Problem # 2 (Marks 4+4=8)
a) ABC Ltd has incurred expenditure, the treatment of which is not prescribed by any existing accounting standard. The board of directors has requested the financial accountant to record the expenditure as an asset so as not to impact the current year’s profit. The accountant is concerned with the request and requires your assistance in determining an accounting policy for this expenditure.
Provide the accountant with two accounting policies or treatments that the company could adopt to account for this expenditure. Also what assistance does AASB provide to help the accountant choose between the policies provided in the above case.
b) Black Boats builds ocean-going yachts which generally take up to 3 years to construct and are worth $50 million each. The company normally takes out a loan to finance the initial construction phase for each yacht. Interest on these loans has been treated as an expense with $750 000 written off over the last 5 years. In the current year ended 30 June 2012, the company changed its accounting policy with respect to interest and now capitalises the interest against the cost of each yacht as allowed by AASB 123 Borrowing Costs. Amounts of $40,000 and $22,000 were capitalised against two yachts on which construction started this year but no adjustments have been made for yachts under construction at the beginning of the year. The new accounting policy and its impact have been disclosed in the notes to the financial statements for the year ended 30 June 2012.
Critically evaluate the company’s adoption of the new accounting policy with respect to the requirements of AASB 108.
• Leo, K., Hoggett, J., Sweeting, J. & Radford, J. (2012) Company Accounting in Australia, 8th Edition, Wiley and Sons, Brisbane