Chapter 6: Accounting measurement systems THEORY IN ACTION Theory in action 6.1 The effect of asset provisioning on earnings How does a provision for underperforming loans affect the earnings of a firm? Should a reduction in equity be recognised? A provision for underperforming loans affects the earnings of a firm by increasing its expenses leading to reduced profits. A charge (expense) and a matching reduction against the relevant asset would be recognised. Note, that it has no effect on the cash position of the firm. The provision is a write-down and it would impact equity by reducing the retained profits component. Students should be asked to consider whether or not the asset can be identified (or merely the asset category), and to discuss the notion that under historic cost accounting changes in asset values are basically ignored until the asset is sold or disposed of by sale or write-down/off. However, students should also be aware of the conservatism principle of lower of cost or market value and the impairment rules under IFRS. They should also be aware of last year’s IFRS ruling that some bank liabilities can now be amortised rather than impaired. A good assignment would be to ask them to research this issue. What are the implications of a change in accounting policy affecting provisions for (1) shareholders, and (2) analysts such as credit rating agencies? A change in accounting policy does not change the underlying value of the business or impact on operating assets. However, if the change impacts on the permanence of cash flows it may affect future dividends and may result in a shift in the share value of the firm. Students might have a look at share price movement around the earnings release and change in policy (note however this is a complex issue). The potential impact of a change in accounting policy on cash flows will be considered by analysts as it may have the potential to affect the size and scheduling of dividends, and the risk of a business. Should the $20 million provision or a larger provision be used in analysing the performance of the company? If so, how would you determine the size of the adjusted provision? This question raises the issue of — what does the provision figure actually mean? This would be a good question to ask the students. It is made up of estimations and calculations. For example, how many of the investors will not pay back their loans, how many will partially repay the loans, and what percentage of the loans are they likely to repay? The estimate of 3 percent of bad debts from the total loan exposure of $556 million appears to have been based on an individual analysis of the ability of each investor to repay their loans. In analysing the performance of the company, any adjustment to the size of the provision would need to be based on an assessment of the adequacy of this approach in estimating the total loan exposure. Discussion should touch on how an accountant makes a bad debt provision from a schedule. Theory in Action 6.2 Outsourcing and costs 1. Identify the potential problems associated with allocating costs that ‘attach’ to services provided by firms such as Infosys Technologies. The allocation of costs to a service provided by a firm can be problematic. While direct costs can normally be easily traced to a particular service, indirect costs such as depreciation and overheads may not be so easily determined for a particular service. The allocation of these costs may require the use of an arbitrary allocation method or the determination of cost drivers in order to allocate the costs over multiple services. 2. What criteria would management use when deciding to expense or capitalise expenditures associated with its services? Under the historical cost approach, management would need to determine which costs have ‘expired’ as these will need to be matched (expensed) against income. Any unexpired costs will be capitalised and carried forward as unmatched assets on the balance sheet. Ready to be matched against future revenue as it flows in. Why is the decision to expense or capitalise expenditures so important to the costs attach principle which underlies the historical cost system? The historical system of accounting relies on the “correct” matching of expenses against revenues in determining profit. Expenditures under the historical system are broken into expense and asset components, with the asset component transferred progressively from the statement of financial position to the income statement as the future economic benefit of revenue is received. The reliability of this system relies on costs being measured and attached correctly and the correct allocation of these costs to expenses or assets. However, the decision to capitalise or expense is not always straight-forward and often judgement may need to be made on whether the expenditures have expired and what the probability is of that asset generating future revenue. Theory in action 6.3 Review of deteriorating assets leads to write-downs What criteria would management use to decide when to write down impaired assets on the statement of financial position? Discuss the reasons underlying the write-down of Fox Interactive Media. When assets have a value that is significantly lower than what is reported in the accounts they are considered to be ‘impaired’ and management must write-down these assets to their ‘true’ value. Normally this would require some level of independent valuation and an outline of the basis for the write-down decision. However, in reality, management has considerable discretion to determine which assets are written-down and when. If it appears that a significant write-off is required, management will ‘clear the cupboard’ and write-down any asset it feels has the potential for future losses in value, as it is better to lump the ‘bad news’ into one accounting period. The reason for the write-down of Fox Interactive Media is due to impairment in value caused by restructuring changes and the rapid rise of a rival website ‘Facebook’. The restructuring changes may be the result of the plan to charge for news website usage. The write-down may also be reflecting the significant advertising slump on the value of News Corp assets such as newspapers, movies, books and satellite TV. Comment on the timing of the decision by News Corp management to write down the MySpace networking site, given the ‘rapid rise of rival Facebook’. The timing of such decisions predominantly rest with management. Management are often reluctant to write-down assets and tend to save up write-downs for one-off hits rather than consistent reductions in profits. However, it is likely that the loss of market share to rival Facebook will be accompanied by a significant drop in advertising revenue which will impair the value of News Corp’s Facebook asset. What effect would amortisation of News Corp’s media assets have on reported earnings under the historical cost system? Amortisation is regarded as an expiration of the value of an asset and so it increases expenses and decreases reported earnings. Under the historical cost system management have choices as to the basis of measurement, the timing and the level or amount to be adjusted when determining amortisation. Theory in Action 6.4 Optimum resource allocation and required rate of return How will CCA based on physical capital maintenance help managers to make better resource allocation decisions? Rates of return based on the firm’s ability to replace assets and continue operations. If this rate of return is less than the cost of capital (required rate of return) then managers should invest in other assets or certainly sell up the asset if sales price is close to purchase price Determination of asset maintenance policies Replacement of assets Pricing and output determination Dividend policy Retain or sell assets (but need both buying and selling prices) How will the use of CCA help investors make decisions about whether to buy or sell shares in a particular company? Investors should calculate rates of return based on the company’s ability to replace assets and continue operations. If this rate of return is less than the cost of capital (required rate of return) then investors should invest in other firms. Investors can also rate investments based on the rate of return of the current buying cost of inputs. Investments should be made in descending order based upon the calculated return or expected return on CCA. Using CCA means that financial statements between firms are now theoretically comparable. Will income and dividend decisions change under CCA? Explain. Income effects will be a function of the industry. Industries that have raw materials and physical assets that are increasing in price will have lower income under CCA because of higher depreciation and amortisation charges (eg. manufacturing). Industries based upon lower technology input costs will have higher incomes (e.g. computer and technology industries). Dividend policies may not dramatically change because managers do not like to adjust dividend policies. However, at the lower end managers should be aware that dividend payments greater than CCA income will mean that managers, in order to maintain current operations, are required to raise funds from sources other than internal operations. Explain in your own words what is meant by the going concern assumption? Barton explains the concept and measure of the going concern status of the firm are based on the ability of the firm to earn a normal rate of profit on owners’ investment, where all measures are based on the current market opportunity costs (buying prices) of resources. Instructors should use this question to fully explain the concept as it is outlined in corporate law – that is, the ability of the firm to pay its debts as and when they fall due. QUESTIONS According to the historical cost system, what is the objective of accounting and the role of profit? What criticisms are made of profit calculated under the historical cost system? Stewardship is emphasised as the objective of accounting in traditional historical theory — enunciated by Paton and Littleton. Accountability to equity holders is primary. Owners and creditors are considered to be especially interested in what the firm (management) has done with the funds they have entrusted to it. Therefore, information should be provided to give an accounting of the performance of the firm in using the funds from a creditors point of view. Hence conservatism is required in valuation. Determining ‘net worth’ to owners is not of primary importance. Critics say that stewardship is too narrow an interpretation of the objective of accounting. The stewardship emphasis causes a preoccupation with the past. Users want information for decision making, which calls for a ‘forward looking’ position. This is now the principles based approach championed by the IASB for international accounting standards. Because accountability and stewardship is emphasised, the belief is that equity holders are primarily interested in the results of the use of their funds. Thus an emphasis on flows and hence to earnings as the primary statement; the statement of financial performance is more important than the statement of financial position. After all, the objective of the firm is to make a profit a concept that is embedded in business. The balance sheet (now statement of financial position) is a link between two statements of financial performance. It is a repository (dumping ground?) of unamortised historical costs. Critics charge that we claim the balance sheet is a statement of financial position; but, in effect, historical theory downplays this interpretation. We should be more serious about making the statement of financial position a meaningful statement, one that fits the claims we make about it. Useful information for decision making implies that the statement of financial position items should be as important as the income statement items. Current values would be more relevant. Explain the concept of ‘costs attach’. What do critics say about the concept? What is meant by the terms ‘unexpired cost’ and ‘expired cost’? The theory is that the dollar amount of the historical cost of purchased goods and services ‘attaches’ to those goods and services. As the goods and services are used in the production of the product, the cost of the product can be determined by counting the attached costs of the goods and services that constitute the final product. As Paton and Littleton said, ‘it is as if costs had a power of cohesion’. Critics believe the notion of ‘sacrifice’ is the only meaningful cost. This is supported by economic theory. There is no evidence that dollar amounts of historical cost attach themselves to physical times. This is purely an abstract view, not supported by evidence. Why this attaching takes place only for acquisition (historical) cost is not clear. If an item is valued at replacement cost because of the lower of cost or market method, then cost suddenly ‘detaches’. These terms relate to the theory of costs attach. If the dollar amount of cost attaches to the physical items, then assets can be seen as ‘unexpired’ or ‘unamortised’ costs. Assets (or portions of them) and services that have been expensed are ‘expired’ costs. Paton and Littleton said the destiny of all costs is to ‘expire’ on the income statement. Would market value-adjusted statements be more ‘decision useful’ than those prepared applying historical cost measures? Would using current market values reduce the number of decisions required to prepare financial statements? This of course very much depends on the decision proposed. If the decision was related to protecting creditors producing conservative accounting reports to monitor managers’ compensation then the answer is no. If financial statements were determined to aid decision making by investors then the answer is probably more positive. Edwards and Bell also argue that a current cost system is also appropriate as a management accounting system. Students after reading this chapter should realise that there are several accounting systems because the decisions to be made in the business world are varied and complex. Using current market values requires a more complex accounting system and more decisions to be made in preparing reports. What are the three types of decisions managers are faced with in running a business? How does accounting enter the decision-making process? The three types of decisions pertain to the allocation of resources within the firm in order to maximise profits. They are: 1. Those relating to the expansion of the firm. What amount of assets should be held at any particular time? 2. Those relating to the composition of the assets. What should be the form of the assets? How much working capital, how much of equipment, of plant, etc.? 3. Those relating to financing. How should the assets be financed? How much debt financing, of new equity, of retained equity etc.? To make decisions regarding the three problems mentioned above, managers need to form expectations about future events. Expectations are based on past events, and therefore past decisions relating to the past events must be evaluated. Accounting information helps managers to evaluate their past decisions. In so doing, accounting information serves as a basis for forming expectations. Explain the Edwards and Bell concept of ‘business profit’. Business profit = Current operating profit + Realisable cost savings Current operating profit = Excess of the current value of the output sold over current costs of related inputs Realisable cost savings = Increase in the current cost in the current period of assets held Instead of using the term ‘realisable cost savings’, we prefer the term ‘holding gain’. There are a couple of questions that need to be dealt with concerning holding gains/losses: do these involve all assets, and are liabilities to be also considered? Although Edwards and Bell defined realisable cost savings in terms of assets, it is clear from a reading of their book (chapter 7) that they also included liabilities — they meant all assets and liabilities. However, because short-term monetary assets and liabilities are similar to cash, and the value of cash is constant (except in terms of purchasing power), they said that as a practical matter these could be ignored. Therefore, holding gains/losses refer to non-monetary assets and long-term liabilities. What are the benefits of separating out the holding gains (or losses) in profit determination? What are some shortcomings of this separation? This question assumes the financial capital view. Benefits include: Can determine if holding activities are successful. Holding a certain composition of assets and liabilities is one way management tries to enhance the firm’s market position. The evaluation of holding activities can be made because it is separated from operating activities. Gives credit where credit is due. The managers at certain periods are given credit for purchasing non-monetary assets when they were cheaper, or incurring debt when the interest rate was lower. Can better evaluate the performance of management. Management usually has more control over operating activities than holding activities. Management is hired in order to direct the operating activities of the firm. Changes in current cost of non-monetary assets are not always within the control of management. However, in some firms (for example, traders, builders) profit from holding activities is an important component of profit activities and it is economically desirable to be fully aware of the market prices and movements of these activities. Can better predict future cash flows. Changes in the current cost of assets (that is, holding gains/losses) reflect changes in future cash flows that will occur because of the use of assets. These changes in cost relate to the ‘unexpected’ component of economic profit. Shortcomings include: Some decisions of management affect both the operating and holding components. Therefore, separating the holding gain or loss from operating profit may be misleading. For example, a company may purchase a machine this year where the cost falls, incurring a holding loss; but the use of the machine is expected to decrease operating expenses in the future. Management may be criticised for the holding loss this year, when in the long run, due to the decrease in operating expenses, they have actually made a ‘good’ decision. The rationale for separating out holding gains/losses and including them in the statement of financial position is debatable. Questions 4 and 6 below deal with these issues. There are several explanations to justify the inclusion of holding gains as profit. Discuss them. The explanations to justify the inclusion of holding gains as profit are given below. Although not asked for, criticisms of each are also given. Holding gains represent a cost savings due to having purchased the assets at a lower price. The comparison is between the actual acquisition cost of the asset and the current cost. Critics say that this argument implies that the cost savings are an ‘opportunity gain’. This means that a comparison should be made between what actually occurred and what might have happened. Theoretically, what might have happened is unlimited in number. Critics say that the opportunity gain concept also implies that a comparison should be made between what the firm did and what other firms did, because a cost saving measures the firm’s cash position relative to other firms. This would be extremely difficult to perform. Holding gains represent an increase in the value of the assets. This is an economic event that has an effect on profit. The company is economically ‘better off’, because its assets are worth more. Critics say that this argument is inappropriate, because in most cases the asset is expected to be used in the business, not sold. Therefore, the current exchange price is not relevant. Holding gains represent changes in the future cash inflow expected to be generated because of the use of the assets. (This is the argument used by the FASB in Statement 33.) This theory believes that increases in current cost help investors in assessing the future cash flow of the company. Theoretically, holding gains relate to the unexpected profit component of economic profit. Critics say that his argument is an empirical one, and there is no persuasive evidence to indicate that changes in the current cost of non-monetary assets relate to future changes in cash inflow. It would be worthwhile to have students analyse each argument, pro and con, to determine how reasonable each is. Explain the difference between financial capital and physical capital. The financial capital concept is the traditional view. It keeps track of capital in terms of the dollar amount invested in the company. A return on financial capital means that there is an excess of the dollar amount of capital at the end compared with the dollar amount of capital at the beginning, excluding the effect of transactions with owners. In other words, there has been an increase in the value of money capital. The physical capital concept looks at capital in terms of its physical aspect, and then translates it into dollars. Usually, the physical aspect relates to the firm’s producing capacity. A return on physical capital results only if the physical productive capacity at the end of the period exceeds the physical productive capacity at the beginning of the period, excluding effects of transactions with owners. For example, if at the beginning of the year, X has the capability of producing 10 000 units of product, then profit occurs only after the current dollar amount of that capability at the end of the year is maintained. The capability to produce 10 000 units may be expressed in terms of plant and equipment. Only current cost (or replacement cost) is relevant for a physical capital view. The main difference between the two is the placement of price changes of non-monetary assets and long-term debt during the period. Under the financial capital view, these price changes are included in profit as holding gains/losses. Under the physical capital view, these are placed directly into shareholders’ equity as a capital maintenance adjustment. Explain Samuelson’s argument for changes in current cost as a capital maintenance adjustment. Samuelson argues first that the separation between holding activities and operating activities is not clear-cut; therefore, holding gains/losses should be excluded from income. Second, cost savings (holding gains) are an opportunity gain resulting from taking one course of action as opposed to another. But the alternative has already been forgone by the actual course of action taken. Once the asset is acquired, its cost is a sunk cost that cannot be avoided by any future action. The only choice is to sell or continue using the asset, but holding gains are not based on these choices. They are based on the course of action not taken and which no longer exists. Third, income relates to net cash flows, realised or expected. Cost savings (holding gains) are neither realised cash flows nor expected cash flows, but forgone cash flows. For these reasons, the physical view is more rational. According to MacNeal, why was the ‘going value’ theory, which assumes the firm is a going concern, formulated? During the 18th and 19th centuries, the practice arose whereby creditors required owners to submit a statement of net worth and a statement of earnings prior to extension of credit. To ensure their reliability, creditors insisted that the statements be prepared by an independent accountant. Business firms were mostly owned by one person or a small group of partners. The independent accountant had an obligation only to the owner and creditor. The accountant soon learned that a conservative posture satisfied both parties. Creditors were mainly interested in knowing that the net worth and income were at least as great as reported. Since the owner was knowledgeable of their business, they could make their own personal adjustments to determine a more correct picture of their financial status. Creditors came to view with great esteem those businesspersons who made a practice of understating their net worth and earnings, and accountants began to see it as their duty to prevent overstatements of net worth. However, when an understated asset was sold for a higher price, especially immediately after the issuance of financial statements, the accountant had to explain this discrepancy. To justify the valuation at original cost, the ‘going value’ theory was created. Is the theory realistic? Consider specific corporations, such as BHP, GMH, Bond Company. How long have these companies existed? What is the probability that they will still exist 50 years from now? Sterling argues that history shows that the lives of companies are finite. Explain the concept of ‘adaptive behaviour’ of the firm by Chambers, and how ‘financial position’ relates to it. Chambers sees the firm as an adaptive entity engaged in buying and selling goods and services. The notion of adaptive behaviour implies a continual attempt to adjust to the environment for the sake of survival. Through its managers, the firm is aware of the expectations of the interested parties associated with it (for example, owners, customers, employees, creditors). A condition of a firm’s existence is that expectations of all interested parties are satisfied, at least to a greater degree than the satisfaction perceived in alternative courses of action. Ultimately, they are interested in cash receipts to themselves due to their association with the firm. To continue in business, a firm must have the capability to engage in transactions. This capability is revealed by its financial position. This relates to the firm’s capability to go into the market with cash for the purpose of adapting itself to present conditions (to buy, sell, etc., whatever is necessary to survive). In the last analysis, the survival of the firm depends on the amount of cash it can command. Adaptive behaviour, therefore, calls for knowledge of the cash and current cash equivalents of the firm’s net assets at any particular time. Why is Chambers critical of the notion of ‘value in use’? Chambers says value in use is basically a calculated amount of a present expectation. It represents beliefs about the future, not facts about the present. It is personal to the owner or firm, and therefore it is subjective. On the other hand, market value is determined by the market, and therefore is objective. Market value represents a firm’s capability to buy things and pay its debts, as of a given date. Market value is seen to be necessary for an evaluation of the financial position of a firm. What is the basis of Sterling’s conclusion that exit price should be used for the valuation of items? Sterling used a simple model, a wheat trader in a perfect market with a stable price level, to determine which valuation method is superior to all others. Valuations are made because information is desired. The valuation method that provides the most information is the best method. The decision model of users reveals what information is relevant. The problem then is to select the appropriate decision model, and the way to determine this is to consider the problematical situation and the ability of a model to predict the consequences of alternative courses of action. For the wheat trader, Sterling posed three decision problems: 1. to enter and stay in the market 2. to hold either cash or wheat 3. to evaluate past decisions. Sterling’s analysis shows that one bit of information is relevant to all decisions: the present market (exit) price. Other pieces of information may be relevant to one or more decisions, but not to all. Even when the assumption of perfect competition and stable prices is relaxed, the present market (exit) price is superior to all other kinds of information. What is Chambers’s argument concerning the question of ‘additivity’? Is it fundamentally important to be able to add together ‘like’ valuations in the statement of financial position? One cannot add together the purchase price of an asset to an amount of cash if the total is to be meaningful. The total should relate to the firm’s ability to enter the market and engage in transactions. To be meaningful, the parts which make up the total should all be on the same basis — that is, refer to a single characteristic. Liabilities are expressed at their current cash equivalent — what the company must pay to settle the liabilities. To be comparable, assets should also be on the same basis — cash or current cash equivalent (exit price). Any amount whose basis is a future event or object is hypothetical, not objective, and cannot be added to a current cash amount. Present value and net realisable value are examples. If all items on the statement of financial position are on a current cash equivalent basis, then the financial condition of the firm and its ability to adapt to the environment can be better seen. Critics charge that the current cash equivalent of an asset is to be determined on the assumption of a gradual, orderly liquidation, and therefore something of the future is assumed. If anticipations cannot be avoided, then the current cash equivalent (exit price) violates the principle of exclusion of anticipatory calculations. Larson and Schattke argue that the cash equivalents of individual assets sold separately, and the same assets sold as a package, may be quite different. On this basis, they maintain that cash equivalents are themselves not additive. The logic of their argument needs to be considered. The price received on the sale may vary under different circumstances — does this fact preclude the additivity of the amounts? The results of the different indirect valuation methods are approximations of present value; they may be imperfect but they do refer to a common property — present value. Therefore, in this sense, the results of the different methods are additive. Or we can also say that the different methods are all attempts to approximate ‘true’ value. What are the criticisms of the profit concept under exit price accounting? Profit is a measure of how effective the performance of the company is in a given period. Performance has to do with the operations of a company. Exit price accounting puts emphasis on changes in the exit price of assets rather than operations. In most cases, the firm has little control over these price changes. Performance relates to the decisions made by management, which are formulated into plans. An evaluation of the expected plans against the actual outcome must be made; then the firm can decide whether to continue to use the assets for the purpose they were acquired. One concept of profit is to measure performance in terms of what was originally intended. Only after the plan that resulted in a given profit is evaluated is it then rational to decide whether the plan should be changed. Chambers’ concept of profit, it is argued, ignores this type of evaluation. The plan for each period is to maximise the current cash equivalent of the net assets for that period. Exit price accounting does not match costs with revenues to measure the performance of the firm. Assume that you favour exit price accounting. Give at least three reasons for your support. In support of exit price accounting: Exit prices are objective because they are market determined. If there is no market price, then the item is stated at zero. Current (exit) values reveal the financial condition of the firm, its ability to adapt to the environment — that is, to go into the market to buy and sell. All the values in the financial statements are additive — that is, they refer to one characteristic: cash or current cash equivalent. Current values are relevant to users for their decision models. There is no problem concerning the allocation of costs. Exit price accounting is based on events that actually happened — increases and decreases in values as determined in the market, as well as items purchased, sold or paid. Values in the financial statements are based on reality. Research studies show that in many cases current (exit) values are more objective than historical cost. In any event, current values are less subjective than most people believe. How can exit value accounting be used to assess the financial risk of a balance sheet. The difference between entry prices and exit prices indicates the liquidity (financial) risk of investing in an asset. If this difference is high then the operating risk of the asset should be lower as the value in use becomes the primary income recovery mechanism. Evaluate the argument that a mixed or piecemeal approach to standard setting is required in order to ‘better’ measure profit and financial position. If the firm has assets that are mixed — financial, operating, intangible — then valuation would require the utilisation of different concepts. This appears to be the way that standard setting bodies are headed. However, the conceptual nature of the system becomes more and more complex, and gives the impression that the output is a result of compromise rather than being driven by one conceptual general model. Explain how both exit price and current entry price accounting systems can be used to make decisions about retaining or selling assets. First, there are some assumptions made: Market prices are more relevant for financial decision making Additivity and reliability are important requirements for accounting measurement systems Conventional historic cost has many defects Accounting outputs and decision making is similar when markets are liquid When markets are very liquid and exit and entry prices are virtually the same they can be viewed as substitutes. However, when markets are not very liquid and prices deviate then these systems are compliments. They give information on value in use and liquidation value. The divergence in price can also be viewed as a measure of investment risk. See page 191 which also uses NPV. • If CCAc > EXAc; and CCAc > NPVc, then assets have value in current use (c) — maintain current operations. • If EXAc > CCAc; and CCAa > NPVa, then liquidate assets currently used (c) — continually adapt assets to other alternative investments (a). • If EXAc > CCAc; and CCAa < NPVa, then liquidate and discontinue all operations. Explain the concept of 'fair value' as defined in IAS 16/AASB 116 and outline benefits to financial statement users of continually revaluing assets to their current value. Students are encouraged to read this standard before answering the question. This standard relates to tangible assets - property, plant and equipment. First, fair value accounting has a commercial focus and is generally interpreted as current market price accounting or else some form of discounted present value. General guidance is to use a market price if markets are reliable or discounted present value if they are not or the asset/liability is not traded. However, what market price is appropriate is not always spelt out (should you use selling prices or buying prices?). Some guidance is provided but one may use a cost model or a revaluation model. For example, PPE could have a mixture of current cost, selling prices, and historical cost. The following questions relate to the apparent divergence in view between the standard setters and the private sector, with respect to the need to shift from historical cost to current value accounting: (a) In your opinion, why do standard setters moving away from traditional historical cost accounting? (b) Why do think that the business community and the public accounting firms are so strongly opposed to a move away from historical cost accounting? (c) Measurement principles are fundamental to any accounting system. Why does the Framework lack fully developed measurement concepts? The answer to these questions relies on the students’ perspectives. These questions can be used to facilitate debate on moving from historical cost to market/current-value approaches. (a) Standard setters (in Australia) do not share agreement on the move to market-value-based standards. However, the recent trend with SAC 5 and AAS 25 and AAS 26 indicates a growing acceptance by the AASB to alternatives to historical cost. This is largely a function of international trends and the increasing number of standards dealing with specific reporting and measurement issues. This is also consistent with the adoption of the conceptual framework, developed as a guide to appropriate reporting and measurement outcomes, which focuses on the most appropriate solution and which is outside the traditional constraints of the historical cost system. (b) Reasons for the opposition to move away from historical cost include: the potential risk associated with auditing reports based on alternative measurement systems costs associated with changing knowledge and audit techniques costs associated with current-value systems potential to reduce reported profits and in some cases asset values significant changes which may be required to reporting systems. (c) This is subjective and a matter of perspective. Students should discuss this from the perspective of each key group, including management, shareholders, the Australian Securities & Investments Commission and the accounting profession. Has the complexity of alternatives to historical cost approaches become an excuse for keeping the historical cost system? With the level of technology available, the complexity of alternative measurement and reporting models is not really an issue. The reasons could include: both academics and practitioners cannot agree on what is an appropriate model end users may not understand more complex information the overall costs of reporting may prohibit adoption of alternative models such models are still subject to the weaknesses of the historical cost system, particularly in terms of the ability of directors to pick and choose applications and the timing of disclosures. IAS 36AASB 136 requires the use of discounting techniques to assign a ‘value in use’ to assets. The discount rate used is required to take into account the risks associated with the asset for which the future cash flows are being estimated. Consider the implications of applying this in practice by determining how you would derive the present value of an asset in the transport industry and what risk premium you would apply? Detail how you would justify your approach to shareholders. Determining an asset-specific discount rate to apply to future cash flows introduces uncertainty and subjectivity to the valuation process. AASB136 specifies the discount rate as a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset to the extent that the risks are not already reflected in the cash flows. It is stated that this rate is estimated from the rate implicit in current market transactions for similar assets or from a weighted average cost of capital of a listed entity that has a single asset similar in terms of service potential and risks to the asset under review. The difficulty of determining an appropriate discount rate in practice is illustrated by looking at the transport industry where risk is affected by a wide range of factors including the volatility of fuel prices and the diversity of competition existing in the industry. Where an implicit market rate cannot be determined, a surrogate rate would need to be determined and justified to shareholders on the basis of relevance and reliability. Explain the underlying approach to intangibles under IAS 38AASB 138. Is the approach consistent with the matching principle? Is the splitting of the research and development components of expenditure and the different accounting treatments justified given that the nature of the expenditure is the same? IAS 38/AASB 138 requires an intangible asset to be recognised only if the future economic benefits are probable and can be reliably measured. This complies with the matching principle by ensuring that only those expenses that are probable and can be reliably measured are matched against revenues of the period. The standard also requires that all research and development costs be expensed as incurred, except for those development costs where certain criteria can be met with regard to technical feasibility, intention to complete, saleability etc. The standard therefore compartmentalises the treatment of research costs (which must invariably be expensed) and development costs (which may only be capitalised under certain conditions). The need to distinguish between research costs and development costs is therefore crucial to the correct matching of expenses with revenues, regardless of the similar nature of these types of expenditure. 25. If you were the auditor of the company in question 23, what evidence would you seek to support your opinion about the fair presentation of the asset? ASA 540 and 545 (ISA540) require the auditor to consider the risk of material misstatement with respect to fair value measurements and disclosures. The auditor should evaluate whether the assumptions of management are reasonable the fair value measurement was determined using an appropriate model, if applicable; and management used relevant information that was reasonably available at the time. This means that the auditor must specifically consider how management identified and considered the risks in relation to this asset, the process used to calculate the cash flows, and the assumptions and information which affected the choice of the discount rate. If all of these are considered reasonable, the auditor would normally accept the valuation. Note that it is not sufficient to recalculate the valuation. The auditor has to test management’s processes for identifying information which would impact on the valuation. PROBLEMS Problem 6.1 (Very difficult - this problem should only be attempted by students undertaking advanced studies) Sharp Ltd has traditionally maintained its accounting system on an historical cost basis. However, because of continuing inflation, it has decided to prepare its financial reports on a current value basis. Its historical cost balance sheet as at 30 June 2011 (year-end) is shown below. The company had its assets valued at their current buying prices on 30 June 2011, with the following results: Transactions for 2011-12 consisted of: The following information should also be taken into account. The new motor vehicles and equipment are subject to the same straight-line depreciation rates as the existing ones. Income tax to be provided for is $75 850. Dividends of 15% on the shares (including the new issue) are to be provided for. The historical cost of 30 June inventories is $236 000. The 30 June buying prices of equivalent physical assets owned by the company are: The 31 December buying price of 1 July inventories was $204 000, while the 31 December buying price of 30 June inventories was $220 000. Overall, the cost of original inventory increased by 35% during 2011-12 and the CPI increased from 100 to 110. Required: A. Present a set of financial statements in accordance with the requirements of SAP 1 for the 2011-12 reporting period. B. Show all calculations and appropriate general journal and ledger entries. C. Explain why you calculated the adjustments for backlog depreciation and the gain/loss on monetary items in the manner which you chose. Sharp Ltd financial statements SHARP LTD Income Statement for the year ended 30 June 2012 Sales $2 330 000 Less Cost of sales Opening Inventory $ 204 000 Purchases 1 490 000 1 694 000 Closing Inventory 220 000 Cost of sales 1 474 000 Gross Profit $ 856 000 Less Operating Expenses 227 000 Wages 461 000 Depreciation of Plant 31 200 Depreciation of Building 8 200 Depreciation of Vehicles 24 500 Interest 25 000 776 900 Current Cost Operating Profit before Tax $ 79 100 Add Gain on Holding Monetary Items 2 018 Current Cost Entity Profit $ 81 118 Less Tax 75 850 Current Cost Entity Profit after Tax $ 0 5 268 Less Dividend 6 000 Entity Profit for 2011-12 ($054 732) Add Retained Profit from 2010-11 9 800 RETAINED PROFIT CARRIED FORWARD ($044 932) A proprietary result may also be calculated as follows: Current cost operating (entity) profit after tax $ 5 268 Add gain on loan capital 25 000 Current cost proprietary profit after tax $30 268 SHARP LTD Statement of Financial Position as at 30 June 2012 Current Assets Current Liabilities Bank $ 58 000 Accounts Payable $ 156 000 Accounts Receivable 183 000 Tax Payable 75 850 Inventories 284 000 Dividend Payable 60 000 $ 525 000 $ 291 850 Long-term Assets Long-term Liabilities Motor Vehicles $160 000 Debentures 250 000 Less Accum. Depn 78 000 82 000 Equipment 369 000 Shareholders’ equity Less Accum. Depn 150 750 218 250 Paid-up Capital 400 000 Share Premium Reserve 70 000 Building 420 000 Current Cost Reserve 545 932 Less Accum. Depn 92 400 327 600 General Reserve 40 000 Land 400 000 Retained Earnings (44 932) $1 027 850 $1 011 000 TOTAL $1 552 850 TOTAL $1 552 850 Journal Entries June 30 Inventories (172 000 – 182 000) Dr 10 000 2011 Motor Vehicles (85 000 – 115 000) Dr 30 000 Equipment (188 000 – 260 000) Dr 72 000 Buildings (220 000 – 400 000) Dr 180 000 Land (160 000 – 380 000) Dr 220 000 Accum. Depreciation Motor Vehicles Cr 12 000 Accum. Depreciation Equipment Cr 28 800 Accum. Depreciation Buildings Cr 36 000 Goodwill Cr 40 000 Current Cost Reserve Cr 395 200 Initial revaluation of non-monetary assets at 30 June 2011 buying prices. Jun 2012 Inventories (182 000 – 204 000) Dr 22 000 Current Cost Reserve Cr 22 000 Revaluation of July 2011 inventories at MOY Dec 2011 prices. June2012 Inventories (220 000 – 284 000) Dr 64 000 Current Cost Reserve Cr 64 000 Valuation of June 2012 inventories at Dec 2011 prices. * These inventory adjustments are to centre the current costs of inventory at the middle of the reporting period. Motor Vehicles (145 000 – 160 000) Dr 15 000 Equipment (330 000 – 369 000) Dr 39 000 Buildings (400 000 – 420 000) Dr 20 000 Land (380 000 – 400 000) Dr 20 000 Current Cost Reserve Cr 94 000 Revaluation of non-monetary assets at June 2012 prices. Depreciation of Motor Vehicles Dr 24 500 Accum. Depreciation of Motor Vehicles Cr 24 500 Depreciation at 20% on Dec value of Motor Vehicles Depreciation of Plant Dr 31 200 Accum. Depreciation of Plant Cr 31 200 Depreciation at 10% on December value of Plant = 27 700 + 6 months depreciation on new plant = 3 500 31 200 Depreciation of Buildings Dr 8200 Accum. Depreciation of Buildings Cr 8200 Depreciation at 2% on Dec value of buildings Current Cost Reserve Dr 7500 Accum. Depreciation of Motor Vehicles Cr 7500 Backlog depreciation charged on motor vehicles to cover shortfall on previous depreciation costs. Calculation: 3 yrs depreciation at 20% on cost 130 000 = 78 000 Less: amount charged in Accum. Deprec. 70 500 7 500 NOTE: December 2012 new cost excludes new vehicles. Current Cost Reserve Dr 15 550 Accum. Depreciation of Equipment Cr 15 550 Backlog depreciation charged on Plant to cover shortfall over past 4 years and December–June 2012. Calculation: 5 yrs depreciation at 10% on cost of existing plant 294 000 = 147 000 6 mths depreciation at 10% on cost of new plant 75 000 = 3 750 150 750 Less: Amount charged in Accum. depreciation 135 200 Backlog depreciation 15 550 Current Cost Reserve Dr 4 200 Accum. Depreciation of Buildings Cr 4 200 Backlog depreciation charged on Buildings to cover shortfall over past 10 years and December–June. Calculation: 11 yrs depreciation at 2% cost 420 000 92 400 Less: Amount charged in Accum. Deprec. 88 200 Backlog depreciation 4 200 Gain on monetary items: (a) Loss of monetary assets Bank = $ 5 200 Accounts Receivable = $51 625 $56 825 (b) Gain on monetary liabilities (excluding long term) Accounts Payable = $46 550 Other Payables = $12 293 (assume not related to the purchase of inventories) Gain on monetary liabilities $58 843 Net gain on monetary items $ 2 018 Journal Entries Current Cost Reserve Dr 2018 Statement of financial position Cr 2018 Current Cost Reserve Ledger Account Debit Credit June 2011 Initial adjustments for Current Cost 395 200 June 2012 Inventory (BOY) 22 000 June 2012 Inventory (EOY) 64 000 June 2012 Adjustments Current Cost 94 000 June 2012 Depreciation Motor Vehicles (backlog) 7 500 June 2012 Depreciation Plant (backlog) 15 550 June 2012 Depreciation Buildings 4 200 June 2012 Net monetary items 2 018 $545 932 Problem 6.2 (moderate) Company Y had the following transactions in Year 2. The perpetual FIFO inventory system is used. 1. Purchased on credit, 4000 units of inventory at $5 each. 2. Sold 3000 units for $12 each on credit. Replacement cost at this time is $7 each. There were 1000 units in beginning inventory at $4 each, which represents both current and historical cost. The exit price of the 1000 units is $12 each. 3. At year-end, the building’s current value is $150 000. The gross historical cost was $100 000. The building is 2 years old at year-end and is depreciated 10% per year. The current value at the beginning of the current year was $125 000. 4. At year-end, the value of the land is $50 000. The historical cost was $30 000 and the current value was also $30 000 at the beginning of the year. 5. At year-end, the market price of the debentures, which were issued by the company at the beginning of the year, is $40 168. The debentures were sold at par for $44 000 at the rate of 8%. The current rate of interest on 31 December is 10% and the average for the year was 9%. The remaining life of the debentures on 31 December is 6 years. 6. Accounts receivable of $20 000 has an exit price at year-end of $19 000. The other receivables were collected during the year. 7. At year-end, the selling price of the inventory is increased to $14 each. 8. On 31 December, operating expenses of $12 000 are paid, including interest of $3520. Required: Record the transactions as journal entries under the following methods: (a) conventional accounting (historical cost) (b) exit price accounting. Conventional Exit Price 1. Inventory $20 000 $20 000 Accounts Payable $20 000 $20 000 2. (a) Accounts Receivable 36 000 36 000 Sales Revenue 36 000 36 000 (b) Price Change Adjustment (see below) 8 000 Inventory ($8 1000) 8 000 (c) Cost of sales 14 000 14 000 Inventory 14 000 14 000 3. Building 25 000 Price Change Adjustment 25 000 Depreciation Expense 10 000 0 Accumulated Depreciation 10 000 0 4. Land 20 000 Price Change Adjustment 20 000 5. Discount on Bonds Payable 3 832 Price Change Adjustment 3 832 6. Price Change Adjustment 1 000 Accounts Receivable 1 000 Cash (amount not specified) Accounts Receivable 7. Inventory [($14 – $5) 2000] 18 000 Price Change Adjustment 18 000 8. Operating Expenses 8 480 8 480 Interest Expense 3 520 3 520 Cash 12 000 12 000 For the exit price alternative, the books are assumed to be kept on an exit price basis for the previous year. It is assumed that an adjusting entry at the end of the previous year for inventory was made to record the 1000 units at the exit price of $12 each. Since the cost was $4, the difference of $8 per unit, or $8000 was recorded. The entry here (2(b)) is to reverse the previously recorded adjusting entry. The reversing entry should be made at the beginning of the period. Replacement cost in this problem is irrelevant. Problem 6.3 (moderate) Consider the balance sheet of Circle Ltd on an exit price basis at the beginning of the year: The building was purchased for $90 000 and the shares and debentures were issued when the general price index was 90 on 1 January Year 9. The beginning inventory has an historical cost of $5 each. A FIFO basis is used. The general price index is 100 at the beginning of the year. The following events are mentioned in chronological order for Year 10. 1. Purchased on account 5000 units of inventory at $6 each. The exit price is $15 each. The general price index is 105. 2. Sold on account 5000 units for $15 each. The general price index is 105. 3. At year-end, the building’s current value is $200 000 and the value of the land is $20 000. The sales price of the inventory is increased to $19 each. The market price of the share investment is $25 000. The market price of the debentures is $45 032 on 31 December. The current rate of interest is 12%. The average market rate of interest was 11% for the year. The remaining life of the debentures is 8 years on 31 December. 4. On 31 December, half the land is sold for $10 000. 5. On 31 December, operating expenses of $15 000 are paid. Interest of $5000, which is not included in the $15 000, is also paid. 6. The general price index at the end of the year is 120. The average for the year is 108. Required: Prepare journal entries to record the above events, as well as the statement of financial performance for Year 10 and statement of financial position as at 31 December Year 10, under the exit price method. 1. Inventory (5000 $6) $30 000 Accounts Payable $30 000 2. (a) Accounts Receivable 75 000 Sales Revenue 75 000 (b) Price Change Adjustment 10 000 Inventory (1000 $10) 10 000 (c) Cost of sales (1000 $5) + (4000 $6) 29 000 Inventory 29 000 3. Inventory (1000 ($19 – $6)) 13 000 Building ($200 000 – $90 000) 110 000 Land ($20 000 – $10 000) 10 000 Investment in Y Stock 5 000 Discount on Bonds Payable 4 968 Price Change Adjustment 142 968 4. Cash 10 000 Land 10 000 5. Operating Expenses 15 000 Interest Expense 5 000 Cash 20 000 6. Purchasing Power Adjustment 17 000 Capital Maintenance 16 667 Retained Earnings 333 January 1 December 31 Adjustment Year 10 Year 10 Capital Stock $75 000 120/100 = $ 90 000 $15 000 Capital Maintenance Adjustment 8 333 120/100 = 10 000 1 667 Retained Earnings 1 667 120/100 = 2 000 333 Stockholders’ Equity $85 000 $102 000 $17 000 Circle Ltd Statement of Financial Position as at 31 December Year 10 Cash $ 10 000 Accounts Payable $ 50 000 Accounts Receivable 75 000 Bonds Payable 50 000 Inventory 19 000 Less: Discount 4 968 45 032 Investment in Y 25 000 Ordinary Capital 75 000 Building 200 000 Capital Maintenance Adjustment 25 000 Land 10 000 Retained Earnings 143 968 TOTAL $339 000 $339 000 Statement of Retained Earnings as at December 31 Year 10 Beginning balance $ 1 667 Add net income 141 968 $143 635 Add purchasing power adjustment 333 Ending balance $143 968 Circle Ltd Income Statement for the year ended 31 December Year 10 Sales Revenue $75 000 Cost of sales: Beginning Inventory (at historical cost) $ 5 000 Purchases 30 000 Available for Sale $35 000 Ending Inventory (at historical cost) 6 000 29 000 Gross Profit (at historical cost) $46 000 Price Change Adjustment — beginning inventory (10 000) Price Change Adjustment — ending inventory 13 000 Gross Profit (on exit price basis) $49 000 Sale of land $10 000 Less cost of land 5 000 5 000 $54 000 Changes in value: Investment in Y 5 000 Building 110 000 Land 5 000 Bond Payable 4 968 124 968 $178 968 Less: Operating expenses paid 15 000 Interest paid 5 000 20 000 $158 968 Less Purchasing price adjustment 17 000 Net income $141 968 The format above is recommended by Chambers. Because of criticism that the exit price income statement does not concentrate on operations, he has attempted to show the gross profit on an historical cost basis first, before adjusting to an exit price basis. This is the reason for journal entry 2(b). There are no accruals and deferrals of expenses. CASE STUDIES Case Study 6.1 Fair value or false accounting 1. How are the assets and liabilities measured under IAS 39? They are to be stated at their fair value defined as the amount for which an asset could be exchanged or a liability settled between knowledgeable willing parties at arm’s length. In an active market financial instruments would be measured at their exchange price (buying and selling prices having small margins). If the market is not active, then they are valued at the discounted present value or via an option pricing model. What impact according to the author, will fair value accounting have on the balance sheet and income statement? Any gain or loss is recognised in the income statement and the financial instrument is valued at fair value in the balance sheet. What measurement requirement of historic cost accounting is violated? The measurement requirement is that profit is only measured when an external transaction is realised. Departure from the realisation principle is covered in the criticism section. The problems are: liquidation vs. going concern concept recognition before confirmation by sale definition of profit and meaningful profit problems of obtaining selling prices value in use concept of an asset. Raymon pays particular attention to the concept of realisation. Comments such as ‘the relevance of a value change being a measure of financial performance is the result of a fallacy deeply entrenched in the conventional academic wisdom, and ‘the fundamental mistake is to report value change as a gain or loss’; summarise his position. Is a change in asset value an increase in wealth or income? Are they the same? Of course this is a debate that has occurred amongst financial accounting theorists for nearly a century. Rayman uses the return on investment argument and no adaptive behaviour to support his case. That is if interest rates fall and investors do not realise the capital gain, then they are no better off. This is true as the rate of return has dropped to 5.5% from 8% and no realisation has occurred. However, the opportunity is there to realise the investment and adapt the investment to other classes of assets which will benefit from a fall in interest rates (e.g. stock market, housing). Is unrealised income an increase in wealth or income or not is answered by economists who define increases in wealth as income. Not all accountants agree. What does the general public think? Using the illustration of the recent housing boom can provide a case study. Certainly most people saw the increased prices as an increase in wealth and either realised the value or else used their greater equity to borrow and consume, thus fuelling recent consumer spending. Other case studies can be used by the instructor in this debate. What do you think fundamental value in accounting should be? Refer to the debate regarding value in use and value in exchange in this chapter when answering this question. A difficult question. See the answer to case study 1, question 5 above which addresses the question of the fundamental value of assets and the above section in the text. If the firm has assets that are mixed — financial, operating, intangible — then valuation would require the utilisation of different fundamental value concepts. This appears to be the way that standard setting bodies are headed. However, the problem is that the conceptual nature of the system becomes more and more complex and the solution more vague. Moreover, any standard that attempts to address the problem gives the impression that the output is a result of compromise rather than being driven by one conceptual general model. Moreover, users must be sophisticated enough to understand that different components of fundamental value and because the solution may be a mixed system, the additive principle may be questioned. Case Study 6.2 The following article discusses the impact of exchange rates on earnings. Discuss the implications for Domino’s shareholders of the upgrade in reported earnings due to the weaker Australian dollar for the 2009 year, given that the operational margins were in line with analysts’ expectations. The main concern of Domino’s shareholders would be the amount of earnings available for dividend distribution. While the weaker Australian dollar may have provided foreign exchange benefits from the European side of Domino’s business, these are not predicted to continue as the Australian dollar strengthens. Companies are exposed to exchange rate variations and risk by dealing across international borders and this poses a constant risk to earnings and therefore dividend levels. Many companies engage in hedging activities to counter the effects of such exchange variation risks. The question then is how to handle exchange rate risk and exchange rate hedges in accounting. These are issues attracting considerable academic research. 2. How concerned should shareholders be with changes (increases or decreases) in earnings caused mainly by fluctuations in exchange rates? As above, shareholders should mainly be concerned with the effect on dividend levels and on cash flows. However, shareholders should recognise that the change in earnings is some function of a change in the exchange rate. It does not change the underlying value of the business or impact on operating assets if there is no substantial international funds flow or if there is full hedging. It therefore shouldn’t result in any shift in the value of the shares of the company. However, if there is no hedging and considerable revenue or costs are sourced or expended in other countries then there will be an impact. Again to complicate matters it also depends on the natural hedge that the company has (assets and cash in the foreign country). 3. How will Domino’s forecast earnings be affected by the relatively significant increase in the strength of the Australian dollar since the end of the 2009 financial year? Domino’s forecast earnings will be adversely impacted downwards by the strengthening Australian dollar. Analysts have also predicted that the tax benefits are not recurring (they are one-off) and this will also result in a lower forecast profit. Students might look up the current performance and its correlation with the now high exchange rate. Case Study 6.3 This article discusses the impairment of assets What is the impact of the impairment charges on the income statement and on the statement of financial position of the company? The effect of the impairment charges is a reduction in the earnings of the company and on the carrying value of its assets. Profit reported in the income statement will decrease, and the assets reported in the statement of financial position will decrease. 2. Should shareholders be concerned about the asset impairments on the Hong Kong and United Kingdom operations given that the expected improvement was largely restricted to ‘contract positions’? Explain your answer. Yes — for those reasons outlined above. Shareholders should be concerned with the reduction in the value of assets and the consequent reduction in earnings. The effect of continual asset write-downs is to reduce the net assets and the net value of the company which will eventually flow through to firm and share valuation. Research also indicates that impairments usually follow a decline in share price – they do not lead the share price drop. 3. What is meant by the statement that ‘a net loss … would make a return to shareholders unviable’? Companies generally make returns to shareholders (dividend payments) only if they are generating profits. A dividend to shareholders when a company has incurred a loss or in the face of insufficient cash flows is not sustainable in the long term. While this approach may temporarily appease/impress shareholders, the company needs to be generating sufficient earnings and cash from operations to support the payment of dividends in the long term. Case Study 6.4 This article considers the costs attaching to business divisions. Contrast ‘displacement’ cost with ‘embodied’ cost. ‘Displacement’ cost denotes what has been given up or sacrificed and is synonymous with opportunity cost. On the other hand ‘embodied’ cost (or absorption cost) relates to the factors of production and has to do with what has been outlaid on inputs rather than what has been foregone. 2. Identify the potential problems associated with allocating costs to various products and services. The allocation of costs to various products and services relies on matching which requires the accountant to determine the matching “driver” (units of production, square metres of space used, number of personell etc). Costs of purchase, conversion and other costs must be measured and then apportioned on such a selected basis to particular products or services. The measurement of costs and the sometimes subjective nature of the allocation process may present a problem in determining the amount of costs to be apportioned to particular products or services. 3. Comment on the impact on Bradken’s revenues in the second half of the year, from customers ‘destocking’. Shareholders should be concerned with the underlying value of the company — which may change as a result of the ‘destocking’. Management will need to respond to destocking and cancellation of orders by customers by reducing its costs in line with the declining demand levels. 4. Is the impact you identified in question (2) likely to have an influence on the amount of product and/or services cost that can be separated and categorised into new groups? Explain your answer. As a result of challenging trading conditions the company may need to change its products/services mix. This may include adding new products/services and removing others. Some products/services may be altered and merged with others creating the need for a revision of the costs allocated to products/services. Matching is also a dynamic process that must constantly be adjusted to reflect changing business operations. Solution Manual for Accounting Theory Jayne Godfrey, Allan Hodgson, Ann Tarca, Jane Hamilton, Scott Holmes 9780470818152
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