Valuation of Capitalised Research and Development

Question: Discuss about the Valuation of Capitalised Research and Development. Answer: Introduction: The government sectors and entities comprising of both profit and non-profit sectors prepare their general purpose financial reports that are as per the Australian Accounting standards which are further in accordance with Corporation Act 2001 (Presentation of Financial Statements, 2015). The AASB 10 stipulates the standards for Consolidated Financial Statements. The standard presents the guidelines and principle, which are to be followed for preparation and presentation of consolidated financial statements and reports of entities that are controlling one or more subsidiaries (Hodgson and Russell, 2014). The standard presents and establishes the principle of control, which forms the basis of consolidation. As per the Walker (2008), an entity is subject to IFRS 10 application if they are profit oriented and applies this standard. It is also applicable to industries that fall under the category of Tier 1 and Tier 2. The key aim of establishing such standard is for setting up rules for entities along with its subsidiaries for preparation and presentation of consolidated financial statements. The eligibility for application of this standard is that the entity is required to have total control over its subsidiary. Calculation of Goodwill/ Capital Reserve in consolidation process Net fair value of identifiable assets and liabilities = ($158800) (equity) +$6400* (1-.30) (inventory) + 2000* (1-.30) (patent) + 20000* (1-.30) (plant) = $178680 Consideration transferred = $220800 Goodwill = $42120 Consolidated worksheet entries at 1 July 2016 Table 1: Statement showing consolidated worksheet entries at 1 July 2016 Sr. No. Particular Dr. Amount Cr. Amount Journal Entries in the books of Merelyn Ltd at the acquisition date 1 Inventory A/c Dr $6400 To Deferred Tax liability A/c $1920 To Business combination valuation reserve A/c $4480 2 Patent A/c Dr $2000 To Deferred Tax liability A/c $600 To Business combination valuation reserve A/c $1400 3 Accumulated Depreciation A/c $40000 To Plant A/c To Deferred tax liability A/C To Business combination valuation reserve $20000 $6000 $14000 4 Goodwill A/C Dr. $42120 To Business combination valuation reserve A/c $42120 Pre-acquisition Entries at the end of year 1 Share Capital A/c Dr $100000 Retain Earnings A/c Dr $58800 Business combination valuation reserve A/c Dr $62000 To Shares in Cathey A/c Ltd $220800 Worksheet entries at 30 June 2017 The entries that are affected Sales of inventory Depreciation of plant Impairment of goodwill Table 2: Statement showing consolidated valuation entries at 30 June 2017 Sr. No. Particular Dr. Amount Cr. Amount 1 Cost of sales A/c Dr $6400 To Income tax expenses A/c $1920 To business combination valuation reserve A/c $4480 2 Patent A/c Dr $20000 To Deferred Tax liability A/c $6000 To Business combination valuation reserve A/c $14000 3 Accumulated Depreciation A/c Dr $40000 To Plant A/c $40000 4 Plant A/c Dr $20000 To Deferred Tax liability A/c $6000 To Business combination valuation reserve A/c $14000 5 Depreciation expenses A/c Dr $2000 To Accumulated Depreciation A/c ($20000*10%) $2000 6 Deferred tax liability A/c Dr. To Income Tax Expense A/c ($2000*30%) $600 $600 7 Goodwill A/c Dr To Business combination valuation reserve A/c Dr $42120 $42120 8 Impairment loss goodwill Dr $1300 To Acc. Impairment loss- goodwill A/c $1300 Pre-acquisition Entries The pre-acquisition entries are affected by: -transfer from business combination valuation reserve Journal Entry 1 Share Capital A/c Dr $100000 Retain Earnings A/c Dr $58800 Business combination valuation reserve A/c Dr $62000 To Shares in Cathey A/c Ltd $220800 2 General Reserve A/c Dr $30000 Transfer to general reserve $30000 3 Trf. from business comb. valuation reserve A/c Dr $19600 Buisness combination valuation reserve A/c $19600 The aim of financial statement is to serve information regarding this financial positioning, performance and cash flow of entities that are useful for a wide spectrum of users in undertaking economic decisions. To accomplish this aim, financial statements serve information of entities like assets, liabilities, income and expenses, equity and cash flows (Carson and et.al., 2011). The information served along with the notes is assistive and helps in predicting the future cash flows of entities, which helps in finding out the timing and certainty. The standard directs on making the statement of financial position as the commencement of early comparative period where an entity retrospectively applies the accounting policy or makes ares tatement of items retrospectively in its financial reports or reclassifies the items stated in its financial statements (Ke, Pham and Fargher, 2004). All terms that are stated in AASB 101 standards is adequate for entities which strive for profit both in p rivate and public. An entity may make own use of titles other than those that are specified in this standard. Statement of financial position Table 3: Balance Sheet of Heaven Ltd as at 30 June 2016 Notes Amount $ ASSETS Current Assets Cash and cash equivalents 1 2,98,080 Accounts receivables 6,41,020 Inventory 2 9,70,000 Prepayments 3,400 Calls in arrears (2500 shares at 20c) 500 Total current assets 19,13,000 Non-Current Assets Land Building 17,50,000 Patent 1,00,000 Plant and equipment 17,16,000 Long Term Investments 3 13,00,000 Total non-financial assets 48,66,000 Total Assets 67,79,000 LIABILITIES Current Liabilities Accounts Payable 7,90,000 Accrued Expenses 8,520 Provisions 4 4,79,000 Dividend 2,00,000 Total Current Liabilities 14,77,520 Non-Current Liabilities Employee Benefit 4,00,000 Mortgage Loans 2,40,000 Total Non-Current Liabilities 6,40,000 Total Liabilities 21,17,520 Equity Paid-up Capital 4086000 Retained Profit 5 5,75,480 Total Equity 46,61,480 Total Equity Liabilities 67,79,000 Notes to Accounts Note1: Cash Cash Equivalents Cash at Bank $298080 Total $298080 Note 2: Long-Term Investment 10% Telstra Bonds $1300000 Balance c/d $1300000 Note 3: Accounts Receivable Balance b/d $651020 Less: Impairment of accounts receivable $10000 Balance c/d $641020 Note 4: Provisions Current Tax Liability $160000 Accumulated Depreciation - Plant Equipment $72000 Accumulated Depreciation - Building $207000 Accumulated Depreciation - Patent $40000 Total $479000 Note 5: Retained Earnings Opening Balance $275000 Profit for the period $500480 Dividend Payable -$200000 Balance c/d $575480 Statement of changes in equity Table 4: Statement of changes in equity of Heaven Ltd. Share capital Retained earnings Total equity Balance at 1 July 2015 $4086000 $275000 $4361000 Changes in accounting policy 0 0 0 Restated balance $4086000 $275000 $4361000 Changes in equity for the year 2016 Issue of share capital 0 0 Profit for the period 0 $500480 $500480 Dividend Paid 0 -$200000 -$200000 Balance at 30th June 2016 $4086000 $575480 $4661480 References Carson, E.andet.al., 2011. Audit reports in Australia during the global financial crisis.Australian Accounting Review.21(1).pp.22-31. Hodgson, A. and Russell, M., 2014. Comprehending comprehensive income.Australian Accounting Review.24(2). pp.100-110. Ke, F.Y., Pham, T. and Fargher, N., 2004. The relevance to firm valuation of capitalised research and development expenditures.Australian Accounting Review.14(34).pp.72-76. Walker, R.G., 2008. Disclosure of Financial Commitments.Australian Accounting Review.18(2).pp.161-172. Online Presentation of Financial Statements, 2015. [PDF]. Available from https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf. [Accessed on 7th