Assessment Overview and Requirements 

As a professional accountant you may be required to prepare or assist in the preparation of general purpose financial statements, review financial and business information and present your findings to either clients or senior management / Board of Directors. Synthesising and analysing information to ensure the financial statements are complete, accurate and comply with the relevant accounting standards and regulation and communicating your work output in an appropriate manner are important professional skills.

Aim:

The aim of the assignment is for students to review and analyse case facts and financial information provided for the purpose of:

(i) preparing draft financial statements (and related work papers); and

(ii) preparing a report outlining key issues identified during your review of the case facts and preparation of the draft financial statements.

Requirements:                                                                              

Part A: Financial Statement Preparation

1. Consolidated Statement of Financial Position as at 30 June 2021;
2. Consolidated Statement of Profit and Loss and Other Comprehensive Income for the year ended30 June 2021;
3. Consolidated Statement of Changes in Equity for the year ended 30 June 2021; and
4. Note disclosures supporting the balances included the consolidated financial statements prepared in (1) – (3) above.
5. You are also required to provide a copy of your work papers.  The work papers should include (i) a final trial balance for the consolidated group and the parent entity, (ii) a detailed reconciliation of opening and closing retained earnings, (iii) adjusting journal entries required to  be processed (excel / word) and (iv) any related workings / calculations.  These work papers should also include sufficient notes explaining workings / calculations and adjusting journal entries. The work papers should clearly identify the entity the adjustments relate to (ie. LUXURY Furniture Limited, CONCEPT Designs Pty Ltd, Consolidation Entries).

The draft consolidated financial statements should portray the Group’s financial results and the Parent entity’s financial results for the year ended 30 June 2021.

Part B: Report                                                                                                         

You are required to present the draft Financial Statements and work papers, together with your report covering the following matters:

• Your report should outlinekey issues the Group should consider and their impact / potential impact on the financial statements.  
• These key issues should include discussion of relevant matters you identify during your review of the Group’s operations and preparation of the Group’s draft financial statements for the year ended 30 June 2021. The report may include discussion of areas / transactions where more information or clarification is required in order to finalise the draft financial statements;
• These matters should also include a discussion of key issues identified by the regulator as being relevant to 30 June 2021 reporting period (as relevant to the Group).
• Your report should include a draft of the following accounting policy:
• Revenue  (the accounting policy should comply with AASB 15); and Leases (the accounting policy should comply with AASB 16)

Background and Scope:

You have recently accepted a position as Senior Financial Controller for LUXURY Furnishings Limited (“LUXURY Furnishings”).  The role encompasses, inter alia, preparation of the monthly management accounts and the periodic financial statements.  

LUXURY Furnishings is a retailer of luxury furnishings such as furniture, fittings, curtains, carpets, and other decorative pieces. LUXURY Furniture acquired 100 per cent of CONCEPT Designs Pty Ltd (hereafter collectively referred to as “the Group”) on 1 April 2019.  CONCEPT Designs source handmade bespoke furniture for luxury concept and display apartments. The Group’s head office is located in their warehouse in Brisbane.  The Group’s year end is 30 June.

Due to ill health, the Chief Financial Officer has taken three months personal leave, which commenced in May 2021.  Consequently, you have been tasked with preparing the draft financial statements for the year ended 30 June 2021.

Corporate Profile:

Due diligence records related to the acquisition have been supplied by the accounting firm that assisted with the acquisition.  These records identify CONCEPT Designs Pty Ltd had share capital of $100,000 and Retained Earnings of $750,000 as at the date of acquisition.   The Managing Director has advised that the carrying value of assets and liabilities were consistent with fair value at the date of acquisition with the exception of Land where the fair value had been assessed as $325,000 higher than the carrying value.  The premium  paid also reflected a customer database which had a fair value of $100,000 at the time of acquisition.

The parent entity produces general purposes financial statements, a copy of which is provided to the bank as per their lending agreement. Luxury Furnishings borrowed $1,250,000 on 1 September 2021. The loan term is seven years with an interest rate of 5.25%.  Payments are made on the 30^th day of each month. The lending agreement requires that the Group maintain a minimum quick ratio of 3.5:1 and interest coverage of 1.75: 1  based on EBIT.  

Financial Statements and Transactions:

The Finance Director of LUXURY Furnishings provided the following information:

• The Group has warehouses located in Brisbane and Melbourne. Sales are made direct from the warehouse.    The land and warehouse are owned by LUXURY Furnishings.
• Stocktakes are performed on a bi-annual basis at each warehouse.  
• CONCEPT Designs Pty Ltd sold a reception desk to LUXURY Furnishings on 20 October 2020 for $65,000. CONCEPT Designs acquired the reception desk for a cost of $105,000on 10 November 2015.  The reception desk was being depreciated by CONCEPT Designs Pty Ltd on a straight-line basis over ten years.  LUXURY Furnishings has assessed that the furniture have a remaining useful life of four years.  
• The Group has adopted the accounting policy of measuring land and buildings using the revaluation model and other items of furniture, plant and equipment using the ‘cost model’.
• LUXURY Furnishings leased a showroom space at its Melbourne warehouse to CONCEPT Designs Pty Ltd for a period of five years from 1 July 2020, with an option for a further five years.  The annual rental payment is $120,000.  The implicit interest rate is the agreement is 4.25% p.a.  Concept Designs is unsure whether they will exercise the option period. The first payment occurred on 30 June 2021.
• In early June 2021, Luxury Furnishings was the victim of a cyber-attack.  The malware deleted records in the Group’s centralised inventory system and customer management system.  The CFO advises that the internal auditor is satisfied that the substantial majority of records effected have been corrected and the information provided by the system should be materially complete and accurate.  A stocktake was not undertaken as a result of the cyber-attack on the basis that the year-end stocktake was scheduled for 30 June.
• Goodwill on acquisition was impaired by $35,000 in the year ended 30 June 2020.  
• Buoyed by increasing property prices in Melbourne, LUXURY Furnishings booked a $250,000 revaluation increment in relation to the warehouse.   The revaluation gain relates to an increased valuation of the land.
• LUXURY Furnishings lent CONCEPT Designs Pty Ltd $95,000 on 15 January 2021 to assist with cashlow shortages experienced as a result of the COVID 19 pandemic. Interest is charged at 5.25 per cent annum and paid in arrears on the 20^thof each month. The loan is repayable on 31 March 2022.
• The Group’s accounting policy is that goods sold can be exchanged / refunded in full within 7 days of purchase provided the item(s) are returned in their original condition and is accompanied by proof of purchase.  Goods can returned within one month of the sale date for a full refund provided the item is unused, in its’ original condition and undamaged.  Proof of purchase just also be supplied.  Historically 1% of sales are returned for a refund. Consequently the company books the full sale price as revenue at the time of sale.
• There have been no share issues or capital transactions during the year.
• On 28 June 2021 CONCEPT Designs received a large order totalling $125,000.   The client paid  $30,000 upon placement of the order, thereby boosting the sales figures for June. The furniture is to be delivered by 15 July 2021.
• On 31 March 2018, LUXURY Furnishings received legal notification that proceeding in relation to an unfair dismissal claim have commenced.  The former employee is seeking $100,000 in damages plus costs.  The company’s lawyers have advised the likelihood of an unfavourable outcome for the company is seventy per cent with potential payout range of between $20,000 and $30,000.  The company has booked a $100,000 provision in the financial records.  The court date has been set at 5 July 2021.
• In early 2021, CONCEPT Designs sourced some artisan paintings for LUXURY Furnishings. The painting cost CONCEPT $150,000 to acquire and was sold to LUXURY Furnishings for $175,000.  The year end stocktake identified that 50% of these painting was still on hand at 30 June 2021. Luxury Furnishings sold the inventory for $95,000.
• The tax rate is 30%.  Luxury Furnishings has recorded  Income Tax Expense based on 30% of profit in the current year.
• Luxury Furnishings is considering selling fifteen percent interest in Concept Designs Pty Ltd to an external party.
• All amounts are expressed exclusive of GST. GST is not required to be incorporated into the transactions or adjustments for the purposes of this assignment.

Draft Financial Statements:

The draft trial balance for LUXURY Furnishings for the year ended 30 June 2021 is included at Appendix A.  Concept Designs have also provided a copy of their financial information for the year ended 30 June 2021.

LUXURY Furnishings Limited - Trial Balance for the year 30 June 2021

CONCEPT Designs Pty Ltd - Trial Balance for the year ended 30 June 2021