Accounting Business Letter - Essay Example

Ian Dunno, CEO Techno Ltd 155 George St, Sydney Re: Various accounting issues Dear Mr. Dunno Thank you for your letter. Your queries seem tobe related to the following concerns: 1. In the first condition a customer who slipped in your office premises on a banana skin has sued you for carelessness and inadequate or poor safety services provided by Techno Ltd seeking compensation for damage or injury. It is clear from your statement, initially your lawyers were completely unaware of the financial demands that the customer would make against the injury and for your financial report the company reached a decision that no financial compensation would be paid to the client. In this case the customer has a right to claim for injury and medical costs as well as rehabilitation costs according to the legal position of the customer who can claim for 'tripping and slipping'. In this condition, a financial statement covering medical and injury costs as well as rehabilitation costs added to the financial report of the company should have been added. However the customer's claims should be made within the financial year under consideration and if this has been done as is the case, you definitely have to be prepared for any kind of financial compensation and include the medical expenses of the client concerned and establish the amount that will have to be paid for any damages claim. You will have to include this in the miscellaneous section of your expenses or damage related costs. 2. Your second query is related to your understanding of AASB accounting standards that are based on International Financial Reporting Standards, and whether these are applicable in the current reporting period for your company which began on July 1, 2005. With your poor understanding of AASB standards, you have considerable doubts as to whether the current accounting standards as practised by your company's research and development unit is consistent with the new accounting standards as specified by the AASB accounting standards. Your query seems to be specifically valid for new accounting standards for research and development. Here is my response. The AASB accounting standards are equivalent to the IASB standards. This is the Australian version of accounting standards however some recent amendments have been made. However there are several exceptions to implementing new accounting standards for the current reporting period beginning July 2005 and all new accounting standards could be included in the next accounting period. Some of the clauses are given below as examples to aid your understanding. AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards, as issued in July 2004: Exemption from the requirement to provide comparative disclosures for AASB 6 In its first Australian-equivalents-to-IFRSs financial report, an entity that adopts Australian equivalents to IFRSs before 1 January 2006 need not present the disclosures required by AASB 6 Exploration for and Evaluation of Mineral Resources for comparative periods (Accounting Standard, AASB 2004-1). This suggests that your company may be exempted from following new accounting standards till the next reporting period. 3. Let me now examine your third concern which is related to the fact that the market capitalization of Techno Ltd appears to be several times higher than the value of the net assets as reported. It is your belief that some of the major assets in your company are not being reported. You definitely consider that the highly innovative and trained programmers in your company are one of the greatest assets of your company, yet it is not being officially booked as an asset. Since a large amount of money is invested in developing a motivated and talented team of trained personnel which you are sure will add to intellectual capital in the future, you want to report your team of researchers as an asset. Apart from this, like your major rival company you also want to report goodwill and reputation in your balance sheet and annual financial report. These are all possible and your arguments may be correct. My response is as follows: You are definitely correct in your opinion and the expenditures in developing intellectual capital being considerable, the research and development team and trained personnel in your company could be considered as intellectual capital and also an important asset. This can be accounted for in your financial statement as 'intangible and long term assets'. Accounting standards according to AASB are also applied for intangible assets and should be applied in this case as well. Intangible assets are identified by future economic benefits. Goodwill and reputation acquired in business is also considered as intangible assets. The following point was given by AASB accounting standards that answer your question well: "This Standard applies to, among other things, expenditure on advertising, training, start-up, research and development activities. Research and development activities are directed to the development of knowledge. Therefore, although these activities may result in an asset with physical substance (e.g. a prototype), the physical element of the asset is secondary to its intangible component, that is, the knowledge embodied in it". Another instance of intangible asset includes - goodwill acquired in a business combination; As you can see from the AASB clause documented above, goodwill, reputation, research and development training are all considered as intangible assets and should be included in an accounts statement. However do keep in mind that internally generated goodwill cannot be considered as an asset (AASB,138, 2005). I hope I have provided you with adequate clarifications and with a clear understanding of accounting procedures that you require. Thank you for your custom. Regards, _____________________ CPA Smith & Sons 2 Fountain Street, KNOWLEDGEBANK, NSW 2845 References: Compiled Accounting Standard AASB 138, 2005 Intangible Assets ACCOUNTING STANDARD AASB 2004-1, December 2004 Amendments to Australian Accounting Standards From: http://www.aasb.com.au Read More