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FINANCIAL REPORTING

GROUP REPORT
Salman Buzaid 201400057 – Mansoor Almansoor 201501397 –
Mohammed Almansoor 201501398 – Maryam Husain 201400493

JUNE 11, 2018


BAHRAIN POLYTECHNIC
Table of Contents
Question One............................................................................................................................. 2
A) The statement of profit or loss and other comprehensive income for the year 2016 . 2
B) The statement of changes in equity for the year 2016 ................................................. 3
C) The statement of financial position as of 31 December 2016 ...................................... 4
Question Two .......................................................................................................................... 14
A) Advise Fatema on how to account for the acquisition of the 5 tents ......................... 14
B) Advise Fatema on how to account for the events in 2017.......................................... 17
C) Advise Fatema on how to account for the customer list. ........................................... 19
D) Advise her on how to account for the depreciation method change ......................... 20
References ............................................................................................................................... 22

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Question One
A) The statement of profit or loss and other comprehensive income for the
year 2016

FIBERBOATS
Statement of Profit or Loss and other comprehensive income
For the year ended 31 December 2016
Notes BD BD
Revenue 1 850,110
Less: Cost of Sales 2 (216,510)
Gross Profit 633,600

Add: Income
Gain from Revaluation of Investment property 3 200,000

Less: Expenses
Administrative expenses 4 (192,433)
Distribution expenses 5 (46,861)
Other expenses 6 (29,823)
(269,117)

Other losses
Loss on disposal of Vehicle #356 7 (7,424)
Loss on Revaluation of Land 7 (14,500)
(21,924)

Profit before Interest and Tax 542,559


Less: Finance Costs
Premium amortization 8 (208)
Interest expense 8 (3,592)
(3,800)

Profit for the year 538,759

Dividends 9 (14,380)

Profit after dividends paid 524,379

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B) The statement of changes in equity for the year 2016

FIBERBOATS
Statement of Changes in Equity
For the year ended 31 December 2016
Ordinary Revaluation Retained
Notes shares reserve Earnings Total
Opening balance at 1st January 2016 719,000 35,500 273,530 1,028,030
Revaluation loss (35,500) (35,500)
Dividends paid 9 (14,380) (14,380)
Profit for the year 538,759 538,759
Closing balance at 31 December 2016 719,000 0 797,909 1,516,909

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C) The statement of financial position as of 31 December 2016

FIBERBOATS
Statement of Financial Position
As at 31 December 2016
Notes BD BD
Non-Current Assets
Investment Property - Building 400,000
Property, Plant and Equipment 7 686,435
Intangible Asset - Development Cost 12 16,189
Total non-current assets 1,102,624

Current Assets
Inventory 2 34,500
Trade Receivables 10 634,880
Allowance for Doubtful Receivables 6 (5,991)
Prepaid Advertising 5,800
Total Current Assets 669,189
Total Assets 1,771,813

Equity
Share Capital - 2BD Ordinary Shares 719,000
Retained Earnings 797,909
Total Equity 1,516,909

Non-Current Liabilities
Bond Payables 8 95,000
Premium on bonds 1,692
Total Non-Current Liabilities 96,692

Current Liabilities
Trade Payables 71,645
Interest Payable 8 3,800
Bank Overdraft 11 81,663
Total Current Liabilities 157,108
Total Liabilities 253,800
Total Equity & Liabilities 1,770,709

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Workings
Note 1 – Revenue

Revenue = Sale of finished goods + Revenue from Ship Yard repair services – Cash discount

= 600,130 +250,000 – (1000 ×2%)

= BD 850,110

Note 2 – Cost of Sales

Cost of Sales = Opening Inventory + Purchases – Closing Inventory

= 55,760 + 195,250 – 34,500

= BD 216,510

Closing Inventory

The Raw Materials, Work in Progress and Finished Goods are the components that are
used to calculate the closing inventory.

 Raw materials
It was calculated upon the lower of cost or Net Realizable Value (NRV).

Reference Cost NRV Cost or NRV Amount (BD)

silica sand 1,505 2,550 Cost 1,505

COP 5246 652 810 Cost 652

COP 6485 594 450 NRV 450

COP 5648 684 220 NRV 220

Limestone 4,545 3,400 NRV 3,400

COP 8964 6,465 7,280 Cost 6,465

PLAS5241 1,155 2,820 Cost 1,155

PLAS 5295 6,464 4,440 NRV 4,440

soda ash 252 150 NRV 150

PLAS 5548 855 960 Cost 855

PLAS 6954 6,596 6,410 NRV 6,410

PLAS 8900 645 600 NRV 600

Total of Raw Materials 26,302

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 Work in Progress (WIP)
Formula used to calculate the WIP

Reference WIP Estimated Estimated Estimated Cost NRV BD


inventory selling cost of selling
Cost price completion cost

Molten 840 890 140 90 980 800 800


glass

Fine 920 1,750 75 80 995 1670 995


filaments

Glass 630 420 53 17 683 403 403


marbles

Total WIP 2198

 Finished Goods
The lower amount if the Cost or NRV is provided directly in the question

Reference Cost NRV Test

Fiberglass pipe 4,550 NRV>Cost

Boards for insulation and filtration 1,450 NRV>Cost

Total Finished Goods BD 6,000

Therefore, the closing inventory will be as follow:

Closing inventory Amount (BD)


Raw materials 26,302
WIP 2,198
Finished goods 6,000
Total closing inventory 34,500

Note 3 – Income

Income from Gain on Revaluation of Investment property

= Valuation at 1 January 2016 - Valuation at 31 December 2016

= 400,000 – 200,000

= BD 200,000

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Note 4 – Administrative expenses

Administrative expenses
Expenses Note Amount (BD)
Management fees 38,400
Wages and Salaries (67,900×65%) 44,135
Rent expense 75,000
Machine depreciation 7 25,000
Vehicle depreciation 7 9,898
Total administrative expenses 192,433

Note 5 – Distribution expenses

Distribution expenses
Expenses Note Amount (BD)
Vehicle depreciation 7 23,096
Wages and Salaries (67,900×35%) 7 23,765
Total distribution expenses 46,861

Note 6 – Other expenses

Other expenses
Expenses Note Amount (BD)
Provision for Doubtful Debts 627
Training expenses 2,567
Research expense 26,629
Total other expenses 29,823
 Provision for Doubtful Debts

Provision for Doubtful Debts at 1 January 2016

= BD 5,364

Provision for Doubtful Debts at 31 December 2016

= Net credit sales × percentage of uncollectable net credit sales

= 599,130 × 1% = BD 5,991

Comparison between the amount of provision for doubtful debt at 1 January 2016 and the
amount of provision for doubtful debt at 31 December 2016 to determine whether there is
increase or decrease in the provisions of doubtful debts.

The provision for doubtful debts at the beginning of the year was BD 5,364 and BD 5,991 at
the end of the year. So, this indicates that the provisions of doubtful debts have increased.

Increase in provisions of doubtful debts = 5,991 - 5,364

= BD 627

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 Research expense

Research expense
Note Amount(BD)
Consulting/experts selection (labour costs) 2,666
Search for alternatives (labour costs) 4,585
Selection of a solution (labour costs) 5,000
Servicing fees 5,215
Software design (labour costs) 4,571
Software testing (labour costs) 4,592
Total research expense 26,629

Note 7 – Property, Plant and Equipment (PPE)

PPE
Amount (BD)
Land 450,000
Machines 155,000
Vehicle 81,435
Total 686,435

 Land

At 1st of January 2016 = BD 500,000

Market value at the 31st of December 2016 = BD 450,000

Revaluation loss = 500,000 - 450,000

= BD 50,000

Loss on revaluation of Land = Revaluation loss - Revaluation surplus

= 50,000 – 35,500

= BD 14,500

Revaluation reserve = 35,500 - 35,500

= BD 0

The revaluation reserve id BD 0 which means that there is no more available amount as
there is a loss in the revaluation which is taking place and to decrease the loss, the reserve
was used.

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 Machines

At 1st of January 2016 = BD 230,000


Accumulated depreciation = BD 50,000
Depreciation expense= BD 25,000
230,000 − 30,000
8

NBV at the 31st of December 2016 = Machine cost - Accumulated depreciation –


Depreciation expense

= 230,000 - 50,000 - 25,000

= BD 155,000

 Vehicles

Years Total usage (kilometres driven) for all vehicles Vehicle (#356) expected usage (kilometres driven)
2014 300 Km 80 Km
2015 250 Km 65 Km
2016 250 Km 55 Km
2017 150 Km 55 Km
2018 150 Km 60 Km
2019 300 Km 40 Km
Total no of usage 1400 Km Total no of kilometres driven 355 Km

Vehicle depreciation
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑐𝑜𝑠𝑡 − 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒
𝑇𝑜𝑡𝑎𝑙 𝑛𝑜. 𝑜𝑓 𝐾𝑖𝑙𝑜𝑚𝑒𝑡𝑟𝑒𝑠 𝑑𝑟𝑖𝑣𝑒𝑛
32,000 − 8,800
355
=BD 65.35 per KM

Depreciation for the year of 2014

65.35 Per Km × 80 Km

= BD 5,228

Depreciation for the year of 2015

65.35 Per Km × 65 Km

= BD 4247

Comparison between the NBV of assets to the disposal amount to see whether the disposal
of vehicle #356 has a gain or loss. If the results show that the NBV has higher amount than
the disposal amount, then there is a loss on disposal for the vehicle #356.

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Vehicle #356 NBV = Initial cost – Accumulated depreciation

= 32,000 – (5,228+4247.8)

= BD 22,524

Vehicle #356 was sold in 1st of January 2016 for = BD 15,100

NPV – Disposal amount

22,524 – 15,100

= BD 7,424

The NPV is higher than the disposal amount. Hence, there is a loss on disposal with BD 7,424.

The cost of vehicle #356 and the no of Km driven which was disposed should be removed to
find the amount of depreciation for the remaining vehicles.

Depreciation
(𝑉𝑒ℎ𝑖𝑐𝑙𝑒 𝑎𝑡 𝑐𝑜𝑠𝑡 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑐𝑜𝑠𝑡) − (𝑉𝑒ℎ𝑖𝑐𝑙𝑒 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 − 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒)
(𝑇𝑜𝑡𝑎𝑙 𝑛𝑜. 𝑜𝑓 𝑢𝑠𝑎𝑔𝑒 − 𝑇𝑜𝑡𝑎𝑙 𝑛𝑜. 𝑜𝑓 𝐾𝑖𝑙𝑜𝑚𝑒𝑡𝑟𝑒𝑠 𝑑𝑟𝑖𝑣𝑒𝑛)
(225,000 − 32,000) − (25,000 − 8,800)
(1400 − 355)
=BD 169.2 per Km

The remaining vehicle depreciation at the 31st of December 2016

Depreciation per km × No. of driven km’s at 2016

169.2 × (250 – 55)

= BD 32,994

The vehicle depreciation has been split to 30% for administrative expenses and 70% for
distribution expense.

30% Administrative expenses

30% × 32,994

= BD 9,898

70% Distribution expenses

70% × 32,994

= BD 23,096

Remaining vehicles without the vehicle #356

Cost Accumulated depreciation NBV

225,000 – 32,000 78,571 + 32,994 193,000 - 111,565

= BD 193,000 = BD 111,565 = BD 81,435

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Note 8 – Bonds Payable

Date Interest Payment Interest Expense (BD) Premium Amortization Premium Bond carrying
(BD) (BD) balance amount (BD)
(BD)
01-01-2016 1,900 96,900
01-07-2016 3,800 3591.65 208.35 1691.65 96691.65
01-01-2017 3,800 3583.92 216.08 1475.57 96475.57

Calculations

 Bond carrying amount (BD)


Bond face value × 102%
95,000× 102%
= BD 96,900

 Premium balance (BD)


Bond carrying amount - Bond face value
96,900 - 95,000
= BD 1,900

 Interest payment (BD)


Bond face value × interest rate × 6/12 (semi-annual)
95,000 × 8% × 6/12
= BD 3,800

 Interest expense (BD)


Bond carrying amount × market interest rate × 6/12 (semi-annual)
96,900 × 7.4131% × 6/12
= BD 3591.65

 Premium amortization (BD)


Interest payment – Interest expense
3,800 – 3591.65
= BD 208.35

Note 9 – Dividends

No. of shares * dividends paid per share

(719,000/2) * 0.040 = BD 14,380

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Note 10 – Trade receivable

Opening balance as at January 1st, 2016 = BD 35,750

Total amount of sales on account at August 1 = BD 600,130

YACHIE paid 1,000 on August 11

600,130-1000= BD 599,130

Total trade receivables = 35,750 + 599,130 = BD 634,880

Note 11 – Cash Expenditures

Item BD
Repair services 250,000
Purchased inventory (195,250)
Bonds Payable 96,692
Interest payment on bonds (3,800)
Research expenses (26,629)
Intangible asset - Development cost (16,189)
Prepaid Market Campaign (5,800)
Training Expenditure (2,567)
Sale of Vehicle #356 proceeds 15,100
Payment received from YACHIE company 980
Management fees (38,400)
Wages and salaries (67,900)
Rent expense (75,000)
Total (68,763)

 Bank overdraft Account

BD
Bank Balance at January 1st 2016 (12,900)
Cash earnings/expenditures (68,763)
Bank balance at December 31st 2016 (81,663)

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Note 12 – Development Costs

Item BD
Registration system name 3,000
Drawing requirements tools (labour costs) 6,895
System development (labour costs) 1,000
Users testing (labour costs) 3,658
Technical documentation (labour costs, materials) 1,636
Total 16,189

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Question Two
A) Advise Fatema on how to account for the acquisition of the 5 tents
On March 31st 2016, five tents were acquired from a supplier who sold them for BD 3,000 and
transported to the location for BD 20.

The five tents are assets of Desert Challenge W.L.L. as it is a physical resource, that were
purchased from an external supplier (past event) and will be used to serve the customers
whose visit is expected to contribute in generating cash flows to the entity (future economic
benefits). Therefore, according to IAS 16 and based on the information stated above, the
luxury desert tents asset is an item to Desert Challenge's PPE (Recreation Equipment).

To recognize a Property, Plant and equipment we should take two major points in
consideration (BPP Learning Media Ltd, 2017):

1- "It is probable that future economic benefits associated with asset (tents in this case)
will flow to the entity".
2- The asset cost can reliably be measured.

Therefore, once the PPE is recognized as an asset, it will initially be measured at cost (IAS16:
para.15).

However, the cost of an asset should include three main components, which are purchase
price, import duties and directly attributable costs. Consequently, the cost of the tent will
include the purchase price BD 3,000 and the direct attributable costs BD 20 (initial delivery
and handling costs).

After measuring the costs, it should be decided whether to capitalize the item or not. When
an item is capitalized, it will be recorded as an asset (Bragg, Capitalize definition, 2017). In
contrast, if an item is not capitalized, it will be recognised as an expense. Therefore, a
capitalized asset will appear in the balance sheet rather than the income statement. To
capitalize an expenditure, it should meet two main categories:

1- It should exceeds capitalization limit.


2- It should have a useful life of at least one year.

Therefore, in this case the tents will not be capitalized. It is because it does not meet both
criteria as the tents were purchased for a competitive price and it has no useful life.
Consequently, it will be recorded as an expense in the income statement for the current year.

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At the end of December 2016, the tents should be measured. Therefore, IAS 16 offers two
main treatments, it offers the choice of recording an asset by its cost or revaluing it to fair
value (BPP Learning Media Ltd, 2017). As the revaluation model unreliable option for SME's,
therefore the cost model would be the suitable option in order to measure the tents. To
elaborate, cost model is calculated through carrying the asset at its cost less depreciation and
accumulated impairment loss. An asset depreciation begins when the asset is available and
ready for use, which it is in the necessary condition and location to be capable of operating as
it intended by the management. Consequently, the depreciation of the tents starts from April
2016 as it intended by the management that the tents furniture was fitted and ready to use.
Meaning that the tents were placed in April 2016 as it is not possible to fit the furniture
without fitting the tents first. To determine the useful life of an asset, we have to consider
three main factors, which are expected physical wear and tear, obsolescence and legal or
other limits on the use of the assets. Once the useful life of an asset is decided, it should be
reviewed at the end of each financial year. Therefore, the depreciation rates will be adjusted
for the current and future periods as if the expectations are significantly differ from the
original estimations. Consequently, the effect of change should be disclosed within the
accounting period in which the change has taken place. Moreover, useful life assessment
requires a judgment, which is based on historical or previous experience of a similar asset as
the useful life of a tent is 10 years (Capital asset class codes and useful life schedule, 2014).

An asset depreciation refers to the allocation of an asset's cost over its lifecycle (useful life)
(Keythman, n.d.). Depreciation expense is incurred at every accounting period in order to
account for using an asset, for example, depreciating building in operations. On behalf of
financial reporting purposes, SME's have the option of choosing one of three depreciation
methods. Therefore, a business should select the best method that matches the depreciation
expense to revenues generated by the help of the asset. The first depreciation method is the
straight line. It is the method that allocates the cost of an asset equally on its useful life at
each period, considering that an asset will be used equally through its useful life. For instance,
office furniture and building are types of assets that are depreciated through straight-line
method. The second method is units-of-production; it allocates depreciation on per-unit basis
at each period. This method is used in order to determine if an asset is generating a
measurable quantity of output at each period in units, for instance machine hours. Moreover,
this method allocates less expense if an assets output is low and more expense when an
output is high. The third method is declining-balance, it allocates more depreciation expense
to early years of an asset and eventually decreases at each year of its life. It is useful when an

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asset is used more at the beginning of its useful life than in its later years, such as vehicles.
Consequently, straight-line method would be the most suitable method to calculate the tents
depreciation as it will be used equally through its useful life.

In order to calculate an asset depreciation, we have to determine whether the asset has a
residual value or not. A residual value is the amount expected to obtain when an asset reaches
its end of its useful life and disposed (Bragg, Residual value, 2018). To determine an asset
residual value, there are three ways. First, treating the asset as it has no residual value. It
commonly used for assets that have low value, therefore its assumed that it will have no
residual value at the end of its useful life. Moreover, it simplifies the calculation of
depreciation. In addition, it is an efficient approach when the residual value decreases below
the asset predetermined threshold level. In contrast, recognized depreciation amount will be
higher as no residual value will be subtracted. Second, calculating residual value through
comparable method. This method helps in determining the residual value of an asset through
similar type of asset. For instance, determining a vehicle value compared to similar vehicle in
the market. Third, calculating residual value through policy method. A firm might have a policy
that contains an equal residual value for all assets within a certain type of assets. This method
is not defensible if policy value is more than the market value, as it would decrease the
depreciation expense. However, this approach is not commonly used. Therefore, it is
recommended to use the no residual value approach as the tents has low value, which will
simplify calculating the depreciation expense.

Business owners desire to maximize their profits. In order to maximize profits, the owner
should be aware of unnecessary costs and increase employees' productivity. Therefore, to
maximize profits, it is recommended to follow these three techniques (Kent, n.d.). First,
investigate where money is being spent. One of the biggest expenses categories a business
owner usually face is overheads. Therefore, a long-term lease would be an effective way in
order to ensure stability of a company if rent expense increases. Moreover, it is recommended
to review other expense categories. If there is a huge rise within a specific category, look
deeply into its details. Therefore, some expenses might reduce or increase based on its effect
on the company's revenues. For instance, if advertising campaign helped in increase of sales,
an increase in expense might be worth. Second, review cost structure. Ensure having a
sufficient mark-up on services. When costs increases in order to perform the service, an
increase in selling price would be reliable. Therefore, reviewing company's cost structure
regularly will help to track costs that are on increase in order to include in selling price before
it is too late. Third, motivate employees. When employees are comfortable and pleased,

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higher quality of work will be accomplished. Therefore, using simple motivation techniques
would be helpful. For instance, the employee of the month might receive a coupon or a gift
card.

B) Advise Fatema on how to account for the events in 2017


Stolen cash

It was discovered in January 2017 that BD 20 cash shown as an asset in the statement of
financial position at 31 December 2016 had been stolen on 28 December 2016.

The stolen cash was classified as an asset in Desert Challenge W.L.L. statement of financial
position, it was possibly under current assets under the title of petty cash or cash. The cash
was stolen at the end of the reporting period, therefore, with accordance to IAS 10 – Events
after the reporting period. The IAS contains requirements for when events adjustments in the
financial statements needs to be done. Events that require adjusting are those with evidence
that they have existed at the end of the reporting period (IAS 10: para. 3).

Fatema should adjust the amounts recognised in their financial statements to reflect the
adjusting events that have occurred, which is the stolen cash as it is an example of discovery
of error or fraud that shows that the financial statements do not reflect correct information.
To fix this Fatema should debit owner equity and credit cash to account for the stolen cash as
shown below (International Accounting Standard Committee, N.d.).

Journal entry

Date Title Debit Credit


January 2017 Loss by theft 20
Cash 20

Moreover, the financial statement current assets (cash) should be reduced by BD20 to account
for the stolen cash and the statement of profit and loss should have theft expense added and
that would lower profits by BD20.

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Stolen equipment

It was discovered that a carpet in the tent AHMAR (recorded as Property, Plant and Equipment
in the statement of financial position at 31 December 2014) had been stolen on 12 February
2017.

The stolen equipment was classified as PPE in Desert Challenge W.L.L. statement of financial
position, as it was part of the furniture for the tents which costed the company BD 2598.
However, according to IAS 10 events after the reporting period. Events that arose after the
reporting period are non-adjusting. Since the equipment was stolen on 12th of February 2017
it is past the reporting period and should not be adjusted in 2016 financial statements. But it
is important to note that even if some events do not require to be adjusted they may be
required to be disclosed (IAS 10: para. 22). One of the main points that would suggest if
disclosure is required is the materiality of the loss. As some losses may hinder the user’s ability
to make proper decisions with regards to the business (IAS 10: para.21). However,
determining the materiality has three key steps, firstly to choose the appropriate benchmark,
secondly to determine a level of benchmark this is usually in terms of a percentage, thirdly is
to justify the reason behind this choice (ICAEW, 2017). This is because materiality could be
calculated in different ways and the company has to see which method they see fit for their
business, because the overall materiality reflects the users’ needs and expectations while the
performance materiality is set by auditors at a level less than overall materiality to avoid
undetected errors or misstatements (ICAC, 2015). Thus, based on Desert Challenge W.L.L.
performance materiality if the value of the carpet that was stolen is above the value in which
an item is considered material by the business then it should be disclosed in 2016 financial
statements as to correctly reflect the business performance (International Accounting
Standard Committee, N.d.).

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C) Advise Fatema on how to account for the customer list.
As the revaluation model is not a choice for SME's, cost model would be a suitable option to
use in order to measure the customer list. The cost model equation is intangible asset cost
less accumulated amortisation and accumulated impairment loss (BPP Learning Media Ltd,
2017). Regarding the useful life of an intangible asset, it might be finite or indefinite based on
the entity assessment. To determine the useful life of an intangible asset, we have to take
several factors into consideration such as expected usage, typical product life cycles,
obsolescence, maintenance required and limits on the use of the asset. Therefore, in Desert
Challenge's case the customer list has a finite life as it is expected to be effective for three
years. Thus, a finite intangible asset should amortized over its useful life (Bragg, Intangible
assets accounting | Amortization, 2017). The amortization amount would be the intangible
asset recorded cost less residual value. However, in most situations intangible assets does not
consider having a residual value. Moreover, if there is a pattern of an economic benefit that
will be generated from the intangible asset, an amortization method that estimates that
pattern should be adopted. If not, it usually amortized by using the straight-line method.
Nevertheless, if an intangible asset is impaired, amortization should be adjusted by taking into
consideration the reduced carrying amount and reduced useful life of the asset. For instance,
if an asset has a carrying amount of BD1,000,000 and a useful life of five years, reduced to
BD100,000 and two years of useful life after impairment, then the amortization annual rate
would consequently change from BD200,000 per annum to BD50,000 per annum. The entity
should asses impairment loss when situations indicates that the intangible asset's carrying
amount might not be recoverable, or on a yearly basis. To indicate an impairment loss there
are many factors, such as significant reduction in the asset's market value, extreme costs
incurred to purchase the asset or it is possibly be sold or disposed before the end of its useful
life. To recognize an impairment loss, the impairment loss account will be debited and
intangible asset's account will be credited. Therefore, the intangible asset new carrying
amount will be its old carrying amount less the impairment loss. Consequently, the asset
amortization should be adjusted based on the new carrying amount. Also, based on the
information achieved through impairment testing, the remaining useful life of the asset might
be adjusted. Note that a previously recognized impairment loss cannot be reversed.

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D) Advise her on how to account for the depreciation method change
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors is applied in the
selection and application of accounting policies, it accounts for changes that have happened
and the corrections that have to be made to amend prior errors.

Desert Challenge W.L.L. has to select the accounting policies that they see fit for their
company, the policies must be in line with IASB standards and interpretations (IAS 8.7) as for
the selected accounting policies of Desert Challenge W.L.L. they have decided to use the
straight-line method to calculate depreciation for the jeep cars. In addition, the estimated
useful life of the vehicles was three years. Desert Challenge W.L.L should be consistent with
all the accounting policies that they used. They should not use straight-line method for the
jeeps and then double declining method for another assets, as that would be deemed
inconsistent (IAS 8.13). Changes in the accounting policies of the company should not be solely
be made to increase the profits of their company as it may be seen as a form of fraud because
such change should sway users’ decisions, changes in accounting policies are there to present
the information faithfully and without errors, if need be (IAS 8.14). If Desert Challenge W.L.L.
decided to change their accounting policies, they would have to disclose the change and the
effect it have on the financial statements (International Accounting Standard Committee,
N.d.).

In 2017 Fatema, one of the owners is not happy with the result of their company’s statement
of profit or loss. The accounts assistance suggested an improvement, to change the useful life
of the vehicles from three to five years, as that’s what one of the owner now believes is the
suitable useful life of their vehicles. This is a form of change in accounting estimates, as this
change would have an effect on the statement of profit or loss because the useful life would
be extended by two more years. However, even if their intentions are not solely to increase
their profits by decreasing the depreciation of each year, Desert Challenge W.L.L. should not
be the ones to decide on the actual useful life of the vehicles, they would need to hire an
expert in the field in order to correctly estimate the reviewed useful life of the vehicles. If the
independent expert seems to agree that the useful life of the vehicles are indeed five years,
Desert Challenge W.L.L. would need to disclose the bases for valuation such as, in this case
the change in the useful life of the vehicles from three to five years (IAS 16 paras. 73-78). In
addition to the change in total depreciation accolated for the 2017 period from BD7000 a year
to BD3850 a year.

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Moreover, changes in accounting estimates should be recognized by including it in the profit
or loss in periods in which this change would have an effect on, the current year, and the
future years as both periods would be affected by this change (International Accounting
Standard Committee, N.d.). Thus, the accumulated depreciation would have to be adjusted.

21000
= 𝐵𝐷 7000 𝑎 𝑦𝑒𝑎𝑟
3

3
7000 𝑥 = 𝐵𝐷1750
12

BD 1750 would be the accumulated depreciation for 2016.

21000 − 1750 = 𝐵𝐷19250

19250
= 𝐵𝐷4052.63 𝑎 𝑦𝑒𝑎𝑟
4.75

So, the accumulated depreciation as at 31 December 2017 would be 4052.63 + 1750 =


𝐵𝐷5802.63

According to these calculations each year would add BD4052.63 to the accumulated
depreciation except the last year in which 4052.63 𝑥 0.75 = 𝐵𝐷3039.47 would be added as
the useful life would expire at October 1st. The accounts assistant suggestion would increase
the profits slightly, however, as seen above the accounts assistant depreciation calculations
are wrong and need to be adjusted.

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References
BPP Learning Media Ltd. (2017). Financial Reporting (10th ed.). London: BPP Learning Media
Ltd.

Bragg, S. (2017, December 18). Capitalize definition. Retrieved June 3, 2018, from
Accounting Tools: https://www.accountingtools.com/articles/what-does-capitalize-
mean.html

Bragg, S. (2017, November 17). Intangible assets accounting | Amortization. Retrieved June
1, 2018, from Accounting Tools:
https://www.accountingtools.com/articles/2017/5/17/intangible-assets-accounting-
amortization

Bragg, S. (2018, January 16). Residual value. Retrieved June 1, 2018, from Accounting Tools:
https://www.accountingtools.com/articles/the-residual-value-calculation.html

Capital asset class codes and useful life schedule. (2014, September 1). Retrieved June 1,
2018, from Office of Finance:
https://www.ofm.wa.gov/sites/default/files/public/legacy/policy/30.50.htm

ICAC. (2015). Materiality Guide. Retrieved from Independent Commission Against


Corruption:
https://www.icac.nsw.gov.au/images/Ricco%20Public%20Website/Exhibit%20R97.p
df

ICAEW. (2017). Materiality in the audit of financial statements. Retrieved from ICAEW:
https://www.icaew.com/-/media/corporate/files/technical/iaa/materiality-in-the-
audit-of-financial-statements.ashx

International Accounting Standard Committee. (N.d.). IAS 10 — Events After the Reporting
Period. Retrieved from IAS Plus: https://www.iasplus.com/en/standards/ias/ias10

International Accounting Standard Committee. (N.d.). IAS 8 — Accounting Policies, Changes


in Accounting Estimates and Errors. Retrieved from IAS Plus:
https://www.iasplus.com/en/standards/ias/ias8

Kent, J. (n.d.). How to Maximize Your Profits. Retrieved June 1, 2018, from Small Business:
http://smallbusiness.chron.com/maximize-profits-16368.html

Keythman, B. (n.d.). How to Choose a Depreciation Method. Retrieved June 1, 2018, from
Small Business: http://smallbusiness.chron.com/choose-depreciation-method-
43894.html

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