Briefly discuss the concept of Reporting Entity in SAC 1
How asset is defined and recognised under the AASB Framework?
Silver Developers Ltd is a property development company listed on the Australian Securities Exchange. They paid $650 000 for a prime piece of sub-divi¬sional land adjoining several growing educational institutions. The purchase was funded with a fixed term two-year loan of $315 000 at 7.8 per cent from the NAC bank. Interest was payable monthly with the full amount of the principal due at the end of two years.
The company expended $78,000 in each of the two years to secure all necessary permits and provide water, sewerage, drainage and roads. On the first day of the third year, a very successful auction on site sold all the lots for a total of $1 mil¬lion. Sufficient cash was received immediately to repay the loan. The remaining amounts due to the company were payable in instalments over two years, free of interest.
The company accountant was asked to recommend how these transactions should be reflected in the accounts. The accountant rang various personal contacts in the real estate business and was told of the following approaches adopted by other companies.
• Treat the interest as an expense in the year paid and all land sales as revenue at the time of the auction.
• Capitalize the interest until the land was sold and regard sales as revenue at the time of the auction.
• Treat interest as part of the cost of the land and recognize revenue from sales according to the time at which payment is due.
• Treat interest as part of the cost of the land, but do not recognise sales as revenue until the final payment is received from the purchaser.
Required: Advise Silver Developers Ltd on this accounting treatment by referring to the requirements of AASB 102 Inventory, AASB123 Borrowing Costs, AASB 118 Revenue.