Objectives This assessment item relates to the following unit learning outcomes: ? Interpret and...

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Objectives This assessment item relates to the following unit learning outcomes: ? Interpret and apply the AASB’s Framework for the Preparation and Presentation of Financial Statements. ? Interpret the technical requirements and conceptual aspects of selected accounting standards that address key issues in financial reporting. ? Apply relevant accounting pronouncements and professional judgement to solve routine accounting problems. 2 Question 1 Total 6 marks Biotran Ltd is a biotechnology company that researches and develops new drugs for the treatment of a wide range of health issues. Biotran Ltd’s accounting policy in relation to research and development expenditure is based on the requirements of AASB 138 Intangible Assets which requires all research expenditure to be expensed as incurred and only permits the capitalisation of development expenditure in very limited circumstances when specified criteria in AASB 138 Intangible Assets are satisfied. During the year ended 30 June 2016, Biotran Ltd incurred research expenditure of $26 million (which was expensed), development expenditure of $38 million (of which $18 million was capitalised) and reported total comprehensive income of $8 million. In February 2016, the Australian Accounting Standards Board (AASB) announced that they intend to amend AASB 138 Intangible Assets to permit entities to capitalise research expenditure and to make it easier for entities to capitalise development expenditure. The AASB intends to issue the revised AASB 138 Intangible Assets in early 2018. In July 2015, at the beginning of the current reporting period, Biotran Ltd decided to change its accounting policy for the valuation of materials inventories (used in research and development) from a weighted-average cost (WAC) method to a first-in, first-out (FIFO) method. Biotran Ltd believes that the FIFO method more accurately reflects the usage and flow of inventories. Also in July 2015, Biotran Ltd made changes to the estimated useful life and residual value of its buildings to reflect concerns that the commercial property market would decline due to reduced demand and excess capacity. Required (a) Explain the term ‘accounting policy’ and distinguish between ‘retrospective application’ and ‘retrospective restatement’. (1 mark) (b) Assume that the AASB issues a revised AASB 138 Intangible Assets in 2018 that permits the capitalisation of research expenditure and makes it easier to capitalise development expenditure. According to AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors, how would Biotran Ltd account for this change? (1 mark) (c) According to AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors, under what circumstances is Biotran Ltd permitted to change its accounting po

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QUESTION 1 
(a) Accounting policy refers to specific accounting principles and the methods used in 
application of such principles for the preparation and presentation of financial statements. 
For example the policy for valuation of inventories and investments. 
RETROSPECTIVE APPLICATION means application of a new accounting policy in 
such a manner as if it had been applied in previous years as well. 
RETROSPECTIVE RESTATEMENT involves restatement of previous period’s financial 
statements and correcting all measurements, recognitions and disclosures in older 
financial statements. It is normally carried when there are prior period errors found in 
subsequent years. 
(b) As per Para 14 of AASB 1081, the entity shall change the accounting policy if there is a 
change in an Australian Accounting Standard. There is a need to have retrospective 
application of such change in accounting policy, if there are no transitional provisions in 
the changed standard. 
(c) As per Para 14 of AASB 108, there are only 2 circumstances where the accounting policy 
can be changed- 
i. When there is a change in Australian Accounting Standard OR 
ii. When the change is expected to result in better presentation or preparation 
of financial statements. 
Such change in accounting policy should be accounted for with retrospective 
application. The entity is required to adjust the opening balances of the earliest 
period reported in context of such inventory values. 
                                                           
1
 Accounting Standard, A. A. S. B. 108 Accounting Policies. Changes in Accounting Estimates and Errors. 
(d) As per PARA 24 of AASB 108, if it is impracticable to determine period specific effects 
for one or more periods, then the effects shall be applied on the opening balances of the 
earliest period reported with a corresponding adjustment to the opening balance of each 
affected component of equity for that period. 
(e) The changes in estimated useful life and residual values get covered in the definition of 
changes in accounting estimates.

Objectives This assessment item relates to the following unit learning outcomes: ? Interpret and apply the AASB’s Framework for the Preparation and Presentation of Financial Statements. ? Interpret...

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