The Application of Relevant Accounting Polices - Example

Report on the Application of Relevant Accounting Polices AMP Limited Company Financial Statement Table of Contents Report on the Application of Relevant Accounting Polices 0 Table of Contents 1 Owner’s equity 4 Income tax expense, benefits and obligations 5 Tax from investments 7 The differed tax 7 Goods and services tax 8 Payables 8 The intangible assets 9 Intangibles 9 Goodwill 10 Capitalized costs 11 Management rights 12 Value of in force business 12 Distribution networks 12 The statement of cash flow 13 Conclusions 16 References 17 Introduction The AMP limited company The AMP limited is a company dealing and operating in the insurance industry in Australia and other countries. It has interest other entities, having a controlling interest. The (IFRS10 2012) requires that an entity having majority control or controlling interest (holding company) in other companies to prepare and present consolidated financial statements, to define control principle and state control Vis a Vis consolidation, to clearly set out the principle of control and to set out the accounting requirements needed for the preparation of the financial statements. AMP limited have prepared its financial statements according to these requirements and presented its consolidated financial statements. AASB 10 on Consolidated Financial Statements requires an entity to prepare its statements and consolidate them; the group have prepared and presented consolidated financial statements for the financial year ended 31st December 2012 (AMP 2013). (IFRS10 2012) Continues to state that an entity must use uniform accounting policies for reporting its transactions eliminating intra group transactions and balances and present the equity of the subsidiary separately from that of the holding company, AMP limited have observed all this requirements in the consolidated financial statements. International accounting standards one (IAS 1) prescribes the basis for the presentation of financial statements to ensure compatibility with previous periods statements and with other entities. (IAS1, 2012) Requires entities to disclose information about assumptions made about it future with other major estimation and uncertainty also disclosed at the end of the reporting period. The company has disclosed all the necessary information that the users of the financial statements may require in making judgment full filling the (IAS1 2012) requirements. I have chosen the owners equity section, recording of income tax expense benefits and obligations, treatment of intangible assets and statements of cash flow. This is because the company has provided satisfactory information in these four areas and also they are clear in their application and use as far as the financial statement of AMP limited. The other two leasing and recording of segment activities doesn’t have enough disclosure requirements. Owner’s equity This is the owner’s investment in the company. As (AASB10 2011) requires the AMP limited equity represents ownership of the company. Equity is made up of ordinary shareholders and other equity related issues in the statement of changes in equity. Equity is represented by the; contributed equity, reserve (contributed from equity), reserve for share based payment, hedge reserve for cash reserve, the revaluation reserve for owner occupied property, translation reserve for foreign currency, hedge of the net investment reserve, capital profit reserve, loss reserve from demerger and the retained earnings. This make up the total owners’ equity at AMP limited. The Australia accounting standards board requires that an entity disclose all the information relating to the capital formation of the entity. In a given format a company should disclose the composition with their amounts of the components that make the equity of the company. The AASB states that equity is composed of the equity contributed the retained earnings and the reserves created there on for the purposes of running the company. AMP capital is in form of diversified investment providing services domestically and internationally. The group has established operations in many countries like Bahrain, China, India, allowing it have source of competitive offshore opportunities. AMP limited equity was affected by movement of various items including the issue of new shares, the equity contribution reserve was created in 2003 to account for the additional loss after the demerger of the subsidiary in the United Kingdom in December of 2003. The loss emanated from the valuation of the subsidiary by the directors and the market based fair value of its operations. The equity statements must indicate if there is any dividend paid during the year that is interim and or final dividends. The issued share capital is in respect of ordinary shares and is recognised at fair value of the consideration received by the holding company. Any issue costs of shares are shown in equity as deduction after tax from proceed of issue of the shares. The corporation Act of 2001 and (AASB10 2011) allows the AMP limited to be granted relief to allow life insurance entities to trade and hold shares in AMP limited, this is as a result of investment activities. The usability and transparency of owner’s equity may be improved by breaking down all the components of the whole group and analysis of each is made. This would help to compare the capital formation of each company and sufficient consolidation information will be availed. This would also aid to know which company is maximizing its capital for purpose of wealth creation. Income tax expense, benefits and obligations The international accounting standards 12 (IAS 12) on income taxes requires that an entity income taxes shall include domestic and foreign taxes which are deducted from taxable profits. They also include such taxes as the withholding taxes payable by the subsidiary, joint venture or associates on distribution to the reporting entity. (IFRS 2012) Requires that tax for holding company and subsidiary be consolidated, the tax for the AMP limited comprise the holding company (AMP limited) and its controlled entities are domiciled in Australia. Tax has been consolidated together with its controlling entities. This also takes in to account the sale of fifteen percent (15%) interest in the AMP capital holdings limited which was sold on 1st march 2012 but this was implemented on 30th June 2003. The AMP limited (holding company) assumes that the current levy balances arising from external transactions recognised by the entities in the consolidated tax and that the differed tax assets arising from unused tax losses and credits recognised by the entities in consolidation of tax. The holding entity has agreed a tax funding for the controlled entities from the consolidated tax in the group as (AASB112 2010) requires. All companies in the consolidated tax will continue to be responsible for their operations of funding tax payments required to be submitted by the head entity arising from the transactions of the holding company under the agreement fulfilling the requirements of (IFRS 2012). This will make the holding company to make contributions to the controlled entities, which will be calculated under the agreement and proportion of tax contributed. This will reflect the payment of the tax obligations to the Australian taxation office. Any asset or liability arising from the agreement will be treated as related party transactions payable or receivable in the consolidated statement of financial position of the whole group. The payment of such assets or liabilities is based on the tax consolidated group to utilize the amounts recognised by the whole group. The (AASB112 2010) continues to assert that the income Tax expense is the amount of tax liability payable by the whole group out of the generated taxable income based on the tax rate for each component for the year ended 31st December 2012. This fulfills the requirements of the IAS 12 on the consolidation of the taxes from the subsidiaries to the reporting group as (IFRS 2012) also outlines. This income tax expense is adjusted for differed tax assets and liabilities which are attributable to; temporary difference of tax bases of assets and liabilities and other statement of financial position carrying amounts, the tax losses unused and the impact of changes of the deferred tax liabilities or assets arising from the changes in the tax rates or manner in which this balances are expected to be realized. The company has made adjustments for any difference between the amounts paid or expected to be paid relating to prior periods and the amounts that are provided for this periods at the start of the financial year of 2012 as corporations Act 2001 requires. Tax from investments The income tax expense in AMP group reflects the tax imposed on the shareholders and policy holders. This arises from the life insurance entities. (IFRS 2012) Outlines that all taxes be consolidated, this confirms the IAS 12 on allocation of taxes. The investment contracts liabilities and life insurance contracts liabilities are expressed in net in Australia while in other countries are expressed in gross amount. This is from the policyholders’ share of nay current tax payable as well as the differed tax balances of the whole group (AMP group). The amounts that are paid to Australian taxation office are captured as decrease in investment contracts liabilities while they are not included in the income tax expense. The differed tax The IAS 12 requires that a differed tax asset to be recognised and carried forward for unused tax losses and credits to extent of probable future taxable profits will be available for the unused tax losses and credits to be utilized as (IFRS 2012) states. This is based on the tax rates and enacted for jurisdiction. Assets and liabilities from the differed tax are recognised for temporary difference at the tax rates which are expected to apply when deferred tax assets are recovered or when liabilities are settled. The company has made an exception for some temporary differences arising from the recognition of an asset or a liability. Consequently there is no differed tax or liability which is recognised in relation to this initial difference. Tax assets differed are only recognised when it’s in future the taxable amount will be available to utilize those losses and temporary differences as required by(AASB112 2010) as well as corporation Act of 2001 . Differed tax is not discounted for present value (including amounts reported in respect of investments contracts and life insurance contracts). The AMP group has fulfilled this requirement on the differed tax assets. Goods and services tax The AMP group operates in a number of different tax categories and therefore its goods and services are taxed at different levels of taxes. The income and expenses are reported net of due tax except where such goods and services are of input tax or unrecoverable tax. This is recognised as part of the expense cost or part of acquisition cost. The cash flows have been reported at gross basis while reflecting any goods and services tax paid on them. The operating cash flows in the cash flow statement are from the goods and services taxes which are either recoverable from or payable to the local tax authorities. The AASB and corporations Act 2001 requires that an entity to calculate tax based on the tax category in which this goods and services have been derived as (IFRS 2012) concur. Payables The IAS 12 under (IFRS 2012) on measurement requires that assets and liabilities on differed tax be valued or measured at the tax rate expected to be applied when the liability is settled or the asset is realized based on the tax rates and tax laws enacted at the end of the reporting period. The payables have been measured at fair value while some are reported at fair value, most payables approximates fair value of the nominal amount paid. This fulfills the IAS 12 of measurement of tax liabilities and assets. They reflect the tax consequences that would follow from the manner of its liabilities. They are not discounted as IAS 12 requires. AMP group have as per the IAS 12 on allocation accounted the tax consequence of all its transactions in the same manner it has accounted for the other transactions and events. This has taken the tax effect of those transactions in the financial statements. The group has affected the changes in goodwill arising from the business consolidation of financial statements. IAS 12 requires the changes in goodwill to be taken in to account for businesses with subsidiaries and consolidating their financial statements as (IFRS 2012) continues to explain. Tax understanding among some users is issue for tomorrow, however this is an important aspect legally as the tax compliance has to be observed. Most firms try to keep tax matters in their own in order to evade tax. Transparency and usability can be improved by awareness entities. The intangible assets Intangibles These comprise the goodwill, capitalized costs, management right, the distribution networks, value of in force business, distribution networks and other intangibles as categorized by the AMP group. All theses intangible assets were amortised and or impaired during the reporting year of 2012. The group reported impairment losses in capitalized costs, management right and distribution networks during the year, this was included in the operating expenses in the income statement. The company group acquired half that was remaining from AMP capital Brookfield pty limited, Cavendish pty limited and some distribution network related to planner business. The intangible assets have an indistinct life as reported by AMP group. They can impact on the net profit of which is nature which the AMP group cease to control the investments. AASB 10 requires that intangible assets acquired through business combinations to be measured at their fair value in the acquisition date. The standard further requires that the management to asses at each reporting period, the indicators of impairment to the carrying amount of the intangible assets. The recoverable amount must be determined and compared to the carrying amount of that intangible asset. As per (AASB13 2011) the management is required to apply judgment in determining if there is any impairment indicators and where required determine the recoverable amount. Goodwill The amount recognised as goodwill in the intangible assets is the amount and above (the excess of) the consideration transferred in a business combination at fair value, non controlling interest amount recognized and equity interest until that time held in the assets acquired exceeding the fair value to the identifiable assets acquired assets. It is supposed to be billed to cash producing items of the group. Management judgment is required in determining these cash generating units, as well as selecting the valuation techniques and setting assumptions after valuation to determine the recoverable amount as well as liabilities assumed this fulfils the requirements of (AASB13 2011). It has been calculated at cost less the impairment losses accumulated. It is amortised. The group reported impairment losses in goodwill. Goodwill impairment is from controlled companies from life entities statutory funds that conduct business operations which are not related to the main wealth management operations of the whole group. The group observed the requirements of IFRS 3 and (IAS21 2012) on business combinations that require the entities to recognize and measure goodwill acquired in combinations or gain from purchase gain. The goodwill is made up from two components of that attributable to the shareholders and that attributable to the policyholders. The impairment testing used by the group is based on the assumptions as to the level of the profitability of each and every business. The changes in goodwill do not include any future restructuring or any anticipated changes by the management. The management reported that there was no possible change that could in the assumptions that could make the carrying amount of the goodwill to exceed the recoverable amount. Investment and maintenance expenses of the goodwill are estimated based on the unit cost derived the budget amounts for the following year and also increased for future years to take in to account the inflation rate. The goodwill acquired by AMP limited from its associates has been accounted for using the acquisition method as per the requirements of (IFRS3, 2012). The acquisition method as per IFRS 3 is used by business entities which does not have common control. AMP limited has used the same accounting policies with those of its associates. (IAS21 2012) requires that goodwill arises from acquisition of foreign operations and adjustments to carrying amounts of liabilities and assets be treated as liabilities and assets of the foreign operations, AMP limited have a subsidiary in new Zealand and have accounted for this changes when calculating the value of the goodwill. Capitalized costs This are cost relating to creation of an asset with expected future economic benefits with reliable measurements. They are subject to amortization at a straight line method over their estimated useful life; however their lives do not exceed five years except to those relating to information technology systems development projects where the management expects economic benefits to occur over a long period of time. This confers with (AASB13 2011) requirements. Management rights As defined by (IFRS3 2012) AMP limited have prepared the management rights to that of IFRS3 that is the right to receive fees for services of management of assets which are acquired as part of business combinations or acquired directly, when these assets can be recognised as intangible assets when separately identified and measured with probability of management getting benefits. They are measure at costs at their recognition and they are not amortised. AMP limited estimates indefinite useful life where rights to manage the asset has no fixed term. The contractual term of the management right is taken to be the useful life of the asset where they are subject to contractual terms. Value of in force business Its value is measured at fair value at the beginning and there after amortised over its useful life using the straight line method. Its value in the statements is estimated to be ten years for wealth management as well as distribution business while wealth protection and mature business have useful life of twenty years. This is as per the requirements of (AASB1054 2011). Distribution networks This is recognised where the whole group acquires customer lists or the distribution related rights and not through business combinations. They are measured at fair value at the beginning and later amortised over their useful life three to fifteen year using the straight line method. The group assesses the useful life of the intangible assets at the end of every period and adjusted to reflect the current conditions. The following are not subject to impairment as outlined by the group as per the requirements of (IFRS 2012); financial assets which have been measured at fair value in the income statement and investment properties. Goodwill is tested once every reporting period while other intangible assets are reviewed for impairment where events or sucumstances dictate carrying amount may not be recoverable. The AMP limited assesses the impairment of goodwill by grouping assets to their lowest levels to where they are separately identified cash flows. These assets have monetary value but no physical value. Usability and transparency can be improved by more disclosure and more legislation by institutions to enhance their disclosure. The statement of cash flow IFRS 1 requires that an entity prepare its financial statements whether interim or full year reports in a way that is transparent to the users and comparable to other periods; in a manner that provides a good starting point for accounting and which are prepared at a cost which is not exceeding the benefits of those statements as (IFRS1 2012) on presentation of the financial statements puts it. The AMP limited have classified the information in the statement of cash flow in to operating activities, investing activities and financing activities as required by the IFRS on presentation of the financial statements. The company paid dividends for the year which is categorized as net of the dividends reinvestments plan and those dividends from the treasury shares. This is shown in the statement of changes in equity as IFRS 1 requires. The groups cash and cash equivalent was affected by the exchange rate effects. This is reflected in the statement as well. AMP limited have included the statutory funds that have a substantial impact on the cash flows from operating activities as well as investing activities and repayment from borrowings relating to non banking operations and cash and equivalent balances in the statement of cash flow. The company has treated distributions reinvested and dividends as non-cash items, however this is contrally to the international financial reporting standard that requires that dividends be treated as cash items either to be paid in amount or inform of shares by an entity, this is explained in the (IFRS1 2012). The AMP life insurance entity has contributed the larger part of the amounts of distributions received and dividends. These funds are legal and are restricted by the entities of those statutory resources. AMP have included all proceeds from sale of investment in financial assets, this include loan and advances (without repayment) as well as purchase of financial assets. The company reported that payments made to acquire other subsidiary and other business did not impact negatively in the consolidation of AMP group and therefore did not have a material impact on the financial statements of the whole group (AMP 2013). The IAS 28 and (AASB13 2011) on investment in associates and joint ventures require that on first recognition the investment in associates or joint venture be recognised at cost, the carrying amount to be decreased or increased to recognize the investor’s share of the earnings following the date of acquisition. The AMP limited has prepared the statement of cash flow using uniform accounting policies for the events and transactions in a similar way as (IAS28 2012) requires. IAS 1 on presentation of financial statements requires that adjustments be made for difference in the application of accounting policies. The associated entities of the AMP limited and other controlling interest use the same accounting policies and therefore no adjustments would need to be made in the consolidation of the cash flow statement. The group has fulfilled the requirements of IAS 39 on financial Instruments recognition and measurement of the impairment loss of goodwill in proportion of its investment in the associate. The requirements of IFRS 12 on disclosure of interest in other entities have been observed by the group by disclosing in the cash flow statements the financial activities from and to the associates, the proceeds from the sale of 15% of AMP CHL and the issue of subordinated debt. In the investing activity the group have indicated the proceeds from acquisition of AMP AAPH limited, payments made to acquire other entities and businesses loan it advanced to the controlled entities and payment to adoption holders, this shows the disclosure of interest in other entities as required by IFRS 12 and (IAS28 2012). However the group have not indicated which method they have used in the consolidation of the entities (AMP limited and its associates) whether the equity method or otherwise. The AMP limited has accounted for the effect of exchange rate. (IAS21 2012) Requires that the resulting exchange difference be recognised in the cash flow statement, the group have accounted for this in the cash flow statement. AMP limited has improved the cash flows to treat the reinvested distributions as non cash transactions and has not included them in the cash flow statement, though it was including them in the previous reporting periods. This has decreased dividends, the distributions received as well as the cash flow from the operating activities. The cash and cash equivalent is made up of cash on hand available on demand and the deposits held at call with financial institutions. They have been calculated at fair value which is the principle amount. The company has also included liquid investments without significance risk in terms of changes in value, with short term maturity and deducted the bank overdraft. Borrowings consist of the bank overdrafts in the statement of financial position. Little remains to be done in this area of financial reporting. The fixed mode of reporting as outlined by various reporting standards has merely any room for improvement. However the explanations of the contents of the cash flows can make them to be transparent and more usable by the users. Conclusions The AMP limited have prepared its financial statements for the year ended 31st 2012 according to the requirements of the Australia accounting standards board (AASB), the international accounting standards (IASs) and international financial reporting standards (IFRSs). The group and the company have observed all requirements necessary to satisfy the users. The company has provided exhaustive e notes to the financial statements to explain what is contained in the statements of cash flow, owner’s equity, income statement and intangible assets. The preparation and recording of these items in the financial statements of AMP group and AMP limited is relevant and conforms to relevant accounting standards. References AASB10, 2011 Australia accounting standards board AASB 10 consolidated financial statements Victoria. AASB1054, 2011 Australia accounting standards board accounting standard australian additional disclosures Victoria. AASB112, 2010 Australia accounting standards board Amendments to Australian Accounting Standards – Deferred Tax: Recovery of Underlying Assets Victoria. AASB13, 2011 Australia accounting standards board accounting standard AASB 13 fair value measurement Victoria. AASB13, 2011 Australia accounting standards board accounting standard fair value measurement Victoria. AMP, 2013 AMP Limited AMP 2012 annual report Sydney. IAS1, 2012 IFRS Foundation staff IAS 1 Presentation of Financial Statements London. IAS21, 2012 IFRS Foundation staff The Effects of Changes in Foreign Exchange Rates London. IAS28, 2012 IFRS foundation staff IAS 28 Investments in Associates and Joint venture London. IFRS, 2012 International Financial Reporting Standards IAS 12 Income Taxes London. IFRS, 1012 IFRS IAS 28 Investments in Associates and Joint Ventures London. IFRS1, 2012 IFRS IFRS 1 First-time Adoption of International Financial Reporting Standards London. IFRS10, 2012 IFRS Foundation staff IFRS 10 Consolidated Financial Statements London. IFRS3, 2012 IFRS Foundation staff IFRS 3 Business Combinations London. Read More