ABT Security System Inc. (ABT) is a company known around the world for its state-of-the-art electronic surveillance and monitoring equipment, its alarm control centers and a full line of residential security systems including fire alarms, sprinkler systems, and burglar protection devices. ABT has a December 31 accounting year-end and the company's headquarter is located in the City of Burnaby in the Province of British Columbia. Any prospective customer is entitled to a free home visit by an ABT security consultant. The consultant will provide an assessment of the security needs at the prospective customer's home. If the customer decides to acquire the recommended security system, a formal contract will be prepared by the ABT consultant and signed by the customer. ABT every visit conducted by its security consultants. The S400 covers travel costs and the time spent by the consultants on each visit. In the company's current fiscal year, ABT's security consultants conducted a total of 8,500 visits to prospective customers incurring a total cost of $3,400,000. You work in a large public accounting firm and ABT is a new client of your firm. The senior partner in charge of the ABT engagement has instructed you to start a file on ABT. The senior partner has also informed you that your first major responsibility in this engagement is to provide a recommendation to the client on the appropriate basis of financial reporting ABT management should use in the preparation of the company's financial statements. Required: (i) Describe carefully all the major factors you would consider in deciding on the appropriate basis of financial reporting ABT management should use in the preparation of the company's financial statements. (ii) Assume that ABT will prepare its financial statements in accordance with the International Financial Reporting Standards (IFRS) and use accounting policies developed based on the new 2018 IFRS Conceptual Framework. List and explain carefully the major issue you want to address and the important factors you need to consider in deciding how ABT should account for the $3,400,000.
ABT Security System Inc. (ABT) is a company known around the world for its state-of-the-art electronic surveillance and monitoring equipment, its alarm control centers and a full line of residential security systems including fire alarms, sprinkler systems, and burglar protection devices. ABT has a December 31 accounting year-end and the company's headquarter is located in the City of Burnaby in the Province of British Columbia.
Any prospective customer is entitled to a free home visit by an ABT security consultant. The consultant will provide an assessment of the security needs at the prospective customer's home. If the customer decides to acquire the recommended security system, a formal contract will be prepared by the ABT consultant and signed by the customer. ABT every visit conducted by its security consultants. The S400 covers travel costs and the time spent by the consultants on each visit.
In the company's current fiscal year, ABT's security consultants conducted a total of 8,500 visits to prospective customers incurring a total cost of $3,400,000. You work in a large public accounting firm and ABT is a new client of your firm. The senior partner in charge of the ABT engagement has instructed you to start a file on ABT. The senior partner has also informed you that your first major responsibility in this engagement is to provide a recommendation to the client on the appropriate basis of financial reporting ABT management should use in the preparation of the company's financial statements.
Required:
(i) Describe carefully all the major factors you would consider in deciding on the appropriate basis of financial reporting ABT management should use in the preparation of the company's financial statements.
(ii) Assume that ABT will prepare its financial statements in accordance with the International Financial Reporting Standards (IFRS) and use accounting policies developed based on the new 2018 IFRS Conceptual Framework. List and explain carefully the major issue you want to address and the important factors you need to consider in deciding how ABT should account for the $3,400,000.
Financial reporting refers to the disclosure related to the financial results as well as the information related to the management and stakeholders that are external to the organization about the performance of the company over a specific time.
i) The factors that would be considered while deciding based on financial reporting for the preparation of the financial statements of the company are as follows:
- Accrual basis: Under the accrual basis, the revenues are reported in the period in which they are earned and expenses are reported in the period in which they are incurred.
- Understanding of financial position: Preparation of financial statements as per GAAP would give readers a better understanding of the organization’s financial position at the end of the year. As per GAAP, the companies are responsible to provide the reports on their cash flows, the operations that are related to making of profit, and overall financial conditions.
- Established framework: Financial statements must be prepared as per GAAP (Generally Accepted Accounting Principles) as this framework is used to comply and allows the financial statement comparability.
- Auditing of financial statements: In case auditing of financial statements prepared as per GAAP is required and cash basis is preferred by the organization, they would make necessary adjustments while closing the books of accounts. An organization may also find it less confusing to have the financial statements that are audited to match the internal financial statements.
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