ACFI2011-Financial Accounting and Reporting Entities
Part A
The 2019 Novel Coronavirus infection (‘COVID-19’) outbreak has developed rapidly in 2020. It has brought about devastating consequences for communities across the globe including the interrupted movement of people and goods throughout the world and the governments’ restrictions on individuals and businesses. The resulting impact on financial reporting will be significant. One of the main accounting issues is that entities will be required to perform impairment tests as indicators of impairment will exist for many entities.
Determining when the effects of COVID-19 should be reflected in the impairment calculations in accordance with IAS 36 (i.e., AASB136 Impairment of Assets) will depend on:
∙ The period end of the financial statements (i.e. the reporting date); and
∙ The sector and geography in which the entity operates
Let us assume two reporting entities, multinational corporations, Company A and Company B with the reporting date of 31 December 2019 and 29 February 2020, respectively. It takes three months for financial reports to be authorised for issue.
To illustrate the timeline:
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31 December 2019
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30 January 2020
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29 February 2020
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20 March 2020
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2019 financial year-end for Company A
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WHO’s announcement of coronavirus as a public health emergency.
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2019 financial year-end for Company B
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Australian borders were closed to all non-residents.
This government action would affect the entity’s future operations.
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Required:
Advise how the effects of COVID-19 on impairment tests of assets should be reported in the books of:
1) Company A
2) Company B
Provide justification for your answer.
Note: You may assume that Company A and Company B operate in any sectors that have been significantly impacted by COVID-19 – e.g. travel, tourism, entertainment, retail, construction, manufacturing, insurance and education. You do not have to assess which type of assets, and how much, will be impaired by the result of COVID-19.
Part B
NUSPACE Ltd, a retailer for aerospace products, commenced operations on 1 July, 2020 by issuing 150 000 $2.00 shares, payable in full on application. There were no share issue costs.
For the year ending 30 June 2021, the company recorded the following aggregate transactions:
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Accounts
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$’000
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Sales
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7 000
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Other income
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800
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Cost of sales
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3 800
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Administration charges
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360
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Selling and distribution expenses
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800
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Employee entitlement expenses – (selling)
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380
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Wages and salaries – (selling)
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350
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Wages and salaries – (admin)
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200
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Doubtful debts expense
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20
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Depreciation expense - to be calculated
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Interest expense
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300
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Other borrowing expense
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60
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Income tax expense
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220
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The following additional information was noted during the preparation of financial statements for the year ended 30 June 2021:
●Inventory was measured at the lower of cost and net realisable value.
●Buildings, plant and equipment were measured at cost. The benefits were expected to be received evenly over the useful life of the asset.
●Financial assets held for trading are equity investments that are held for the purpose of selling and short-term profit taking.
●Additional 30 000 $2.00 fully paid shares have been issued and fully paid on 1 April 2021.
●A cash dividend of $50 000 (27.8 cents per share) was declared and paid during the 2021 financial year and a final dividend for 2021 of $55 000 was proposed but not recognised in the financial statements.
●$150 000 of other loans are repayable within 1 year. The remaining amount is payable in full at the end of 2024.
●The provision for employee benefits includes $55 000 payable within 1 year.
●The warranty provision is in respect of a 12-month warranty given on certain goods sold.
●The bank loan is for 10 years and repayable in full at the end of the term. The interest rate is 5% and it is secured over the land.
●NUSPACE Ltd uses the single statement format for the statement of profit or loss and other comprehensive income and classifies expenses by function within the statement.
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Asset
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Cost ($)
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Useful life (years)
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Land
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450 000
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-
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Plant and equipment
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3 000 000
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5
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Buildings
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7 00 000
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10
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●The following assets were purchased on 1 July 2020:
●Land was revalued upward by $50 000 (assume zero income tax for this transaction). The valuation was conducted by the registered valuer, The Invaluable Pty Ltd.
●Summarised account balances are provided below:
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Year-end balances, 30 June 2021
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$’000
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Cash on hand
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50
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Cash on deposit, at call
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700
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Trade debtors
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7 570
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Allowance for doubtful debts
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20
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Other debtors
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850
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Inventory
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3 300
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Financial assets held for trading
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500
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Land
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500
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Buildings
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700
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Plant and equipment
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3 000
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Patents
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590
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Amortisation of patent
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50
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Bank loans
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6 000
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Other loans
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500
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Trade creditors
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7 700
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Provision for employee benefits
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300
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Warranty provision
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1 000
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Current tax payable
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320
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Deferred tax liability
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200
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●NUSPACE Ltd transferred $100 000 out of retained earnings into general reserve.
●Assume plant and equipment facilities are mainly used for selling and distribution activities and buildings are occupied and used by administrative staff.
Required:
For the year ending 30 June, 2021 (NOTE: comparative financial statements are not required),
1.Using the pro forma table supplied in appendix B, prepare a preliminary trial balance for NUSPACE Ltd;
2.Prepare a statement of comprehensive income for NUSPACE Ltd in accordance with the requirements of AASB 101. NUSPACE Ltd uses the single statement format for the statement of profit or loss and other comprehensive income and classifies expenses by function within the statement;
3.Prepare a statement of changes in equity for NUSPACE Ltd in accordance with the requirements of AASB 101;
4.Prepare a statement of financial position for NUSPACE Ltd in accordance with AASB 101. Use the current/non-current presentation format;
Prepare appropriate notes to the accounts. (You do not need to prepare notes related to income taxes. Include the following note as note 1. You may optionally add accounting policies to this note)
