Address all the technical issues/discussion in the letter

Case Study

Assume that you are a graduate accountant working for Highend Accountants, a public accounting firm located at 203 York Street Sydney, NSW 2000. The manager of your firm, Mr. John Little asked you to draft a letter in response to an email received from Ms. Michelle Smith, the managing director of Lowsales Ltd in response to various key accounting issues. Make sure you include any references from AASBs, Corporations Act and relevant websites.

The following email was sent from Ms. Michelle Smith to John Little.

Dear John,

Thank you for your phone call this morning. As discussed, we have recently hired a new chief accountant for our group who is concerned about three matters.

Firstly, the chief accountant expressed his concerns to the Board that there were no deferred tax accounts. The chairperson said that we should not be wasting our time on future tax consequences because there are far more important issues for us to focus on. The company pay taxes every quarter, is this not sufficient? Could you please explain this issue? As I said, we are all non- accountants, and therefore an example would be great.

The chief accountant raised a second matter about the recording of revenue. For example, Lowsales Ltd executes a contract to sell and install machinery for our customer, Gregory Ltd to support their dam construction project. The sales price charged for the machine, installation and ongoing support is $6,000,000. The terms state that Gregory Ltd will pay for the machine immediately (fair value of the machinery is $5,000,000). The installation will take approximately 3 months to complete (fair value of installation is $1,000,000). In addition, Lowsales Ltd have agreed to provide Gregory Ltd with 24 months of ongoing technical suppoort (fair value of technical supportt is $100,000).

In the accounts of Lowsales Ltd revenue of $6,000,000 (on the date the contract was exchanged) was recorded. However, the chief accountant requests that Lowsales Ltd should apply the five-step model per the accounting standard to record the revenue. Can you explain the five-step using the above example?

The accountant raised a third point. He recommended that Lowsales Ltd adopt the revaluation method for property, plant and equipment instead of our current cost method. Can you explain what is the difference between the cost method and the revaluation method? I am also not sure how this affects our financial statements. Could you please explain how this may impact our financial statements? Our board thinks that the revaluation method is better as we can increase company asset values anytime and therefore it will attract more new investors. Is this correct?