Friday, December 3, 2010

Accounting & Auditing Sample for Master's Level

Title: The Directors of Fast Track PLC are anxious to maintain their share price, as a large US corporation is about to attempt a hostile takeover. As the company has no reserves, it will be unable to pay a dividend this year if it does not make a significant profit. Since it has already failed to pay an interim dividend, the share price has already fallen significantly and may plummet if there is no final dividend either.

Companies Act 1985 and IAS

[Student Name]

[Course Title]



Companies Act 1985 and IAS

An audit of the financial statements and records of Fast Track PLC reveal that the directors have made adjustments in the accounting records of the company which are not permissible or are in conflict with the accounting standards and company law. These adjustments have been made in the accounting records to present a handsome profit in the financial statements which translates into healthy dividends to avoid any hostile takeover in the future. The irregularities found in the adjustments made by the directors in the financial statements are presented in the following sections with reference to Companies Act 1985 and International Accounting Standards.

1. Revaluation of Assets

The land sold by the company for £20 million was initially recorded at a historical cost of £5 million but the land was revaluated to £10 million before sale. According to Companies Act (1985), all profit or loss arising from the revaluation of an asset has to be credited or debited to a separate revaluation reserve account but the company failed to transfer this gain on revaluation of £5 million to the revaluation reserve account. The appropriate method at the time of revaluation would have been to transfer the gain resulting from revaluation to the revaluation reserve account and presented separately on the balance sheet. The amount may be transferred from the revaluation reserve to the profit and loss account on sale of land and not before it. The company had an option of reverting back to the historical cost system but that should have been implemented before the sale of land and not after it. On the other hand IAS 16 (2008) requires that when a revaluated asset is disposed off the amount in the revaluation surplus may be left as it is or it may be directly transferred to the retained earnings section. The recording of £20 million revenue and a cost of £5 million, resulting in a £15 million profit is an inappropriate presentation. The Companies Act 1985 supersedes the international accounting standards in this case and the directors may transfer the realised amount of 5 million from the revaluation reserve account to the profit and loss account and present the remaining £10 million profit separately on the profit and loss statement. The directors have to ensure that appropriate disclosures are made with respect to this transaction in the notes accompanying the financial statements. The presentation of this transaction on company accounting records should be as follows

£ Million

Income from sale of Land 20

Fair Value of Land (10)

Profit from sale of land 10

Other Comprehensive income 5*

Total income generated through sale 15

* 5 million transferred from revaluation reserve on realisation of profit

2. Revenue Recognition

The company acquired a contract of supplying portable toilets to Worldwide Festivals PLC in 2009 where a total income of £12 million will be generated over a period of three years. The company supplied half of the toilets by the end of January 2010 while the remaining will be supplied by 31st March 2010. The directors have proposed to include all revenues related to the delivered toilers in the income of 2009. The primary problem in this transaction is related to revenue recognition. IAS 18 stipulates that revenue can be recognised when all of the following conditions are met (IAS 2009):

(1) The risks and rewards of ownership have transferred from the seller to the buyer

(2) The seller does not retain any managerial involvement or power over the sold items

(3) There is a probability that the future benefit associated with the sold item will flow to the company

(4) The revenue amount can be reliably measured

(5) The cost incurred during the transaction can be reliable measured.

In the case of Fast track PLC it is probable that the future benefit of the toilets delivered till January 31st will flow to the company and the amount of revenue can be measured reliably. Furthermore, the risks and rewards, managerial involvement and control of half of the toilets delivered till January 31st, 2010 have also been transferred to Worldwide Festivals PLC. On the other hand all of the revenue recognition requirements under IAS 18 have not been satisfied for the remaining toilets which will be delivered by 31st March 2010. Therefore, the revenue arising from the first half of toilets worth £6 million can be recognised and included in the profit and loss account and the remaining revenue of £6 million cannot be recognised in the financial statements of 2009.

3. Recording revenues and provisions

Fast Track sold portable offices to Bloggs Builders PLC and entered into a contract where Bloggs could return the offices in the first nine months or Fast Track could seek the return of these offices in the same period. The company accountants should have made a provision of contingency for this transaction due to possible obligation to Bloggs if they returned the portable offices. IAS 37 stipulates that an entity must recognise a provision for contingency when there is an obligation, payment is more likely and the amount can be reliably estimated (IAS 1999).

The total revenue recognised from the sale of portable offices was £1.5 million while Bloggs returned £0.5 million worth of offices by the end of the year which means the actual revenue generated from the sale was 1 million. The company accounted for this revenue of £1 million but failed to recognise the saving on returned offices. The original sales value of the returned offices was £0.5 million whereas they were depreciated on a straight line basis at a rate of 25% for nine months which was 93,750. This means that the actual value of the returned offices which were sold for £0.5 million was 406,250 at the time of return which signifies a saving of 93,750 and total revenue of 1,093,750.

The company recorded servicing income of 150,000 while it completely ignored the cost associated with this income. According to IAS 18, the cost associated with services provided should also be recognised in the profit and loss along with the sales revenue (IAS 2009). Therefore Fast Track also needs to recognise and record the cost of 60,000 associated with servicing of offices. This implies that the company not only has to record a service income of 150,000 but it also has to record the associated cost of 60,000 in the profit and loss. The income structure for Fast Track PLC in this respect is presented below.


Revenue from Sale of offices 1,093,750*

Other Income:

Servicing income 150,000

Cost of servicing (60,000)

Total Servicing income 90,000

Total Income generated 1,183,750

* Revenue from offices sold = £1 million

Savings from returned offices = 500,000 X 0.25 X 9/12

List of References

IAS. (2008). IAS 16 Property, Plant and Equipment. London: International Accounting Standards Board.

IAS. (2009). IAS 18 Revenue. London: International Accounting Standards Board.

IAS. (1999). IAS 37 Provisions, Contingent Liabilities and Contingent Assets. London: International Accounting Standards Board.

Office of Public Sector Information. (2010, November 7). Companies Act 1985 (c. 6). [Online] Available from: [Accessed on November 7, 2010]

Author: Masters Dissertation

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