The according to IFRS – Business Combinations a

The Financial Statement for PARIS SPlc required additional amendments related to a lease and a fair value ofconsideration. According to ISA 17 there are twotypes of lease finance, a finance lease and an operating lease.  A financial lease is a lease that transferssubstantially all the risks and rewards incidental to ownership of an asset tothe lessee.  PARISS Plc has entered intolease agreement to lease a piece of plant and equipment for 7 years. The riskand rewards lie with lessee – PARISS Plc.

Hence, the lease should be classifiedas a finance lease as the estimated life of the asset is 7 years and PARISSretains the right to use this asset for this period of time in accordance withthe lease agreement, hence enjoying the rewards of the machinery. Therefore, afinance lease should be recorded in the financial statement as anasset and liability at the lower of the fair value of the asset and the presentvalue of the minimum lease payments. In regards to finance lease, paymentsshould be apportioned between the finance charge and the reduction of theoutstanding liability.

The depreciation policy for finance lease should beconsistent with that for owned assets (Anon., 2017). Therefore, have been made necessaryadjustments to the PARISS Plc Financial Statement in regards to lease, whichare included in Appendix 1 – Working A and Appendix 6 – Working 10Additionally, according toInternational Financial Reporting Standard 3 (IFRS) contingent considerationshould be measured at fair value at the time of business combination and shouldbe taken into account in the determination of goodwill. In the PARISS’SStatement of Financial Position have been recorded an amount of deferred cashtimes a discount rate of 5%  andcontingent cash times a discount rate of 5% (Anon., 2018).

Therefore, havebeen made amendments in respect to consideration, which are included in Appendix2 – Working B and in Appendix 6 – Working 9Moreover, according to IFRS –Business Combinations a cost of investment in PARISS’s Financial Statementshould be measure at fair value and calculate as the acquisition and should becharge to profit and loss accounts.A due to diligence exercise carriedout on the acquisition of SwP, the report has revealed that SwP has land atfair value of £100,000 and its cost value of £400,000. A subsidiary company hasundertaken research into the development of a new production process in orderto improve efficiency and reduce costs.

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A valuation of the R&D has beenundertaken by a reputable firm and remains at fair value of £150,000. TheFinancial Statement of SwP include disclosure of a contingent liability whichremains at £400,000 on 31 December 2016. Therefore, the acquirer shouldrecognise any contingent consideration as part of the consideration foracquire. However, the requirements of IAS 37 – Provisions, Contingent Liabilitiesand Contingent Assets do not apply to the recognition of contingent liabilitiesarising in a business combination (Anon., 2018).Under IFRS the accounting for R&Dis dealt with under IAS 38, Intangible Assets.

ISA 38 states that an intangibleasset is to be recognised if it is probable that future economic benefits fromthe asset will flow to a business and the cost of the asset can be measurereliably. IFRS 3 requires that identifiable intangible assets acquired throughthe business combination are separated in the consolidated accounts (Anon., 2018). IAS 16 – Property, Plant andEquipment (PPE) outlines the accounting treatment for PPE. At first PPE ismeasured at its cost, then either using cost or revaluation model ordepreciated so that its depreciable amount is allocated on a systematic basisover its useful life. Any items of PPE should be recognised as assets when itis probable that the future economic benefits associated with the asset willflow to a business and the cost of the asset can be measured reliably (Anon., 2018).

Additionally, as SwP and PARISS havebeen trading between each other, according to IFRS 10 Consolidated FinancialStatement, all intra – group balance (unrealised profit), transactions, incomesand any expenses should be eliminated totally. Hence, trade receivables andpayables in PARISS and SwP have been cancelled effectively each other out inthe consolidated statement of financial position. These amounts must not beconsolidated because group can end up with receivable to itself and payable toitself (Anon., 2018).

Moreover, accordingto IAS 18 revenue should be stated before deduction of cost of sales and is recognisedon the provision of goods and services that relate to the ordinary activitiesof   the entity. Revenue should be measureat the fair value of the consideration received or receivable. In determiningfair value is necessary to take in to account any trade discounts or volumerebates granted by the seller (Anon., 2018).  Therefore, further amendments hasbeen made to Consolidated Schedule in respect to PPE, R & D, contingentliability and intra – group, which are included in Appendix 2 – Working C,Appendix 6 – Working 7 -, 8 and Appendix 3 – Working 1 – Net assets. According to IFRS 3 the goodwillshould be measured at the date of the acquisition of the subsidiary. Goodwill ismeasured as a difference between the aggregate of the value of theconsideration transferred at fair value, the amount of any – controllinginterest and in a business combination. Goodwill can be measured also as adifference of the acquisition date fair value of the acquirer’s previously heldequity interest in the acquire and the net of the acquisition date amounts ofthe identifiable assets acquired and the liabilities assumed.

Additionally,purchased goodwill is an intangible asset, so should appeared in theconsolidated statement of financial position. Moreover, as the acquisition hasbeen completed, the purchased goodwill – impairment has been identified as anintangible non – current asset in the statement of financial position (Anon., 2018).

Consequently additionalamendments has been made, which are included in Appendix 3 – Working 2 and Appendix4 – Working 3.Furthermore, IFRS 3 allows accountingpolicy to measure Non – controlling interest (NCI) either at fair value orNCI’s proportionate share of net assets. NCI has to be measured at acquisitiondate fair value. Non – controlling interest represents an ownership stake inthe equity of a subsidiary company, which is not controlled by the parentcompany (Anon., 2018). Hence, additionaladjustments in respect to NCI have been made, which are included in Appendix 5– Working 4.

According to IAS 28 an associate isan entity over which an investor has significant influence. Associates arebrought into the group accounts using the equity method. Additionally, theaccounts of the associate are not added line by line to the group accounts.

Theequity accounting method results in the recognition of the associate in thegroup accounts as Investment in associate. Goodwill is not recognise separatelyfor associate. Any goodwill purchased is include in the group’s account –”Investment in associate” (Anon., 2018). An Appendix 5 –Working 5 includes all necessary amendments relating to Investment inassociate. Appendix 5 – Working 6 includes calculation related to consolidatedretained earnings.

                             Human Resources “Human capital is described as acapitalised value of the increased flux of earnings that will move to anindividual who has been the receiver of an investment in skills or knowledge.  In other words, human capital is anasset owned by an individual. Therefore, individual wealth is increased throughthe process of investment. An investment is a process by which part ofpotential output of community is shifted from current consumption to aproductive use that will increase the output of society in the future. Aninvestment normally take place in a formal educational or work environment (Parkman, 1987)”. “The process of identifying,measuring data about human resources and communicating this information toconcerned parties is called Human Resources Accounting (HRA). Moreover, HRA isdescribed as a qualification of human organisational contribution such astraining, experience or ability to communicate effectively.

  It is the application of creative skill tovalue, record and present the human resources capital in reports of abusiness.  The objective of HRA is to identifythe value of human resources, calculation of the cost and value of people to businessorganisation and exploration of the cognitive and behavioural impact of thisinformation. Management of human resources isessential in respect to accounting professionals. Valuation, recording of humanresources in accounts as well as honest disclosure of this information infinancial statements, are demanded by shareholders. To improve managerialperformance and employee’s efficiency. Investment in developing human resourcesis cost effective revenue expenditure.

Its impact on increasing the abilitiesof employees delivers benefit for the long term. Theoretically, human capital cost ismore important than the expensing method. Data relating to human assets is morevaluable for internal as well external users when making different decision.  Many businesses, which requirenotable creativity or they are science based, demonstrate a considerabledifference between market value and net book value. This difference is forintangible assets, including human skills.

 Nevertheless, the human resources arenot recognised in Balance Sheet report. The human capital is not properlyaccounted for businesses book of accounts. Auditors are concerned about the fact that the balance sheet report isshowing the true position of the business however, do not recognise the valueof Human Resources.

Therefore, the main problem of HRA is recognition time andprocedure of recognising human capital.  However, some of researches haveproposed a model, which is an extension to Lev and Schwartz Model (L&S),which was developed in 1971 for valuing human resources. The model uses avaluation principles of L&S ( e.g.

: the total earnings are discounted atthe rate of cost of capital; therefore, the value will be the value of humanresources) but in the same time removes major weakness of L&S model such asit is able to account for Human Resources in the balance sheet report. Thecapital cost, which is related to employees has been written over expectedservice life of employees, which incidentally is one of the concept of accounting.In this model total wage paid to the worker has been charged in profit and lossaccount and some part of it has been charged as depreciation or amortisation ofhuman asset. This model has some restrictions such as method for calculation canbe difficult for each employee. It is essential, while valuing human capital doesnot forget about the fact that human beings are highly sensitive to outsideforces, human skills in a business and do not remain unchanged. Therefore, themodel suggest if skills of employees are directly reflected in revenue of abusiness, so Human Resources should be capitalised on the same bases.

 Recently Human Resources Accountinghas been highlighted as very important for two main reasons. First and foremostthere is a need for relevant and complete information, which can be used toimprove and evaluate the management on Human Resources. Secondly, existence aswell as a success of a business largely depends on the quality of human asset.  Human Resources Accounting shouldhelp with decision making process and aid an idea of display of a completepicture of financial position of a business organisation by measuring the valueof human capital and disclosing this information in external financial reports.

The Generally Accepted Accounting Principles (GAAP) as well as theInternational Accounting Standards Board (IASB) should be linked to HRA.  A human asset cannot be valued, measured andanalysed in monetary term in the same way as financial and physical assets.  Irrespective of the amount of financialresources spent on training, development, transfer or acquisition it will betreated as revenue expense. A human asset is a crucial factor for any businessorganisation accomplishment.

 Therefore,any cost incurred on human capital should be recognised and capitalised as itgives benefits measurable in monetary term.  The advantages of HRA are as fallow: Helpsto allocate resources more efficiently. Increasesproductivity of human assets – improves morale, cooperation, job satisfaction,creativity and influence the individual behaviour, attitude and thinking ofdesire direction.Developseffective decision making by management group.

Enhancethe quality and helps to develop principles of managemen.tIncreasesshareholders long term investments.Simplifiesperformance measurement by assessing strength of a business.The disadvantages of HRA are asfallow:Thereis no specific guideline for measuring the cost and value of human capital.Uncertaintyof human resources creates uncertainty in its valuation in realistic approach.InternationalAccounting Standards (IAS) and International Financial Reporting Standard(IFRS) do not provide any guidelines for the treatment of HRA approach. Tax law does not recognise human assets.

   In conclusion, human capital areskills and knowledge, which are used to produce goods and provide services.There is a need to prescribe the specific provisions for valuating HR anddisclosing the details of investment in human capital in the form of trainingand development expenses and wages through annual report. Therefore, the needto measure data about human resources and communicating this information withshareholders, directors and managers is crucial for increasing the value of abusiness” (Md. Amirul Islam, Md.Kamruzzaman, Md.

Redwanuzzaman, 2013).