Accounting Treatment of Property Free-Samples-Myassignmenthelp

Questions: 1.Identify in the Financial Statements, the notes to the financial statements, and the statements of significant accounting policies those parts that relate to property, plant and equipment. 2.In addition to goodwill, what are the categories of intangible assets of this Organisation? How are they recognized and measured? 3.Where do provisions appear in the statement of Financial Position? 4.What are contingent liabilities and how can they arise 5.Using the Financial Statements Calculate, and Comment on, the following ratios Current ratio, rate of return on total assets, times interest earned, the debt ratio and the P/E ratio. Answers: 1.AASB 116 is typically related with the accounting treatment of property, plant and equipment so that the users of the financial report can find the information of the companys investment in property, plant and equipment. The detail disclosure of this information has to be made in the notes to financial statements so that it can be easily understood by the users about the information provided by the company related to the company purchase, sales or disposed of property, plant and equipment (Annual Report, 2016). In the annual report of Wesfarmer the information related to the property, plant and equipment is given in notes to accounts on page number 101. Looking at the notes related to the property, plant and equipment it can be said that Wesfarmers had make sure that all the requirement given in the AASB standard 116 has been fully complied. There has been separate disclosure of each assets and their initial cost of purchase with actual depreciation on that asset. To calculate the net carrying value of the asset all the procedure prescribed in the AASB has been followed. There is statement on the recognition and measurement that describes that net carrying value of property, plant and equipment has been measured on the cost of purchase minus depreciation and impairment. Straight line method of depreciation has been used to calculate the depreciation on property, plant and equipment (Annual Report, 2016). AASB 136 is related to the impairment of assets and in the annual report of Wesfarmers it has been presented in the notes to accounts number 17 and page number is 118. The notes related to impairment of assets is presented in well manner format with proper disclosure of all the information related to the testing of impairment of assets, calculations of impairments, recognized impairments and any reversal of reversal of impairments (Annual Report, 2016). 2.In addition to goodwill other intangible assets presents with Wesfarmers are Trade Names, Contractual and non contractual relationships, software and gaming and liquor licenses. All the intangible assets apart from the goodwill has been recognized initial on the cost that are purchased and intangible assets acquired in the process of business combination is recognized at their fair value on the date of acquisition. After the initial recognition of intangible assets they are carried on cost less any amortization and any impairment losses. The useful lives of the intangible assets are estimated on the following basis: Intangible Assets Useful Lives Trade names Indefinite and Finite (up to 20 years) Contractual and non contractual relationships Finite (Up to 15 years) Software Finite (up to 7 years) Gaming and Liquor Licenses Indefinite Impairment of intangible assets has policies that are applicable for all intangible assets of the recognized in the Wesfarmers. If the asset does not generate independent cash inflows and its value in use cannot be estimated to be close to its fair value, the asset is tested for impairment as the part of the cash generating unit (Annual Report, 2016). 3.The provisions appear under the liability section of the statement of financial position and detailed information about the provisions is provided in the notes to statement number 9 on page number 103 and 104. The long service leaves is recognized in the provision section of employee benefits. As per the accounting policies it is measured as the present value of the expected future payments for the services provided to the company by the employees. The value of long service leave presented in the annual report of the Wesfarmers were 1154 million AUD $ as part of current liabilities and 180 million AUD $ as part of non-current liabilities in respect of year 2016. Dividends appear on the liability side of balance sheet as the provision only when the dividends are declared and before they are paid to the shareholders. When dividend are declared and are not paid to the shareholders they become the liability of the company and as the accounting standard it is essential to show the dividend that is unpaid under provisions in case it is not paid to the shareholders. When dividend is paid it is no longer present at the liability side of the organization of the balance sheet. Information related to the dividends paid and declared is given in notes to statements number 11 and it is given on page number 106. As per information given dividend has been declared and paid in the same accounting year therefore it has not been presented under the provision section of the annual report (Annual Report, 2016). 4.Contingent Liabilities refers to the potential liability of the company that can arise depending on any occurrence of future uncertain event. As per the accounting AASB 137 contingent is recoded in the financial statements when it is probable that the amount of contingent liability can be reasonably estimated and they will certain events in the future that will impact the outflow of resources of the organization (Annual Report, 2016). Following are the disclosure requirement of for contingent liabilities as per AASB 137: Unless the possibility of any outflow in settlement is remote, an entity shall disclose for each class of contingent liability at the end of the reporting period a brief description of the nature of the contingent liability and, where practicable: an estimate of its financial effect, measured under paragraphs 36-52; an indication of the uncertainties relating to the amount or timing of any outflow; and The possibility of any reimbursement. In the annual report of Wesfarmers the contingent liabilities are mentioned under notes to accounts 21 under Commitments and Contingencies. The various contingent liabilities are operating lease commitments, capital commitments and other expenditure commitments. All the contingent liabilities are disclosed properly by the company (Annual Report, 2016). Contingent assets refer to the possible assets of the company that can arise in future due to the gain that is probable at any future date on the occurrence of any future event. As per accounting standard AASB 137, company cannot recognize the contingent assets even if it is probable that contingent gain will arise in future. 5.Liquidity Analysis Liquidity analysis means measuring the company position to pay the current liabilities through the use of short term assets of the company. The current liabilities refer to the expenses that are due in one year time period and short term assets or current assets refers to assets of the company that are capable to be converted into cash and cash equivalent in short period of time generally one year. Current ratio is the most important ratio that helps to evaluate the liquidity position of the company. Current Ratio: Current ratio is the current assets divided current liabilities. It means this ratio check amount of current assets is presents in the company against the amount of current liabilities to be paid by the company. Current Ratio: Current Assets/Current Liabilites Current Ratio of Wesfarmers in year 2016 = $ 9684 /$10424 = 0.93 times The current ratio of Wesfarmers in year 2016 is 0.93 times that indicates that company has only 0.93 times the current assets present in the against the current liability of 10,424 million. So it can be said that liquidity position of the Wesfarmer was critical and it must be taken care by the company in as early as possible. Profitability Analysis Profitability analysis means measuring the income earning capability of company through the available resources. Profitability means income earned by the firm on the assets present in the company. There are many ways through which profitability can be measured. Net profit ratio, rate of return on total assets and return on total equity are the some of well known ratios that are used to measure the profitability of the firm. Rate of Return on total assets: This ratio shows the percentage of return the firm is earning on the total assets employed in the one financial year. Rate of return on total assets: Net profit/Total Assets Rate of return on total assets of Wesfarmers in year 2016 = $407/ $40,783 = 0.99 % Rate of return on total assets of Wesfarmers in year 2016 was almost 1 % that indicates that company has earned very low return on the total assets. It can be concluded that overall profitability position looking at the ratio of rate of return on total is very weak and management has to take serious steps to increase the income earning capability. Solvency Analysis Solvency analysis means ability of company to pay the debt capital out of other capital present. This analysis helps to know the level of leverage capital (Debt capital) present in the company. Times Interest earned: This ratio tells the times the company has ability to pay the interest expenses out of the profit earned. This ratio shows the company ability to pay the interest liability on the debt capital. Times Interest Earned: Profit before Interest and Taxes / Interest Expenses Times Interest Earned of Wesfarmers in year 2016 = $1386 / $308 = 4.5 times (Annual Report, 2016) The interest coverage ratio of the company is 4.5 times that shows company can pay almost 4 times the interest expenses as of now. So it can be said that solvency position of the company was good in year 2016. Debt ratio: This ratio measures the amount of debt capital present in the company against the equity and long term capital. Debt Ratio: Long Term Liabilities/Shareholders Equity and Long term Liabilities Debt Ratio of Wesfarmers in year 2016 = 7410/ (22949+7410) = 0.24 times Debt ratio of the Wesfarmers was 0.24 times that indicates company has 0.24 times the debt capital against the total capital present in the company. Price earning Ratio: This ratio is the measure the value of the company as it measures the current share price on the basis of per share earning. This ratio measures the times the market value of company to the earning per share of the company. P/E Ratio: MPS/EPS =$40.10 / $0.36 = 111.38 times (Bull, 2007) Wesfarmers has P/E ratio of 111.38 times that indicates that market value of company is very strong as compare to earning capability. References Annual Report, 2016. Wesfarmers. [Online]. Available at: https://www.wesfarmers.com.au/docs/default-source/reports/2016-annual-report.pdf?sfvrsn=4 [Assessed on: 17 May, 2017]. Bull, R. 2007. Financial Ratios: How to use financial ratios to maximise value and success for your business'. UK: Elsevier.