Numerous Accounting Issues Accounting Standard

Question: Describe about the Numerous Accounting Issues for Accounting Standard. Answer: Issue 1: The accounting standard defines a unit that generates cash as the smallest group of the assets that is identifiable and is capable of generating the cash flows and the cash flows generated are somewhat not dependent on the other assets or the other group of the assets. In case, there is any situation wherein the entity suspects that the asset could be impaired, then the recoverable amount of that individual asset will have to be estimated. In case, it is not possible to estimate or to determine the recoverable amount of that asset, then the entity will have to determine the recoverable amount of that cash generating unit to which that asset belongs to, which is the cash generating unit. An impairment occurs when the assets carrying value is less than its recoverable value. An asset is stated to not have a recoverable value in the presence of the following situations: When the value in use of that asset cannot be estimated and it is somewhat close to the fair value less the costs to sell the same. When that asset cannot generate any flow of cash which is independent from the flow of cash from the other assets (IAS 36, 2016). The entity would call a transaction as a business combination transaction when the assets and the liabilities that have been taken over constitute to be a business. The combination of a business can take place in many of the different ways such as transferring of cash, incurring of the liabilities or when there is an issue of the equity instruments (IFRA 3, 2016). As per IFRS 3, there are a number of ways through which a business combination could take place for the purposes of satisfying the legal etc objectives like when one entity becomes the subsidiary of another entity (IAS plus, 2016). In case of impairment, the following entry shall be passed: Impairment loss A/c Dr To Asset A/c In the given case, Mc Carthys purchased a business segment of Karens Coffee at $950,000. So, this amount will have to be disclosed in the financial statements. But there is as such no provision, rule or accounting standard that states that the difference between the purchase consideration and the net assets of the business segment taken over shall be accounted for as goodwill. This happens when a business takes over the control of more than 50% of another business which is consolidation. This business segment can be regarded as being a cash generating unit in case it is capable of producing the cash flows independent of the other business assets. No goodwill shall be calculated on the same. And since the business segment has declined, the same has to be impaired since it now constitutes to be a cash generating unit. Issue 2: As per IAS 16, which relates with the Property, plant and equipment. This accounting standard allows mainly 2 models of accounting: Cost model: in this, an asset is carried out at its cost less the accumulated depreciation and impairment. Model of revaluation: in this, an asset is shown at the amount at which the asset prevails in the market less the amount of the depreciation and impairment. Under the model of revaluation, the revaluation must be carried out on a regular basis, say yearly. In case, there is a revaluation in asset which causes an increase in the value of that an asset, then the same must be reported as an income and also must be accumulated in the amount that is available for being distributed to the shareholders unless and until, there is a reversal of the revaluation that causes a decrease in the revaluation of the same asset that has been compared previously as an expense. And in this case, the same must be reported in the statement of profit and loss (IAS plus, 2016). The increase in the value of the asset is never available for being distributed as dividend. The increase in the amount of the depreciation shall be charged to the Profit and Loss account. When any asset is revalued, then there is a specified period of years that would amount to an increase of a decrease in respect of each of the class (CA club India, 2016). The accounting entry for the revaluation of land shall be: Land A/c Dr. To Revaluation reserve A/c In the given case, the company intends to revalue the asset that it had purchased during the year 1960 but it must be informed that if it does it, then that would amount to revenue manipulation since the asset must be revalued on a regular basis, say yearly so that there is not a major difference between the carrying value and the fair value of that asset. End even if the company does revalue the asset, then the amount of the income shall be transferred to the revaluation surplus account as per the requirements of the accounting standard. And hence, would not be transferred to the statement of the profit and loss. Therefore, even if the company revalues the land, the desired profit level shall not be achieved. Issue 3: An alteration in the method which has been followed for the purposes of preparing the financial statements that is being charged on the assets amount to a change in the accounting policy. Generally, the amount of the depreciation must be apportioned on somewhat a basis so that the book value of the asset reduces systematically over the period of time. The method of depreciation must be applied consistently from one period to another. The change in the method of providing the depreciation must only and only be applied in case the same has been desired by the statute or in order to comply with the accounting standard or when it would better represent or prepare the financial statements of an enterprise. Alteration in the depreciation method would entail the calculation of the depreciation as per the method from the date when the asset had come into use, that is, there has to be a retrospective application of the depreciation rate on that asset. The difference arising from the retrospective computation would be charged as against the profit of the year during which the depreciation has been restated. In the case, wherein the method of change in the rate of depreciation results in the deficiency in the past years, then that amount of deficiency must be put as against the profits of the current year. And in case, there is a surplus due to the alteration in the method which has been followed for the purposes of preparing the financial statements, then the same must be treated as an income in the statement of income and expense. This change shall be regarded as the alteration in the method which has been followed for the purposes of preparing the financial statements. And the same must be quantified and must be disclosed. The method of deprecation must then be reviewed on a regular basis, say yearly (MCA, 2016). The accounting entry passed by the company though would be correct (Depreciation A/c Dr To Accumulated depreciation A/c-Asset ) but the amount would have been wrong due to the wrong application of the %. The current year entry would be: Depreciation expense-P/L A/c Dr To Accumulated depreciation A/c-Asset There shall be no reversal of the entries since the depreciation charged has been less, the additional amount of the depreciation will have to be charged. For the previous years too, the following additional entry will have to be passed: Depreciation expense-P/L A/c Dr To Accumulated depreciation A/c-Asset The above depreciation shall be calculated using the depreciation method as has been employed by the entity. The given case is a classic example of a change in the policy that is followed when it comes to prepare the financial statements and there has be a retrospective application of the rate of depreciation. Hence, this cannot be ignored by the entity. Depreciation has to be applied and any difference has to be charged as against the profits that have been earned during the current year. I do hope that the above helps your goodself. With Best Regards Kate Peterson Financial Controller References: https://ec.europa.eu/. (2016).International Accounting Standard 36 Impairment of Assets. [Online] Available at: https://ec.europa.eu/internal_market/accounting/docs/consolidated/ias36_en.pdf [Accessed 10 Sep. 2016]. https://ec.europa.eu/. (2016).International Financial Reporting Standard 3 Business Combinations. [Online] Available at: https://ec.europa.eu/internal_market/accounting/docs/consolidated/ifrs3_en.pdf [Accessed 10 Sep. 2016]. Iasplus.com. (2016).IAS 16 Property, Plant and Equipment. [Online] Available at: https://www.iasplus.com/en/standards/ias/ias16 [Accessed 10 Sep. 2016]. Iasplus.com. (2016).IFRS 3 Business Combinations. [Online] Available at: https://www.iasplus.com/en/standards/ifrs/ifrs3 [Accessed 10 Sep. 2016]. Ayer, C. (2016).Revaluation of Assets. [Online] CA club India. Available at: https://www.caclubindia.com/articles/revaluation-of-assets-73.asp [Accessed 10 Sep. 2016]. www.mca.gov.in. (2016).AS 6. [Online] Available at: https://www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf [Accessed 10 Sep. 2016].