B-Assessment-MEGAPORT LIMITED MP1
This essay highlights the execution of AASB conceptual framework (AASB 101 and AASB 102) and business practices in Australia. For this, Megaport Limited (MPA1) is selected to develop understanding of the AASB conceptual framework.
Measurement of Inventory
According to AASB 102, it is required to measure the inventories at the lower of cost and net realisable value. The cost of inventories will include all the purchasing costs, costs of conversion and other costs that incur in bringing the inventories to their present location and condition (Henderson et al., 2015). From the annual report 2018 of Megaport Limited, it is identified that company has reported inventory as per AASB 102 by using net realisable value.
There is disclosure of the method used for valuation of the inventories in the annual report of the company. It discloses the details of the inventories (Annual Report, 2018). It means Megaport Limited uses an accounting policy to measure the inventories and the method to value the inventory changes.
The firm uses specific policy for accounting the value of inventory and the method of valuation of inventory changes with the nature of the inventory (Annual Report, 2018). As per the AASB 102, it is also needed for the company to disclose the characteristics of inventory affecting the management decisions to measure the inventory.
The annual report of the firm shows that there is disclosure of the characteristics of inventory in the notes to the accounts (Henderson et al., 2015). So, it can be depicted that the quality of disclosure regarding the inventory measurements by the company is good and appropriate as per AASB 102.
Inventory system and reasons for adopting it
There are two types of inventory system in accounting namely periodic and perpetual inventory system that are used by the firms to manage the inventories. Megaport Limited uses periodic inventory system as it is used to measure the level of inventory and costs of goods sold (COGS) by preferring an occasional physical count.
In this system, the company updates the inventory account and costs of goods sold yearly. It is difficult and time consuming for the firm to perform a physical count.
Periodic inventory system is effective for the company to manage the inventory because there are low expenses related to acquisition of the technology and staff to operate this system (Axsäter, 2015). This method is easy to implement to maintain the awareness of the inventory. Apart from this, the used inventory system by the company is cost effective to implement as there is no need to invest in the costly software solutions.
Periodic inventory system is also suited to the firm as there is no need for this company to track the inventory on a day-to-day basis as it is a service company (Patil and Singh, 2016). So, this system is valuable to determine the beginning inventory and ending inventory within the accounting period.
Costing method and reasons for adopting it
From the annual report of Megaport Limited, it is identified that the historical cost accounting is used by the company to value an asset for balance sheet at the price paid for asset at the time of its acquisition (Annual Report, 2018). According to AASB 101, in this costing method, the company’s accountants record revenue, expenditure and asset acquisition and disposal at the historical cost.
This cost is based on the actual amount paid or received to complete the transaction. The firm uses this costing method because it is simple to apply as it does not need any market values. It means there is no need for the firm to do market research to determine the current price or market value. This cost does not change with the future changes in the market (Whittington, 2015).
They record the original cost of the item in the financial report that allows them to prepare the financial statements easily and quickly saving time and cost both. In addition, simplicity of the historical costing method allows the users to understand and interpret the financial reports easily even for the individuals with the non-financial background.
At the same time, the historical costing method is objective and reliable because the original cost of the items can be verified and confirmed by checking the previous records. Moreover, this method is valuable for the company to compare the original cost and current cost of the items to make a comparison statement (Masadah et al., 2016).
Impact of the different costing methods on the financial statements
In historical cost method, the assets, incomes and expenditures are listed in the financial statement of the company based on the price at which they were originally purchased. This method is used to record the amount of capital spend to buy the assets or for any expenditure (Sharma, 2018).
But at the same time, if the firm uses fair costing method then it will impact the financial statements by recording the current market price of the asset or liability. It is because this method allows the company to report its assets and liabilities at the estimated amount of capital that they will receive on selling the assets or alleviating the liabilities (Strouhal, 2015).
However, it is stated that the use of fair costing method is quite effective to make the accounting information more accurate and reliable as compared to historical method. For example, it is shown in annual report of Megaport that the PPE were being purchased at $19687023 as it was reported based on the historical costing method (Annual Report, 2018).
But if they now appraised at a market value of $50000, then the cost of the properties on balance sheet will rise to $50000 and reflect the amount of PPE of $19737023 on balance sheet on using fair costing method. It is because it will provide more accurate value of the item in the financial statement of the company in today’s market.
Based on the above discussion, it can be concluded that Megaport Limited considers AASB 101 and 102 standards to report the transactions in its financial statements. It uses periodic inventory system and historical costing method to determine the cost of the items in the financial statements.
At the same time, it can also be concluded that the use of fair costing method and historical costing method have different impact on the financial statements of the company.
Annual Report 2018. [Online] Available at: https://www.asx.com.au/asxpdf/20180822/pdf/43xk417tqby4gj.pdf [Accessed: 7 February 2019]
Axsäter, S., 2015. Inventory control (Vol. 225). Springer.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Masadah, W.M., Al-Omush, A. and Shiyyab, F.S., 2016. Fair Value Accounting Standard (IAS 39) Versus the Historical Costs Principle. International Business Management, 10(2), pp.123-128.
Patil, R. and Singh, G., 2016, December. Inventory management and analysis in an orthodontic practice. In Seminars in Orthodontics (Vol. 22, No. 4, pp. 280-288). WB Saunders.
Sharma, K., 2018. Fair-Value Accounting and Financial Statement Analysis. AJMI-ASEAN Journal of Management & Innovation, 5(2), pp.176-188.
Strouhal, J., 2015. Historical Costs or Fair Value in Accounting: Impact on Selected Financial Ratios. Journal of Economics, Business and Management, 3(5), pp.560-564.
Whittington, G., 2015. Fair value and IFRS. In The Routledge companion to financial accounting theory (pp. 237-255). Routledge.