CASE STUDY: KELLY LTD
Re: Numerous Accounting Issues – year ending 31 December 2012
From: Jane Kelly [
[email protected]]
Sent: Monday 30 July 2012 at 8.45am
To:
[email protected] Dear Margaret,
Thanks for visiting our company yesterday and meeting with me. As discussed
Kelly Pty Ltd became a public company on 1 January 2012 and there are a couple
of issues that the board of directors has raised with me in relation to the
financial statements. I have noted them below for your response.
To assist us in our decision making process could you please make sure that any
elevant sources such as the AASBs, Corporations Act, up-to-date financial
accounting texts, reference books, journal articles, and/or websites are
eferenced so that the accounting team here could check them out when
evaluating your answer. The Financial Controller Paul Pincher would also like to
e copied in on your response.
Issue 1: The non-cu
ent assets of the company were shown at cost in the
alance sheet as at 31 December 2011. However our new assistant accountant,
who has just completed her accounting degree, mentioned that some of these
non-cu
ent assets might need to be impaired, now that we are a public
company. Is this co
ect? Why would we need to impair assets that we use in the
usiness? How does this work? And can’t we choose to just leave the assets at
cost and then recognise the loss once we finally sell, scrap or otherwise dispose
of them. On the other hand if we recognise an impairment of some of the assets,
can’t we also recognise an increase in the value of some of the assets by showing
them at revalued amounts?
Answer
Non-cu
ent assets mean assets which are not to be used in one normal
operating cycle of any business. Non-cu
ent assets mean assets whose benefit
will accrue to the company over one operating cycle of the company usually one
year or less. It may include building, machinery, goodwill, other intangible assets
etc.
Impairment is mandatory for every company whether the company is a private
company or a public company. Every company which ca
ies an asset on its
alance sheet at its book value which is less than its ca
ying value must be
impaired. It does not matter whether the company is a private or a public
company.
Impairment of assets is required as we prepare financial statements based on
“prudence”. Prudence method shows that the financial statements should
account for any know losses and liabilities. Further, financial statements should
e prepared on “fair value” concept which states that assets and liabilities
should be recorded in the financial statements based on its cu
ent value and not
its historical...