ASSIGNMENT TWO – 12.5%
Faresh Fazlin Nisha
S11107463
QUESTION ONE
General purpose financial reports acts as a mode of communicating relevant and
reliable information of a reporting entity to wide range of users both in public
and private sector and are governed by relevant financial accounting standards.
Thus discussion will be based on the classification and disclosure of certain
items in the general purpose financial reports and will further elaborate on
accounting and non-accounting challenges faced as a result of disclosures.
To begin with, Carbon trading permits are form of emission trading rights
issued by the corporate body to businesses (emitters) by setting a quantitative
limit on the amount of emissions in order to reduce the amount of pollution
done by industries. Both allowances and credits are used as incentives to reduce
emissions by assigning a monetary value to pollution as a market based
approach. In 1997 the adoption of Kyoto Protocol lead to an increase in the
emissions trading and the cap and trade system started in 2005 by the European
Union’s Emissions Trading Scheme (Laura, 2012). This system gives the rise to
the question how should Carbon Trading permits be recognized in GPFR?
Different ways of obtaining these permits creates different views of disclosure.
If rights are bought at a fixed price through market trading or if it is issued free
of charge by government then this will be disclosed as an Intangible Asset
under IAS 138 since it is without a physical substance and becomes tradable
instrument which will be controlled, future economic benefits will flow in if
sold or remittance received.
On the contrary such permits are good in terms of allowances classified as
assets but which past event gives rise to controlling these allowances and how is
it measured whereas the entity is not better off since additional charges are
incurred as to before industry polluted freely however current situation limits
that and any extra pollutions will be deemed as accrued expenses to the industry
creating an debt event which is termed as a Contingent Liability under IAS 37
as it becomes a present obligation, legal enforceability and requirement to
settlement of a debt (FORNARO, 2009). The indifferent view of classification
of allowances leads to certain challenges. Firstly how should emission
allowances be valued? Fair value, historical or revaluation method. Usually
allowances bought are recorded at cost however if received from government
then to be at fair value and both are subject to periodic impairment testing.
Since it is unclear on the classification of intangible assets and liabilities it leads
measurement problems on the financial statements in terms of recognition of
deferred expenses or accrued expenses to accommodate changes in income
statements since users relay on the accuracy of financial statements. Also it
raises issues of the timing of recognition whether on issue or delivery of
emissions (Laura, 2012). Non accounting problem of pollution which is curbed
by allowances on the other hand pollution has spill over effects such as affects
ecosystem, leads to extinction of certain species and mainly affects marine lives
due to spillage of industrial waste and human health is also affected widely e.g.
deforestation leads to soil erosion’s and 30% of forest has be eliminated and
usage of chemicals in sugar and fish industries pollutes water supply in Fiji.
Thus it can be argued on that trading permits doesn’t faithfully present
economic reality of these schemes in environment reporting.
Furthermore, Intellectual property developed in a business is referred to as
creations of the mind, the ideas and concepts for which a single owner
(monopoly) exists as per the law and was designed to protect the ownership of
the fictional and arty work which includes copyright, patents, trademarks,
artistic works, literature, designs, music, models, etc. The most widely used are
patents for a specific design, copyrights for written work and trademark for a
symbol or name e.g. Apple, McDonalds (Investopedia, 2016). Since intellectual
property promotes progress of an entity in financial and economic terms thus it
is important for it to be recognized and classified in financial statement. Under
IAS/ AASB 38 Intellectual property is classified as Intangible Assets as it is
identifiable, the entity has control over the asset which will generate future
economic benefits and can be measured reliably. However in terms of
disclosure IAS 38 differentiates between intangible assets that are formed in
business and of which are purchased from outside. Intellectual property
consisting of patents, copyrights and trademarks have cost associated and are
capitalized as assets in balance sheet and are to be amortized over its useful life
, hence during end of financial year entities should disclose amortization
expenses so financial reports present a true position of the business.
Moreover, the current aim of accounting standards is moving towards global
harmonization of financial reports in presenting a true and fair value for
