Essex Ltd is a large Australian manufacturing company that is listed on both the Australian Securities Exchange (ASX) and the New York Stock Exchange (NYSE). It is March 2021 and the senior management of Essex Ltd are currently evaluating a range of investment options in relation to Orion Ltd. Any investment undertaken in Orion Ltd would occur on 1 July 2021.
During the year ending 30 June 2020, Essex Ltd made a $20,000 loan to Orion Ltd. The loan term is five years, and the interest rate is 4%.
The senior management of Essex Ltd hired a financial analyst to evaluate Orion Ltd. The financial analyst has made the following projections:
- Orion Ltd is projected to have assets of $5 million and liabilities of $3 million. The financial analyst believes that many of Orion Ltd’s assets are carried at amounts well below their fair values.
- Total comprehensive income for the year ending 30 June 2022 is projected to be $300,000. Of this amount, $250,000 would be net profit whilst $50,000 would be other comprehensive income.
- During the year ending 30 June 2022, Essex Ltd is projected to purchase approximately $100,000 of inventory from Orion Ltd and sell $20,000 of non-current assets to Orion Ltd. In addition, Orion Ltd is expected to pay a dividend of 5 cents per share.
The investment options are as follows:
- Option 1: purchase 40% of the issued shares of Orion Ltd on 1 July 2021. This would require the purchase of 120,000 shares at a projected price of $15 each.
- Option 2: purchase 80% of the issued shares of Orion Ltd on 1 July 2021. This would require the purchase of 240,000 shares at a projected price of $15 each.
The management of Essex Ltd has asked you, as one of the company’s accountants, to prepare a memorandum to be distributed to the company’s shareholders that explains the accounting requirements for each of these two investment options. As part of your answer, you should explain how the profit of Orion Ltd would be recognised by Essex Ltd.
AASB 16 Leases is an important standard for accountants to understand because it sets out the principles for the recognition, measurement, presentation, and disclosure of leases. This standard is the international equivalent of IFRS 16 Leases.
(a) Use an internet search engine (for example, Google) to find two resources that, in your opinion, would be useful to you in gaining an understanding of AASB/IFRS 16 Leases. Your resources should be as follows:
You do not need to include the document or video with your answer, but you do need to include: name of document/video, author, date, and the link to the document/video.
You should not include AASB/IFRS 16 Leases as one of your documents. In addition, you should not include any document that merely summarises AASB/IFRS 16 Leases. (2 marks)
(b) Explain why these two resources would be useful to you in gaining an understanding of AASB/IFRS 16 Leases. Your discussion should consider the following:
- Are the resources authoritative and credible? Consider who the author is.
- Are the resources up to date?
- What makes the resources useful? For example, comprehensive coverage of the topic, clear and simple explanations, useful diagrams, and examples, etc.) (2 marks)
(c) Identify two other activities that you would use to gain an understanding of AASB/IFRS 16 Leases in addition to using resources found from an internet search. (1 mark)
Content selection Relevance. Content is relevant when it contributes to fulfilling the purpose of the writing task. The relevance of content is also affected by the intended audience (for example, their prior knowledge about a topic) and the scope of the writing task (for example, limitations such as word length). The document should:
- Include all relevant content: no relevant content should be omitted, and
- Not include any irrelevant content.
Sources. The content should be adequately supported by appropriate (authoritative, relevant and credible) sources. Typical sources used include references to textbooks, journal articles, and accounting standards.
Organisation The content should be well-organised which requires both of the following:
- An organisational pattern that is clear, logical, and appropriate for the writing task. Organisational pattern refers to the systematic arrangement (sequencing) of the writing.
- Good use of structuring elements. The structuring elements are the parts of a writing task that form the basis for an overall pattern and include: the introduction, use of sections, headings and sub-headings, transitions, and conclusion.
Development The writing should demonstrate competence in the subject and the ability to articulate knowledge and communicate effectively. This requires consideration of the purpose of the writing task and the intended audience.
Development refers to the ways the writing explores and illustrates the topic. It may include one or more of the following: research, synthesis, analysis, critique, identification, explanation, evaluation, description, discussion, examination, justification, argument, and exploration. Level of detail. The level of detail (depth) should be appropriate for the writing task.
Accuracy. The content should be accurate: complete and free from error. Errors result from mistakes (for example, misstating a definition, using of out-of-date material, and incorrectly interpreting and/or applying an accounting requirement) or omissions (for example, omitting part of a definition or part of an accounting requirement).