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To:  Mr. Con Pete Managing Director of Pewter Ltd Level 6, 510 King William Street  Adelaide SA 5000  From:     Ms Jane McKenzie Manager, McKenzie and Associates 668 Smith StreetAdelaide SA 5000 Date:

Subject: Addressing the issues rose in respect of the accounting treatment of several transactions via email.

Dear Mr. Con

Thank you for reaching out to us. All the queries raised by you have been duly taken into consideration by us. For the purpose of addressing and mitigating the same help has been taken from the provisions laid out in the various standards issued by the AASB. All the issues along with their solutions have been addressed as follows:

1)     For the purpose of the addressing the issues faced by Con Peter corresponding to the lease that has been taken by him an effort must be made to understand the provisions that have been laid out in this respect in AASB 16 (Deloitte.com. 2019). This is the standard that is being used for the purpose of the recognition and measurement of the amount related to lease. The details pertaining to the recognition and measurement of the lease taken up by the lessee are given out in the accounting standard clearly. the steps that are needed to be followed by the lessee in the process of recognition of any lease in the financial statement of the entity the following steps must be undertaken  by him:

a)      On the very date of commencement the right of use of the asset shall be measured by the lessee at cost.

b)      There are several components that are to be included in or factored in for the purpose of measuring the right-of-use asset. The factors or elements that are going to be include in the right of use asset are as follows

         i   The amount that has been ascertained as the initial measurement in respect of the lease liability. ii)                  Any payment that has been made in respect of the lease prior to the date of commencement after deducting any lease incentives that might have been received on the part of the lessee(Deloitte.com. 2019).

      iii   Any sort of direct costs that have been incurred by the lessee in the initial stage of the entire agreement(Deloitte.com. 2019

). ia   An estimate of the amount of costs is needed to be ascertained by the lessee that is going to be incurred for the purpose of dismantling or removing the asset that has been acquired by the lessee on lease. in addition to this any expenditure that is going to be incurred by the entity in respect of restoring the site where it was located or making proper restoration in respect of the asset that has been taken on lease to the specific conditions that are being mentioned in the terms and conditions of the agreement(Deloitte.com. 2019). These costs will not be recognised in case the same are incurred by the entity for the b purpose of producing inventories. The obligation relating to the recognition of these costs may arise on the part of the lessee on the commencement date itself or for having used the asset for a specific period of time.

      c It is required on the part of the lessee to recognise the above mentioned costs corresponding to right-of-use once the obligation in        respect of these costs have been incurred on the part of the lessee(Deloitte.com. 2019).

       d  There are certain regulations that are needed to be complied with at the time of the initial measurement of the cost by the lessee      corresponding to the lease liability.  all the payments corresponding to the lease that have not been paid yet are to be discounted to   their present values for the purpose of the getting the amount of the lease liability that has to be recorded by the lessee in the books of the entity for the relevant period of time(Deloitte.com. 2019). The discounting for the same will have to be done based on the discounting rate that is implicit in the terms that have been laid out in the lease agreement of the entity. The same has to be used if it is possible to readily ascertain the same. In case it is not possible to ascertain the rate readily the lessee needs to make use of incremental borrowing rate for the same.

          1  For the purpose of understanding the way in which the revenue of the entity must be recognised in the financial statement that is prepared and presented by the entity study of the provision stated out in the AASB 118 has to be conducted. As per the guidelines issued by the AASB 118 it has been stated that the revenue of the entity must be measured based on the fair value of the consideration that is to be received or receivable (Aasb.gov.au. 2019). The amount of the revenue that is to be charged by the entity from its customer is primarily dependent upon the agreement that has been entered into by the entity and the buyer. The same will have to be measured at fair value of the consideration that has been received by the entity or is going to be received by the entity after taking into consideration any trade discount or volume discount that is being allowed to the customer by the entity.

For the purpose of recognition of any revenue from the sales of goods in the books of the accounts of the entity all the following conditions must be satisfied:

  All the significant risks and rewards associated with the asset have been transferred by the entity to the buyer along with the ownership of the goods(Aasb.gov.au. 2019).

b)      There is neither continuing managerial involvement nor any effective control over the goods that has been sold by the entity. Any sort of involvement must not be involved on the part of the management that is usually associated with the ownership of the asset(Aasb.gov.au. 2019).

c)      It is possible on the part of the entity to measure the amount quite reliably.

d)     It is fully assured that all the economic benefits associated with the transaction will flow entirely to the entity.

e)      All the costs that are to be incurred in respect of the transaction can be measured reliably.

Hence, after going through the provisions of the AASB 18 properly it can be ascertained that the revenue related to the sale of the accounting software will have to be made only after the expiry of the one month after the installation of the software(Cpaaustralia.com.au. 2019). The reason for the same is that it is only after this period that all or significant risks and rewards associated with the asset is completely transferred to the buyer.

3.

In terms of AASB 119, the long term benefits of the employees can be of three types, unconditional, conditional and pre-conditional. In this respect, the payment of the leaves for the employees who works for the organisation for 10 years or more is the unconditional benefits which the entities are needed to provide in terms of the legislations stated in the AASB framework (Aasb.gov.au. 2019). But the key consideration which has been generated in this respect is that, the payment for the leaves to the employees are being paid at cash basis which is simple and being in used for a specific period of time. In this respect, by introducing the accrual basis for the accounting of the long term benefits of the employees in case of additional leave will bring certain complications in the business of the entity.

In respect of the disadvantages of implementing the accrual accounting basis for the payment of the leaves of the employees, it can be very complex and difficult to manage. Certain confusions and mistakes can be made by the management with will because overspent. Beside this, the financial statement of the entity can also be manipulated if such accounting procedure is being taken into account by the management in this respect(Aasb.gov.au. 2019).

But there are certain advantages of accrual accounting on the basis of the upcoming considerations related to the expenses of the entity which can also be included in the budget report. In this respect, such implementation can help the entities to reduce the tax burden of the entity in terms of issuing the invoices(Aasb.gov.au. 2019). Beside this, in terms of reducing the risks such as the overspending and non-over drafting accounts before payments, the accrual accounting can also be helpful in this due respect.

In the general overview, the accrual accounting basis is more suitable for the business entity in terms of the desire and resources to implement it correctly. Beside this, the company can also reduce certain tax advantages in case such instances are being implemented in the accounting procedure of the company.

 

 

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