CO5123 Advanced Issues in Accounting Assignment Sample
Here’s the best sample of CO5123 Advanced Issues in Accounting Assignment, written by accounting expert.
Introduction
The main objective of this study is to discuss accounting issues that may face by a firm in order to acquire a mining business. In this study, the Singapore Construction Pte Ltd wants to acquire Mining Tech Pte Ltd in Australia to expand the business. For this, the company has to focus on the accounting system of Australia as well as international accounting to make an effective financial system for the company. It will be helpful to avoid the mistakes in the international accounting of the firm. In this report, the accounting issues for a firm in extractive industries are defined that can be helpful to develop the understudying about the risk and uncertainty associated with the accounting.
Discussion
Are there any difference in GAAP between Australian and international standards in relation to exploration for and evaluation of mineral resources?
In concern to exploration for and evaluation of mineral resources, there is some difference in GAAP between Australian and international standards. As per the scope of international accounting standard (IAS) 36, the exploration and evaluation costs of mineral resources are carried forward by entities in the extractive industries and the development stage are not excluded in concern of an area of interest prior to the activities in the same area of interest (Drielsma et al., 2016.). On the other hand, according to the Australian accounting standard (AASB 1010), the exploration and evaluation costs are carried forward a firm in the extractive industries in concern of the areas of interest prior that needs any activity in the area of interest entering and the development stage are not tested for impairment provided exploration. In addition, the evaluation of the activities in the areas of interest has not at balance date reached a stage that permits a reasonable assessment of existence or economically recoverable reserves may provide. Additionally, in AABS the active and significant operations in relation to the areas of interest are continuing. International accounting standards include the extraordinary items whereas Australian accounting does not include it (Brown and Tarca, 2012). In addition, the Australian accounting standards no require any adjustment if the event indicates a going concern activity after the reporting date while in IAS, there is a need of adjustment for events that indicate the going concern assumption.
Is there any variance in accounting treatment in relation to licensing in intangible assets and mining industry?
In Australian accounting, the accounting treatment of licensing in intangible assets and mining industry includes the variance because it is a non-monitory asset of the business. It is provided in the IAS 38 that the goodwill of the firm has intangible assets in the mining industry and the demand of the mining products are much high in the market (Bice, 2014). The intangible assets are that assets recognized as exploration and evaluation expenditure must be attributed to the relevant mining licenses and identified as an intangible asset.
Based on my reading of mining industry, I heard five phases of a company’s operations in the extractive industry but I am not sure and provide me with detail explanation.
Phases of operations in the extractive industry
| Phases | Explanation |
| 1. Exploration | In this phase, the company searches the suitable resources for commercial exploitation such as:
Ø Researching and analyzing that areas of historic exploration data Ø Conducting topographical, geochemical, geological, and geophysical studies Ø Exploratory drilling, trenching and sampling |
| 2. Evaluation | In this phase, the firm determines the technical feasibility and commercial viability of the mineral resources. Such as:
Ø Assessment of the volume and grade of deposits
Ø examine and test the extraction methods and metallurgical or treatment processes (Pellegrino and Lodhia, 2012) Ø Survey for transportation and infrastructure requirements Ø Conducting market and finance studies This stage is basically a feasibility study that defines the proved or probable reserves and leads for making the decision for developing a mine. |
| 3. Development | The ‘Development’ phase establishes the access by providing commissioning facilities to extract, treat and transport production from the mineral reserve and the other preparations for commercial production.
It includes: Ø Advance removal of overburden and waste rock Ø Sinking shafts and underground drifts Ø Permanent excavations Ø Constructing roads and tunnels |
| 4. Production | In the production phase, the day-to-day activities are obtained saleable product from mineral reserve on the commercial scale. The extraction and processing before sale are included in this phase. |
| 5. Closure and rehabilitation | After mining operations, the closure phase is started. This phase of the operation includes restoration and rehabilitation of the site. |
The above table represents the five phases of operations of an extractive industry that provides the detailed explanation about each phase.
What is the main accounting issue for entities in the extractive industries?
There are some accounting issues that can occur for the mining firms in extractive industries:
- Revenue recognition– The accounting of the revenue includes different costs, sales, exchange of products, revenue for forwarding selling, provisional pricing, etc.
- Depreciation and amortization– The accounting of depreciation for assets in mining activities as well as the accounting of amortization on a component basis (Franks and Cohen, 2012).
- Deferred stripping costs– In the accounting of differed stripping cost, need to decide that it is capitalized or not as well as how it can be measured and amortized.
- Renewal and reconditioning costs– The account issues occur that these costs should be capitalized or not.
- Inventory valuation– The measurement of inventory and long-term stockpiles are the major issues in inventory valuation.
My CFO mentioned to me that there are four broad approaches to accounting for pre-production costs, identifying the approach advocated in AASB 6
Basically, there are four approaches to accounting for pre-production costs that are given in the below table:
| 1. The expense or costs written-off method, | It recognizes the costs as expenses in the period in which they are incurred. |
| 2. Expense and reinstate method | This approach identifies the costs as expenses when it does incur, but reinstate these expenses as assets if those costs consequently rise to economically recoverable reserves (Hunter et al., 2012). |
| 3. Full-cost method | This approach identifies the costs for asset irrespective of the firm such as the success of the exploration program. |
| 4. Successful-efforts method | This method limits the asset that is recognized for those costs which are likely to result in the discovery of economically recoverable reserves and other costs are defined as expenses. |
In the current AASB 6, the successful efforts method is an effective approach that is advocated in the area of interest method, especially, in concern to this case.
Are there any variances between requirements of AASB 6 from AASB 1022, predecessor standard for the extractive industry?
There is a variance between the requirement of AASB 6 from AASB 1022, where AASB 6 restricts the treatment of exploration and evaluation expenditures whereas AASB 1022 provides solutions for an accounting of Extractive Industries. As well, it provides the treatment of development, construction, and restoration costs, amortization of those costs, treatment of inventories and revenue recognition (Miyagawa and Hisa, 2013).
Basically, the treatment of exploration and evaluation expenditures is provided in AASB 1022 that permits an entity to continue its existing accounting policies for treating the exploration and evaluation expenditures. In paragraph 13 of AASB 1022, it permits a firm to change its accounting policies in exploration and evaluation expenditures because these changes can make the financial report more relevant and the firm can make an effective decision (Chun et al., 2012). In addition, it is not less reliable or more reliable as well as it does not reduce the relevance of the accounting.
My managing director mentioned to me that “mine removal and mine site restoration costs are largely due to exploration and evaluation activities. They are always a legal obligation arising from contractual agreements signed by an entity to gain access to mineral resources. It is generally accepted accounting practice to include the undiscounted amount of these costs as part of the carrying amount of development”. I have no idea on this statement and I would like to know whether you agree or disagree with this statement. At the end of mining activities, mine site has to be reinstated and would like to the accounting treatment for reinstatement cost. Give reasons so that I can provide an explanation to my managing directors
As per the legal obligations of extractive industries, the provided statement is right because the cost of mine removal and mine site restoration is much high for the inverter and it is ethical for them to sign a contractual agreement where the investor can earn profit from the mineral resources. In addition, the accounting practices accept this undiscounted amount as carrying the amount of development (Axtle-Ortiz, 2013). After the completion of the mining activity, the owner of the mines like government offers this mine to another investor. In this, the initial investment is not refunded at the time of reinstatement and it is treated as reinstatement cost in the accounting books. The main reason behind it is that the mine is established on the government land and it is provided to the inverter as lease so that they have to pay for it.
Because of the risk and uncertainty associated with mining operations, exploration and evaluation costs related to an area of interest should be recognized as expenses in the period in which they are incurred.’ Critically evaluate this statement.
The expense method is supported by this statement. This assertion also supports that the risk in a mining operation is much high for exploration and evaluation costs that should be included in the accounting books as expenses for the current financial period. It also defies that there is very less probability of success that is less than 0.5 and it includes the costs of exploration and evaluation. It means the entity should not recognize it as an asset until it earns profit or return of investment (Yallwe and Buscemi, 2014.). This statement is a persuasive argument that helps to understand that the probability of a commercially viable discovery is very small, especially, in the exploration and evaluation phases of the process.
Summary of accounting policy and disclosure for the mining industry
In the mining industry, an entity develops their accounting policy for its E&E expenditure and it complies with IFRS Framework as well as on the basis of exemption permitted by IFRS 6 (Crass et al., 2015). IFRS 6 allows a mining firm to carry forward a pre-existing policy under the national GAAP with some limitations.
Conclusion
On the basis of the overall discussion, it can be said that Singapore Construction Pte Ltd can acquire the business of Mining Tech Pte Ltd but there are some limitations that restrict the firm. It has the much high cost of initial investment but the company knows that there are availability of mineral resources.
References
AASB 6, 2018. AASB 6 – Exploration for and Evaluation of Mineral Resources – December 2004. [Online] Available at: https://www.legislation.gov.au/Details/F2005B01569 (Assessed on: 29 Aug, 2018)
Axtle-Ortiz, M.A., 2013. Perceiving the value of intangible assets in context. Journal of Business Research, 66(3), pp.417-424.
Bice, S., 2014. What gives you a social licence? An exploration of the social licence to operate in the Australian mining industry. Resources, 3(1), pp.62-80.
Biondi, L. and Lapsley, I., 2014. Accounting, transparency and governance: the heritage assets problem. Qualitative Research in Accounting & Management, 11(2), pp.146-164.
Brown, P. and Tarca, A., 2012. Ten years of IFRS: Practitioners’ comments and suggestions for research. Australian Accounting Review, 22(4), pp.319-330.
Chun, H., Fukao, K., Hisa, S. and Miyagawa, T., 2012. Measurement of intangible investments by industry and its role in productivity improvement utilizing comparative studies between Japan and Korea. Discussion papers, 12037.
Crass, D., Licht, G. and Peters, B., 2015. Intangible assets and investments at the sector level: Empirical evidence for Germany. In Intangibles, Market Failure and Innovation Performance (pp. 57-111). Springer, Cham.
Drielsma, J.A., Russell-Vaccari, A.J., Drnek, T., Brady, T., Weihed, P., Mistry, M. and Simbor, L.P., 2016. Mineral resources in life cycle impact assessment—defining the path forward. The International Journal of Life Cycle Assessment, 21(1), pp.85-105.
Franks, D.M. and Cohen, T., 2012. Social Licence in Design: Constructive technology assessment within a mineral research and development institution. Technological Forecasting and Social Change, 79(7), pp.1229-1240.
Hunter, L., Webster, E. and Wyatt, A., 2012. Accounting for expenditure on intangibles. Abacus, 48(1), pp.104-145.
International Financial Reporting Standards, 2018. Financial reporting in the mining industry. [Online] Available at: https://www.pwc.com.au/industry/energy-utilities-mining/assets/financial-reporting-mining-industry-2013.pdf (Assessed on: 29 Aug, 2018)
Miyagawa, T. and Hisa, S., 2013. Estimates of intangible investment by industry and productivity growth in Japan. The Japanese Economic Review, 64(1), pp.42-72.
Pellegrino, C. and Lodhia, S., 2012. Climate change accounting and the Australian mining industry: exploring the links between corporate disclosure and the generation of legitimacy. Journal of Cleaner Production, 36, pp.68-82.
Yallwe, A.H. and Buscemi, A., 2014. An era of intangible assets. Journal of Applied Finance and Banking, 4(5), p.17.
BHP, 2018. Annual Report 2017. [Online] Available at: https://www.bhp.com/-/media/documents/investors/annual-reports/2017/bhpannualreport2017.pdf (Assessed on: 29 Aug, 2018)
________________________________________________________________________________
Know more about UniqueSubmission’s other writing services:
