CHAPTER 5 Balance sheet 2135.51 Assigning a cost to inventory LO10
As a trainee accountant, you have been asked to determine the monetary value that should be
assigned to the inventory of sporting equipment on hand as at the end of the financial year for Sportit
Ltd. You are currently looking at the inventory levels of a training shoe that is very popular. The
number of pairs of shoes on hand at the start of the accounting period was 200, and these had a mon-
etary value of $10 000 assigned to them. During the year, a further 1500 pairs of the training shoe
were purchased and, at the end of the year, a stocktake revealed that there were 60 pairs unsold. The
purchases were made throughout the year. Five hundred pairs of shoes were purchased at a unit price
of $60, a further 500 pairs of shoes at a unit price of $65, and a further 500 pairs at a price of $63.
Required
a. Differentiate the cost assigned to the inventory of training shoes using the (1) FIFO and
(2) weighted average cost methods.
b. LIFO is a permitted cost assignment method in the United States but is not permitted under
IFRS. Compare the effect on assets and profits if LIFO was used rather than FIFO in times of
rising cost prices.5.52 Fair value LO4, 5
There is an IFRS on fair value measurement. The objective of this standard is to define fair value
and specify the framework for measuring fair value. Identify characteristics of assets and liabilities
that should be considered when determining fair value.Decision-making activities
5.53 Liability criteria
During the global financial crisis in July 2008, the National Australia Bank (NAB) was exposed to
collateralised debt obligations (CDO). Consequently, NAB wrote down $1 billion associated with
these risky instruments, with its share price plummeting and shareholders losing $450 million.
A shareholder class action was initiated against NAB. The class action was settled in 2010, with
NAB agreeing to pay $115 million — a fraction of the loss to shareholders. The lawsuit claimed
NAB failed to disclose the extent of its subprime investments. Yet, despite the settlement, NAB
denied liability and advised the settlement was reached on a ‘commercial basis’ only.
Source: Wilkins, G 2012, ‘NAB pays $115m to settle class action’, The Sydney Morning Herald, 10 November.Required
a. Referencing the Conceptual Framework, discuss if NAB should record a liability when a law-
suit is launched.
b. Access the 2010 and 2011 NAB’s annual reports and identify how NAB has disclosed and/or
recognised the lawsuit.
c. The Conceptual Framework refers to a present obligation being a legal or constructive obli-
gation. With reference to an example, describe your understanding of a constructive obligation.
d. At the time of writing, the Conceptual Framework is being revisited. Identify the changes, if
any, to the liability definition and recognition criteria as a result of this work.5.54 In a significant accounting-related court action, the Australian Securities and Investments
Commission (ASIC) took the directors of Centro to court over the misclassification of liabilities.
On 27 June 2011, the Federal Court found the directors had breached their duty of care. The
judge found that each director knew of the interest-bearing securities and should have been aware
of the relevant accounting principles that would have alerted them to the error in signing off
accounts that classified billions of dollars as long-term rather than short-term debt. Each month the
directors received a 450-page board package. The financial report presented to the board contained
65 documents with 93 sets of complex financials. The directors’ defence was that the board papers
were voluminous and they could not be expected to absorb that amount of information.