Explain which of the following items is material in accordance with the requirements of
AASB 108 ‘Accounting Policies, Changes in Accounting Estimates and Errors’.
(a) During a routine computer system check, it was discovered that corruption of sales
data had led to an understatement of sales revenue by $180 000 for MattCom Ltd
during the reporting period ended 30 June 2018. Total sales revenue for the period
was $1 500 000.
(b) MattCom Ltd issued 500 5% $100 debentures during the reporting period ended
30 June 2013. At the time of issue, the market value of each debenture was $100.
At 30 June 2018, total liabilities were equal to $1.25 million. The issue of the
debentures significantly increased the likelihood of MattCom Ltd failing to meet
the required interest coverage ratio specified in a loan agreement with Portsmith
Bank.
(c) Would your answer to (b) change if the loan agreement with Portsmith Bank did not
specify a minimum level for MattCom Ltd’s interest coverage ratio?
(d) During the reporting period ended 30 June 2018, the financial situation of MattCom
Ltd deteriorated significantly due to increased competition and a shrinking market for its products. There is no evidence that MattCom’s situation will improve in the
future. During this time, the directors revalued equipment upwards by $47 000. At
the time of revaluation, recorded equity was $940 000.
