Answers

Answers 2016-11-10T15:00:25+00:00

1.Identify and discuss FOUR areas of subjective judgement in BEP’s financial statements for 2008. As part of your discussion, you should highlight any changes that you would recommend to ensure that the final statements are in accordance with the IASB’s Conceptual Framework and present a “true and fair” view as required by the Companies Act 2006 and GAAP.

Answer:
1.)The Internal Accounting Standards Board (IASB) prescribes the treatment of intangible assets acquired in business in International Accounting Standard 38 (IAS 38) – Intangible Assets. According to IAS 38, an intangible asset once recognized and acquired subject to the criteria that has a definite useful life and its cost has been measured reliably and the expected future economic benefits will flow to the entity. In the BEP’s case, although it has complied with requirements of IAS-38 in terms of recognition of its licenses and copyrights, however, in case of Harry Boulder license amounting to £ 80,000 and in case of KFun/Tara Productions copyrights’ no amortisation has been charged. An amortisation is required to be charged to the carrying amount reported in the balance sheet as soon as the intangible asset is available to be used or benefits are being derived from it.

2.)According to International Accounting Standards 2 (IAS 2) – Inventories; whereby it stipulates that inventories must be reported at lower of its cost or net realizable value. However, in the BEP’s case inventories are stated at only on historical cost. Since, the author from whom the license was obtained has retired; the company however holds worth £ 680,000 merchandise stock and also there has been closure of TV transmission on the part of KFun/Tara productions which cast significant doubt about the realizable value of such merchandise stocks. Although John Bowman is confident to sell the stock above market price but there is a need to determine a reliable market value and most probably it will be lower than the cost. Accordingly, BEP should write off its inventories by directly debiting the loss in cost of goods sold and crediting the carrying amount of inventories.

3.)The Prudence concept as prescribed in International Accounting Standard 1 (IAS 1) – Presentation of Financial Statements, clearly states that while preparing financial statements a degree of caution is required such that assets or income are never overstated and liabilities and expenses should never be understated. Accordingly, in case of BEP, the company has booked trade receivables on credit sales without making any provision for doubtful debts. There can be possibility say for instance 5-10% of its trade debts go unpaid. Further, as mentioned in the case, there is also an issue regarding a complaint from the customer amounting to £ 123,000 who is reluctant to settle his dues on account of defective quality of toy. The company however is testing the products. Regardless of the results of the tests a provision is required to be made and if tests prove defective quality, the company should write of its trade debts by £ 123,000 immediately.

4.)As far as accidental payment on the part of customer is concerned who subsequently told BEP to keep the payment as deposit for next order. The company however has debited its bank account without passing the corresponding credit entry. Therefore, BEP should book it as unearned revenue or as an advance from the customer in its current liabilities because unless or until the sale has to be made to this customer sometime in future when the merchandises have been despatched and all the risks and rewards have been transferred to the buyer in accordance with IAS 18 – Revenues.

2.Prepare the Statement of Cash Flows for BEP for 2008. Use the information provided in the case study information only. Do NOT incorporate any amendments you might recommend in your answer to Question 1.

Answer:
The Statement of Cash flows for BEP for the year ending 31st December 2008 is as follows;
(For workings please refer to the attached excel worksheet)