Define the accounting policy issue


Assignment:

Holmes Institute Memo

Slammon Salmon Ltd (SSL) is an aquaculture business that raises Sockeye Salmon. It measures its biological assets, in accordance with AASB 141 (Agriculture), at fair value less costs to sell. Sockeye Salmon is highly prized for its brilliant red, firm, dense flesh.

As at its 30 June 2012 year-end, SSL has 1,000,000 kg of live 10 month-old Sockeye salmon and 100,000 kg of smoked salmon.

Table: Market value and costs of Sockeye salmon at various ages:

Age (months) Farmed Salmon

Life Stage or Status Retail Price/kg Production Costs Cost to Sell

8 but 12 Live and immature $ 8.00 $ 2.00 $3.00

12 but 18 Live and immature $10.00 $ 5.00 $2.00

18 Live and mature $16.00 $ 6.00 $1.00

18 Smoked $26.00 $ 4.00* $ .50

These are the incremental processing costs of smoked salmon and do not include the value of the live and mature salmon that was processed into smoked salmon. Required (treat parts 3a and 3b as separate issues):

a) Using the above information, what value should SSL place on its immature Sockeye salmon and smoked salmon assets? (value them individually) - Justify by referring to the principles of AASB 141 and/or AASB 102 (Inventory) of the 2012 Handbook.

b) During the current year, SSL reduced production costs by half at all life stages by not feeding krill to its Sockeye salmon. However, the Sockeye did not colour-up (i.e., they had white flesh). If unchanged, the lack of colour will reduce their value by half, at all life stages.

However, a technician found that by injecting a krill-based food dye into the Sockeye one week before they were harvested, they coloured-up better than if they had been fed krill and became worth three times more (i.e. 50 percent more than if fed krill). The SSL Chief Executive Officer (CEO) noted that the intense colouring is due to the same natural dye as the krill-fed Sockeye, that their customers will never know about the colouring, and that the dye-coloured Sockeye taste better than krill-fed Sockeye.

The external auditors and the SSL CEO are arguing over the SSL policy on valuing live immature Sockeye. The auditors want the value of the immature Sockeye to be based on the fair value of the white Sockeye as at the year end. The SSL CEO asserts that the policy is far too conservative and will not give a true and fair view of SSL?s performance. Instead, the CEO wants the increased value at the end of the growthcycle to be anticipated throughout the growth-cycle, rather than as a large lump at harvest.

The auditors? proposal will reduce the Table "Retail Price/kg" to half the current value and the CEO?s proposal will increase those values to 1.50 times:

i. Advise the SSL CEO (Ms Christine Slammon) as to which of the two proposed policies is the most appropriate by using steps 2-6 of the accounting policy choice model to evaluate the choices.

ii. Put a value on the 10 month-old live Sockeye asset, using the more appropriate new policy.

A Basic Accounting Policy Choice Decision Model:

1. Identify the relevant facts including key stakeholders (distinguish known facts from assumptions, identify the factors that are „unknown?)

2. Define the accounting policy issue(s)

3. Identify relevant accounting standards, rules, & principles

4. Identify alternative accounting policies

5. For each alternative, decide to what extent the particular alternative satisfies the rules/principles in 3 above AND identify the short & long term consequences

6. On the basis of the analysis in 5 above, choose that policy that best satisfies the relevant accounting principles/rules and maximises positive (or minimises negative consequences).

Request for Solution File

Ask an Expert for Answer!!
Accounting Basics: Define the accounting policy issue
Reference No:- TGS03038806

Expected delivery within 24 Hours