FINANCIAL ACCOUNTING RESEARCH ASSIGNMENT

2016

	


[BUACC2606 FINANCIAL ACCOUNTING RESEARCH ASSIGNMENT SEM 1, 2016]



 
Table of Contents
Introduction	3
Accounting Concepts and relevant examples	3
Units of Production basis	5
Straight line basis	5
Impairment charges:	5
Determination of ore reserve and mineral resource estimate	6
Measurement problem in the context of present AASB / IASB standards	6
Significance of different processes for achievement of estimates	7
Conclusion	9
References	10


















Introduction

Accounting concepts are broad set of broad accounting principles devised for providing basic framework for financial accounting and reporting. Accounting concepts ensure users of financial statement are not deviated by adoption and implementation of accounting policies. Since financial reporting involves significant professional judgments, accountants must consider adoption of consistent accounting principles. Asset valuation and asset recording in books of accounts is an important component of financial statement (Babawale, G., Ajayi, C., 2011). Under International Financial Reporting System, assets cannot be booked at price more than their net realizable value and the net present value of their future income streams in comparison to recoverable amount. In this report, we discuss how Rio Tinto uses different accounting conventions and concepts for asset valuation and recording. In addition, the report highlights measurement problems in the present context of AASB / IASB standards and conceptual framework. The report also lays emphasis on significance of using different ‘processes’ of measurement for estimates achievement. 

Accounting Concepts and relevant examples

Rio Tinto Limited is engaged in finding, mining and processing of mineral resources. The company is listed on Australian Stock Exchange. The company prepares financial statement on a going concern basis in accordance with Companies Act 2006. Rio Tinto’s management acknowledges the fact that preparation of financial statements requires assumptions, assumptions and estimates (Babawale, G., 2013). The judgments are used in application of accounting policies and in critical accounting estimation. The company’s management base their judgments, estimates and assumptions upon relevant facts, information and previous experience. The management admits that but actual results may differ materially from the amounts included in the financial statements. Review of asset carrying value and estimation of asset lives are key areas of judgment involving estimation uncertainty (Choudhury, M., 2011). The company believes factors such as estimation of asset live, determination of ore reserve and mineral resource estimates and contingencies possessing significant risk to assets and liabilities valuation. 

The company prepares financial statements under historical cost convention. Under historical cost convention, price of an asset is recorded in the balance sheet on its normal or original purchase price at the time of acquisition. This accounting convention has no correlation with market value of an asset. Thus, volatility in asset prices does not impact recorded asset value and hence balance sheet figures. In case, the useful life is shorter and there is no reasonable alternative use of asset, Rio Tinto records depreciation on property, plant and equipment over their useful life and or over the remaining life of the mine or smelter or refinery. Since the company is engaged in iron ore mining, estimation of useful live of assets including iron ore body gains significance (DeLisle, J., Grissom, T., 2011). This is because of the fact that these assets are cash generating units and their useful lives are dependent on the life of the ore body to which they relate. The lives of mining properties and assets are based on expected life of the ore body. In turn, the life of mine plan determines and estimates life of the iron ore body. On the other hand, when major assets are cash generating units and not dependent on life of iron ore body, management applies judgment in estimation of remaining service potential of long lived assets. Different factors affecting remaining service potential are taken into consideration for estimation of useful life (Grover, R., 2016). Moreover, annual review and periodic changes are reflected prospectively for material assets and asset categories. 

Rio Tinto concurs with accounting experts opinion that asset value are bound to depreciate due to normal wear and tear and use. Thus, the company records depreciation on assets as soon as an asset is available for use. Rio Tinto charges depreciation on major categories of assets including property, plant and equipment on a unit of production and or straight line basis (Hordijk, A., Nelisse, P., Gritter, L., 2011). The different methods of depreciation are used by the company depending upon type of assets and accounting information. They are as follows:




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