Advanced Financial Accounting

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Assessment 3 Case Study
Subject Code: ACCM4200
Subject Name: Advanced Financial Accounting
Assessment Title: Assessment 3
Assessment Type: Statement of Advice
Word Limit: 2,000 words (+/- 10%)
Weighting: 40%
Total Marks: 40
Submission: Individual via Turnitin on MyKBS.
Due Date: Tuesday of Week 13 at 19:55 AEST
Disclaimer
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The views expressed by presenters delivering course material by lecture or workshop may not necessarily be those of Kaplan Business School.
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Background Information
You are a graduate accountant and now working for Kaplan Partners, an independent consulting & accounting firm located at 63 Elizabeth Street, Sydney, NSW 2000.
The Senior Partner, Ms. Kiran Shrestha, has called you into her office and handed you a letter from a client requesting advice on transactions recently taken place. See letter below.
Kiran has asked you to draft a letter or Statement of Advice (SOA) for her to review by COB (close of business) next Friday.
Task Requirements
Prepare a Statement of Advice (SoA) addressing the accounting issues raised by the client. The maximum length for the SoA is 2,000 words (+/- 10%).
• Analysis and Recommendations: Review the client’s letter to identify the correct accounting treatment for the transactions mentioned. Justify your recommendations by citing specific paragraphs from the relevant Accounting Standards.
• Communication and Presentation: Clearly outline the identified issues and your recommendations. A professional format and presentation of the Statement of Advice is critical.
Reminder:
Check the Assessment 3 Outline on MyKBS for more information including:
• The instructions on the use of GENAI/ChatGPT
• Academic Integrity Policy and Late submission Policy, and
• Assessment Marking Guide.
Letter received from Mr. Alor Ikaz, CEO (Chief Executive Officer)
27 August 2024
Ms. Kiran Shrestha
Senior Partner
Kaplan Partners
63 Elizabeth Street,
Sydney, NSW 2000
Dear Kiran,
I am writing to seek your advice regarding numerous accounting issues for the year ended 30 June 2024.Our Financial Controller has left the firm unexpectedly and we require immediate help with the transactions completed recently. We would be grateful if you could reference the relevant Australian Accounting Standards with a detailed explanation of the rationale behind the appropriate accounting treatments.
The items we seek guidance on are as follows:
Item 1
Please create a statement of cash flow statement for us. The financial statements are in Appendix
1.
Other relevant information are as follows:
a) For the purposes of the statement of cash flows, we define cash and cash equivalents to include cash at bank and short-term deposits at call, net of outstanding bank overdrafts.
b) During the reporting period, we made two issues of ordinary shares details as follows:
• the convertible notes outstanding as at 30 June 2024 were converted to 150 000 ordinary shares issued at a conversion price of $2.00 per share; and
• 200 000 shares were issued at $2.00 per share for cash.
c) During the year ended 30 June 2024, plant and equipment costing $60 000 and having a book value of $30 000 was sold and we made a loss of $10 000.
d) The company had access to bank overdraft facilities of up to a maximum of $150 000. The bank overdraft are payable on demand and are subject to annual review.
e) The accounting policy states to disclose interest received and dividends received as investing activities.
Specifically, please prepare a statement of cash flows using the direct method.
Additionally, please include:
I. a note for cash and cash equivalents and
II. provide a reconciliation of profit to net cash flows from operating activities.

Item 2
As at the beginning of the financial year 2024, we had two provision accounts with the following balances:
(a) Provision for lawsuit claims $16m, and (b) Provision for warranty $31m.
During the year and for the period ended 30 June 2024, lawsuit claims were settled for $18m and warranty costs of $34m were paid. We would like to increase the warranty provision to $41m at year end.
Please provide the relevant journal entries that we should make for 30 June 2024 to prepare our annual report. Please show us all your workings as well (i.e. settlement of the lawsuit claims and increase of warranty provision).
Item 3
Our company is the primary contractor responsible for constructing a power plant for Top Energy Ltd. During the course of construction, defects in the construction of the power plant were brought to Management’s attention. The estimated cost to fix these defects is $120m. We had previously recognised a provision for warranty of $60m on the project as part of project costs.
We believe, however, that we can recover a substantial part of the costs from the subcontractors who performed some of the construction work. Negotiations with these subcontractors are ongoing, and to date, only two subcontractors have accepted liability. The amount of reimbursement that is considered virtually certain, therefore, is estimated to be $30m.
Please advise what is the correct way to treat this transaction with explanations and appropriate journal entries.
Item 4
Our biscuit factory, located in Vietnam, has been incurring losses for the past 2 years. Management is considering the option of either restructuring the plant or selling it to an external party. Management believes that losses will continue for another 2 years at about $4m per annum before the business operation could turnaround.
At year end, neither the restructuring plan nor the plan to sell was finalised. The carrying amount of the net assets of the plant, at year end, was $45m. Based on its current condition, the recoverable amount of the plant was estimated to be at $40m.
Please advise what is the correct way to treat this transaction with explanations?
Item 5
On 18 April 2024, the Board of Directors of the company decided to close down the confectionary making products plant. On 25 June 2024, a detailed plan for closing the plant was agreed by the Board and letters were sent to customers advising them to seek an alternative source of supply.
As a result of the plant closing, redundancy notices were sent to staff of the plant. Furthermore, a binding agreement was made to sell the assets and the carrying amount of the net assets of the plant was $20m with the expected net proceeds from selling the individual assets (and settling the liabilities) to be $12m.
Other costs expected to be incurred are as follows.
• termination costs of $2m (changes in management structure costs),
• costs to sell a line of business $3m,
• staff relocation costs $1.2m,
• staff retraining costs $1.4m and
• expected additional operating costs for the first quarter of 2025 financial year $8m.
The closure of the plant was completed by 25 August 2024. The company’s year end is 30 June.
Please explain whether the closure of the plant should be reported in the financial statements of 2024. Also, please provide what amounts (if any) should be recognised in the financial statements.
Thank you for your time. I look forward to hearing from you soon.
Yours sincerely,
Alor Ikaz
CEO
APPENDIX 1
Requirements of Statement of Advice
1) Use the template provided (Optional)
2) Any sources that you use must be acknowledged to avoid plagiarism. Information on referencing can be found under -Study Resources – Academic Skills- on MyKBS at this link.
3) Identify and refer to specific paragraphs of the relevant Accounting Standards in your advice.

Struggling with where to start this assignment? Follow this guide to tackle your assignment easily!

Step-by-Step Guide to Writing Your Statement of Advice (SoA)

1. Understand the Client’s Request
Before you start drafting your Statement of Advice (SoA), carefully read the client’s letter. Identify the specific accounting issues the client is seeking advice on. Break down the letter into manageable items and ensure that each issue is clearly addressed in your advice.

Key Items to Address:

Item 1: Statement of Cash Flows using the direct method
Item 2: Provision adjustments (lawsuit claims and warranty)
Item 3: Construction defect provisions and reimbursements
Item 4: Accounting for losses from a foreign subsidiary (Vietnam plant)
Item 5: Plant closure costs and provisions

2. Analyze Each Item Based on Relevant Accounting Standards

For each item, you will need to refer to specific Australian Accounting Standards (AASBs). Look up the relevant sections and paragraphs within each standard to justify your recommended accounting treatment. Use appropriate citations from these standards to demonstrate your understanding.

Example Breakdown:

Item 1: Cash Flow Statement
You will need to apply AASB 107 – Statement of Cash Flows to create the cash flow statement. Focus on the direct method and include necessary adjustments, such as the issuance of shares and cash flows related to plant sales. Don’t forget to include the note for cash and cash equivalents, along with a reconciliation of profit to net cash from operating activities.
Item 2: Provision Adjustments
Reference AASB 137 – Provisions, Contingent Liabilities and Contingent Assets when advising on the adjustments to provisions. This will guide the accounting treatment for the lawsuit claim settlement and the increase in the warranty provision. Provide journal entries for each change.
Item 3: Construction Defects
Here, you’ll refer to AASB 137 again, but you also need to consider the recoverable amount from subcontractors under AASB 15 – Revenue from Contracts with Customers. Provide journal entries for recognising the warranty provision and the expected reimbursement.
Item 4: Foreign Subsidiary Losses
For this, apply AASB 136 – Impairment of Assets to determine how to treat the impairment of the Vietnamese plant. Consider if there’s a need to recognise an impairment loss, given the difference between the carrying amount and recoverable amount.
Item 5: Plant Closure
This involves applying AASB 137 to assess whether any provisions for the plant closure need to be recognised. Ensure you address the expected closure costs, termination costs, and other liabilities. You may also need to determine if these costs should be recognised in the financial year ending June 30, 2024.

3. Format the Statement of Advice Professionally

Your SoA should be clear, concise, and well-structured. Use headings, subheadings, and bullet points to organize your responses and make them easy to follow. The format should reflect a professional advisory document.

Report Structure:

Cover Page
Include the title “Statement of Advice” and basic details like the client’s name, your name, the date, and the subject (e.g., “Accounting Issues for Year Ended 30 June 2024”).
Executive Summary (1 page max)
Provide a brief overview of the key issues and your recommendations.
Introduction
Briefly outline the purpose of the Statement of Advice and the client’s request.
Analysis of Accounting Issues:
For each item raised by the client:
- Clearly state the accounting issue.
- Refer to the relevant Australian Accounting Standards.
- Provide your analysis and recommendations.
- For journal entries, show full calculations and justifications for each transaction.
Conclusion
Summarize the key recommendations for the client’s consideration.
References
List all the sources and standards you’ve referenced in your advice, including the relevant AASBs.

4. Communicate Your Recommendations Clearly

Each issue must be addressed with clarity. Here’s how to approach it:

Justify Recommendations
For each issue, explain the rationale behind your recommendations, citing specific paragraphs from the relevant accounting standards.
Provide Practical Advice
Make sure your advice is actionable. For example, when preparing journal entries, ensure they are formatted correctly and aligned with the standards.

5. Prepare Journal Entries and Calculations (Where Required)

For the accounting treatment involving provisions and other adjustments, provide the relevant journal entries and ensure that your calculations are clear and accurate. Double-check the amounts for consistency and make sure they match the accounting treatment you’ve recommended.

6. Proofread and Finalize the SoA

Once you have drafted your SoA:

Ensure that your document is well-organized and free from errors.
Make sure each recommendation is backed by solid reasoning and evidence from the accounting standards.
If you used any external sources, properly reference them to avoid plagiarism.
Use a professional tone throughout the document.

Final Tips:

Stay Concise
Focus on the most critical points, keeping your explanations clear and to the point. Remember, the SoA has a 2,000-word limit (+/- 10%).
Cite Specific Paragraphs
It’s essential to cite the relevant paragraphs from the Australian Accounting Standards to back up your analysis and recommendations.
Use Visuals (If Necessary)
If you think it’s helpful, you can use tables or charts (like for the journal entries) to make your SoA more readable.

Good luck with your Statement of Advice! This guide should help you tackle each issue and ensure you provide well-supported, professional advice to your client.

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