The Reporting Entity - Example

Running header: Accounting Student’s name: Instructor’s name: Subject code: Date of submission: Reporting entity Ai) determining whether Large Mart is a reporting entity; A reporting entity can simply be defined as any organisation that provides financial information to its stockholders either voluntarily or through requirement by law. International financial reporting standards (2008) refer to a reporting entity as an entity for which it is reasonably expected the existence of users who depend on its general financial reports for information useful for them in evaluation and making decisions regarding allocation of resources. As such, there is an obligation on such an entity to prepare external financial reports for the benefit of these dependent users. The dependent users may include investors, suppliers etc. As such, whether Large Mart is a reporting entity largely depends on whether there are users for which may rely on its financial reports to make decisions regarding allocation of resources. In case it is not readily apparent whether the dependent users exist for Large Mart, the CFO should consider the following in determining whether the entity is a reporting entity; a) Is there separation of management from economic interest? – according to Jabez (2007), if there is separation of management from economic ownership such as is the case in a public company, it is more likely that Large Mart has users who would depend on its general purpose financial reports as a basis for making and evaluation of resource allocation decisions. This would qualify Large Mart as a reporting entity. b) Political/ Economic influence- the ability of Large Mart to significantly impact the welfare of external parties will determine whether it is a reporting entity. The greater the influence, the more the likelihood that dependent users exist for the entity. For instance, Large Mart is a reporting entity if it enjoys dominant market position and is is concerned with balancing the interests of a significant group. c) Large Mart’s financial characteristics- the financial characteristics to be considered in this case include its size - which may be depicted by its sales value, number of staff, value of assets or its indebtedness (Jones, 2009). The larger the size of Large Mart, the more likely that there exists users who are dependent on its general purpose financial reports in making and evaluating their resources allocation decisions. By considering the above factors and hence establishing the existence of users dependent on Large Mart’s financial reports in making and evaluation of their resources allocation decisions, the Chief Financial Officer will be able to determine whether or not the entity is a reporting entity. Aii) As stated above, reporting entities are required to prepare general purpose financial reports to assist the dependent users in making and evaluating their resources allocation decisions. As such, if Large Mart is found to be a reporting entity, it will be required to prepare general purpose financial reports. Such financial reports prepared by Large Mart will be required to adhere to the requirements of relevant accounting standards such as GAAPS and AAS. This will call for its Accounting department to apply the following elements when accounting for transactions and events. i) Annette, (2003) states that the general purpose financial reports will have to cover three areas namely; the financial position, financial performance and cash flow. ii) Since the reports are supposed to enable users make resource allocation decisions, the quality of information they provide should guarantee their usefulness to the users. As such, they should have the following qualities; a) Relevance – the reports will be required to be relevant to the users and this is only possible if they confirm or correct the users’ expectations on the firm’s past events. The reports should also assist the users in forming expectations about the firm’s future. It is important that the reports be prepared and availed to the users at the right time since information presented past when it is needed would not assist the users in making their decisions. b) Understandability - the firm will be required to prepare the general purpose financial reports in a way that users will be reasonably expected to comprehend. However, accounting standards generally assume that users have reasonable knowledge on Large Mart’s activities and environment and will willingly study the reports with reasonable diligence. c) Reliability –the information in Large Mart’s reports should correspond with its actual underlying transactions and events. It should be independently verifiable and be neutral or free from bias. d) Comparability – Large Mart’s reports should be comparable in that users should be able to identify similarities and differences between the reports and other reports both in terms of periods and entities. ii) In order to arrive at the correct financial information in the reports, Large Mart will be required to be consistent in its application of accounting principles when recording transaction. For instance, the revenue and expenses recognition criteria applied should be consistent (Howard, 2007). The same case should be applied in determining the measurement criteria for assets and liabilities. By ensuring that the General Financial Reports con form to the above requirements, Large Mart will ensure that the reports serve their required purpose to the users. B: R&D acquisitions Calculation of depreciation a) Microscope Cost = $150,000 Useful life = 6years Received on 1 may Depreciation for the month = 150,000/5× 1/12 = $2500 for the month of May b) High performance computer Cost = $50,000 Useful life = 2 years Received on 15th May hence used for half a month in May Hence depreciation for the month = $50,000/2×1/12×1/2 = 1041.667 JOURNAL ENTRIES: a) Microscope Date Account Name Debit Credit May 31 201x Depreciation Expense $2500 Accumulated Depreciation b) High performance computer Date Account Name Debit Credit May 31 201x Depreciation expense $1041.667 Accumulated depreciation $1041.667 On revaluation a) Microscope – revalued to $180,000 Accumulated depreciation -$2500 Book value to date -$147,500 Gain on revaluation is hence $32,500 Journal entry: Date Account Name Debit Credit 1 June 201x Acc. Depreciation Microscope Revaluation Surplus $2500 $30,000 $32,500 b) High performance computer Revalued to $20,000 Accumulated depreciation = $1041.667 Book value to date = $48,958.33 Loss on revaluation is hence $28958.33 Journal entries: Date Account Name Debit Credit 1 June 201x Accumulated depreciation Loss on Impairment High performance computer 1041.667 28,958.33 30,000 References: Annette, M. (2003). Accounting principles and basics. London, Rutledge. Howard, J. (2007). Financial accounting and organisational decision making. Berkeley, Seal Press. International Financial Reporting Standards. (2008). Retrieved from CICA: International Financial Reporting Standards Database. Jabez, W. (2007). The reporting entity concept, Accounting. Auditing and Accountability Journal, 12(5), 45-52. Jones, B. (2009). Contemporary issues in financial reporting. Harvard Business Review, 95(14), 95-101. Read More