Question

Objective: The objective of this report is to analyse the Australian Conceptual Framework in accounting standard setting and apply the related key concepts to contemporary business practices. Your discussion should be aligned with the Conceptual Framework for Financial Reporting and relevant AASBs to support your analysis.

JB Hi - Fi Ltd has assets with the following costs and fair values as at 30 June 2019:

Asset type	cost	Fair vale
Inventory	$886,700,000	$912,000,000
Machinery	$40,800,000	$46,000,000
Total	$927,500,000	$958,000,000

The company decided.to measure the assets at cost and therefore disclosure the assets in the statement of financial position (balance sheet) at an amount of $927.5 million despite the fact that it could receive $958 million at the time if it sold them.

You are required to answer the following questions:

1) Would such financial statements be true and fair if the assets were disclosed at a total of $927.5 million?

2) Would such financial statements be true and fair if the assets were disclosed at a total of $958 million?  

Assume if the assets were recorded as following as at 30 June 2019:

Asset type	cost	Fair vale
Inventory	$886,700,000	$830,000,000
Machinery	$40,800,000	$36,000,000
Total	$927,500,000	$866,000,000

3) Would such financial statements be true and fair if the assets were disclosed at a total of $866 million because inventory and machinery actually could be sold at those values?

During COVID 19, the value of the company’s assets declined due to the Global Lock-down. Many businesses were forced to close shops or downsize their business operation. Refer to https://www.applianceretailer.com.au/2020/04/jb-hi-fi-employees-call-for-stores-to-closeduring-coronavirus/.

In this report, you are also required to select a 2018/2019 annual report of an Australian company listed in the ASX (Australian Stock Exchange). My one is SEEK Limited; ASX: SEK

You should provide your comments on the following questions:

1) Identify the measurement methods of Property, Plant and Equipment (PPE) that are adopted by the chosen company. Provide your explanation.

2) In your opinion, provide recommendations to the CFO regarding the measurement methods of PPE adopted by the chosen company that can improve financial performance in the 2019/2020 annual report under the current business environment. The report should demonstrate effective communication, logical presentation and integrated evaluation.

In particular, you may refer to the following or other AASBs in your report. • AASB Conceptual Framework for Financial Reporting • AASB 102 Inventories 5 • AASB 116 Property, Plant and Equipment • AASB 136 Impairment of Assets • AASB 101 Presentation of Financial Statements

Special instructions of the report:

• The report should include an executive summary, a body of contents covering points listed above, and a reference list.

* References used in the report such as the annual report of your chosen company or AASBs should be included in the reference list. Remember to provide a link to the annual report in the reference list.

• Find its annual reports for 2017/2018 or 2018/2019 financial year. Remember to use a complete annual report, not a concise financial report or a half-year financial report.

Answer 1

As per AASB 102,Inventories shall be measured at the lower of cost and net realisable value.

The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Net Realisable Value

The cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly or partially obsolete, or if their selling prices have declined. The cost of inventories may also not be recoverable if the estimated costs of completion or the estimated costs to be incurred to make the sale have increased. The practice of writing inventories down below cost to net realisable value is consistent with the view that assets shall not be carried in excess of amounts expected to be realised from their sale or use.

Inventories are usually written down to net realisable value item by item. In some circumstances, however, it may be appropriate to group similar or related items. This may be the case with items of inventory relating to the same product line that have similar purposes or end uses, are produced and marketed in the same geographical area, and cannot be practicably evaluated separately from other items in that product line. It is not appropriate to write inventories down on the basis of a classification of inventory, for example, finished goods, or all the inventories in a particular operating segment. Service providers generally accumulate costs in respect of each service for which a separate selling price is charged. Therefore, each such service is treated as a separate item.

Estimates of net realisable value are based on the most reliable evidence available at the time the estimates are made, of the amount the inventories are expected to realise. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the end of the period to the extent that such events confirm conditions existing at the end of the period.

Estimates of net realisable value also take into consideration the purpose for which the inventory is held. For example, the net realisable value of the quantity of inventory held to satisfy firm sales or service contracts is based on the contract price. If the sales contracts are for less than the inventory quantities held, the net realisable value of the excess is based on general selling prices. Provisions may arise from firm sales contracts in excess of inventory quantities held or from firm purchase contracts. Such provisions are dealt with under AASB 137 Provisions, Contingent Liabilities and Contingent Assets.

Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. However, when a decline in the price of materials indicates that the cost of the finished products exceeds net realisable value, the materials are written down to net realisable value. In such circumstances, the replacement cost of the materials may be the best available measure of their net realisable value.

A new assessment is made of net realisable value in each subsequent period. When the circumstances that previously caused inventories to be written down below cost no longer exist or when there is clear evidence of an increase in net realisable value because of changed economic circumstances, the amount of the write-down is reversed (i.e. the reversal is limited to the amount of the original write-down) so that the new carrying amount is the lower of the cost and the revised net realisable value. This occurs, for example, when an item of inventory that is carried at net realisable value, because its selling price has declined, is still on hand in a subsequent period and its selling price has increased.

As per AASB 116,An entity shall choose either the cost model in paragraph 30 or the revaluation model in paragraph 31 as its accounting policy and shall apply that policy to an entire class of property, plant and equipment.

Cost model

After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses.

Revaluation model

After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.

If an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs shall be revalued.

1.Therefore financial statements would be true and fair if the assets were disclosed at a total of $927.5 million provided if its assumed as entity followed Cost Model for measurement of PP&E.

2.Therefore financial statements would not be true and fair if the assets were disclosed at a total of $958 million since Inventory Valuation is not in accordance with AASB-102.

3.Therefore financial statements would be true and fair if the assets were disclosed at a total of $886 million provided if its assumed as entity followed Revaluation Model for measurement of PP&E & , the entire class of property, plant and equipment to which that asset belongs shall be revalued.

For SEEK LIMITED refer to below link

https://www.asx.com.au/asxpdf/20191028/pdf/449xy4s4yd4mbg.pdf

The company you have selected does not have the notes related to Property,Plant & equipment.So the details related to measurement methods could not be provided.

U can reach out to me with other corporate,so that i can explain & elaborate your requirement.