Part 1 Flashcards
Accounting treatment for accumulating paid absences?
- Est no. of days use in next period “A” - Accrual this year: Dr Expense Cr Accrual
- Contribute 5% total remuneration. - paid salaries of 10.5M - Bonus 3M - Company paid 510K into the plan. Accounting treatment?
DR P/L 675K (5% of remuneration) CR Cash 510K CR Accrual 165K
Defined benefits plans: - Net interest cost? - Current service cost? - Past service cost? - Contribution? - Benefit?
1) DR P/L CR Obli DR Asset CR P/L 2) DR P/L CR Obli 3) DR/CR P/L CR/DR Obli Amendment/Curtailment 4) DR Asset CR Cash 5) DR Obli CR Asset
Deposit in 1/7/20X7 10M. interest 2.5% and receive at maturity date 30/6/20X9. A further 3% interest if FX rate of $ against RKR >= 1.15$ to 1 RKR. Explain the treatment?
- Deposit is financial asset. - According to IFRS 9 measured either amortized or FV. - AMORTIZED: (1) held within biz model and to collect cash flow. (2) Specific date & solely payment of principal and interest. - Contract term shows unrelated to basic lending arrangement. - Recorded as “hybrid contract”
Angel bought Shane for 70% on 1/6/2006. On 30/6/2008 Angel sold half of Shane for $120K, at that date FV of 35% holding more at $130K. The RE and Share cap at the date disposal is $81K and $100K. GW at the acq: $61.4 K and NCI at disposal $72.7K - Calculate investment in associate?
FV of consider received: 120 FV of remain investment: 130 NCI: 72.7 GW loss: (61.4) RE: (81) Share cap: (100) - Total investment: 80.3K
- SD bought 60% of KL in 1/7/2000. NCI at acq: 1,960 NCI share of Post acq 28/2/2001: 170.667 - SD bought another 20% of KL in 1/3/2001 for 1,000 - Advise the accounting treatment?
- Bcuz SD already control KL so this is not acq. Just transaction between group shareholders. - The transaction will adjust NCI and equity. - NCI: NCI at acq: 1,960 NCI share post profit: 170.667 -> NCI: 2,130 Decrease in further acq: (20%/40%*2,130)=1,065 - Equity: Consider paid: (1,000) Decrease in NCI: 1,065 Adjust to equity: 65 DR NCI: 1,065 CR Equity: 65 CR Cash: 1,000
Key changes in IFRS 16 Leases
- All leases must be reported except for lease <12m - Measure lease liability and recognize interest. - ROU and liabilities must be measured on a PV.
Lease freezer for 10 year at 30K per year. include servicing cost. Could lease the same for 27K and service 5K. How should account for?
- Must record lease and non-lease component separately - Allocate base on stand-alone price: Lease: 30*27/(27+5) account as lease. Expense: 30*5/(27+5)
E acquire T for 60% in 1/12/2005 (half year) GW: 6 T was acquired with a view to sale and at 31/6/2006 meets criteria for being a disposal group. FV of T at 31/5/2006 is 344 and est selling cost 5 NCI at % FV. Carrying amount of net asset: 329 - Calculate impairment losses?
Notional GW: 6*100%/60%=10 + Carrying amount of net asset: 329 - Recover amount: (FV-cost of disposal) 344-5*100%/60%=335.7 Impairment loss: 3.3
31/05/2005 Zbay made a loan of $100m. Interest rate 4.5% per annum. On 31/05/2005 the initial PV of expected credit loss, using discount factor of 4% was 25m. At that date the probability over the next 12 months was 10%. An allowance had been recognized at 31/05/2005. At 31/5/2006. customer was in serious financial situation and there was objective evidence of impairment. PV of expected credit losses was 48.1M - Explain the treatment?
- On 31/05/2005 need to recognize allowance accordance w IFRS 9. 10%*25m=2.5m. - Interest 4% will be recorded in P/L which is the unwinding of discount. DR P/L (4%*2.5) CR Loss allowance -> Loss allowance at 31/05/2006 is 2.6M Interest income for the year: 4.5%*100m - By 31/05/2006, stage 3 of IFRS 9 has been reached. must record full 48.1m. DR P/L (48.1-2.6) CR Loss allowance.
On 1/6/2005 Ejoy purchased a 5 year bond w principal amount 50m and fixed rate 5% which was the current market rate. The bond classified as at FV through P/L. Ejoy entered into floating rate swap. Ejoy has designated the swap ass a FV hedge of the bond. At 31/05/2006 market rate 6%. FV of bond decreased to 48.3M. Ejoy received 0.5M in net interest payment on the swap. Assume that IFRS 9 hedge effective and any gain/loss on the swap is the same ass loss/gain on the bond. - Accounting treatment?
1/5/2005: 50 Interest income(5%*50) 2.5 Interest received (2.5) FV loss (balancing) (1.7) FV at 31/5/2006 48.3
Z hold properties for investment purposes. 1/7/2005, Z held 10 floor office. 1st floor, Z uses. 2nd floor for B (group company) FOC. and 8 floor for normal rent. It was est FV of office was 96M at 30/6/2006. Z has policy to restating all land and building. - Which go to P/L?
Investment(8FL) Owner(2FL) 1/7/2005 72 18 Depn(18m/15year) (1.2) FV gain (balancing) 4.8 2.4 FV at 30/6/2006 76.8 19.2 - Depn 1.2 charged to admin cost. - 4.8 goes to investment income. - 2.4 OCI
On 1/1/2006 Z enter to a contract to sell 10,000 units for 1,000$/unit. If customer buy more 5,000 u, price will be 950$. 6,000 u are manufactured and delivered in 4 months to 30/4/2006. Customer place additional 5,000u on 30/3/2006. Minor defects in 6,000u and Z agreed to issue credit note 40$ per unit. Z and customer agreed to net of in the future payment. A further 7,000u had been manufactured and deli by 30/06/2006 without any defects. Z include 6$m (6,000u*1,000$) for the first 6,000u . - Accounting treatment?
- Manufacturing defect: Reduction in revenue Dr Revenue Cr AR (6,000*40$) - Further 7,000u The price 950$ apply depending on the old contract, so it is not a separate contract. Instead it will cancel old contract and create new contract. Therefore the price for 7,000u will be average price 4,000u for 1,000$ and 3,000u for 950$ -> 972$ per u DR Revenue 972*7,000 CR AR - For 2,000u has not sold, no need to record revenue.
Bravado acq 10% in Clarity on 1/6/2007 for $8M. The investment was accounted for as an investment in equity instruments and at 31/5/2008, its value was $9M. On 1/6/2009 Bravado acq additional 15% interest in Clarity for $11M and achieved significant influence. Clarity made profit after dividend $6M and $10M for 31/5/2008 and 31/5/2009. - What is the amount in investment on SOFP?
Cost of investment: 20M Profit for the year: 10M*25% Total: 22.5M
Jarvis set up an innovative project to find new ways to solve environment challenges. The director said that the project will enhance the environment for future. He believes that all exp can be classified as a non-current asset. - Advise the accounting treatment?
- Should be meets definition of an asset (controlled by entity and brings future economic). So Jarvis must have intention to use the asset on a continuing basis & should not resale. - Consider the type of spend: IAS 16 PPE or IAS 38 Intangible Asset. - All exp under research phase goes to exp and only exp under development stage can be capitalized. - Jarvis need to closely monitor for any impairment risk arise.
Discuss what is meant by Corporate Responsibility (CR) and in particular the factors which should encourage companies to disclose social and entertainment info?
- To stakeholder and society: Besides profit now stakeholders want biz has responsibilities for their activities. - Strategic decision: affect two outputs: the goods and service produced and the environment consequences. FACTOR Encourage disclosure: - due to public interest. - Increase shareholder value. - Influence from Government and professional bodies. - Public guidelines: Integrated Report framework.
The director of Columbus have strong views on the usefulness of the financial statement after their move to IFRS. Although IFRS implement a FV model, IFRS are failing users of FS as they do not reflect the financial value of an entity. - Discuss the director’s views regards the use of FV in IFRS and the fact that IFRS the financial value of an entity?
- IFRS uses a mixed measurement system: + Historical cost: ez to understand, real transaction amount, less scope for manipulate however cant reflect the cost overtime. + Definition of FV! - Financial value of entity: While IFRS allow to use FV to measure Asset/Lia, FS prepared under IFRS are not. As believed, intended to reflect the aggregate value of entity. Since IFRS disallow to record certain internally generate intangible asset. Only when an entity acquire by another entity
Columbus lease a property, however the FS have not shown a lease asset or liability. The new director wants to record into the FS. - Discuss the ethical & accounting issues and advise the appropriate accounting treatment.
Accounting Issue: - IFRS 16 requires to recognize all lease over 12m. - Initial recognition: Must record ROU and a lease liability, record at PV of the future payment . Ethical Issue: - There has been an intimidation threat as new director got pressure from old director. And also the objectivity and integrity. - Director may not record the lease to obtain the better financial position for loans, so this is advocacy. - Also Director not act for professional competence to show the right result.
Casio has 3 segment: They wish to allocate head office mgt exp, pension exp, the cost of mgt properties and interest. - Advise the mgt the accounting policies?
- IFRS 8: Operating Segments The allocation method can be significant impact on FS. Those exp could be material amounts. - IFRS 8 does not prescribe a basis -> need reasonable + Head office cost: Allocate base on revenue or net asset. Follow the size of biz. + Pension exp: The most related is salary exp or number of HC. + Cost of mgt properties: Value of properties or age of it. + Interest: These need not be allocated to same segment IFRS 8 calls this asymmetrical allocation.
The segmental info can differ from reported FS. Although reconciliation are required, these can be complex for user. Director have a responsibility in disclosing infor to enhance corporate value but this may conflict w their CSR. - Discuss how ethics of CSR disclosure r difficult to reconcile w shareholders expectation?
- shareholders expected to be social and environmental responsibility as well as profitability. - 2 output: goods/services and social/environment consequences. - There may be a conflict of interest. - However, it is possible being a good corporate citizen and improve biz performance. -> Company makes a detailed disclosure.
Directors want to inject capital in order to modernize PPE. Bank requires borrowers have a good projected CF as well as a level of profitability. The current CF does not meet criteria. And the Chief Accountant just joined the Casino and doesn’t want to lose his job. - Discuss potential ethical conflicts which may arise in the above scenario and the ethical principles which would guide CA response in this situation?
(1): In fact the current CF does not meet criteria so CA has a pressure to comply ethical & professional std as well as satisfied the directors in this situation. (2): He has duty to act in the best interest. It might be a conflict between short and long term of the company. - Ethical principle. - Self interest & advocacy threat: risk of losing job and disclose misleading infor. - In case of objective, CA tend to biased due to the goal to meet the requirements and providing misleading info would compromise his integrity. –> Action: Submit the true CF and persuade directors for the new direction.
Director have been reviewed IR and believe IFRS already enough. They concern any additional information would be excessive. - Discuss the extend to which CF provide stakeholder w useful info about entity and whether this info would be improve by the entity introducing IR?
- Usefulness CF: Provide valuable info about liquidity, solvency & financial adaptability. Can help users understand and make decision. - IAS 7 requires to disclose following changes in financing activities: + Financing CF. + Obtain & losing subsidiary or other biz. + Changes in FX. + Fair value. - CF are objective and hard to manipulate than profit and help to predict the future flow. - IR: + Limit: Overload of immaterial disclosure. + Show all aspect of capital. + Benefit: FS only has financial data. IR: Provide external data Problem: Hard to prepare (time & cost)
Presdon has year end 31/1. Shortly b4 y.e, P gave a $5M 0% interest loan to its subsidiary Mielly. M repaid full in Feb. Because the loan paid full in Feb. P classified as AR and M classified as AP. M has several bank loan and debt covenant link to interest cover & gearing. B4 receiving the loan, M had bank overdraft 4.5M - Discuss the impact which $5M loan on debt covenant & ethical implication?
- Interest cover: No interest so no impact. - Gearing ratio: Unclear. The loan might clear the overdraft. However classified as AR, AP is misleading. Should be current asset investment & short term loan. - Ethical: Have responsibility to issue true & fair FS. The time of loan indicate some financial support intra group & should be disclosure. - Action: Reclassified the loan.
Comment in the view that indirect method of CF is more useful & informative than direct?
- Direct: Take the cash receipt vs cash payment. + Ad: Easier to understand. + Dis: Time consuming & expensive. - Indirect: Adjust the net profit. (1): Changes in working capital. (2): Noncash: Depn, provision, Deferred taxes.. (3): Other as investing & financing. + Ad: Ezier to prepare. + Hard to understand, manipulate.
Account for disposal group!
- Measurement of disposal group: LOWER carrying amount vs FV less cost to sell.
- Impairment loss recorded in PL, but if Asset hass been measured at revaluated amount ->> decrease revaluation 1st
- Step 1: Carrying amount 90-30=60
- Step 2: Lower between carrying amount 60M and FV (40) less cost to sell (1+0.5) -> Additional 21.5M will record.
Q: Advise the director how to account for the sale at the start of the lease.
Comment on the effect on interest ratio and impact on bank covenant.
- When transfer Havana should Derecognize the carrying amount (4.2M) and recognize ROU at proportion of the previous carrying amount related to ROU retain
- ROU at the start of lease.
= 4.2*3.85/5=3.234
- The gain related to the right retain:
0. 8*3.85/5=0.616 - > The balance (800-616) should be record as a gain.
DR CR
Cash 5M
ROU 3.234
Building 4.2
Lease liability 3.85
Gain 1.84
- ROU should depreciated over 10 years.
– The gain only 184K compared w 800k from director
Q: Appropriate accounting treatment for Bond and discuss any ethical implication?
- Follow IAS 1 need to reclass the loan as current liability due to the payment due within 12m.
- If the lender has agreed to provide a period of grace at least 12m, Alex can reclass as non-current.
- Currentlt, Alex sought 2 loan waivers -> ability for going concern. IAS 1 requires Alex to disclose these uncertainties.
- Ethical: classified as non-current is unethical, does not faithful represent the financial position.
- Impact: Misleading and predict the cash flow.
Q: Question about the treatment for remuneration of BoD
- Alex breached to categories: No breakdown & Exclude NED.
- Breakdown: Alex needs to disclose by the following. Only disclose the total not individual person.
- Short-term benefit
- Long-term benefit
- Post employment benefit
- Termination benefit
- Share-based payment
- NED: IAS 24 requires disclose key mgt personnel therefore need disclose for NED due to their nature not the amount.
- Importance of disclose: Draw attention, link to the position of company, area for threat (self interest)
Q: Advise the director how the agreement should be dealt with reference IFRS and Conceptual Framework?
- Conceptual Framework does not define control. however, risk & reward can be helpful factor.
- IFRS 9 provides 3 example when transferring the financial instrument:
- an unconditional sale of an asset
- sale w the option to repurchase at its FV
- sale which is deeply “out of money”
- In the case, Formatt still received the interest (risk & reward).
- > Formatt should recognize the financial asset and expected credit loss.
Q: IAS 36 Impairment Loss and IAS 37 Provision, Contingent Asset & Liability?
- Value of asset: LOWER carrying amount VS Recoverable amount (HIGHER Value in use VS FV - Cost of sales).
- > 841K to P&L for impairment loss.
- Assessment on 30/Nov: IAS 36 requires to make assessment on each reporting period so using the same cash flow is prohibited.
- Government reimburse are recorded only when virtually certain
- > No credit for the compensation.
Q: Revaluation Gain & then Impairment Loss
Q: Cost of general interest?
- IAS 23 Borrowing Cost: Should be capitalize the cost of interest related to the construction.
- The weight average carrying amount:
(20+70+120+170)/4=95M
- The interest should be capitalize:
(95*9%*4/12)=2.85
Q: Accounting treatment for acquiring sport player?
- Acquisition (IAS 38 Intangible Asset)
- The cost related to acquisition player should be capitalized (Transfer fee, League fee, Agent fee)
- Also include any contingent consideration (need reassessment.
- Amortize over the contract period.
- Extension:
- Revised the carrying amount and amortize over the revise period.
- Sale of player (IFRS 5)
- Classified as HFS.
- Measure: lower Carrying amount Vs FV-cost of sale.
- Impairment Review (IAS 36)
- When carrying amount > Recoverable amount -> Impair
*
Q: Accounting Treatment for the offer for PPE?
Q: Treatment for the indefinite intangible asset-IAS38?
- Scramble capitalized the game as intangible asset is correct.
- Also expense all the maintenance cost to PL.
- IAS 38 requires to choose Cost model or Revaluation. Scramble chooses the cost model.
- Indefinite not the same as infinite. Computer software need to be reviewed each period. When change from indefinite -> finite –>> change in accounting est.
- Scramble does not comply w IAS 36. Need compare expected & actual CF.
- IAS 36 requires CF projection related to the asset in its current condition.
Q: Discount rate for impairment IAS 36?
- Use the specific rate for the CGU.
- Est discount rate: pre tax rate reflect the current market assessment of the time value of money and the risk specific to the asset that have not been adjusted.
- Rate must be the most sensible & justifiable.
- Should not use risk-free rate.
- IAS 36 requires to disclose:
- Amount of loss
- Event led to the loss
- Description of the impairment.
Q: Intangible Asset IAS 38 for football player.
- For the agent fee can be capitalized.
- Can not treat the right to sale ticket as intangible asset.
- The right should be treat a financial asset and record as FV.
