Assessment 2
Assessment Type: Case study report – theory and calculations – individual assessment
Purpose: To allow students to apply the technical knowledge of relevant accounting standards to financial reporting settings. This assessment relates to learning outcomes c, d.
Value: 30% Due Date: Week 9 - 8:00 pm Wednesday of Week 9
Submission: Submission must be made to the Moodle Assignment Link on the KOI Moodle Subject Home Page by 8.00 pm Wednesday of Week 9. A printed copy must be submitted to the Lecturer at the Week 9 Lecture to assist with marking. All assignments must have a signed KOI Assignment Coversheet included with the submission.
Topic: Research Individual Assignment
Task Details: Technology Enterprises Ltd, a listed company, commenced a research and development (R&D) project in July 2017 to modify the method of recharging batteries used in its products. The project was successfully completed in June 2018 and the company applied for a patent for the design.
Technology Enterprises Ltd plans to modify all products in its consumer range over the next two years and has incorporated these plans into its financial budget. The entity expects to derive economic benefits from the new battery recharging technology over the next 10 years.
The accountant was unsure how to account for the project so they used the New Project R&D account to accumulate the salaries of all engineers involved in the project during the year ended 30 June 2018. The following analysis of the salaries expenditure is based on the engineers’ time sheets.
The value in use of the design, estimated using present value techniques, is $4 000 000. However, the fair value of the design is estimated to be only $3 000 000 because the only potential buyer would need to modify the design to adapt it to its own products.
The following conversation took place between the chief executive officer (CEO) and the accountant (ACC).
CEO: That ‘R&D asset’ should make our financial statements look great this year. We can show it is worth $4 000 000 in the balance sheet and add an extra $3 000 000 to profit because it cost only $1 000 000.
ACC: I haven’t finalised accounting for it yet but I am quite sure the accounting standard requires us to measure it at historical cost, and some of it will probably have to be recognised as an expense.
CEO: It isn’t fair. These conservative accounting rules make it impossible to show investors that our project was successful — and expensing any of it will cause our share price to go down because the investors will think it didn’t work.
Required
1. How should the project be accounted for in the financial statements for the year ended 30 June
2018? Justify your answer with reference to relevant paragraphs of AASB 138/IAS 38.
2. To what extent might the rules or restrictions in AASB 138/IAS 38 reduce the comparability of
financial statements?
3. Write a response to the CEO, drawing on your understanding of AASB 138/IAS 38 and the efficient
market hypothesis (refer to chapter 2 of Loftus). Include a recommendation as to how the company might mitigate their concerns about investors’ interpretation of the information reported in the financial statements
Research requirements: Students need to support their analysis with reference to relevant material from the text and a minimum of eight (8) suitable, reliable, current and academically acceptable sources – this should include at least 2 peer-reviewed academic journal articles.
Presentation: 2000 + 10% word short report format. Title page, executive summary, table of contents, appropriate headings and sub-headings, recommendations/findings/conclusions, in-text referencing and reference list (Harvard – Anglia style), attachments if relevant. Single spaced, font Times New Roman 12pt, Calibri 11 pt or Arial 10 pt.
Marking Guide:
Interpretation and representation 20% Calculations 20% Analysis 20% Assumptions 20% Communication 20%
Total mark will be scaled to a mark out of 30 subject marks.