perfect world, investors, board members

In a perfect world, investors, board members, and executives would have full confidence in companies’ financial statements. They could rely on the numbers to make intelligent estimates of the magnitude, timing, and uncertainty of future cash flows and to judge whether the resulting estimate of value was fairly represented in the current stock price. And they could make wise decisions about whether to invest in or acquire a company, thus promoting the efficient allocation of capital.

Unfortunately, that’s not what happens in the real world, for several reasons. First, corporate financial statements necessarily depend on estimates and judgment calls that can be widely off the mark, even when made in good faith…..” (Sherman and Young, 2106, p.1).

The above clearly shows how crucial it is for accountants to apply their professional judgment in arriving to the most reasonable/appropriate accounting choices/estimates which can be quite a challenging process. There is not necessarily one correct answer in most cases and therefore accountants need to be vigilant while dealing with accounting information.

As a student intern and future accountant, you have recently joined the accounting department of an ASX listed company. As a future accountant, and to demonstrate your understanding of the application of professional judgment, you have been asked to look into the company’s annual report, undertake required research on the company’s choices relating to the accounting estimates and policies on property, plant and equipment (PPE), and prepare a report for presentation to other accounting team members and the audit committee.

To complete this assignment, you will need to select a suitable company yourself that meets the following criteria:

  • The company must be a constituent of the S&P/ASX 300 index (www.asx300list.com);
  • The company must publish audited annual financial reports in English, fully complying with IFRS or AASB standards and
  • The company must have a 30 June year end.

Your report must address each of the following:

a) Provide a summary of the criteria for selecting and changing accounting policies according to AASB 108 (you may refer to Paragraphs 7-14) and discuss how professional judgment can impact accounting policies and estimates.

b) Identify and provide a detailed explanation of the accounting policies and the estimates your company uses to measure PPE for the year ended 30 June 2019.

c) Based on your findings in parts a and b, critically evaluate whether the professional judgment applied in accounting estimates and policies of PPE has been reasonable/appropriate. You may refer to relevant information sources to answer the above question (e.g. compare to the norms in the industry).

d) Based on your findings in part c, recommend actions (if any) for improvement in the accounting estimates and policies in PPE for your company.

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