Mine-Tech Ltd Financial Statements - Case Study Example

Finance reporting-IAS To: Jennifer Bache, From: Financial accountant at Mine-Tech Ltd. Date: 17th November, 2014 Subject: Application of IAS 16 on company transactions Background and overview of IAS International Accounting Standards (IAS) is a set of international accounting standards that lay out guidelines on how individual transactions should be treated in completion of financial statements. The accounting standards are set upon principles rather than set rules (Kolitz 2009). They contrast the GAAP in that they are set principles while the GAAP is set rules to be followed in a particular country (Oppermann 2009). The IAS allows company management to use greater discretion and flexibility during financial statement preparation. A recent trend in the accounting standards is working towards a standard based system that will enable the world to use the same principles in reporting (Hennie 2001). The primary motivation is to benefits investors and other users of the documents by reducing the cost of investment and increasing the quality of information provided. Investors are always willing to provide more capital where there is greater transparency among different firms (Roger 2010). Transparency is outlined in the financial records through the use of IAS. The objectives of IAS are to prescribe the minimum content of an interim financial report (Hennie 2001). It is also aimed at prescribing the recognition principles and measurement in financial statements presented for an interim period. IAS is developed with relevance to qualitative characteristics of financial statements. The qualitative features include connection (materiality) and faithful representation (Kolitz 2009). The elements that enhance qualitative characteristics include comparability, verifiability, timeliness, and understandability (Kolitz 2009). Mine-Tech Ltd financial statements The memo is developed in regards of the IAS 16. The accounting standard is established to offer policies on treatment of property, plant and equipment (Kolitz 2009). The accounting standards are widely referred as principles of accounting under fixed assets. The standard defines property, plant and equipment as tangible things (Roger 2010). The items are held for use in the production or supply of goods or services. They include property for rental to others or administrative purposes. The property, plant and equipment should be used during more than one period (David 2008). Treatment of the particulars Particular 1: All the costs will be included in the item of property, plant and equipment. The costs of the items included in property, plant and equipment includes the acquisition price. Buying price includes all the other expenses such as import duty and non-refundable purchase tax (Ahmed 1998). The only deduction is the trade discount. Another inclusion on the costs is costs directly attributed to transporting the item, installation costs, and all other costs till the item are fully operational (Roger 2010). When a company uses its funds for dismantling during the removal and restoration, the costs are also inclusive (Steve 2010). The cost model also state that the initial purchasing cost will be recorded to the financial statements before reporting. Even so, the figures obtained as depreciation of the items and the accumulated impaired losses will be deducted from such costs (Steve 2010). The item will be valued at £169,752 less start-up losses, (£25000). The item’s value is £144752. Start-up losses do not make up the costs of the item. Particular 2: A local mining company will trade in; it’s used cars for a hover 3000 extraction system. The market value for the hover is £50000 but exchanged at a price of £30000. The treatment of this particular is based on the residual clause and de-recognition clause of IAS 16. The residual value is the appraised amount that an entity would obtain in the case of asset disposal. The hover is being disposed at a price of £30000. The actual value is obtained after deducting the estimated cost of disposal. Impairment is circumscribed by application of IAS 36 (Roger 2010). The hover’s initial price is £50000. The estimated cost of disposal is assumed to be £20000. The current carrying amount is £30000 and it is the assumed cost for the cars. Consequently, the mining company has de-recognized the cars but they are of economic value to Mine-Tech. the value of an item under property, plant and equipment (cars) will be recorded as £30000 and it will be included in the financial records. Gains or losses on disposal are supposed to appear in the financial records during reporting (Hennie 2001). Gain or loss is determined by calculating the difference between proceeds received as the price to the item and the carrying amount of the item (United Nations 2007). Particular 3 In 2005, Mine-Tech Ltd purchased a new warehouse at £250,000. The depreciation is calculated in the last 50 years. The property was revalued in 2010 to £275,000. After four years, the property is impaired and its fair value is £200,000. Revaluation items must first be assets in the category of plant, property and equipment (Hennie 2001). The other condition states that the fair value of the item must be measurable. The measurements must be reliable (Roger 2010). The item should be carried at a re-valued amount before recording. The revaluation will be increases to £275000; the increase (£25000) must be recorded in the financial records. The re-valued amount is stipulated to be the fair value at the initial date of revaluation. The fair value is completed by deduction of any accumulated depreciation and subsequent accumulated impaired losses. The standards put in place rules that must be followed when carrying out revaluation (United Nations 2007). The decrease in revaluation placing the fair value at £200,000 should be recorded in the profit and loss account. The revaluations differences have been accounted for in the previous years but need to be accounted for in years to come. Particular 4: Mine-Tech Ltd has purchased specialized equipment at a cost of £570,000. The equipment has a 10 year useful life. Even so, the equipment’s turbines will be replaced after four years. During installation of the turbines, the company will shut operations for two weeks. As per the costs clause of the IAS 16, the costs of the items included in property, plant and equipment includes the acquisition price. Buying price includes all the other expenses such as import duty and non-refundable purchase tax (Ahmed 1998). The only deduction is the trade discount. Another inclusion on the costs is costs directly attributed to transporting the item, installation costs, and all other costs till the item are fully operational (Roger 2010). The two weeks costs will also be included in the cost items of the equipment. The total amount, £570,000, is recorded under the items of property, plant and equipment. The financial statements will account for depreciation and amortization effects to the equipment in its ten year useful life. When Mine-Tech Ltd uses its funds for dismantling during the removal and restoration, the costs are also inclusive (Steve 2010). The cost model also state that the initial purchasing cost (£570,000) will be recorded to the financial statements before reporting. Even so, the figures obtained as depreciation of the items and the accumulated impaired losses will be deducted from such costs (Steve 2010). Particular 5: On January 2014 Mine-Tech Ltd borrowed 10 million at an interest of 6 % as monies to funding construction of new manufacturing plant. To start with, land will be recorded at its acquired value of £4million. Construction was completed on 30 September 2014 at an additional cost of £9.5million. Directly attributed costs of an asset in the class of property, plant and equipment shall include any employee benefits. The benefits must arise directly from the construction or acquisition of the items. IAS 19 defines the costs of employee benefits (Hennie 2001). Other directly attributable costs shall include the costs of developing the site and all costs for initial delivery and handling. Costs of installation and assembly are also attributes of direct costs (United Nations 2007). The total cost of the manufacturing plant will be the cost of land, the cost of developing the manufacturing plant and the interest rate charged for the loan at 6 %. These costs must be recorder in the financial statements. They should be reflected in the balance sheet and the income and expenditure statements. Summary In summing up the above accounting standards, being the accountant of Mine-Tech Ltd I will treat all the items of property, plant and equipment as per the stipulated guidelines. This memo has fully addressed all the issues stipulated under the IAS 16. Financial Accountant Mine-Tech Ltd Company financial ratios Liquidity ratio = 3208/2001 =1.6032 Quick ratio = 3208-104/ 2001 =1.551 Met working capital to sales ratio = 3208-2001/8890 =0.1358 Profitability ratios Gross profit margin = gross income/sales 765/8890 =0.086 Operating profit margin = operating income/sales 377/8890 =0.042 Net profit margin= net income/ sales 540/8890 0.1 activity ratios Inventory turnover = cost of goods sold/ inventory 4986/104 47.94 Total assets turnover = sales/total assets 8890/9020 0.986 Financial leverage ratios Total debt to asset ratio = total debt/total assets 4816/9020 0.533 Equity multiplier= total assets / shareholders’ equity 9020/ 1200 7.516 Return ratios Operating return on assets = operating income/total assets 765/9020 0.10 Return on assets = net income/total assets 540/9020 0.06 Return on equity= net income/shareholders’ equity 540/1200 0.45 References Ahmed Riahi-Belkaoui, 1998. Critical Financial Accounting Problems: Issues and Solutions. Edition. Praeger. D. L. Kolitz, 2009. A Concepts-Based Introduction to Financial Accounting. Fourth Edition, Fourth edition Edition. Juta Academic. David Alexander, 2008. International Accounting / Financial Reporting Standards Guide (2009). 2009 Edition. CCH, Inc.. Hennie Van Greuning, 2001. International Accounting Standards: A Practical Guide. 2 Edition. World Bank Publications. H.R.B. Oppermann, 2009. Accounting Standards. 13th Revised edition Edition. Juta Academic. Roger Hussey, 2010. Fundamentals of International Financial Accounting and Reporting. Edition. World Scientific Publishing Company. United Nations, 2007. International Accounting and Reporting Issues: 2006 Review. Edition. United Nations. W. Steve Albrecht, 2010. Financial Accounting. 11 Edition. Cengage Learning. Read More