As the company’s auditor, I would need to make the decision on which accounting policies to use to help our company, Growcorp Ltd so that we can either have a profit or reduce our losses. There was a certain event during the year 2014 and it caused our warehouse to be destroyed by a fire.
After the fire, we had a problem related to the crops’ revenue and cost where do we include it in the 2013 or 2014 fiscal year? So, we need to fix this problem with the help of an appropriate accounting policy that can benefit us in our situation. However, before making this decision I would need to take into consideration of three issues as it could potentially change how we would recognize it and any similar situations in the future. The three issues are:
1. Identify the IFRS accounting principles being argued BEFORE the fire occurred.
2. Ignoring the fire, which accounting and reporting policies are the best supported by the facts provided? Explain Why
3. What effect, if any, does the fire have on the accounting and reporting policies in issues and on your recommendations?
Issue 1
To determine what IFRS accounting principles are involved before the fire, we need to define our “crops” as it can be either an inventory or “biological assets” under IAS 2 and IAS 41. If we label it under IAS 2 then we cannot put it under IAS 41 or vice versa so depending how we recognize it will also determine what its cost is in the financial statements.
If we were to recognize it under IAS 2 then the way report its cost will be different depending on the situation. Not all cost are related to the product and be put together as cost of inventory. For example, warehousing cost can be put together as cost of inventory depends if we bring our crops into the warehouse and package them before it can be made ready for sale then it will be considered cost of inventory.
If we were to recognize it under IAS 41, it would be considered as “biological assets” assuming these crops are by definition or similar to, living plants. These would need to be measured on initial recognition and report at fair value less costs to sell. Any changes in the fair value would be either net earnings or loss for the period it happens.
So, depending how we define the crops will affect the IFRS accounting principles involved. The principles are:
Recognition of costs to the crops
Measurement of them
How we report them in our financial statements
The revenue recognition is also one of the IFRS accounting principles that are involved because we need to determine whether the crops can be reported as revenue or not prior and after the fire.
Issue 2
If we were to ignore the fire, there are accounting and reporting policies involved on those crops but before we discuss in detail, we need to make some assumptions. The assumptions are:
They are considered as inventory under IAS 2.
Our company are using the earning approach to recognize our revenue. Under earning approach, there are four criteria that must be met in order revenue to be recognized:
1. The risks and rewards are transferred and/or the earnings process is substantially complete and measurability is reasonably assured.
2. The vendor has no continuing involvement in, nor effective control over, the goods sold
3. Costs and revenues can be measured reliably; and
4. Collectability is reasonable assured.
The first criteria are met as Growcorp Ltd. had a point of delivery for their first shipment of crops and it was expected to be made during January 2014. The firm had intention to transfer the risks and rewards of Ownership to the large retail food chain but due to a mishap, they couldn’t deliver it. The same can be said about the earning process as we made an effort to sell the goods so that it can add value to the firm. Moreover, the measurability is reasonably assured as the accounts were being finalized so the price was determinable and getting approved which also fulfills this
