Question

Question 1 [15 marks]

Topic 2: Presentation of financial statements Topic 3: Accounting policies and other disclosures

You are a senior financial accountant at Wagga Ltd, a company that distributes imported furniture. One of the new graduate accountants has prepared the following income statement for the year ended 30 June 2019:

Income Statement for the year ended 30 June 2019

Revenue (NOTE 1) 1,380,000

Cost of sales (590,000)

Gross profit 790,000

Other income (NOTE 2) 18,500

Distribution expenses (NOTE 3) (55,000)

Administrative expenses (NOTE 4) (40,000)

Other expenses (NOTE5) (175,000)

Profit for the year 538,500

Other comprehensive income: Net profit on asset (NOTE6) 35,000

Loss on inventories (NOTE 7)(25,000)

Other comprehensive income for the year 10,000

Total comprehensive income for the year 548,500

Notes:

1. Revenue includes interest revenue and rent received of $180,000 and $20,000 respectively.

2. Other income of $18,500 (net of tax) relates to gains arising from the translation of transactions denominated in foreign currencies.

3. Distribution expenses includes sales returns of $15,000.

4. Included in the administrative expenses are interest expense of $25,000.

5. Other expenses amount includes income tax expense of $128,000.

6. Net profit on asset relates to gains made on the disposal of an office building of Wagga Ltd.

7. Loss on inventories relates to the write-down of inventories to their net realisable values.

8. On 20 August 2019, a fire occurred and destroyed some of the furniture. The financial statements for the year ended 30 June 2019 were authorised on 12 September 2019. This loss, totaling $16,000, has not been recorded in the books. The amount involved is considered material.

Wagga Ltd uses the single statement format for the statement of profit or loss and other comprehensive income and classifies their expenses by function in the statement.

Required:

A. In relation to the classification of expenses as adopted by Wagga Ltd, state and explain the other classification style allowed by AASB101Presentation of Financial Statements. Which classification style is better? Do you think Wagga Ltd has chosen a method that is better for them? Why?

B. How should Wagga Ltd account for the fire occurred on 20 August 2019 in their financial statements for the period ending 30 June 2019? When should the adjustment for the loss be made in the accounts?Note:You should substantiate your answer by making references to AASB110Events after the Reporting Period.

C. Prepare a corrected statement of profit or loss and other comprehensive income for Wagga Ltd for the year ended 30 June 2019, to ensure that it complies with the requirements of AASB 101 and the Australian Conceptual Framework, where relevant.

Provide references to relevant authorities to support your answers. Note:You are not required to provide any notes to the accounts or disclosures relating to this statement.

Important tips:

• Ignore the requirement for prior period comparative figures.

• For requirement 3 above, you should provide separately all workings and explanations to support the figures presented in the statement and make references to AASB101 wherever possible to substantiate your answer. In preparing the statement, you should use the captions that are generally used by a listed entity.

Answer 1

A. Income statement of Wagga Ltd is prepared using a classification based on the function within the entity. As per Para 99 of AASB 101 an entity shall present an analysis of expenses recognised in profit or loss using a classification based on either their nature or their function within the entity, whichever provides information that is reliable and more relevant.

Classification based on nature: [Para 102 of AASB 101] - An entity aggregates expenses within profit or loss according to their nature (for example, depreciation, purchase of materials, transport costs, employee benefits and advertising costs), and does not reallocate them among functions within the entity. This method may be simple to apply because no allocations of expenses to functional classifications are necessary. An example of a classification using the nature of expense method is as follows:

Revenue		X
Other income		X
Changes in inventories of finished goods and work in progress	X
Raw materials and consumables used	X
Employee benefits expense	X
Depreciation and amortization expense	X
Other expenses	X	(X)
Total Expenses
Profit before tax		X

When comparing both the methods its appears that classification based on nature is better as its simple and involves less efforts as compared to classification based on function. Income statement which is prepared using classification based on function requires allocation of costs to functions which may require arbitrary allocations and involve considerable judgment.

Further an entity classifying expenses by function shall disclose additional information on the nature of expense, including depreciation and amortization expense and employee benefits expense. [Para 104 of AASB 101]

In the case of Wagga Ltd. they are engaged in the business of distribution of furniture and does not involve manufacturing activity hence income statement prepared using the classification based on function seems more appropriate for Wagga Ltd as it gives the information expenses by function along with the trading margin on its trading activity.

B. As per AASB 110 there are 2 types of subsequent events i.e. adjusting events and non-adjusting events. Adjusting events are those that provide evidence of conditions that existed at the end of the reporting period. Non-adjusting events are those that are indicative of conditions that arose after the reporting period.

As per Para 22 of AASB 110 ‘destruction of a major production plant by a fire after the reporting period’ is a Non-adjusting event. Drawing the analogy from this example we can conclude that fire occurred on 20 August 2019 is a Non-adjusting event and hence financial statement for the period ending on June 30, 2019 will not be adjusted to take the impact arising out of this fire and the same will be recorded in the subsequent year starting from July’2019.

However if Non-adjusting event is material then entity need to make a disclosure in its notes to accounts to for the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made. [Para 21 of AASB 110]

C. Corrected statement of profit or loss and other comprehensive income for Wagga Ltd. for the year ended on June 30, 2019:

Income statement for the year ended 30 June 2019
Particulars	Working Note	Amount
Revenue	1	1,165,000
Cost of sales		(590,000)
Gross profit		575,000
Other income	2	20,000
Distribution expenses	3	(40,000)
Administrative expenses	4	(15,000)
Other expenses	5	(47,000)
Loss on inventories	6	(25,000)
Profit on sale of asset	6	35,000
Profit before tax and net finance costs		503,000
Finance income	7	198,500
Finance costs		(25,000)
Net Finance costs		173,500
Profit before tax		676,500
Tax Expense		(128,000)
Profit after tax		548,500
Other comprehensive income for the year		-
Total comprehensive income for the year		548,500

Working notes:

1. Revenue:

Particulars	Amount
Working Note 1
Revenue as given in question	1,380,000
Adjustments:
Interest revenue regrouped to finance income	(180,000)
Rent received regrouped to other income	(20,000)
Sales return regrouped from distribution expense	(15,000)
Revenue	1,165,000

2. Other income

Particulars	Amount
Working Note 2
Other income as given in question	18,500
Adjustments:
Rent received reclassed to other income from Revenue	20,000
Foreign currency translation gain regrouped to finance income	(18,500)
Other income	20,000

3. Distribution expense:

Particulars	Amount
Working Note 3
Distribution expense as given in question	(55,000)
Adjustments:
Sales return regrouped from distribution expense to Revenue	15,000
Distribution expense	(40,000)

4. Administrative expense:

Particulars	Amount
Working Note 4
Administrative expense as given in question	(40,000)
Adjustments:
Interest expense regrouped to Finance costs	25,000
Administrative expense	(15,000)

5. Other expenses

Particulars	Amount
Working Note 5
Other expense as given in question	(175,000)
Adjustments:
Income tax expense regrouped to Tax expense	128,000
Other expenses	(47,000)

6. As per Para 98 of AASB 101 there are circumstances that would give rise to the separate disclosure of items of income and expense which includes:

98 (a) - write-downs of inventories to net realizable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs

98(c) - disposals of items of property, plant and equipment;

Hence both the above line item has been shown separately in the income statement.

7. Finance income refers to regrouping from Revenue of rental received of 180,0000 and from other income of foreign exchange gain of 18,500.