Question: The years of networking by Gino has finally paid off and he has just signed a contract to complete the foundation and concrete work for a new skyscraper in Perth. This is the first time that he has been involved in a construction project this large and Gino Constructions Pty Ltd will be one of the contractors of the lead contractor on the build, which is a listed company. This is a huge opportunity for Gino Constructions and he is keen to impress. However, the project will also mean that his financial affairs will available to a much larger group of stakeholders including the union, and there will be increased pressure to demonstrate financial stability and strength to the bank and other key stakeholders in the project. In order to reduce the risk of the job and on advice from his external accountants, he establishes a new 100% subsidiary Gino Concreting Pty Ltd for the sole purpose of completing this job.
The project is likely to run over several years due to the size of it, with profits on the job difficult to estimate due to the time frame. His internal accountant Anna tells him that he is going to have to record the estimated profit on the job on an annual basis, in accordance with the accounting standard on long term construction contracts. Gino thinks this is not logical and that a more appropriate and realistic accounting method would be to account for Gino Concreting Pty Ltd on a project, not annual basis, especially considering that this is all that the new company will do.
Gino also acquires a small office building near the construction site in Gino Concreting Pty Ltd. He pays $1.2m for this. However, the downturn in the property market means that he got a bargain and the property rises to $1.3m in value the following year. All of Gino's other properties in Gino Constructions Pty Ltd are measured using historical cost.
1. Why dose Gino want to extend the reporting period for Gino Contracting Pty Ltd to the life of the construction project and what would prevent him from doing so?
2. What incentive dose Gino have to "massage" and "manage" the earnings of Gino Concreting Pty Ltd?
3. Assuming that Gino Construction Pty Ltd and Gino Concreting Pty Ltd form a consolidated group, what are the measurement options for the city property?