Acct2542 Hw Week 2

Tutorial Week 2 Homework

Chapter 3: Company Operations CASE STUDIES

Case Study 4:

CLEARSAILING LTD A. Currently, there is no Australian accounting standard to provide accounting policies or guidance to deal with accounting for advertising expenditure of this kind. Two potential accounting policies are: (a) expense all advertising expenditure as incurred, or (b) capitalise all advertising expenditure (i.e. treat the costs as an asset). AASB 108, paragraph 10 states that, in the absence of an Australian accounting standard, management shall use its judgement in developing and applying an accounting policy that results in information that is both relevant to the economic decision making needs of users and is reliable, i.e. provides a faithful representation of the entity’s financial position and performance, as well as being free from bias and complete. Paragraph 11 requires management to refer to the accounting standards of other bodies dealing with similar and related issues and the definitions, recognition criteria and measurement concepts contained in the conceptual framework when choosing between competing accounting policies. Students could select either policy – the key issue is whether or not such expenditure results in the creation of an asset as per the Conceptual Framework’s definition. If so, the expenditure should be capitalised. If not, the expenditure should be expensed. Students should provide valid arguments to support their choice of accounting policy. In this case, we would argue against capitalisation as the main purpose of the board is to show a higher profit in the current year, i.e. this is not a faithful representation of the entity’s financial position or performance.

B.

D.

Jeffrey’s View (sometimes accountants disagree with each other) Advertising that is prepaid e.g. 3 months of television commercials, might be recognised as an asset.But advertising costs should otherwise not be recognised as an asset. Subsequent expenditure on...