Thompson Resources ltd
Suite 15, level 6, Plaza Building
878 Charles Street
Adelaide SA 5000
Dear William Thompson,
Thanks for your email on 12 April 2013 in which you requested to advice on different issues according to the company financial statement.
As it is a good sign to convert from a proprietary company to a public company for Thompson Resources Ltd. this decision will be the cause of additional source of finance and also other corporate benefits such as tax credit, (adjustment of tax losses) and many more.
So please find the attachment and if you have further query don’t hesitate to ask me. your sincerely
Issue 1 According to AASB 118 it should be recognized on the following basis. Risks and rewards of ownership have been transferred It is probable that benefits will flow to the seller The costs of the transaction can be measured reliably The entity retains no managerial involvement and exerts no effective control over the goods
As the above points of AASB118, requirements it come into view that the company meting the revenue recognition but on the other hand the “Right of return if the customer is not satisfied with the purchase” because Uno who Art Gallery has the right to return art works within 30 days of receipt. So in this regard Thompson Resources Ltd should not recognize any money receipt as revenue they should consider it as liability first, and then after 30 days they will consider it as revenue and should be transferred to revenue. As the matter of fact state that there is clear condition of contract to refund within 30 days period subject to full refund of money.The other important query pertaining to Export market development grant, it is applicable under International Accounting Standard 120 means forgivable of loan and it is to be recorded when it become received or right to received no matter it actually received. From my concern, I would focus on export development related activities which are defined as the company’s core business. AASB 118 (paragraph 7) stated that the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in equity, other than increase relating to contributions from equity participants. To Thompson Resources, it is ambiguous to determine this export development related activities are the core business of the company at this stage. I would like the manager of the company to provide more evidences in order to help me to decide the nature of this government grant. On the other hand, AASB 118(paragraph 8) addressed that revenue includes only the gross inflows received by the entity on its own account. However, amounts collected from third party are not economic benefits that flow to the entity and do not result in increase in equity. So, this government grant can also be treated as the amounts transferred from third party, and should not be recognised as revenue.
LONG SERVICE ISSUES
The reason, we treated long service leave expense in a complicated way, is that there is a difference between the taxable income and accounting profit. Based on the taxable income, we can further to calculate current tax liability. Leo et al. (2012, p. 225) illustrated that both Australian tax office (ATO) and the accountants treated long service leave as an expense, but in different periods. Thus, it will trigger a different result when it has current tax consequences. For instance, to one of the employees of the strategic management team, $1200 was recognised as an expense for accounting and added to a liability of long-service leave payable in the current year. But, tax deduction was not claimed this year, and $1200 will be allowed as a tax deduction in the future when this employee is paid his or her long-service leave. To…