Intermediate Financial Accounting - Assignment Example

Intermediate financial accounting: business research report Introduction In accounting process, disclosures are required so as to disclose the information concerning the importance of the financial instruments to an organization. Disclosures of these instruments are also needed to find the information about the nature and extent risks that arise from these instruments. The information should be disclosed both in qualitative and quantitative terms. Specific disclosures are required when accounting for a particular kind of assets. Both tangible and intangible assets should be considered during the disclosures process. Assets disclosure is very much important in the accounting exercise because it enables the investors to better compare financial statements that are prepared according to both IFRS and GAAP (IFRS.org, 2011, pp2). Moreover, the disclosure requirements help in improving transparency when reporting on how organizations mitigate credit risks. However, the disclosure process tends to differ from one region to another because of different accounting standards. For example, the accounting standards used in Australia were different from those used in the US and the UK (IFRS.org, 2011, pp5). Therefore, the disclosures of certain items differed to some extent. These differences are being solved by the adoption of international financial reporting standards (IFRS) which is the accounting standards that is required to be followed by all accounting firms all over the world. Abacus property group (ABP) is an Australian company trading on the Australian stock exchange (Abacus property group, 2014, pp39). Abacus property group is a diversified property group which trades in property opportunities across Australia commercial property market. It deals in retail and industrial property, mortgage investments, property fund management and development of syndicates. Question A: Requirements of IFRS on disclosures The IFRS provides guidelines on how various instruments need to be disclosed during the accounting process. For example, when conducting impairment tests and asset valuing, the auditors and directors should ensure that first, the cash flows and assumptions are reasonable (IFRS.org, 2011, pp5). This can be determined by examining the historical cash flows, examining how the organization is funded and the market conditions. In this area, there are normally big variances between the cash flow projections and the real results (Abacus property group, 2014, pp39). These variances mostly raise questions whether the assumptions were valid and supportable. Secondly, the auditors and directors should know that the discounted cash flows are not used to find the fair value in cases where the projections and forecasts are not reasonable. IFRS also requires that during the disclosure, the auditors should amortize the intangible assets that are available even if they have not generated revenue yet. According to the Australian accounting standard board AASB 12, there should be disclosures on unconsolidated structured entities. AASB 13 insists on the determination of the fair value of these financial instruments and other assets. Thirdly, during the process of revenue recognition, the directors and auditors ought to review the organization’s revenue recognition policies to make sure that they are recognized according to the meaning of the transaction. Moreover, the revenue is recognized on the financial instruments basing on the class of the instrument. During the expense deferral, the IFRS requires that the directors and auditors expenses are only deferred when it is obvious that the future economic benefits will arise and when there are assets defined in the standards (Abacus property group, 2014, pp21). For the users of the financial reports to understand the information presented, income and expense should only be included in comprehensive income other than putting them in the profit/loss statements unless it is specifically required by the accounting standards. The disclosure concerning the sources of estimation and judgment in applying accounting policies are very significant since it allow the users of the of the financial reports to scrutinize the reported financial status and performance of the organization (Abacus fund management, 2006, pp28). Therefore, the auditors and directors of every entity should make sure that disclosures regarding specific assets, liabilities and income are made. Question B Current accounting practices of ABP Abacus property group (ABP) like any other company also conducts disclosures on its financial instruments during the accounting process. Since it is an Australian company, it mostly follows Australian international financial reporting standards (AIFRS). ABP acquires properties on the balance sheet for active assets management and recycles them into management vehicles. These provide with it high margins transactions fees in addition to replacement annuity fee (Abacus property group, 2014, pp61). This company uses the strategy of targeting the balance sheet disclosure of 70% of its direct property assets and 30% of its funds management and property ventures. This strategy is always flexible responding to any opportunity that arises however; remain limited by the availability of capital when there are lower property assets. Impairment-: In ABP, the carrying value of the property, plant and equipment are always reviewed for impairment in cases where events and circumstances indicate the carrying value may be irrecoverable. Assets that do not generate reasonable cash flows, the recoverable figure are determined generating unit to which this asset belongs (Abacus fund management, 2006, pp28). In determining the cash in use, the projected future cash flows are discounted to their present value by the use of pretax discount rate that reflects the current market. ABP recognizes impairment losses in the income statement (IFRS.org, 2011, pp11). Moreover, during the impairment, independent valuation is done with necessary regularity to make sure that the carrying amounts do not deviate materially from the fair value of the assets at the date of the balance sheet Disposal-: ABP derecognizes a property, plant or equipment when it is disposed off or increase the future economic activity is anticipated to rise from the continued utilization of the asset (Abacus property group, 2014, pp56). In this case, any loss that occurs due to de-recognition is included in the income statement in the financial year which the said asset is derecognized. Other properties are independently valued on spread period basis in every two years. Investment properties- In ABP, the investment properties are measured at a cost that includes the transaction costs. In this case, the carrying amount involves the costs of replacing the parts of the investment property at a time when the said cost is incurred (Abacus property group, 2014, pp49). The investment properties are derecognized when they have been disposed of or when the property is permanently withdrawn from the usage, and there is no anticipated future benefit from its disposal. The gains and losses on disposal are recognized in the income statement in the year of disposal (Abacus property group, 2014, pp49). Those investment properties under construction are carried at a fair value; this is calculated basing on the estimated fair value when the construction has been completed. Goodwill and intangibles-: ABP measures goodwill on acquisition at a cost that exceeds that of the business of the net value of the asset and liabilities. Goodwill is measured at a cost less any accumulated impairment losses, and it is not amortized. In most cases, ABP reviews goodwill for impairment on an annual basis and even regularly if the circumstances change and show the indications that the carrying value may be impaired in the future. The impairment is found by scrutinizing the recoverable amount of the cash-generating unit to which this goodwill relates (Abacus property group, 2014, pp49). In the case where the recoverable amount of the cash-generating unit happens to be less than the carrying amount, an impairment loss is recognized (IFRS.org, 2011, pp16). However, when the goodwill is part of the cash generating unit and functional in that unit when disposed of, then the goodwill associated with the operation is included in the carrying amount of the operation in case the gain or loss is being determined (Abacus property group, 2014, pp50). Such a good will is measured basing on the relative values of the operation disposed of. Inventories-: When dealing with property development, ABP states inventories at a lower cost of the net realizable value. This net realizable value is got basing on the sales in the course of the business. All expenses incurred during the marketing and selling of the property in this company to customers are estimated and subtracted to determine the net realizable value (Abacus property group, 2014, pp43). In a situation where the net realizable value of inventories is lower than the cost, the impairment expense is recognized in the consolidated income statement. In hotel property, ABP values the inventories at a lower cost and the net realizable value. The net realizable value in this case is the estimated selling price in the normal functioning of the business minus the estimated costs needed to make a sale. Taxation-: ABP group comprises of both taxable and nontaxable organizations. Liabilities rising from the deferred tax and the tax expense are only recognized in respect to the taxable organizations that are subject to this income tax (Abacus fund management, 2006, pp24).The assets gotten from the tax funding agreements with the tax consolidated organizations are recognized as amounts receivable or payable to other organizations in the group. The differences between the amounts receivables or payables under tax funding exercise agreement are normally recognized as a contribution to wholly-owned tax consolidated organizations. The deferred income tax assets are normally recognized for all deductible differences that arise from the initial recognition of the assets and liabilities. Question C Potential gaps There are several potential gaps that exist on how Abacus property group carries its disclosures as compared to the requirements of the IFRS. These gaps exists because there is always on going work that is being undertaken on IFRS where potential amendments are done and also the emerging accepted industry norms in the interpretation of the IFRS (IFRS.org, 2011, pp25). Since ABP is an Australian company that has been using Australian accounting standards from the history, then it is obvious that gaps are likely to exist in disclosures compared to the requirements of the IFRS (Abacus property group, 2014, pp39). This company adheres to the most of the requirements of the IFRS; however, there are a few gaps that still exist. They include; first, on the investment of properties, under AASB 140, the investment property which includes plant and any equipment are not subject to depreciation (Abacus fund management, 2006, pp71). However, ABP does it differently by depreciating such properties. ABP does this because the depreciation allowances in respect to particular buildings plant and equipments are available to the investors so that they can use them for taxation purposes (Abacus property group, 2014, pp39). Moreover, AASB 140 requires that there are no forecasts for future valuations of properties since the directors tend to believe that that there is no reasonable basis on which the forecast can be made. However, ABP estimates the future valuations of investment properties and only derecognize them when they have been disposed of or when the property is permanently withdrawn from the usage and there is no anticipated future benefit from its disposal. Secondly, according to the AASB 3 business combination, goodwill should not be amortized but instead subjected to impairment tests as provided in the AASB 136 impairment of assets (Abacus fund management, 2006, pp28). ABP sometimes tend to amortize some of the goodwill in regard to the prevailing situation. Although it does not amortize them frequently but subjects them to impairment tests regularly. Thirdly, ABP applies AASB 7 financial instruments disclosure which requires that there should be additional disclosures about the fair value measurements and the liquidity risk. The fair value under this amendment relate to all financial instruments recognized should be disclosed by the source of its input (Abacus property group, 2014, pp39). However, IFRS 7 disclosure requirement dictates that particular disclosures should be presented by the instrument based on the international accounting standard (IAS) 39 measurement categories. Some other disclosures are required; other class of financial instruments (Abacus fund management, 2006, pp32). The two main disclosures needed in this case are the first information about the importance of the financial instruments. Secondly, the information about the nature and extent of risks that arise from the financial instruments is also needed. Question D Recommended actions ABP deals with property and investment sector, a sector that is highly capital intensive. Therefore, ABP should note that its ability to raise capital on acceptable terms will much rely on various factors. To satisfy the ASIC reviewers of its financial report, this company should note the changes of the current and future borrowings since this may impact on the availability of funding. It should adopt funding technique that would not increase the refinancing risks as debt facilities tend to mature (Abacus fund management, 2006, pp26).Therefore, the directors should be careful when choosing the funding methods because the company depends much n external funding in carrying out its business. Secondly, ABP should try as much as possible to bridge the gaps that exist between its disclosures and the IFRS disclosure requirements. The adherence to the new laws in the IFRS would reduce the risks that may face the company in future (IFRS.org, 2011, pp8). Moreover, observation of these rules in IFRS would widen its chances of accessing international creditors like World Bank and International monetary fund (IMF) which can boost its capital base. Thirdly, for this company to sustain its good performance, it should be speculative and invest in sectors that have fewer risks but have good markets. Residential sector for example is one of the sub-sectors that perform well in this industry (Abacus property group, 2014, pp84). Therefore, ABP should focus on such opportunities to maximize its potential. History has revealed that the interest rates are inversely proportional to the prices of these residential properties. Therefore, the company should be careful when creating a balance between these two variables that determine this kind of business. In case the directors declare high interests on the property, then the prices would drop drastically vise versa (Abacus fund management, 2006, pp46).Therefore, finding a balance between these two would be the only task for this company. Fourthly, to get a n approval by the ASIC reviewers, ABP should provide sufficient rewards to attract and retain skilled personnel who are well qualified for the tasks and have wide experience. Moreover, the company should establish performance hurdles for each executive so that they get focused on attaining sustainable earnings performance over time. This improves the general management of the firm which would be acceptable by the ASIC reviewers. Conclusion Disclosure of the financial instruments is one of the accounting tasks that ought to be conducted carefully by the auditors and directors of any firm. The disclosures should be done in adherence to the set IFRS so that they are recognized by other international organizations. Australia’s corporate society initially had its on accounting standards; however, in the recent years, this standard has been replaced by the IFRS. Therefore, old firms such as Abacus property group (ABP) were used to the AAS but they are now adjusting to the international standards that are recognized in other countries. This is the reason why some gaps still exist in the disclosures of financial instruments in the disclosure exercise in most companies. Bibliographic references Abacus Fund management. (2006). “Abacus Property Group Explanatory Memorandum.” Accessed 0n 17 December 2014. Retrieved from http://www.epra.com/media/Abacus_Property_Group_Explanatory_Memorandum_Feb_ 2006.pdf Abacus property group. (2014). “Abacus property group: Annual financial report for the year ended 30 June 2014.” Accessed on 17 December 2014. Retrieved from http://www.openbriefing.com/AsxDownload.aspx?pdfUrl=Report%2FComNews%2F201 40828%2F01547393.pdf IFRS.org. (2011). “Disclosures: Offsetting financial assets and financial (Amendments to IFRS 7).” Accessed on 17 December 2014. Retrieved from http://www.ifrs.org/Alerts/PressRelease/Documents/DisclosuresOffsettingFAssetsandFLi abilties_AmdmentstoIFRS7_WEBSITE.pdf Read More