According to Appendix B, Paragraph B2 of the AASB 13 the accountant for Broncobax Ltd must undertake four steps to determine the fair value of the asset acquired (AASB 2015, paragraph B2).
The first step is to determine the particular asset that is subject to measurement. In this case the asset that can be measured at fair value is the exclusive rights to use the device produced by Greentech Ltd.
The second step is to determine the valuation premise that is appropriate for the measurement. This step considers the price a market participant would pay to buy the asset from a seller and the highest and best use of the asset (AASB 2015, paragraph 24; AASB 2015, paragraph 27). In accordance with Paragraph 31 of AASB 13 The highest and best use of the asset can be measured by looking at two alternative uses of the asset, either in-combination with other assets or as a stand-alone asset (AASB 2015, paragraph 31). Paragraph 31(a) of AASB 13 sets out the standards for an asset that is valued in-combination with other assets (AASB 2015, paragraph 31(a)). If it is determined that the highest and best use of an asset is to use the asset in-combination with other assets, then the assets market value is the price that would be received if sold to market participants to be used with other assets. Alternatively, Paragraph 31(b) of AASB 13 sets out the standards for an asset that is valued as a stand-alone asset (AASB 2015, paragraph 31(b)). If it is determined that the highest and best use of an asset is to use it as a stand-alone asset, then the assets market value is the price that would be received if sold to market participants to use as a stand-alone asset. In this case more information regarding market prices is required to determine which valuation premise would be most appropriate for measuring the fair value of this asset. However with the information provided it could be suggested that as it is believed the employees of Broncobax Ltd have the skills to determine the feasibility of the project, then the most appropriate measurement would be the in-combination valuation premise.
The third step is to determine the principal market for the asset, or in the case where there is no principal market, the most advantageous market for the asset, as set out in paragraph 16(b) of AASB 13 (AASB 2015, paragraph 16(b)). In the case that this asset is used in-combination with the beer bottles used by Broncobax Ltd, the assumption can be made that the principal market is the same as their current market.
The fourth step is to determine the valuation technique(s) appropriate for the measurement. Paragraph 62 of AASB 13 provides three valuation techniques; the market approach, the cost approach and the income approach, all of which can be utilised by an entity to measure their assets (AASB 2015, paragraph 62).
Through the application of the four steps set out in Appendix B, Paragraph B2 of the AASB 13 the accountant for Broncobax Ltd is able to determine the fair value of the asset acquired.
The first of Palmer Ltd’s group accountants views to be addressed is that depreciation and other expenses in periods for which there are no related revenues arising from production should not be recognised. Section 50 of AASB 116 sets out the standards regarding the allocation of depreciation, stating that assets are to be depreciated systematically over their useful life (AASB 15, Paragraph 50). While there are no related revenues arising from production during this period, the accountant must recognise this depreciation systematically, otherwise the requirements set by the AASB are not met. While the depreciation must be systematic, Section 60 of AASB 116 defines that the future economic benefits expected to be consumed by the entity from the asset should be reflected in the depreciation method used (AASB 2015, paragraph 60). Paragraph 62 of AASB 116 provides three methods of depreciation; the straight-line method, the diminishing balance method and the units of production method (AASB 2015, paragraph 62). Finding the right method for this scenario would allow the accountant to accurately account for depreciation and better reflect the economic benefits consumed, without causing an imbalance in revenues and expenses on Palmer Ltd’s Profit and loss statement (AASB 2015, paragraph 31).
The second of Palmer Ltd’s group accountants views to be addressed is that the basic driver for depreciation on manufacturing equipment is wear and tear, or its usage. This usage could be interpreted as accounted for in its useful life. Section 51 of AASB 116 states that in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors the useful life of an asset should be reviewed at the end of each financial year and accounted for as a change in an accounting estimate (AASB 2015, paragraph 51; AASB 2015, paragraph 34). Reviewing the useful life of the assets would address the wear and tear not incurred during the period the employees were absent.
As discussed there are alternative methods to account for the period in which the employees were absent. Therefore Palmer Ltd’s group accountants views are not valid.
As defined by paragraph 25 of AASB 138, in the case where Maroons Ltd obtains the patent from Meninga Ltd it would be considered a separate acquisition and the fair value of the intangible asset would be recognised on the balance sheet (AASB 2014, paragraph 25). While this means that the project would not appear on the profit and loss statement, Meninga Ltd would be expected to make a profit. Therefore, the assumption can be made that the cost of obtaining the patient from Meninga Ltd would be more than the research and development costs incurred. Alternatively, Maroons Ltd can carry out the project themselves. In accordance with paragraph 54 of AASB 138 all research costs incurred during the research phase are to be expensed, while all development costs incurred that do not meet the six criteria stated in paragraph 57 of AASB 138 are to be expensed (AASB 2014, paragraph 54; AASB 2014, paragraph 57). The six recognition criteria as set out in paragraph 57 of AASB 138 are; the technical feasibility of the project, the intention to complete the intangible asset, the ability to use or sell the asset, the assets ability to generate future economic benefits, availability of resources, and ability to measure costs reliably (AASB 2014, paragraph 57). In the case these six criteria are met the asset is measured at cost, therefore all costs incurred after the criteria is fulfilled are capitalised (AASB 2014, paragraph 71). In accordance with paragraph 71 of AASB 138, any amounts expensed prior cannot be capitalised (AASB 2014, paragraph 71). While obtaining a patent is more costly than if Maroons Ltd was to conduct the research and development the project themselves, it will allow for the project to be recognised as an asset. The asset will then appear on the balance sheet, instead of expensed on Maroons Ltd profit and loss statement. Therefore, Mr Walters’ proposal to acquire the patent through Meninga Ltd is a sound idea.
Long Service Leave
The long service leave owing to the employees would be classified as a liability in the financial statements of Bennett. A liability is defined under Paragraph 49(b) of the conceptual framework as ‘a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits’ (AASB 2016, paragraph 49). Paragraph 60 defines that a present obligation is a duty or responsibility to act in a certain way (AASB 2016, paragraph 60). In this case long service leave is a present obligation that is the consequence of both a binding employment contract as well as a statutory requirement as set out in state legislation (Fair Work Ombudsman, 2018). Paragraph 63 defines that the liability must arise from a past event, in this case the liability arises from past services (AASB 2016, paragraph 63). Paragraph 62(a) stipulates that an outflow of economic benefits includes the payment of cash, in this case the outflow would be the payment of cash to employees (AASB 2016, paragraph 62(a)). Long service leave fulfils each element of a liability as defined by AASB, and therefore can be classified as a liability in the financial statements of Bennett Ltd.
The overhaul of machinery owned by Bennett Ltd could be considered as either a provisional liability or capital expenditure in the financial statements of Bennett Ltd. A provisional Liability, as defined by Paragraph 14 of AASB 137, is a liability where the amount of the obligation can be reliably estimated (AASB 2014, Paragraph 14). In this case it can be determined that the machinery overhaul is a liability as it is a present obligation, arising from past usage, and the settlement of which requires the outflow of economic benefits to have the overhaul carried out. In this case the company has estimated that the next overhaul will cost $25, 000. It is assumed this figure is based on a prior machinery overhaul, and therefore meets the requirement that the amount of the obligation can be reliably estimated. Alternatively, the overhaul of the machinery could be considered as capital expenditure, on the condition that in accordance with Section 10 of AASB 116, the overhaul results in an extension of useful life (AASB 2015, paragraph 10). Section 51 of AASB 116 defines that changes can be made to the useful life of the machinery and accounted for as a change in an accounting estimate (AASB 2015, paragraph 51). Therefore, depending on the significance of the overhaul, this transaction can either appear as a provisional liability (current/long term liabilities) or as a capital expense (assets) on the balance sheet.
The damages owed by Bennett Ltd to their supplier would be considered as a contingent liability in the financial statements of Bennett Ltd. Paragraph 10(b) of AASB 137 defines a contingent liability as a possible obligation that arises from past events where the amount of the obligation cannot be measured reliably (AASB 2014, paragraph 10(b)). In this case, the damages are an obligation that arises from the outcome of the court case, and Bennett Ltd has been advised the amount of damages could be any amount between the stipulated range. As the damages owed are a contingent liability they are not included on the financial statements of Bennett Ltd, and are instead disclosed in the notes.