Business Report

Smith & Sons Accounting Firm

423 Pitt Street, Knowledgebank

Sydney NSW 2999

2 May 2006

Mr. lan Dunno – CEO of Techno Ltd

445 Smith Street,

Notsureville, NSW 2555

Dear Mr. Dunno

Re: Accounting Issus

Response to your question in the email, I’m very glad to prepare a report to give you more advice and explanation to the accounting issues.

Yours sincerely

Lu Nan

Smith & Sons Accounting Firm

Enc. Report

Issue 1

According to Australian Accounting Standards Board (AASB) 116 Para.30, “After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses.” It is possible to revalue the assets every three or five years.

It is obviously that the assets should be revalued when the fair value is materially different from the carrying amounts, based on AASB 116, since some properties of the enterprise have doubled in value since they were purchased 4 years ago. In other words, the aim of revaluation is to be sure that the carrying amounts of assets are equal the fair value in the balance sheet.

The principle of applying the revaluation model of increment is contained in Para 39 and 40 of AASB 116. “If and assent’s carrying amount is increased as a result of a revaluation, the increase shall be credited directly to equity under the heading of revaluation reserve…” It means that the increase is considered directly as equity, rather than appears in income statement. Hence, a revaluation increment is credited to an asset revaluation reserve unless the increment reverses a revaluation decrement which was previously recognized as an expense.

The benefit of revaluation by fair value method is to show the users a clear comprehension of the enterprise’s real financial position, and easily estimate the feasibility of enterprise’s risk management, since the fair value reflects the reasonable value of property on the financial statement. According to the situation of Techno Ltd, the increment means the improvement of the enterprise’s business operation that advance the confidence of the investors.

However, the costs for changing to fair value method always exist. The details of explanation of costs will follow.

Firstly, the activity that most assets should be revalued properly will raise the costs of process. Because the fair value can only be directly used when the relevant market value is from sufficiently active and liquid market.

Furthermore, due to the revaluation, the data of items on the financial statement will be fluctuated strongly by increment or decrement caused by the fair value method. This influence possibly misleads the users of financial statement.

Lastly, the tax effect can not be ignored. When there is an increment through the revaluation, the enterprise must pay the relevant tax. For example, according to AASB, part of the increment from carrying amounts to fair value should be credited to account item “deferred tax liability” in the general journal.

Issue 2

Under the AASB pre 2005, “research and development” means systematic investigation and experimentation that:

- involves innovation or technical risk, and

- is carried for the purpose of acquiring new knowledge or developing a new product or bringing about