the CFO if the filter system can be treated as an asset of the company. The CFO is not sure whether or not the filter system is an asset of Large Mart because after reviewing the Australian Conceptual Framework document, the CFO is not sure if the filter system produces any future economic benefits. The main reason for the CFO's concerns is that the filter system is not actually used in the production process.

a) Determine whether or not the filter system that was purchased and installed in the Large Mart factory meets the future economic benefit requirement that is included in the asset definition criteria AND provide a detailed description of the future economic benefits that the filter system is producing.

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The filter system does not add value to the production process and cannot be considered an asset by definition of the accounting standards. However, even though it is a necessary component due to the regulation environment, it adds no value to the finished product. The filtration system should instead be considered a liability. The Australian Conceptual Framework treats some items as "social policy liabilities." The definition is given as (McGregor, 2013):

Unlike most assets, liabilities will often arise without an exchange transaction having taken place; for example, litigation liabilities, asset retirement liabilities, taxation liabilities, social policy liabilities and liabilities arising from the receipt of government grants. There is no commensurate inflow (or more precisely 'exchange proceeds') relating to these liabilities. This contrasts, for example, with a conventional loan liability where the reporting entity receives proceeds (the loan amount) from the lender in exchange for the promise to repay the loan, or an insurance contract liability where the insurer receives proceeds (the premium) from the insured as compensation for accepting the risk of loss from the insured. Assessing whether, and identifying when, an obligation arises in relation to 'non-exchange' liabilities and consequently measuring them is sometimes highly problematic

b) Determine whether or not the filter system can be recognised as an asset in the books of Large Mart. When making this decision provide a detailed explanation that outlines how each of the asset definition criteria is (or is not) fulfilled.

In the management accounting version of the Large Mart books the filter could certainly be considered an asset because the manufacturing process could not operate without it due to the regulatory environment. Therefore, even though it does not add value to the finished product directly, it does add value to the organization by their ability to comply with regulations. The financial reporting standard defines a tangible fixed asset as (Accounting Standards Board, N.d.):

Whether acquired or self-constructed, a tangible fixed asset should be….....

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