Financial Accounting in Economic Context

Question: Discuss about the Financial Accounting in Economic Context. Answer: Introduction In this report the issues raised by the board is discussed in details. The report also provides the advice on these issues. In this report, Board Meeting has been conducted for solving the issues in the given assignment. In the first issue, solution has been given whereby estimated profit was less as compared from the budgeted amount for specified period. In the second issue, presented solution has been given on the business combination for recognizing of goodwill and arguing at the same time. In the third issue, there has been issue worth deferred tax liabilities and deferred tax assets for adjusting that is not according to the accounting standard. In the first issue, the company is unable to make the previously budgeted profit of $180000.00 and it is expected that there will be a short fall of 20% (Saunders and Cornett 2014). The director for this suggested writing back the provision of long service leave and annual leave into income and then recognizing the expenses as and when it is incurred. The director argued that this will reduced the budgeted deficit of profit. It is important that this suggestion should be evaluated whether it is permissible under the Australia Accounting Standards (Reimers 2014). The accounting standard provides the meaning of employee entitlement that include wages and salary, annual leaves, long service leaves, super Annuation leave and other post employment benefits (Leuz and Wysocki 2016). Therefore, it is certain that the company will have to pay for the long service leave and annual leave. The Para 10 of the AASB 137, states that provision is a liability of uncertain timing and amount so it can be said to be present obligation of the company. The Para 14 of the AASB 137 provides that the provision should be recognized when there exist a present obligation due to past event (Lee and Parker 2014). It is probable that the settlement of the present obligation will require outflow of economic resources. In addition to this, the provision is required to be recognized if a reliable estimate of the present obligation is made. In this case, the obligation for annual leave and long service leave arises as soon as the employee is recruited and started providing se rvices. Therefore based on the recognition requirement of accounting standard the company should recognize the provision related to annual leave and long leave salary (Hoyle, Schaefer and Doupnik 2015). The directors suggested writing off the provision so that to increase the profit of the company. However, it should be noted that as per the requirement of the accounting standard the decision of the director is not acceptable (Deegan 2013). The AASB 3 Business Combination this standard is applicable in case of a transaction that fulfills the definition of the business combination (Cohen et al. 2013). The Para 3 of the AASB 3 states that an entity shall determine if the transaction is business combination by applying the definition of the standard. The Para 4 of the AASB 3 states that entity is required to apply for the business combination by applying the acquisition method (Saunders and Cornett 2014). The recognition principle provided in Para 10 states that at the date of the acquisition the acquirer is required to recognize the goodwill. The goodwill is calculated by identifying the assets acquired, the liability assumed and the non controlling interest that is acquired. The Para 11 and Para 12 of the standard provides the condition that are subject to which the recognition of assets and liabilities are made. The acquirer should classify the assets and liability acquired and as per the Para 18 of the standard this sh ould be measured based on the fair value at the date of acquisition of the assets. The Para 32 of the AASB 3 states that the goodwill should be recognize by the acquirer at the date of the acquisition by subtracting the assets over the liability (Saunders and Cornett 2014). In this case, the company has merged the business with the Lucy Gallery Limited. The company has bought 70% of the assets of the company. Therefore, it is necessary that the business should recognize the goodwill at the time of acquisition. Deferred tax asset and deferred tax liabilities: Deferred tax asset (DTA) is states a situation where the business has paid more than the obligation or the taxes are paid in advance as per the balance sheet. These excess taxes are returned to the company at a later date in a form of tax relief and therefore, the overpayment is treated as an asset for the company. Deferred tax assets are generated due to taxes carried forward or paid but not recognized in the statement of revenue. This assists in reducing the future tax obligation of the company. DTA is recognized only when there is a considerable expectation that future income will be generated from the asset to offset the DTA (Saunders and Cornett 2014). On the other hand, deferred tax liability (DTL) represents the temporary differences that may arise due to the difference between the enacted and anticipated rate of income tax payable for the current period. there is always a difference exist between the accountable income and taxable income. DTL states that the company will have to pay more tax due to a transaction that have taken place during the period. DTA and DTL should be treated as follows: DTA (in the nature of tax saving) is to be added to Net profit and DTL (in nature of provision) is to be deducted from Net profit (Saunders and Cornett 2014). If net of DTA and DTL is DTL then same shall be shown under Non-Current Liabilities on Liabilities side of balance sheet. If net of DTA and DTL is DTA then same shall be shown under Non-Current Assets after non-current investment on Assets side of Balance Sheet. Therefore the companys treatment is not as per the standard (Saunders and Cornett 2014). Conclusion At the end of the study, it is concluded that three major issues have been identified and discussed in the Board General Meetings. Each problem was attained in the assignment with proper solutions at the same time. This reveals the fact that issues relates with misstated figures in the financial statements for the company and business combination related terms for specified period. Reference List Cohen, J.R., Hoitash, U., Krishnamoorthy, G. and Wright, A.M., 2013. The effect of audit committee industry expertise on monitoring the financial reporting process. The Accounting Review, 89(1), pp.243-273. Deegan, C., 2013. 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