Investor reaction to accounting misstatement - MyAssignmenthelp.com

Question: Discuss about the Investor reaction to accounting misstatement. Answer: 16 January 2018 Mr. Christopher Sampson The managing Director Beachlife Ltd. Level 7, 927 William Street, Brisbane QLD 4000 Dear Christopher I would like to thank you for your prompt response through e-mail. As we always provided you with the best possible solutions, this time also we will assist you in making the decisions regarding the raised issues. We further assure you that the solutions will be complied with the Corporation Act, IFRS and AASB. Yu may be aware of the fact that the intangible assets are not physical by nature. Some of the examples of intangible assets are trademarks, patents, business methodologies, brand recognition and goodwill. The intangible assets can have definite period of life or indefinite period of life. As the procedure for intangible asset valuation like brand recognition valuation is not easy, it requires definite and solid methodology for the purpose of valuation. Further, in case of internally generated intangible asset the asset is not recognized until it is sold. As per Para 63 of IAS 38 and International Financial Reporting Standards (IFRS) brand recognition is the ability of the consumers to identify the brand from distinctive logo or artistic symbol. It also raise the customers expectation with regard to the product quality and assist the company to accumulate the companys attributes and and can campaign for the product accordingly. As the intangible asset like brand are not dealt in regu lar market, various issues generated for valuing the brand. It is further identified that the amount paid as the brand value are generally less as compared to the actual worth of the brand. For example, in the stated issue though the directors want to recognize $ 800,000 with respect to the Sun n Surf Shirts brand, at the time of selling the brand they may get offer for only $ 600,000. For recognizing the internally generated asset like brand, three options are there through which the brand can be recognized in the financial statement in accordance with the efficiencies, effectiveness, integrity and objectivity. As per the options the brand that is externally acquired shall be accounted as goodwill under the financial statement of purchasing company. In accordance with AASB 138 on Recognition of intangible assets, the intangible asset can only be recognized when its value can be measured reliably and the future economic attributes are expected to be attributed to the company. In the given issue stated by you, as Sun n Surf Shirts brands value reliably cannot be measured and the brand has no definite useful life, it cannot be recognised in the companys financial asset. However, it can be disclosed through notes to financial statements. Regarding the 2nd issue we would like to state that AASB 118 Revenue, revenue shall be recognized while it is probable that the upcoming economic benefits will be the inflow for company and the benefits can be reliably measured. Further, the revenue shall be recognized from the below mentioned events and transactions Rendering of the services Sale of the goods Using of companys dividends, royalties and interest yielding assets by others. Further, as per the AASB 137 Provisions, contingent liabilities and contingent assets, the provision is the amount kept aside by the company for meeting the future obligation. Main purpose of the provision is to adjust the current year balance and make it appropriate. Provisions are recorded as current liability under the balance sheet and under the income statement as expense. For creating the provision the obligation shall be probable and it must be at the future date with regard to the date of balance sheet and the obligation shall be legal or constructive obligation. on the other hand the contingent liability is the expected liability that may occur owing to the uncertain event. If the amount of contingent liability can be estimated reliably and the chances of occurring the event is high then the liability is accounted as expenses or loss under the income statement and as liability in the balance sheet. In the given issue stated by you, for selling of equipment by Beachlife Ltd to Goodsports Ltd the seller was obliged to provide maintenance of equipment for 1st year after sales and the maintenance charge was $ 7,500. However, Goodsposts Ltd is entitled to 15% refund of the purchase amount that is ($ 900,000 * 15%) = $ 13,500 if they are not satisfied with the maintenance service of Beachlife. Therefore, the transaction shall be treated by the company recording the sales under income statement at $ 90,000 as the sales taken place as per the AASB 118 and the payment for which is to be received on 30th December that is in the same accounting period. Moreover, as the maintenance charge is the obligation for your company and the amount can be reliably estimated at $ 7,500, this amount shall be accounted as provision in the income statement and current liability in balance sheet. Further, as there is no established probability for the contingent liability amounting to $ 13,500 it shall b e disclosed through notes to the financial statement rather than including it to the financial statement. In case of any doubt or query regarding the issues, you can always contact me in our official contact number or through e-mail. Yours sincerely Ms. Lisa Magenta Manager Magenta and Associates Copy Stewart Hudson Enc Letter Writing Handout Bibliography Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairment decisions by Australian firms and whether this was impacted by AASB 136. Goodwin, J., Atilgan, Y., Simsir, S.A. and Ahmed, K., 2016. Investor reaction to accounting misstatements under IFRS: Australian evidence. Picker, R., Clark, K., Dunn, J., Kolitz, D., Livne, G., Loftus, J. and Van der Tas, L., 2016.Applying international financial reporting standards. John Wiley Sons. Sinclair, R.N. and Keller, K.L., 2014. A case for brands as assets: Acquired and internally developed.Journal of Brand Management,21(4), pp.286-302. Tysiac, K., 2015. FASB delays revenue recognition effective date by one year.Journal of Accountancy. Wagenhofer, A., 2014. The role of revenue recognition in performance reporting.Accounting and Business Research,44(4), pp.349-379.