Contemporary Accounting and Economics

Question: Discuss about the Contemporary Accounting and Economics. Answer: Introduction: The first issue that has been faced by the director is related to spending time on assessing and calculating DTA and DTLs to overcome the accounting the temporary differences. Consideration of Advance tax payment is mandatory for organisations; therefore it is necessary to calculate DTA and DTL. Deferred tax assets generally arise where relief from the tax is available after reducing an expense for accounting purpose such as the balance of loss which is carried over to reduce income tax expenses of the subsequent period (Chytis, 2015). The same can be referred as the tax paid in advance of which benefit can be attained in coming years (IAS 12 INCOME TAXES, 2010). On the other hand, deferred tax liability arises when tax relief is provided in advance, as when income is accrued, but tax is not received. It refers to the tax liability to be payable in subsequent periods relating to the temporary differences in the amount of tax payable and tax paid. Management has an obligation to provi de the true state of the company in context with tax asset and liabilities. In case deferred tax is accounted as income or expense, the same shall be recorded in income and expenditure account of that period. According to AASB 112 specifies that deferred tax must be assigned on in consistent, rational and systematic manner (Compiled AASB Standard 112, 2011). Thus, the argument by several directors that as the company is not cheating and paying the current tax liability in an appropriate manner; there is no need of taking into account the DTA and DTLs is not fundamental. According to Kasipillai and Mahenthiran, (2013) it is mandatory for the company to account and consider these taxes in simultaneous with the current tax liability. Assessing future tax is necessary, and it is suggested that as it is the obligation of management to provide accurate and true state of the company. In the context of DTA and DTL, a reasonable likelihood should be available that tax difference may be reali sed in subsequent years (Guenther, 2014). The next issue that was put through by you was concerned about the frequent variance appearing in a number of warranty expenses. This had been occurring due to the difference between the initially recognised amount and the actual cost of warranty paid or incurred by the company to fix or replace the faulty products. Warranty expense can be defined as cost, which a corporate entity envisages or has already been incurred, for the concurrent replacement and repair of the product, which has been sold. The board recommendation to omit such variance is to recognise warranty expense only when it is actually incurred, and such warranty cost happens. Thus, it emphasises on paying for such cost only when the company is truly repairing or replacing the warranty products (Wen and Moehrle, 2015). The board recommendation to solve the problem is by way of recognising actual expenses and stop recognising the warranty expenses in advance, which will indeed result in reducing the variances. The solut ion to the problem is not the way it should be dealt with. Warranty cost is an expense, which is to be identified in the same period in which the sales had been taken place, wherein the incurrence of the amount can be estimated (Warranty Expense, 2016).The amount specified in context to warranty cost is to be done on the basis of accrual method. This is known as matching principle of accounting where it has been made clear that an entity is required to record all the expenses which are associated with warranty in the period when the business recognises it as sales revenue (Hanlon, Navissi and Soepriyanto 2014). Furthermore, as per Australian Accounting Standard Board, 137 provisions have made it clear that entities are mandatorily required to disclose all the contingent assets and liabilities (Compiled AASB Standard AASB 118, 2010). The cost claims possible losses or penalties of warranty are a part of contingent assets and contingent liability. Entering of warranty cost only on its incurrence will be contradictory to the provision of 137 AASB. Thus, the impact is likely seen on the income statement wherein complete amount of warranty expense is recorded when a sale happens even if there are no warranty claims during such period (Zach, and et.al, 2011). Since the company from a very long time has faced the problem of variance, it is suggested to the company to match the warranty cost by determining a historical warranty percentage from past experiences so that the predetermined claim justifies with the actual warranty claims (Graham, Raedy and Shackelford, 2012). In the case where there is minimum history on warranty expenses, simply record the cost connected with the few warranty claims as clients put them together. Moreover, it is also recommended to the board that it must prepare a report, which gives a clear indication of product quality standards to define the value of the product and estimate the cost of warranty on the basis of such value. The last issue that has been raised by the board is relating to the sale of one of the divisions to a Canadian company as it has been decided to not to focus on that particular line of business of the company. Negotiations for specified issue are going on currently, and the Canadian company is agreeable to pay supplementary $1.5 million on the fair value of net asset identified. The same has been agreed by both the parties. Considering additional $1.5 million amount as goodwill is a disagreeable matter because it has been provided in accounting standard that no self-generated goodwill should be accounted in books of accounts. AAS 18 specifies the provisions of goodwill for cases which relate to the acquisition of business entity or a part thereof and also accounting treatment for internally generated goodwill (Johansson, Hjelstrm and Hellman, 2016). The standard clearly states that no internally generated goodwill can be recognised by such entity. According to Boennen and Glaum, 2014 , a clear line of differentiation purchased goodwill and self-generated goodwill provided in AAS 18. In the present situation, the company is not entitled to consider the amount of $1.5 million even if the same is higher in comparison to the fair value of identifiable assets by considerng the terms agreed between them. The negotiations in the contractual agreement is still pending and if the contract does not proceed for any reason that amount of goodwill cannot be stated in a position statement. As the goodwill is self-generated goodwill and the same cannot be recognised in its accounts. Directors are also not sure regarding the accounting treatment of patent i.e. unrecorded, which is supposed to be transferred to the Canadian company. The valuation of same can be done as follows: 1. The cost of the patent will include the preliminary cost of assets which consist registration, documentation, legal fees and other related costs to the patent 2. Straight line method can be applied for amortisation of same (How do I account for a patent? 2016). 3. In case, the company is not using it anymore it can be longer idea it can derecognize such accumulated amortised Further, as Canadian company is issuing, shares in return the accounting treatment of same can be done accordingly. The form of purchase consideration can be decided as per the choice of parties involved in it; therefore it can be in the form of shares of the entity to which asset is going to be sold (Glaum, Landsman and Wyrwa, 2015). The received shares can be recognised as a long-term investment or short-term investment on the basis of viable accounting provisions. The accounting treatment will be done according to the chosen method. In case the shares are treated as short term investment the net amount will be recorded in books of account and any loss or profit generated from the sale of same will be accounted in PL account and the balance amount will be recognised as capital revenue. In contrary to this, in a situation, if it is considered as a long-term investment then it will be a non-current liability. The journal entry for the same is: s. no Particulars Dr amount Cr amount Shares in XYZ (Canadian) Company a/c Dr XXX To assets transferred of selling division XXX By considering the above-described provision above specified issues provided can be resolved. Consideration of DTA and DTL is necessary and mandatory for the management for assessing advance tax payments. Provisions of AAS 112 specifies that business is required to account such taxes in appropriate and consistent manner. In accordance with matching principles of accounting, it is necessary to record expenses relating to warranty. Provisions of AASB 137 makes imperative for entities to provide disclosure relating to all their contingent liabilities and assets like warranty costs. Further, AAS 18 clearly specifies that self-generated goodwill will not be stated in a position statement. Hence the additional amount cannot be recognised as goodwill. References Graham, J.R., Raedy, J.S. and Shackelford, D.A., 2012. Research in accounting for income taxes.Journal of Accounting and Economics.53(1).Pp.412-434. Zach, T.and et.al, 2011. Warranty reserve: Contingent liability, an information signal, or earnings management tool?.The Accounting Review.86(2). Pp.569-604. Hanlon, D., Navissi, F. and Soepriyanto, G. 2014. The value relevance of deferred tax attributed to asset revaluations. Journal of Contemporary Accounting Economics. 10(2). Pp.87-99. Chytis, E., 2015, February. Deferred Tax Assets from unused Tax Losses under the prism of Financial Crisis. In International Conference on Business Economics of the Hellenic Open University, Athens. (Vol. 160). Wen, H.J. and Moehrle, S.R. 2015. Accounting for goodwill: A literature review and analysis. Guenther, D.A., 2014. Measuring corporate tax avoidance: Effective tax rates and book-tax differences. Kasipillai, J. and Mahenthiran, S., 2013. Deferred taxes, earnings management, and corporate governance: Malaysian evidence. Journal of Contemporary Accounting Economics. 9(1), Pp.1-18. Glaum, M., Landsman, W.R. and Wyrwa, S. 2015. Determinants of Goodwill Impairment under IFRS: International Evidence. Johansson, S.E., Hjelstrm, T. and Hellman, N., 2016. Accounting for goodwill under IFRS: A critical analysis. Journal of International Accounting, Auditing and Taxation, 27. Pp.13-25. Boennen, S. and Glaum, M., 2014. Goodwill accounting: A review of the literature. Online How do I account for a patent? 2016. [Online].Available from https://www.accountingtools.com/questions-and-answers/how-do-i-account-for-a-patent.html.[Accessed on 14th January 2016]. IAS 12 INCOME TAXES, 2010. [PDF]. Available from https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/ifrs-factsheets/factsheet-ias12-income-taxes.pdf?la=en. [Accessed on 14th January 2016]. Warranty Expense, 2016. [Online]. Available from https://www.accountingtools.com/warranty-expense. [Accessed on 24th January 2016]. Compiled AASB Standard 112, 2011. [PDF]. Available from https://www.aasb.gov.au/admin/file/content105/c9/AASB112_07-04_COMPsep11_07-12.pdf. [Accessed on 14th January 2016]. Compiled AASB Standard AASB 118, 2010. [PDF]. Available from https://www.aasb.gov.au/admin/file/content105/c9/AASB118_07-04_COMPmay09_01-10.pdf. [Accessed on 14th January 2016].