Subject: Business    / Accounting

Carcraft Ltd is a company established by the smash repair industry in Australia. Smash repairers fix and repair cars after they have been involved in an accident. Most of the revenue of the smash repair business comes from a small number of insurance companies and car paint is their biggest cost. The industry is very fragmented, comprising many small businesses across Australia. Therefore, the individual smash repairer businesses had very little bargaining power either with the insurance companies or with their suppliers. In order to combat this, Carcraft Ltd was established and aims to negotiate better prices for the smash repairers for their paint and other supplies which they could not do individually due to their size.

The structure of Carcraft Ltd is as follows;

Directors = 4 shareholder representatives plus Noelle

Carcraft Ltd

? The income of Carcraft Ltd comprises rebate income from the paint suppliers as well as investment income. The rebate income is calculated as a fixed % of all the paint that each of the shareholder businesses acquire from the main paint supplier and is paid every July based on the paint costs of the prior financial year.
? Shareholders are generally only provided with financial statements/financial information at the Annual General Meeting (“AGM”) and the company is NOT listed.
? Carcraft Ltd has a policy of paying out dividends annually to the shareholders as well as a small proportion of rebates to shareholders in proportion to their contribution to the rebate income.
? Carcraft Ltd has recently acquired a commercial rental property with bank funding. As a result of the funding, the bank has imposed a debt covenant of a Current Ratio of at least two.

Page 1 of 3

Employees = Noelle, the General Manager and 2 administration staff

Shareholders = 40 individual smash repairer businesses (equal shareholding)

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Carart Ltd

Projected Financial statements for the year ended 30th June 2016

Assets

Income

Current Assets

Rental income

100000

Cash at Bank

150000

Rebates

750000

Rebates receivable

750000

Gross income

850000

Total current assets

900000

Less: Expenses

Non-current assets

Salaries

80000

Land & buildings

1000000

Rebates paid

65000

Total non-current assets

1000000

Other expenses

210000

Total assets

1900000

Interest

45000

Total expenses

400000

Current Liabilities

Staff superannuation

25000

Net Profit

450000

Dividends payable

200000

Less: income tax

135000

Rebates payable

0

Net Profit after tax

315000

Total current liabilities

225000

Less: dividends

200000

Non-current liabilities

Net profit after tax and dividends

115000

Bank Loan

650000

Total Liabilities

875000

Equity

Share capital

40000

Retained earnings

985000

Total Equity

1025000

Scenario and decision

In the June 2016 meeting, Noelle had advised the board that one of the shareholders (Nick) was demanding that an additional $300,000 rebate expense be set aside for him as compensation for his extraordinary contribution to Carcraft’s 2015/2016 rebate income. Nick, who is not one of the directors of Carcraft, had threatened to leave the group if this was not confirmed in the June 2016 board minutes. Reluctantly, the board agreed to the additional rebate expense at this meeting, but noting that the rebate expense would only be physically be paid in July 2016 when the rebate income was received.

During this meeting, Noelle warned the board that the additional $300,000 may need to be recorded in the 2015/2016 accounts due to the application of the conceptual framework and general purpose accounts. The directors disagreed with this, suggesting that

“Why can’t we just record it next year when it is paid? We are not big enough to have to comply with all that stupid accounting standard stuff so we can do what we like. Accounting standards are only for big companies.”

Noelle is unsure of this and has sought your advice as the external accountant to Carcraft Ltd. This advice is to be presented with the draft 2015/2016 accounts to the board in July 2016.

REQUIRED
The main requirement is to provide a recommendation to the Carcraft board as to whether or not they have to prepare general purpose accounts in accordance with Australian accounting standards. In addition, you should address

– The financial impact if the rebate expense is disclosed next year (some financial analysis required) and
– Details of any guidance provided by the conceptual framework (if applicable) for this transaction.

Your recommendation should be in the form of a Letter of Advice, addressed to the board, together with a transmittal email to Noelle.

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