Essay Accounting Notes - Issues in Financial Reporting

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Part A

AASB2 Share-based Payments
The transitional change of AASB2 under AIFRS in recognising expense at fair value for share-based payments (previously at cost under AGAAP) has led to significant adjustments in net profit and shareholder’s equity of the entities.

To adjust for share-based payments previously unrecognized under AGAAP, Centamin recognized an expense of $63,504 and a corresponding expected decrease in the expected profit[1] under AIFRS for the year ended 30 June 2005.

A comparable detriment is also notable in Pan, expensing its Executive’s Option Plan at US$99,378[2] (AUD$136,565), with a corresponding decrease in the expected profit[3] under AIFRS as at 30 June 2005; and accompanying increases in contributed equity of US$11,489[4] (AUD$15,788)[5].

A more significant deterioration is evident in St.George, with the recognition of a $13 million expense[6], decreasing the net profit[7] under AIFRS for the year ended 30 September 2005.

AASB119 Employee Benefits
Previously recognized as an expense under AGAAP, AASB119 under AIFRS now requires the net surplus of defined benefits superannuation plans sponsored by the entities to be capitalised, with a corresponding adjustment to retained earnings.

Accordingly, with its large 7,428 employee base, Fairfax recognized an asset of $6,927,000[8] for the net surplus in its defined benefit funds, leading to a corresponding increase in retained earnings[9] and shareholder’s equity[10] for the year ended 30 June 2005.

Also recognizing actuarial adjustments directly through retained earnings, St.George expected the recognition of a $5 million defined benefit superannuation liability, a $2 million increase in deferred tax assets and a $3 million decrease to opening retained earnings[11] for the year ended 30 September 2005.[12]

AASB138 Intangible Assets
Upon transition to AIFRS, AASB138 requires any internally generated intangible assets, previously capitalised under AGAAP, to be written off as an expense. The subsequent reversal of assets recognition, with a corresponding expense incurred, significantly affects the accounting profit and equity upon the transition to AIFRS.

Such adverse impact is predominantly notable for Fairfax, being a media company with 64.8%[13] of its total assets being intangibles. While the majority of its mastheads, being externally acquired, continue to be carried at fair value, internally-generated mastheads and tradenames are de-recognised, decreasing equity[14] and retained earnings[15] by $6,276,000 for the year ended 30 June 2005.[16]

AASB3 Goodwill
The amortization of goodwill over the periods of expected benefits as permitted under AGAAP has been now prohibited by AASB3 under AIFRS, being replaced by an annual asset impairment test. Subsequently, the amortization expensed under straight-line approach of the entities must be reversed for AIFRS comparative purposes, leading to a corresponding increase in expected net profit.

The most significant impacts of such transitional change can be observed in St.George and Suncorp, respectively reversing goodwill amortization expense of $101million[17] and $61million[18], with a corresponding increase in net profit for the year ended 30 September 2005[19] and 30 June 2005[20]. Other companies have experienced a less substantial impact, with a reversal and a corresponding increase in the expected net profit of $2,359,000[21] for Fairfax and $1,664,875[22] for Codan.

AASB112 Income tax
As opposed to the AGAAP income statement approach, AASB112 under AIFRS requires the adoption of the balance sheet approach for tax-effect accounting, which recognizes deferred tax assets and liabilities to account for temporary differences between the carrying value of assets or liabilities and their tax bases.

Such transitional change amounted to a major impact upon Gasnet, of which deferred tax liability increased by $71,156,000, with corresponding decreases in reserves and total
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