Statement of Advice example for provisions, impairment and cash flow

Assessment 3: Statement of Advice – Advanced Financial Accounting (ACCM4200)

Unit and Assessment Context

Unit: ACCM4200 – Advanced Financial Accounting (Kaplan Business School accounting unit)

Assessment Title: Assessment 3 – Statement of Advice (SoA)

Assessment Type: Individual professional advisory report presented as a Statement of Advice or business letter

Length: 2,000 words plus or minus 10 percent, excluding reference list and any appendix calculations

Weighting: 40 percent of total unit grade

Due Date: Tuesday of Week 13 at 19:55 AEST, submitted via Turnitin on the Learning Management System as a single Word or PDF file

Case Study Overview

You are employed as a graduate accountant at Kaplan Partners, an independent consulting and accounting firm located at 63 Elizabeth Street, Sydney, NSW 2000. The Senior Partner, Ms Kiran Shrestha, has asked you to prepare a professional Statement of Advice in response to correspondence from Mr Alor Ikaz, Chief Executive Officer. The letter relates to a range of complex accounting transactions and events for the financial year ended 30 June 2024.

The organisation recently lost its Financial Controller and requires urgent technical accounting guidance. Management seeks advice on several matters including the preparation of a statement of cash flows, accounting for provisions and contingencies, treatment of warranty defects and reimbursements, impairment of overseas operations, and accounting implications arising from the closure of a manufacturing plant.

Assessment Task Description

You are required to prepare a professionally structured Statement of Advice addressed to Ms Kiran Shrestha. The document must clearly address each of the five accounting issues raised in the client letter. Your Statement of Advice must achieve the following:

• Identify and apply the relevant Australian Accounting Standards and IFRS equivalents for each issue, particularly AASB 107, AASB 136, AASB 137 and AASB 5.
• Cite and apply specific paragraphs of the relevant standards in your reasoning and analysis.
• Provide clear and justified recommendations regarding the appropriate accounting treatment for each matter.
• Include supporting calculations and journal entries where appropriate.
• Communicate in a concise and professional business letter format suitable for an accounting advisory engagement.

Specific Requirements by Item

Item 1 – Statement of Cash Flows (Direct Method)

Using the financial statements and additional information supplied in Appendix 1, you must:

• Prepare a statement of cash flows for the year ended 30 June 2024 using the direct method in compliance with AASB 107 and IAS 7.
• Apply the entity policy of classifying interest received and dividends received as investing activities.
• Correctly classify transactions such as conversion of convertible notes to shares, cash share issues, proceeds from sale of plant and equipment, and movements in bank overdrafts.
• Include a note reconciling cash and cash equivalents to the statement of financial position.
• Provide a reconciliation of profit to net cash flows from operating activities in accordance with accounting standards.

Item 2 – Provisions for Lawsuits and Warranties

At the beginning of the year, the company held provisions for lawsuit claims of 16 million dollars and warranty obligations of 31 million dollars. During the year, lawsuit claims were settled for 18 million dollars and warranty costs of 34 million dollars were paid. Management proposes to report a closing warranty provision of 41 million dollars.

For this item you must:

• Apply AASB 137 requirements on recognition, measurement, and use of provisions.
• Determine the correct closing balances for each provision.
• Identify whether additional expenses must be recognised.
• Prepare appropriate journal entries and full reconciliations of opening and closing balances.

Item 3 – Defective Construction, Warranty Provision and Reimbursements

The company is the primary contractor on a major project where defects have been identified with an estimated rectification cost of 120 million dollars. A previous warranty provision of 60 million dollars exists. Management expects to recover part of the cost from subcontractors, but only 30 million dollars is considered virtually certain.

For this item you must:

• Determine the appropriate warranty provision required at 30 June 2024.
• Apply the reimbursement rules under AASB 137 and recognise any reimbursement asset only to the extent recovery is virtually certain.
• Prepare journal entries for any increase in provisions and recognition of reimbursement assets.

Item 4 – Loss-Making Overseas Plant and Impairment

The company operates a biscuit factory in Vietnam which has incurred losses for several years. The carrying amount of the plant is 45 million dollars while its recoverable amount is estimated at 40 million dollars.

You must:

• Apply AASB 136 impairment principles to determine whether an impairment loss is required.
• Calculate the amount of any impairment loss.
• Explain why future operating losses cannot be recognised as provisions.
• Provide the necessary journal entries and presentation guidance.

Item 5 – Plant Closure, Restructuring and Discontinued Operations

The board has decided to close a confectionary plant and has approved a formal plan communicated to employees and customers. A binding agreement to sell the assets has been signed. The carrying amount of the net assets is 20 million dollars and expected net proceeds are 12 million dollars.

For this item you must:

• Assess whether a constructive obligation for restructuring exists at balance date.
• Identify which costs can be included in a restructuring provision and which cannot.
• Determine whether the assets meet the criteria to be classified as held for sale and as a discontinued operation under AASB 5.
• Calculate any required impairment loss and prepare relevant journal entries.
• Explain how these matters should be presented in the 2024 financial statements.

Structure and Formatting Requirements

Your submission must be presented as a formal Statement of Advice addressed to the Senior Partner and written in professional business English. A recommended structure includes:

1. Letterhead details including address, date and addressee
2. Brief introduction and scope of advice
3. Clearly labelled sections for Items 1 to 5
4. Sub-headings such as Issue, Relevant Standards, Analysis, Recommendation and Journal Entries
5. Conclusion outlining assumptions and limitations
6. A properly formatted reference list

Use 1.5 line spacing, a standard academic font, and include your student identification as required by faculty guidelines.

Research, Standards and Academic Integrity

Students are expected to engage critically with Australian Accounting Standards Board pronouncements and IFRS materials, along with three to four additional scholarly or professional sources such as journal articles, textbooks, or CPA and CA ANZ technical guidance.

All work must comply with institutional academic integrity requirements. The use of contract cheating services or copying from online repositories is strictly prohibited and will be treated as serious academic misconduct. Any use of generative artificial intelligence tools must comply with unit policies and be clearly acknowledged.

Additional Guidance on Professional Judgement

Professional accounting practice requires careful evaluation of evidence, application of standards, and sound ethical judgement. In advisory engagements, accountants must balance technical compliance with clear communication so that clients can understand the implications of complex transactions. Sound documentation and transparent reasoning are essential to demonstrate how conclusions were reached and to support defensible financial reporting decisions (Carlin and Finch 2018).

Marking Criteria Overview

The assessment will be graded on the following broad criteria:

1. Technical accuracy and correct application of accounting standards
2. Depth and clarity of analysis and justification
3. Accuracy of the statement of cash flows and reconciliations
4. Professional communication and report structure
5. Quality and correctness of referencing

For Item 3, the additional expected rectification cost of 120 million dollars exceeds the existing warranty provision of 60 million dollars. Therefore, an additional provision of 60 million dollars must be recognised because the obligation arises from past events and the outflow of resources is probable and reliably measurable.

A reimbursement asset of 30 million dollars may be recognised separately because recovery from subcontractors is considered virtually certain. This asset must not exceed the amount of the related provision and must be presented separately in the financial statements.

For Item 4, the overseas factory has a recoverable amount lower than its carrying value. Accordingly, an impairment loss of 5 million dollars must be recognised in profit or loss in accordance with AASB 136. Expected future operating losses cannot be recognised as provisions because they do not arise from past obligations.

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Learning Resources

Brasolin, A, Costa, F & de Lima, G 2021, Provisions, contingencies and earnings management: Evidence from IFRS adopters, Accounting in Europe.

Carlin, TM & Finch, N 2018, Advanced Financial Accounting, 4th edition, Pearson Australia, Melbourne.

CPA Australia 2020, Impairment of non-financial assets: Applying AASB 136 in practice, CPA Technical Guidance Note.

Morais, AI & Curto, JD 2019, Mandatory IFRS adoption and the economic consequences of accounting for provisions, Journal of International Accounting, Auditing and Taxation.

Wagenhofer, A 2020, Implications of IFRS for measurement of impairment and fair value, Abacus.

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Deegan, C 2020, Financial Accounting Theory, 5th edition, McGraw-Hill Education, Sydney.