QUESTION 1

Buildarama Ltd
a) Calculate the carrying value of the equipment as of 31 December 2018. (10 marks)
$
Cost 20 000
Less Trade discount (1 000)
Delivery costs 200
Set up costs 800
Amount to be capitalised 20 000
Annual depreciation
Depreciation Formula (Cost – Residual Value)/Estimated Useful Life
(20 000 – 2 000)/10 years
1 800
Carrying value at 31 December 2018
$
Cost 20 000
Accumulated Depreciation (1 800)
Carrying value 18 200

b) In accordance with IAS 16 – Property, Plant and Equipment describe the criteria for the
recognition of property, plant and equipment in the financial statements. (7 marks)
Property, plant and equipment are tangible assets held by an entity for more than one accounting
period for use in the production or supply of goods or services, for rental to others, or for
administrative purposes.

Recognition criteria

A Property, plant and equipment are recognised when the Framework recognition criteria are met
which are; it is probable that future economic benefits that are attributable to the asset will flow to
the entity; and the cost of the asset can be reliably measured.

An item of property, plant and equipment should initially be measured at its cost which include all
costs involved in bringing the asset into working condition, capital costs such as the cost of site
preparation, delivery costs, installation costs, borrowing costs (in accordance with IAS 23 – later),
revenue costs should be written off as incurred, dismantling costs which are the present value of
these costs should be capitalised, with an equivalent liability set up. The discount on this liability
would then be unwound over the period until the costs are paid. This means that the liability
increases by the interest rate each year, with the increase taken to finance costs in the statement of
profit or loss.

c) Explain the accounting treatment allowed for the measurement of property, plant and
equipment: (8 marks)
i) At recognition
All items of property, plant and equipment are recognised at cost
ii) After recognition
After recognition, property, plant and equipment can be recognised using either the cost model or
the revaluation model.
The Cost model is where PPE is carried at cost less accumulated depreciation and impairment
losses.
The Revaluation model is where PPE is carried at revalued amount with the revalued amount equal
to the fair value at date of revaluation less subsequent accumulated depreciation and impairment
losses.
QUESTION 2
(a). Provide journal entries to show how the disposal on this revalued property should be
treated in the financial statements for the year ended 31 December 2018. (20 marks)
Carrying value at 31.12.2016 559 000
Depreciation for 2017 + 2018 (26 000)
$559,000 – 0) / (43 years) x 2 Years
Carrying value at 31.12.2018 533 000
Disposal value 600 000
Profit on disposal 67 000

Debit Credit
Disposal Account 559 000
PPE 559 000
PPE – Accumulated Depreciation 26 000
Disposal Account 26 000
Bank 600 000
Disposal Account 600 000
Disposal Account 67 000
Profit on Disposal – Income – SOPL & OCI 67 000
Revaluation Surplus – Equity 115 000
Retained Earnings – Equity 115 000

b) Identify the potential limitations associated with financial accounting as may be considered
by possible investors. (5 marks)
Dependence on historical costs- this is a concern when reviewing the balance sheet, where the
values of assets and liabilities may change over time.
Inflationary effects- if the inflation rate is relatively high, the amounts associated with assets and
liabilities in the balance sheet will appear inordinately low, since they are not being adjusted for
inflation.
Intangible assets not recorded- many intangible assets are not recorded as assets. Instead, any
expenditures made to create an intangible asset are immediately charged to expense.
Based on specific time period- a user of financial statements can gain an incorrect view of the
financial results or cash flows of a business by only looking at one reporting period.
Not always comparable across companies- if a user wants to compare the results of different
companies, their financial statements are not always comparable, because the entities use different
accounting practices.
Subject to fraud.- the management team of a company may deliberately skew the results presented.

QUESTION 3
Describe and discuss the four main qualitative characteristics of financial statements as
identified in the conceptual framework for financial reporting for the preparation and
presentation of financial statements. 25 marks)
The primary objective of financial reporting is to provide high-quality financial reporting
information concerning economic entities, primarily financial in nature, useful for economic
decision making (FASB, 1999; IASB, 2008). Providing high quality financial reporting information
is important because it will positively influence capital providers and other stakeholders in making
investment, credit, and similar resource allocation decisions enhancing overall market efficiency
(IASB, 2006). The dependence of users’ economic decision on financial statements is crucial and if
the financial information is not accurate or is not true and fair then users may end up making wrong
decisions. Therefore, financial statements need to have certain qualitative characteristics in order to
be useful to its users.

Understandability

Users must be able to understand financial statements. They are assumed to have a reasonable
knowledge of business and economic activities and accounting and a willingness to study the
information properly. Complex matters, if relevant for decision-making, should not be left out of
financial statements simply due to its difficulty in being understood. It should be noted that
understandability is classified as a user-specific quality because some information may be useful to
some people but not to others. Also remember that users are assumed to have a reasonable
knowledge of business and economic activities, as well as a willingness to study accounting
information diligently.

Relevance

To be useful information must be relevant to the decision-making needs of users. Information has
the quality of relevance when it influences the economic decisions of users by helping them
evaluate past, present or future events or confirming, or correcting, their past evaluations. The
relevance of information is affected by its nature and materiality. In some cases, the nature of
information alone is sufficient to determine its relevance. In other cases, both the nature and
materiality are important. Information is material if its omission or misstatement could influence
the economic decisions of users taken on the basis of the financial statements. Another important
aspect of relevance is timeliness, which means that information should be made available when it is
required, in other words, in time to influence the decision being made. It is often necessary to make
a trade-off between timeliness and accuracy by providing information that is not completely
accurate in a timely manner.

Reliability

To be useful, information must also be reliable. Information has the quality of reliability when it is
free from material error and bias and can be depended upon by users to represent faithfully that
which it either purports to represent or could reasonably be expected to represent. Information may
be relevant but so unreliable in nature or representation that its recognition may be potentially
misleading. Key elements of reliability include the following faithful representation, substance over
form, neutrality, prudence, and completeness. Another aspect of reliability is representational
faithfulness, which refers to the way transactions and other events are represented in the financial
statements, that is, without any conscious bias, on the part of the preparer, but only seeking to
portray the truth.

Comparability

Users must be able to compare the financial statements of an entity through time in order to identify
trends in its financial position and performance. Users must also be able to compare the financial
statements of different entities in order to evaluate their relative financial position, performance and
changes in financial position. Hence, the measurement and display of the financial effect of like
transactions and other events must be carried out in a consistent way throughout an entity and over
time for that entity and in a consistent way for different entities. The need for comparability should
not be confused with mere uniformity. It is inappropriate for an entity to leave its accounting
policies unchanged when more relevant and reliable alternatives exist. It is important that the
financial statements should corresponding information for the preceding periods.

REFERENCES
1. Alexander, D. & Jermakowicz, E. (2006). True and Fair View of the Principles/Rules
Debate. Abacus, 42(2), 132-164.
2. Amir, E., Harris, T. & Venuti, E.K. (1993). A Comparison of the Value-Relevance of U.S.
Versus Non-U.S. GAAP Accounting Measures Using Form 20-F Reconciliations. Journal
of Accounting Research, 31, 230-264 (Supplement).
3. Ashbaugh, H. & Olsson, P. (2002). An Exploratory Study of the Valuation Properties of
Cross-Listed Firms’ IAS and U.S. GAAP Earnings and Book Values. The Accounting
Review 77(1), 107–27.
4. Ball, R., Kothari, S. & Robin, A. (2000). The effect of international institutional factors on
properties of accounting earnings. Journal of Accounting and Economics, 29, 1-51.
5. Jarnagin, B. D. Financial Accounting Standards. Chicago: Commerce Clearing House,
1992.
6. Kieso, D. E., and J. J. Weyugandt. Intermediate Accounting. New York: Wiley, 1995.
7. Label, Wayne A. Ten-Minute Guide to Accounting for Non-accountants. New York: Alpha
Books, 1998.
8. Meigs, Robert F., and others. Accounting: The Basis for Business Decisions. 11 th ed.
Boston: Irwin/McGraw-Hill, 1999. Woelfel, C. J. Financial Statement Analysis. Chicago:
Probus, 1994.
9. Wolk, H. I., and others. Accounting Theory: A Conceptual and Institutional Approach.
Cincinnati, OH: South-Western, 1992.