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Financial Accounting

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Financial Accounting

Moore and Stephens Accounting

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3rd Floor, Strata 2 Building, Baltimore, QLD 4059

January 14, 2010

Melissa Portland

Managing Director

Dogue Pet Store & Grooming,

17 Martha Road

KELVIN GROVE    QLD   4059

Dear Ms. Portland

            We refer to your query on the presentation of the Franchise item in your balance sheet as of 30 June 2009 as follows:

Non-Current Assets                                                               $

                        Investments                                                            745,000

Property, plant and equipment (net)                   3,845,000

Franchise fee (at revaluation)                               150,000

Total Non-Current Assets                                   4,740,000

            We also wish to clarify the following additional queries which you have forwarded to us as follows:

·         Whether the franchise fee treatment and disclosure currently complies with appropriate Australian Accounting Standards and if not;

·         Identify the modifications, which are required to ensure compliance, including an amended extract of the balance sheet and relevant note disclosures that will accompany the financial statements in relation to the franchise fee.

We have taken note of the following transactions entries which you have sought clarification for: (1) that the franchise which was the only one owned by the company was purchased from the franchisor for $100,000 one year ago on 1 July 2008; and (2) the franchise is for a renewable five-year period with an additional payment of $100,000 and no further renewals are to be granted.

(3) The franchise is to be returned after the renewal period; (4) a revaluation was made 31 December 2008 from $100,000 to $150,000 debiting Franchise fee for $50,000 and crediting Asset revaluation reserve.

            Based on our analysis of the account, we have determined the following

Comments and recommendations for your consideration:

(1)  The presentation of the carrying amount of Franchise account does not comply with the provision of International Accounting Standards (IAS) 38 on Intangibles which states that:

“Carrying amount is the amount at which an asset is recognized in the balance sheet after deducting any accumulated amortisation and accumulated impairment losses thereon.”

Revaluation is therefore not applicable; instead the amortized value must be presented in the Balance Sheet or Statement of Financial Position.

(2)  Based on your data provided, the carrying amount of the Franchise fee should be net of the applicable amortization annually provided for five years. Hence, during the end of the first year after acquisition, the carrying amount is about $80,000. Here, balance sheet should indicate a balance of $4.76M for non-current assets recast as follows:

Non-Current Assets                                                               $

Investments                                                            745,000

Property, plant and equipment (net)                   3,845,000

Franchise fee (net of amortization)                          80,000

Total Non-Current Assets                               4,670,000

(3)  The amortization of the Franchise fee is based on the 5-year contract after which the account will have become zero, until renewed, in which case a new round of amortizations will take place.

(4)  All other information pertaining to the acquisition, amortization, renewal scheme of the Franchise account shall be disclosed in the Notes to the Financial Statements.

Should you have further queries about this matter, please do not hesitate to contact us.

Very truly yours,

Michael Moore

Senior Partner

Reference list

 AASB, (2001) the Nature and Purpose of Statements of Accounting Concepts. Viwanuary 14, 2010     at website: ://www.aasb.com.au/admin/file/content102/c3/ACCPS5_07-01.pdf

AASB 138, (2007). Intangible assets: Compiled Accounting Standard. Australian Accounting. Viewed  January 14, 2010 at website: http://www.aasb.gov.au/admin/file/content105/c9/AASB138_07-04_COMPapr07_07-07.pdf

Fairfax Media Annual Report 2009. Viewed January 14, 2009. At website: http://www.fxj.com.au/shareholders/FXJ-2009AnnualReport_FINALLOWRES_revised.pdf

Spiceland, J., Sepe, J. Tomassini, L. (2000). Intermediate ccounting. International Edition. Singapore. McGraw Hill Publications.

Cite this Financial Accounting

Financial Accounting. (2016, Aug 09). Retrieved from https://graduateway.com/financial-accounting/

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