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Solution 1

As per the case study the Sea Eagle Ltd has not used its Machine and Equipment due to strike, and now Accountant has suggested not to charge Depreciation for the period giving an explanation Depreciation is charged for the wear and tear caused and as there is no wear and tear during this period so it should not be charged, but as per AASB116 (Anon., 2016), Asset Depreciation should start when it is put to use, location and condition is also necessary for it to be able to operate in the required manner as intended.

Physical wear and tear generally depend on various factors, which can be as No. of shifts and repair and maintenance schedule, preventive maintenance policy of the company also. Wear and tear may happen to machines or equipment even if it has not been used for a period of time and is idle.

Sea legal limited experience strike that affected no of its operating plants there no workers during the strike and the and the assets are kept idle the maintenance of the assets also become difficult therefore the wear and tear of Assets also occurs Even though the assets are not in use, but other factors that are technical, obsolescence(which might be commercial) and there will be wear and tear while an asset remains in an idle position, this also results in the diminution to the economic benefits of the asset that might have been obtained so the useful life of assets might be even shorter than its economic life.

An auditing team of legal sea ltd can request the management to provide the Depreciation even though the asset is used or not and whether related has been occurred or not during the strike period because diminution of a valve of the assets will arise.

• Depreciation of Property, Plant & Equipment is a charge to Profit & Loss A/c for the usage of an asset in the smooth running of production and administration activities of the organization. The wear and tear of the asset are accounted as Depreciation irrespective of actual usage. It starts when put to use and ceases when the asset is classified as “Held for Sale” category or the asset is de recognized, whichever is earlier. Therefore the Depreciation normally is not ceased when idle due to reasons other than obsolete or not put to use condition.

Depreciation is charged on the basis of various methods, i.e. Straight Line, or Diminishing Balance Method and Machine usage /hour method. Any method used should reflect the pattern of future expected benefits from the asset. Once the method is adopted, it should be consistently applied unless there is significant change expected in the pattern of future benefit from the usage of the asset. And in such a case, the method can be changed to reflect the new expected pattern, and the same shall be accounted as per AASB 108 as Change in Accounting Estimate.

The depreciation method adopted should be reviewed annually to look at significant change and accordingly change the method to reflect the changed pattern.

The following disclosure is required as per AASB 116:

• Method of Depreciation used
• Life of the assets
• Depreciation amount

In the given case, there was a strike in Sea Eagle Ltd in various plants, and the group accountant is of the view that the Depreciation should not be charged as there would be inappropriate matching of cost and revenue. The view of the group accountant is not correct as it is against the requirement of AASB 116. The method adopted in the earlier period cannot be changed abruptly to suit the situation unless and until the pattern of future expected benefit changes significantly. The strike cannot be considered as a future expected benefit change, and hence the Unit of Production method cannot be adopted. Under the Production (Machine Usage) method, the Depreciation could be nil when there is no production.

Solution 2

Bolton, who holds a trademark, which is quite well known as a company is having it for the last nine years. Trademark is generally in accounting terms is treated as Intangible Assets, and AASB18 is applicable for the Depreciation of such assets. (Australian Government, 2015) Mentions the applicable rules for Intangible Assets; according to it

(a) Expected usage of the intangible asset by the entity

(b) Product life cycles for the asset and its public information for the estimated useful life of such assets

(c) Different types of obsolesces, i.e. which may be Technical /Technological or commercial

(d) Industry stability in which the assets operate and demand change in the market for its products or services

(e) Actions of the Competitors

(f) Breakdown and other maintenance processes and policy around in terms of expenditure and periodicity the level of maintenance expenditure to get such useful life of the assets

(g) Or the control period of the assets, e.g. the expiry dates of the assets.

“An entity shall assess whether the useful life of an intangible asset is finite or indefinite and, if finite, the length of, or a number of production or similar units developing that useful life. An intangible asset shall be regarded by the entity as having an indefinite useful life when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is required to generate net cash inflows for the entity ” is the actual quote from the Para itself, Para 88 helps to determine whether the useful life of an intangible asset is finite. In the given question, the trademark has finite life to generate the cash flow of the company. But whether that finite period is limited to 5 years or 9 years can be determined on the basis of Para 94 of AASB 138. (Australian Government, 2015)

“The useful life of an intangible asset that arises from contractual or other legal rights shall not exceed the period of the contractual or other legal rights, but may be shorter depending on the period over which the entity expects to use the asset. If the contractual or other legal rights are conveyed for a limited term that can be renewed, the useful life of the intangible asset shall include the renewal period(s) only if there is evidence to support renewal by the entity without high cost. “

Initially Para 94 limits the useful life of an intangible asset to the period of other legal rights or to the period over which entity expects to use the asset whichever is shorter. Further, Para 94 suggests that if an intangible asset is renewable, then the period of renewal shall be included in the useful life of an intangible asset if following two conditions are satisfied :

(1) In case there is supportive evidence to for renewal

(2) Cost of renewal is not significant

In the given Question, the legal life of a trademark is 5 years and hence initially, at the time of recognition of an intangible asset, the entity should consider the useful life of 5 years or such period over which the company expects it to be used this trademark whichever is shorter. But since the trademark is renewable by the entity without any high cost, the entity can include the period of renewal to the period of trademark if there is evidence available to support the renewal by an entity.

To determine the useful life , an entity should obtain the following information for such a trademark.

An analysis of:

• The life cycle of the product
• Market Trends and competitive analysis
• Brand Expansion Opportunities
• Customer Relationship

Solution 3

According to AASB 137 and IAS 37 (Australian Government, 2014), “Arrangement is an obligation of unsure planning or sum”. Risk is a current commitment emerging from past occasions, the settlement of which can bring about a surge of monetary assets. The arrangement is a risk on the grounds that there is a current commitment, yet the sum and season of the settlement aren’t yet known.

An arrangement will be perceived just if the accompanying conditions are met:

1. An element has a new commitment (legitimate or useful) because of a past incident
2. It is likely that an outpouring of assets exemplifying financial advantages will be needed to settle the commitment; and
3. A dependable Matrix can be set to measure the performance.

As indicated by AASB 137, “An unexpected obligation is

(a) An Potential commitment which rises from some past occasions and its presence will be affirmed distinctly by the event or non-event of at least one unsure future occasion not completely inside the control of the element; or

(b) A Current commitment that arises from previous occasions, however, is not perceived in light of the fact that

• It unlikely that a surge of assets encapsulating monetary advantages will be needed to settle the commitment
• The measure of the commitment can’t be estimated with adequate unwavering quality.

Unforeseen liabilities are not perceived in the budget reports as they are possibly (I) potential commitments or (ii) current commitments that don’t meet the acknowledgement rules.

1. The arrangement must be made against this risk three months compensation for saved representatives $76000.

2. In the event that the arrangement is made, it will surely build the equipping proportion, as the arrangement is treated as a drawn-out risk. An increment in outfitting proportion will be a pointer of expanded danger. Forthcoming speculators won’t take up the danger, and they will go over away. If the provision is created, it will certainly increase the gearing ratio, as the provision is treated as a long term liability. An increase in the gearing ratio will be an indicator of increased risk. Prospective investors will not take up the risk, and they will go away.

References

Anon., 2016. AASB Standard. [Online]

Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB16_02-16.pdf

[Accessed 2020].

Australian Governement, 2014. AASB 137. [Online]

Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPjun14_04-14.pdf

[Accessed 2020].

Australian Government, 2015. AASB 138. [Online]

Available at: https://www.legislation.gov.au/Details/F2015L01558

[Accessed 2020].

Australian Government, 2015. content105/c9/AASB138_08-15_COMPoct15_01-18.pdf. [Online]

Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf

[Accessed 2020].