Price strategy - Hot Air price change

Hot air changed their retail price in April 2011.

The previous retail price was 225 per person in 2010/2011. The normal flight included a Champaign buffet breakfast which was very tasty and sufficient. Due to cut down the cost and increase the profit, from 1st April 2011 the Hot Air cancelled the breakfast and increase express flight 10 AUD per person.

Despite the cost cut down as cancelling the breakfast, the 10 AUD per person additional fee is a little bit weir. People will usually choose the express light to catch up the cruise which can take them to the Great Barrier Reef. Normally the visitors came to Cairns and stay in Cairns three to four days and Chinese tourists stay even less. So the express flight will be sold out quicker than the normal flight. I think the 10AUD price difference is designed to encourage people to choose the second flight which is the normal flight.

But does this strategy work for the Chinese tourist market? I am doubt about it.

Hot Air put a lot of marketing emphasis on the Chinese market. With the booming of the Chinese tourism market in Cairns, Hot Air got a piece of pie. Hot Air ballooning become one of must-to-do option for the Chinese tourists.

But the most of Chinese tourists come to Australia as a group and travel to 3-4 cities of Australia and New Zealand in 10 to 15 days. So they don't have a lot of time in Cairns. For achieving must-to-do willing, they have to take hot air ballooning before going to the reef. This is the reason for the customer to choose the first flight.

Never than less, the other reason is those tour guides and tour leaders told their customers that the express flight has more chance to see the sunrise than the normal flight. It is partially true but people buy it.

So those were two major reasons for Chinese tourists to choose the express flight and the express flight will be more popular than the normal flight.

Although the 10 AUD different may convert some tourists from the other countries excluded China from express flight to normal flight, but to convert Chinese tourists to do so, we need some other strategies.

Cendant Case Study

Question 1:

Professional standards outline the auditor's consideration of material misstatements due to errors and fraud.

a) What responsibility does an auditor have to detect material misstatements due to errors and fraud?

The purpose of assurance engagement is enhancing the reliability of the subject matters. So it is auditor's responsibility to provide a reasonable level to assure the financial report is true and fair.

Financial report is a data assembling which reflect the position of the business. Therefore these users, including investors, managements, shareholders and the other parties can make decision base on the information provided by the financial report. Then the information which impacts on the process of decision making for the uses of the financial report is defined as materiality (Kimmel, Carlon, Loftus, Mladenovic, Kieso, & Weygandt, 2006).

The fairness and trueness of the material is important to the users of financial reports. The major task of auditor is to identify the misstatement in the financial report. By definition, misstatement is a difference between the amounts, classification, presentation or disclosure of a reported financial report item and the amount, classification, presentation or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. There are two kinds of misstatements and they rise from error or fraud respectively (Auditing, Assurance and Ethics Handbook, 2010).

But by the limitation of auditing, financial report audit only provides reasonable assurance instead of total responsibility to the fairness and trueness of the reports. The auditors can assure about whether the financial report is prepared in all material respects in accordance with a financial reporting framework. The reason of the limitation is determined by the nature of financial reporting, the nature of audit procedures and the need for the audit to be conducted within a reasonable period of time and at a reasonable cost (Moroney, Campell, & Hamilton, 2011).

b) What two main categories of fraud affect financial reporting?

By definition, fraud is an intentional act through the use of deception to obtain an unjust or illegal advantage. These two main categories of fraud are financial reporting fraud and misappropriation of assets fraud.

Generally say misappropriation of assets fraud involves some form of theft. Therefore misappropriation of assets fraud will decrease the assets and increase the expenses then it will reduce the owner’s equity of the company (Auditing, Assurance and Ethics Handbook, 2010). 

Financial reporting fraud is intentionally misstating items or omitting important facts from the financial report (Moroney, Campell, & Hamilton, 2011). In Cendant case, the fraud is the accounting department manipulating the revenues to meet the expectation of Wall Street analyst. Than the company can have more opportunities to merge other companies. The affect of the financial reporting fraud will increase sales therefore increase the profit of the company. The financial reporting with fraud will indicate the future earning ability to the share market therefore rising the share price in the exchange market. 

c) What types of factors should auditors consider when assessing the likelihood of material misstatements due to fraud?

First the auditors should consider the company economical environment to identify whether there are incentives and pressures to commit a fraud (Moroney, Campell, & Hamilton, 2011). CUC is in the travel service industry which is highly competitive. And CUC's revenue has dramatic doubled in the mid-1990s. To merge the other company, the company's profit has to keep increasing to meet the analysts’ expectation. So the managements of CUC have pressures to create more profit by fraud financial figures.  

Second the auditors should look into the financial report whether there are opportunities to perpetrate a fraud. (Moroney, Campell, & Hamilton, 2011) In this case, CUC made various year-end adjustments to the general ledger. Those significant adjustments created great opportunities to make a fraud.

Finally, attitudes and rationalisation to justify a fraud need to be assessed by the auditors. (Moroney, Campell, & Hamilton, 2011)CUC has been required to amend its financial statements by the Securities and Exchange Commission several times for using aggressive accounting practices in later 1980's and early 1990's. And from CUC's high speed expand, the companies top management showed high enthusiasm to maximise the share price. So the top level managements have created a flexible environment for the financial fraud.    

d) Which factors existed during the 1995 through 1997 audits of CUC that created an environment conducive for fraud?

Seeking the incentives and pressures to commit a fraud, material stated in the early and mid-1990's CUC acquired several companies to expand market share. Those acquisitions included Entertainment Publications in 1992, Net Market in 1994, Welcome Wagon International, Home Shopping Travel Club, Privacy Guard in 1995, Sierra On-Line, Davidson & Associates in 1996. CUC also came into the new contracts with big companies such as Intel, Time Warner and American Airlines. CUC had doubled revenues from 738m in 1993 to 1.4b in 1996 and at same time CUC's net income rose from 25m to 163m (CUC International Inc. - Company Profile, Information, Business Description, History, Background Information on CUC International Inc.).

CUC was in highly increasingly competitive industry. To maintain high growth rate hut pressures on the managements.

However, for year-end reporting purposes, CUC made various year-end adjustments to incorporate the misstatements into the general ledger. Those adjustments are the opportunities to perpetrate a fraud.

Question 2:

Entity's 5 interrelated components of internal control

a) What responsibility does an auditor have related to each of these five components?

Internal control is the process designed, implemented and maintained by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of the entity's objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations.

Internal control framework is one of the independent reference for auditors to gather. The auditors need to test the five components of the internal control to identify the level of risk to error or fraud. The auditors need to test the effectiveness, consistent, inspection of documents for evidence of authorisation, inspection of documents for evidence that details included have been checked by appropriate client personnel, personnel performing,how they perform their tasks and re-performing control procedures.

1) The control environment

The control environment is the attitudes, awareness and action of management and those charged with governance concerning the entity's internal control and its importance in the entity. And the control environment sets the foundation for effective internal control, providing discipline and structure and includes several elements such as, communication and enforcement of integrity and ethical values, commitment to competence, participation by those charged with governance, management's philosophy and operating style, organisational structure, assignment of authority and responsibility, human resource policies and practices.

The auditor should consider each of these areas and their interrelationships. Especially, the auditor need to identify the significant deficiencies.

2) The entity's risk assessment process

The entity's process for identifying and responding to business risks, in the financial reporting area, is how management find risks in the preparation of a financial report that is true and fair.

There are three kinds of risks, inherent, control and detection risks. Inherent risk is the susceptibility of an assertion to a misstatement that could be material, either individually or when aggregated with other misstatements, assuming there are no related controls. Control risk is the risk that a client's system of internal controls will not prevent or detect a material misstatement. Detection risk is the risk that the auditor's testing procedures will not be effective in detecting a material misstatement. And auditors need to assess the combined inherent, control and detection risks to evaluate the risk of the material misstatements.

3) The information system, including the related business processes, relevant to financial reporting, and communication. The role of information systems is to capture and exchange the information needed to conduct, manage and control an entity's operations. Auditors will test the information system related to the financial reporting objectives as same as initiating and recording transactions, balance and events. 

4) Control activities

Policies and procedures that help ensure that management directives are carried out. An audit need to categorise activities such as performance reviews, information processing, physical controls, segregation of incompatible duties. Those activities are easier to be test by the auditors compare those entity-level control activities.

5) Monitoring of controls

After establishing and maintaining internal controls, an important responsibility of management is to monitor the controls to assess whether they are operating as intended and modified for changes in conditions on a timely basis.

An audit needs to collect evidence about the design and effectiveness of internal controls. Those considerations include periodic evaluation, person in charge, communication channel, management implements, correcting significant deficiencies, implements reports and recommendations from regulators, function of internal audit and evaluations or observations made by the external auditors (Moroney, Campell, & Hamilton, 2011).

b) One component of internal control is the entity's control environment. What factors should an auditor consider when evaluating the control environment?

The entity's control environment includes several elements such as, communication and enforcement of integrity and ethical values, commitment to competence, participation by those charged with governance, management's philosophy and operating style, organisational structure, assignment of authority and responsibility, human resource policies and practices.

Communication and enforcement of integrity and ethical are essential elements of the control environment. Auditors should test what are the ethical and behavioural standards of the organisation and how they are communicated and they are monitored and enforced in business activities.

Commitment to competence can be judged by auditors' professional knowledge whether the employee and managements qualified with their assigned jobs and received suitable supervision.

Auditors consider the board's independence from the managements, the experience of its members, the extent of its involvement and scrutiny of management's day to day activities, and its interactions with the internal and/or external auditors. Therefore that is the way the participation by those charged with governance to be valued.

Management's philosophy and operating style need to be obtained by the auditors to identify the factors that influence management's attitudes towards internal control.

For the organisational structure, auditors need to understand the structure and its policies and procedures in matter of its size and complexity. And alternatively auditors can review the structure of the organisation through company's information systems.

The auditor also needs to gain evidence to show how authority and responsibility for operating activities are assigned, and how reporting relationships and authorisation hierarchies are established.

The competence and integrity of an entity's employees are essential so the auditors need to evaluate the human resource policies and practices. (Moroney, Campell, & Hamilton, 2011)

c) What red flags were present during the 1995 through 1997 audits of CUC that may have suggested weaknesses in CUC's control environment?

Water Forbes and Kirk Shelton did not create a control environment. Four of CUC's directors were tied with Walter Forbes through other joint investments in start-up companies.

These requirements by the Securities and Exchange Commission to change their financial statements are also reflect CUC's bad control environment.

Question 3:

Management override of controls

a) Provide an example where management override occurred in the Cendant fraud.

Management override is the management not complying with the exiting internal control regulation to fraud the financial figures in the financial report. This is normally happened when the management has incentive and pressure to achieve business target.

In CUC, the management recognised the deferred revenue as revenue immediately. That is an example for the management of CUC override the internal control.     

b) What are the required auditor responses to further address the risk of management override of internal controls?

Although internal control over financial report is effective and well-designed, the management override still happened in many entities. Senior management might perpetrate financial statement.

It is difficult to identify the risk of management override fraud because management is in charge of the design, implementation and maintenance of internal controls. Actions need to be taken to address the risk of management override of controls. Maintaining scepticism is an attitude to know the fraud risk including management override existing in every entity. Auditors should strengthen understanding of the business to form the foundation of the business. Team of auditors can use brainstorming to identify the fraud risk. Auditors can use the code of conduct to assess financial reporting culture. And the governance should create a whistle-blower program and a broad information and feedback network.

These activities could not guarantee to prevent, deter or detect fraud through management override of internal controls. But as result these activities can help auditors to establish oversight of management. (Management Override of Internal Controls: The Achilles' Heel of Fraud Prevention, 2005)

Question 4:

Several misstatements were identified as a result of the fraud perpetrated by CUC management

a) For each misstatement identified, indicate one management assertion that was violated.

There are three misstatements identified in the CUC and they are irregular charges against merger reserves, false coding of services sold to customers and delayed recognition of membership cancellations and bank rejection of charges made to members' credit card accounts.

Irregular charges against merger reserves are artificially inflate earning by fictitiously recording revenues or reducing expenses and reducing the merger reserve in CUC. An audit can used the assertions used for transactions and events, including income statement items. The accuracy assertion is to test amounts and other data relating to recorded transactions and events have been recorded appropriately. In this case the expense and revenue for the merges should be recorded correctly.

False coding of services sold to customers is a classification fraud. Classification is that transactions and events have been recorded in the proper accounts. CUC put the revenue into a different account it can be recognised as income immediately instead of deferred income therefore the revenue is inflated.

Delayed recognition of membership cancellations and bank rejection of charges made to members' credit card accounts is a cut-off matter. Transactions and events have been recorded in the correct accounting period. This will increase the revenue in the accounting period. 

b) For each misstatement identified, indicate one audit procedure the auditor could have used to detect the misstatement.

When testing for accuracy, an auditor needs to search for evidence that transactions and event have been recorded at appropriate amounts. In the CUC case, the auditors should collect the contract and transaction record relates to the merge to calculate what the correct amount is should be included in the financial report.

When testing for classification, an auditor needs to make sure that transactions and events have been recorded in the proper accounts. The auditors working on the CUC case should test the accounts to identify whether or not all the transactions in the particular account belong to the correct account.

When testing for cut-off, an auditor searches for evidence that transactions have been recorded in the correct accounting period. The auditors working on the CUC case need to test all the possible transactions which had happened have been recorded in the correct accounting period. (Moroney, Campell, & Hamilton, 2011) 

Question 5:

Some of the members of CUC's financial management team were former auditors for Ernst&Young, LLP.

a) Why would a company want to hire a member of its external audit team?

A company may want to hire a member of an external audit team simply for expertise.  For instance, if an audit manager has worked on a particular engagement for several years, that manager may know more about the operations of the audited entity than anyone else they could hire.  In that instance, there may be no other motive. However, if a company consistently hires from the external audit team pool, one would have to wonder about the overall integrity of management and the audit team. (Moroney, Campell, & Hamilton, 2011)

b) If the client has hired former auditors, how might this affect the independence of the existing external auditors?

Hiring a member of an external audit team may not necessarily impair independence.  However, if there was an unreported attempt to hire an audit team member or an unreported attempt to be hired during the audit, independence is impaired.  Other independence issues may arise after the person is hired but must be considered on an individual basis.

Independence is the ability to act with integrity, objectivity and professional scepticism.

In CUC case, familiarity threat will be arise which refers to the threat that can occur when a close relationship exits or develops between the assurance firm and the client or between members of the assurance team and directors or employees of the client. The result can be that the assurance team become too sensitive to the needs of the client and lose their objectivity. (Moroney, Campell, & Hamilton, 2011)

References List

Auditing, Assurance and Ethics Handbook. (2010). Pearson Australia.

CUC International Inc. - Company Profile, Information, Business Description, History, Background Information on CUC International Inc. (n.d.). Retrieved 4 2, 2011, from Reference for Business: http://www.referenceforbusiness.com/history2/69/CUC-International-Inc.html

Kimmel, P. D., Carlon, S., Loftus, J., Mladenovic, R., Kieso, D. E., & Weygandt, J. J. (2006). Accounting Buidling Business Skills 2nd edition. Milton: John Wiley & Sons Australia, Ltd.

Management Override of Internal Controls: The Achilles' Heel of Fraud Prevention. (2005). Retrieved 4 3, 2011, from Aerican Institute of Certified Public Accountants: http://www.aicpa.org/ForThePublic/AuditCommitteeEffectiveness/AuditCommitteeBrief/DownloadableDocuments/management%20override%20achilles_heel.pdf

Moroney, R., Campell, F., & Hamilton, J. (2011). Auditing A Practical Approach. Milton: John Wiley & Sons Australia, Ltd.

Para-sailing vs. Bus Charter business

One of my friend went to a Para-sailing company on Green Island recently. She works as a sell man to promo Para-sailing product to the Chinese tourists. Then she is seeking some advice from me to enhance her sales performance and also the marketing strategy.

During the conversation, I try to get some idea about the basic information of Para-sailing business. Para-sailing has maxim daily capacity of 84 which made up by 12 per hour times 6. Let's assume they have half capacity sold on every day, operated 300 days a year and 100 AUD per head income. Their revenue will reach 1,260k. That is a very good result for that small company.

All their assets include a 10 person size boat, 2 or 3 para-sail and a permit. Comparing bus charter business, we need 5 buses fleet to generate such revenue. They are far more efficient.

Look into the para-sailing company's assets, the most valuable item is the permission. If you can have a permission, the para-sailing will be a good business for the family investor.

Measurement

Executive Summary

This paper introduces the measurement under the accounting Framework. Since measurement is basic information gathered from the business activities and transactions, it should reliably to reflect the reality of the report objectors so which type of the measurement should be chosen in the financial report is important to the report users. Also, which type of the measurement should be chosen should depend on respective criteria. In this paper, there are three issues indicated to illustrate the different type of measurement consideration in terms of the different business activity and purpose. The three issues are foreign currency exchange, agriculture accounting and public sector accounting. During the comparison, readers may conclude some ideas to apply four types of accounting measurement systems in the different business environments.

Introduction

Measurement is the fundamental framework in accounting. This paper reviews the definition of accounting measurement and the different types of measurement. Meanwhile, this paper uses three issues in accounting area to illustrate the implication of the different measurement systems. The three accounting issues are public sector, foreign currency and agriculture accounting. By choosing the correct measurement system, financial report can reflect true and fair business information.

 Accounting Measurement

As generally considered, accounting is a measurement and communication discipline. There are two principles relating to accounting measurement. One is to identify appropriate objects of a measurement. The other is the way that the objects are measured so as to identify properties of alternative measurement approaches or to estimate a given measurement object (Belkaoui and Jones 1996; Clinch 2000). Yet, Staubus (2004) suggests that there are two views included in accounting theory literatures. The first one is the Chambers/Sydney view asserting only one measurement method through current net realizable price. The other view is the Staubus/mainstream view accepting several measurement methods in one same financial report.

The Accounting Handbook (2011) indicates that there are several objectives for financial report. The financial reports provide necessary information for common needs of users to understand financial situations in regard of financial effects of past events of their entities such as financial positions, financial performance and cash flow. Such understanding enables the users to make economic decision. Also, the financial reports provide information regarding results of stewardship or accountability of management that relates to resources entrusted to, which, again enable users to make economic decisions such as whether or not to sell investment in their entities. Nevertheless, the Handbook (2011) further indicates that financial reports do not necessarily convey non-financial information which is also needed for economic decision-making.

To achieve the objectives of the financial report, measurement that is adopted for the report needs to be considered. Normally, the study of accounting practices starts from considering the range of technical issues in relation to record and report financial or economic activities. In the fifteenth century, Pacioli (cited inGodfry, Hodgson et al. 2010) described a double-entry accounting system stemmed from the basic technical processes. In 1929, the traditional historical cost system emerged after collapse of the Wall Street. In the 1960s, a few alternative systems were developed such as updated cost system for measurement of current costs of resources usage and for evaluation of capital at current buying prices as well as systems applied current selling prices. Two major current buying price systems were proposed. One was the fair value accounting system that was proposed by Edwards and Bell on the basis of the concept of financial capital maintenance using physical capital maintenance and significantly affects the derived measure of profit. In another system, income and capital are measured by selling prices or exit value (Godfry, Hodgson et al. 2010). Noteworthy, though entities usually combine different measurement bases, they commonly adopt the historical measurement basis to prepare their financial reports. Another fact is that, some entities adopts the current cost basis for effects regarding changing prices of non-monetary assets, which falls into the inability of the historical cost accounting model (Shying and Ngiam 2011).

Nonetheless, according to The Accounting Handbook (2011), measurement refers to a process for monetary amounts determining. During this process, elements of the financial statements are recognized to produce balance sheet and income statement. This process involves selecting particular basis of measurement. Thus, there are several measurement bases that are considered for different degrees and are combined variously in financial reports.

There are four measurement bases are identified in The Accounting Handbook (2011). The first one is historical cost assets. They are recorded at the amount of cash or cash equivalents paid for fair values of the considerations when acquired at the time of their acquisition. Liabilities are recorded, at the same time, at the amount of proceeds received in exchange for obligation. The liabilities can also be recorded at the amounts of cash or cash equivalents under certain circumstances when such cash or cash equivalents are expected to be payments in regard of satisfaction of the liabilities in the normal course of business. The second one is current cost assets. They are recorded as the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently (Shying and Ngiam 2011). The liabilities are recorded at the amount of the cash or cash equivalents that are not discounted but that would be required for current obligation settlement.  The third one is realised value assets or settlement value assets. They are recorded at the amount of cash or cash equivalents that can be current obtainable when the asset is sold in an orderly disposal. Liabilities are recorded at the settlement values. In other words, the undiscounted amounts of cash or cash equivalents are paid under expectation to satisfy the liabilities in the normal course of business. The fourth one is present value assets. They are recorded at the present discounted value of future net cash flows. Meanwhile, the item is expected to generate in the normal course of business. Liabilities are recorded at the present discounted value of the future net cash outflows to settle the liabilities in the normal course of business (Godfry, Hodgson et al. 2010).

Various types of measures in accounting are possible for respective purposes. For example, there are direct or indirect accounting measures. The former are primary and actual measures of an object or its attributes. The latter are secondary measures derived indirectly though algebraic transformation of certain set of numbers representing direct measure of an object or its attributes. Another type of measure is classified as a past, present or future measure to refer respectively to a measure of a future event under consideration of decision time dimension. Also, there is measure type that can be classified as a retrospective, contemporary or prospective measure when referring to whether an object or its attribute measures belong to a past, present or future event under consideration of the time when measurement is made (Belkaoui and Jones 1996). To illustrate, there are three issues are indicated below which are foreign currency exchange, agriculture accounting and public sector accounting.

Measurement in Public Sector Accounting

Public sector is important to a country because it acts on behalf of its people and communities for their interests and provide collective goods and services that cannot be accomplished by private sector (Deegan 2010). There are three broad groups of public sector which are government trading enterprises, government departments, and whole of government (Henderson, Peirson et al. 2011). The development of accounting regulation of public sector reporting has been one of the most important projects of the AASB/PSASB because it directly influences with a significant degree on the Australian people’s well-being and public resources. With improved financial reporting practices, the government and taxpayers are provided with information to make informed decision on the way that the resources are to be allocated (Deegan 2010).

There are several differences between the public sector and the private sector. Their bases are different. Public sector is based on budget when the other is on a self-sustaining basis. When considering transfers, the public sector holds objective of inequality of exchange and redistributive transfer while the private sector has each transaction in the form of an exchange of resources between the enterprise and its environment. In the aspect of performance, the public sector has little connection between taxed and the benefits at the level of individuals. Yet for the private sector, its performance is considered as its marketability of its output compared to its input. Thus, compared to private sector, public sector faces problems of absence of profitability as a regulatory mechanism as well as a measurement framework. Further, the accountability of public sector has to respond to questions from individuals and organizations for their conduct, responsibilities and activities; has to provide information for evaluation of the performance of the parties concerned; and has to provide financial reports to set an important example of the accounts for process of evaluation (Moxham 2009; Deegan 2010; Henderson, Peirson et al. 2011).

Three issues are inherent in the public sector accounting which are infrastructure and heritage assets, land under roads and form as well as content of financial statements. Of the three issues, the first two need to be considered with the measurement issues. The priority is to make clear definition of the issues with essential features.

The infrastructure assets are public facilities, immovable and require sustainability of living standards and relevant essential services. Whereas for heritage assets, they are considered as assets that are unreplaceable or indefinitely preserved such as museum collections, national parks, and nature reserves. However, infrastructure assets and heritage assets are difficult to be measured because their characteristics are different from that of other assets. Firstly, costs of such assets are ‘sunk’. Secondly, they are not vendible or evaluated by marked value. Thirdly, information that they convey is rather socially than commercial benefits. Also, such assets do not have physical life that can be determined. Besides, they actually are liabilities rather than assets (Deegan 2010). As a result, it is argued that these assets need to be measured with special treatment. For example, the amounts of infrastructure ad heritage assets need to be disclosed as two separate categories of non-current assets in the statement of financial position of government departments (Sutcliffe, Micallef et al. 1991; Deegan 2010; Henderson, Peirson et al. 2011).

As for the issue of land under roads, the major features include three aspects. First, it is the uncertainty about the land under roads that is to be controlled by which entities. Secondly, there is not much reliability in measuring the land under roads. Also, to recognize land under roads costs a lot which exceeds its relevant benefits. Yet the framework notes that assets are to be recognized when they meet the definition and recognition criteria of assets. The recognition criteria include asset with a reliably measured cost or other value. Current value also needs to be estimated and determined for land under the roads in the absence of a market transactions through analysis of market transactions for adjacent land (Deegan 2010; Henderson, Peirson et al. 2011).

Measurement in Agricultural Activity

Agriculture Sector involves biological assets which are non-human living assets such as animals and plants controlled by entities. There are two broad categories of the biological assets. One is bearer biological assets that generate revenue by producing output more than once. The other is consumable biological asset generating revenue only once when the assets are slaughtered, harvested or sold.

The consideration of biological asset measurement roots in their essential features that such assets are living and capable of biological transformation. Such features make the biological assets different from other assets and lead to certain accounting problems for classification, measurement and recognition of changes in asset value. Nevertheless, the biological assets are basically classified into to two categories: animal and plants. Such classification enables an easier consideration for measurement (Henderson, Peirson et al. 2011).

Animals

After series of arbitrary assumptions and allocations, costs of animals can be estimated and determined. It is commonly agreed that cost is not a satisfactory basis for measuring animal due to unreliable measuring to recognize such assets. Also, it provides irrelevant data which brings more practical difficulties for measuring such assets (Roberts, Staunton et al. 1995). However, there are several alternative ways to measure market value of animals.

There are three variations of market value. Firstly, the net price is the net realisable value obtained after the animal is sold with deducted transaction costs at the end of each reporting period in an orderly market. Secondly, discounted market value is net realisable value achieved after market value is reduced by a certain amount to a possible future market price. Thirdly, agreed values for animal are involved in standard value which is based on conservatively estimated market prices in foreseeable future. As the market changes all the time, the animals are recognized in the accounts at the standard values. Thus, generally, net realisable value becomes the best alternative to measure the value of the animals by providing more relevant and reliable information than merely cost.

Plants

Noteworthy, compared to measuring the animal, measuring bearer plant biological assets through the net realisable value is particularly difficult. For example, results of measuring a vineyard or an orchard by the net realisable value are usually a sum of the net realisable values consisting land, improvements and the plant biological assets. The fact is that bearer plant biological assets are seldom measured separately from the land on which they grow. Also, the fact is that the net realisable value is usually considered and determined by the price at which the land, improvements and bearer plant biological assets are sold as a unit. Besides, some other issues need to be considered when measuring forestry assets. There are three possible const-based methods for the forestry assets measurement which are historical cost, compounded historical cost, and replacement cost. To incorporate current value-based methods of accounting for such assets, the suggested ways are net-present-value method and net-realisable-value method(Henderson, Peirson et al. 2011).

Measurement in Foreign Currency

AASB121 contains accounting principles for companies regarding foreign currency translation and presentation in the balance sheet and profit and loss account. Effects of changes in foreign exchange rates were introduced for annual reporting periods beginning on or after 1 January 2005. The Financial Reporting Standard 121 states the principal issues determining which exchange rates to be uses and how to report the effects of changes in exchange rates in the financial statements. The magnitude of the exchange rate valuation effect has been increasing during recent years. There are two main reasons. One is that it is considered as a part of reflect of large fluctuations. The other reason is that it reflects increasing degree of international financial integration. As higher cross-holdings of financial assets across countries increase, the exchange rate valuation effect is concentrated on gross assets (Shying and Ngiam 2011).

AASB121 specifically defines 3 different exchange rates for foreign currency translation which are closing rate, exchange rate and spot exchange rate. All the entities’ transactions are recognised in the functional currency when all currencies other than the functional currency are foreign currencies. Meanwhile, foreign accounts should be translated at the exchange rate in effect at the date of transaction which is spot exchange rate or at the first date of the month when transactions occur. Also at the end of month, foreign accounts should be translated at the exchange rate in effect at the closing date of the month(Shying and Ngiam 2011).

Notably, any foreign accounts denominated monetary items are measured using the closing rate. On the other hand fair value is used to measure any non-monetary items arising from transactions denominated in foreign accounts. A part of non-monetary items that are measured in foreign currency at historical cost in a foreign currency are translated using the exchange rate at the date of transaction. Nonetheless, depending on the accounting regulations that affect the parent company, the translations can be done at the exchange rate at the end of the period or at the average exchange of the period. As a result, income statement are usually translated at the average exchange rate over the period when balance sheet that exposures foreign subsidiaries are usually translated at the prevailing current exchange rate at the time of consolidation.  The differences caused by translations are exchange differences which recorded in financial report in accounts of assets, capitalisation or expenses in the period in which they arise (Dumas 1984; Board 2010).

IAS 36 Impairment of assets states that all assets are subject to impairment tests such as recoverable amount test as well as in IAS 2 Inventories states that net realisable value tests. These two requirements interact through the comparing process of non-monetary assets measured in a foreign current that are assessed for impairment. There are two aspects involved in the comparing process. One is the carrying amount that is translated at the rate when the amount was determined. The other is the net realisable value or recoverable amount translated at the rate then the value was determined. Based on the comparison, assets are impaired in the functional currency instead of in the foreign currency. Such situation roots in the factor that some amounts used in impairment testing are translated to the functional currency at the current rates while the carrying amounts are translated with historic rates(Board 2010).

Conclusion

In general, there are many different types of business activities and transactions. Through illustration of three issues, the understanding is that appreciate types of measurement need to be considered to record the real information about the reporting entities. Therefore, nature of respective business procedure and purposes of the report need be justified before choosing the measurement system. To achieve, keeping knowledge update is necessary as well as being aware of debates in applying the measurement. Also, it is important to produce financial reporting that reliably reflects the reality of the report objectors to the report users. Thus, different types of accounting measurement need to be considered and chosen in accordance with different business environment. 

 

 

Reference

Accounting Handbook 2010, Pentice Hall, 2010.      

Belkaoui, A. R. and S. Jones (1996). Accounting Theory. Marrickville, Harcourt Brace.    

Board, I. A. S. (2010). IAS 21. Changes in Foreign Exchange Rates, IASB.           

Clinch, G. (2000). "Accounting Measurement and Capital Market Research." Australian Accounting Review 11(2): 58-62. 

Deegan, C. (2010). Australian Financial Accounting. Waterloo, NSW, McGraw-Hill.          

Dumas, B. (1984). "Exposure to Currency Risk: Definition and Measurement." Financial Management 0046-3892(13/2): 41.           

Godfry, J., A. Hodgson, et al. (2010). Accounting Theory. Milton, QLD, John Wiley & Sons Australia.     

Henderson, S., G. Peirson, et al. (2011). Issues in Financial Accounting. French Forest, NSW, Pearson Australia.           

Moxham, C. (2009). "Performance Measurement: Examining the applicability of the existing body of knowledge to nonprofit organizations." International Journal of Operations & Production Management 29(7): 740-763. 

Roberts, D. L., J. J. Staunton, et al. (1995). Accounting for Self-Generating and Regenerating Assets. Melbourne, Australian Accounting Research Foundation.           

Shying, M. and J. Ngiam (2011). (ed.) Accounting Handbook. C. Australia. Australia, Pearson Australia Group Pty Ltd.     

Staubus, G. J. (2004). "Two Views of Accounting Measurement." ABACUS 40(3): 265-279.        

Sutcliffe, P., F. Micallef, et al. (1991). Financial Reporting by Government Departments. Melbourne, Australian Accounting Research Foundation.