SBRR

Download as docx, pdf, or txt
Download as docx, pdf, or txt
You are on page 1of 60

Leases – IFRS 16

Example 1.1

 The Lease term is 3 years (2+1), Fixed lease term of 2 years + 1 year
extension option which is certain to be exercised.
 Total Payments:
o Year Payment DR Present value
o 1 1000 0.952 952
o 2 1000 0.907 907
o 3 700 0.863 604
Total PV = 2463
 The Present value of the 2700 in the future is 2463 today
 Initial accounting ( on the date of the lease ) 1st January 2020
o The initial liability will be $2463, this is the present value of future
lease payment obligations.
o The Value of the right of use asset initially will be $2463, but there is
a direct cost/cash outflow ( commission paid to agents ) of $420
which will add on the value of the RUA. The Final Initial value of the
RUA will be $2883
o Dr Right of use Asset 2883
o Cr Lease Liability 2463
o Cr Cash A/cb 420

 At the year end


o RUA gets depreciated.
o Liabilities increase with the effective interest
Amortized Cost Table:
Year Initial Balance Int@5% Payment Closing balance
1 2463 123 (1000) 1586
o In the year ended 31st December 2020, $123 will be recorded as a
financial cost (interest) in the P/L. $1000 will be treated as a cash
outflow and the closing liability of the lease at the year end of $1586

o The right of use asset will be depreciated over the lesser of either 1.
The useful life or 2. The Lease term. In this case the lease term will be
taken into consideration ( 3 years )

o The depreciation of the asset at the end of the will be 2883/3 = 961,
and the value of the RUA at the will be 2883-961 = $1992

o The depreciation of $961 will be charged to the P/L, and the RUA will
be recorded at the SOFP

Example 1.2

(a) It is a service contract rather than a lease contract. Starbucks does not have
right of use to the mentioned space as Dubai airport ( the lessor ) has
substantive substitution rights and can shift the location of the space at any
time and does not incur any significant costs and therefore it is also
economically beneficial. The amounts paid by starbucks will be recorded in
the P/L statement
(b) This is a lease contract rather than a service contract. The Lessee ( building
material company ) has Right of use of the underlying asset ( ship ) and can
direct its use ( where it will sail to ) and gain economic benefits. The lessor
does not possess substantive substitution rights ( cannot replace a ship with
another one if it is economically beneficial to do so ) Even though the lessor
has placed restrictions, the lessee has the entire right to direct its use
throughout the lease term. The Bldg. material will company will record RUA
(ship) in the SOFP and a corresponding lease liability

Example 1.3

 As per IFRS 16, a contract is a lease contract if it conveys right of use to an


underlying asset for a consideration over a period of time.
 The Lessee can check whether they possess right of use by checking if the
lessor possess substantive substitution rights or not.
 It can also be done by assessing if the Lessee has the ability to enjoy
substantially all the benefits of the asset and have the ability to control and
direct its use
 The contract gives enough evidence that it is a lease contract. This is
because eventhough there are some restrictions imposed, Calendar ( lessee
) will be able to control the aircraft (RUA) in the accepted limits and the
restriction will not limit any substantial benefits that Calendar will enjoy.
This is because Calendar has full control over the whereabouts, cargo and
passengars of the plane
 Despite the fact that Diary ( Lessor ) has the authority to substitute the
plane, they do not possess substantive substitution rights because its not
economically beneficial to them to replace it as there are significant costs
involved and Diary must adhere to rigid interior and exterior specifications.

 The treatment done by the accountant is incorrect. Because the contract is


a lease, it should not be recorded as an expense in the P/L statement
 Calendar should record the right of use of asset and a corresponding
liability in the Statement of Financial Position

 The Lease liability will be accounted as the present value of future lease
payments, and a cash outflow will also be recorded as the effective interest

Example 1.4

LESSOR ACCOUNTING

Example 1.5

 This contract is a finance lease. The lease period which is 4 years is equal to
the useful life of the asset ( greater than the majority of the useful life )
 The PV of future payments is equal to the fair value of the leased asset ( it is
substantially all of the PV )
 Accounting
o Step 1 : Derecognize the leased asset ( NBV) $60,000
o Step 2 : Record a receivable that will be the PV of lease payments -
$68,253
o Step 3 : The difference is recorded in the P/l Statement as a gain or
loss
o DR Recievable 68,253
o CR Leased Asset 60,000
o CR Cash inflow/Profit 8,253
 Subsequent Accounting:
 The receivable must be recorded at amortised cost
Year Opening Balance Interest 11% Payment Closing Balance
1 68,253 7507 (22000) 53,760

 Nigel will amortize the receivable by recording interest income of 7,507


which will increase the receivable, and the payment received at year end of
22,000 is a cash inflow and will reduce the receivable leaving a receivable
balance of 53,760

Example 1.6

 This is an operating lease. The Plant will be returned to Ajay at the end of
the lease period which is 4years ( much less than the useful life of the
leased asset which is 25 years ). Also the total contract value is $380,000
which is only 43% of the original cost and does not cover all value of the
plant substantially
 Ajay will keep the asset and depreciate it over 25 years ( 880,000/25 =
35200). This will be recorded in the P/l
 The Contract rental income of $380,000 will be recorded throughout the 4
year period in a straight line basis ( 380,000/4 = $95,000) and will be
credited in the P/L Statement

Example 1.7

 Seller/Lessee
 Step 1 : Derecognize the CV of the asset
 Step 2 : record the proceeds at FV
 Step 3 : record the Lease Liability at the PV of Lease Payments
 Step 4 : Record the Rights of use asset at the proportion of rights retained
CV x PV/FV
1.2 x 1.9/1.3 = 0.76
 Step 5 : The balancing figure is the gain or loss on disposal
 Dr. Cash $3m
De. ROU $0.76m
Cr. PPE $1.2m
Cr. Lease Liability $1.9m
Cr. Gain disposal $0.66M
 Richard will have a ROU asset of $760,000 that will depreciate over 5 years.
760,000/5 = 152,000. This depreciation expense will be recorded in the P/L
Sheet
 The Lease liability will amortize by incurring finance cost ( 1.9 x 10% = 0.19 )
$190,000 which will increase the lease liability. The lease liability will be
reduced by annual payments of $500,000 as cash outflow
1,900,000 + 190,000 – 500,000 = $1,590,000

Branson Buyer/lessor:
 Step 1 : Recognize the asset and cash outflow
 Dr. PPE 3M
Cr. Cash 3M
 Step 2 : Identify if its financial leas or operating lease
o Lease term < useful life
o PV of payments 1.9/3 = 63% doesn’t substantially cover the entire
fair value
o This is a operating lease
 Rental Income of $500,000 will be recorded as the P/L as income on
straight line basis (500,000/5 = 100,000)
Share Based Payments IFRS 2

Example 2.1

 2021 accounting treatment


o (500-20-55) x 100 x $15 x 1/3 = $212,500
o Eligible Employees x No. of share options x FV at grant date x Vesting
Period
o Eligible employees = ( Total employees – Employees left )
o Dr. Expense 212,500
Cr. Shares to be issued 212,500
 2022 accounting treatment
o (500-20-22-18) x 100 x $15 x 2/3 = $440,000
o Expense for this year = 440,000-212,500 = 227,500
o Dr. Expense 227,500
Cr. Shares to be Issued 227,500
 2023 Accounting treatment
o (500-20-22-15) x 100 x $15 = $664,500
o Expense for this year = 664,500 – 440,000 = 224,500
o Dr. Expense 224,500
Cr. Shares to be issued 224,500
o Dr. Shares to be issued 664,500
Cr. Share Capital/Premium 664,500

 Explanation
 Share Options issued to employees by the company are recorded as an
extra expense and a corresponding credit to be issued in equity
 The expense has to be spreadover the vesting period (3 years ) and takes
into account the actual leavers and the employees expected to leave in the
future
 The Share options are valued using the fair value of the option at the grant
date and remains unchanged throughout the vesting period
 The entity will record $212,500 as an equity in 2021. $227,500 in 2022 and
$224,500 in 2023. Once the shares are vested, this is then transferred to
shares capital and premium.

Example 2.2

 2021
o (500-20-20) x 200 x $5 x 1 / 2 = $230,000
o Dr. Expense 230,000
Cr. Liability 230,000
o Share Appreciation rights are given to employees with the promise to
pay cash based on the share price in the future.
o The number of eligible employees will be considered and valued at
the fair value at the end of each year. This is spread throughout the
vesting period and recorded as an expense with a corresponding
entry as Liability.

 2022
o (500-20-24) x 200 x 7 = 638,400
o Expense for the year = 638,400 – 230,000 = $408,400
o Dr. Expense 408,400
Cr. Liability 408,400
 20th December 2023 -> Employees will exercise their SAR’s -> (500-20-24) x
200 x $8 = $729,600
 The difference of $91,200 will be recorded in the P/L statement
 Dr. Liability 638,400
Dr. Expense 91,200
Cr. Cash outflow 729,600

Example 7.3

The increase in the pension settlement from 10% to 15% is a past service cost and
has to be recorded in the P/L.

Pension is an integral part of the company compensation and company operation


AS IT RELATES to the employees and the ervices they provide therefore the
correct treatment is that this increase in settlement amount ( benefit ) will be
recorded in the P/L and not OCI

Only the remeasurement gain or loss are recorded in the OCI


Segment Reporting IFRS 8

Example 3.1

10% Test

Revenue = $100,00

Asset = $1,000,000

As per the Revenue Test , these segments must be reported:

 Lexus 270,000
 Yaris 160,000
 Corolla 330,000

As Per the Asset test, these segments must be reported:

 Lexus 3,400,000
 Corolla 3,800,000

10% Profit Test = 98 + 47 + 121 + 12 = $278,000

278,000 x 10% = 27,800

As per the Profit test, these segments must be reported:

 Lexus 98,000
 Yaris 47,000
 Corolla 121,000
 Avalon (29,000)

The additional reportable segment as per the profit test would be


Avalon, and therefore the final reportable segment are:

 Lexus
 Yaris
 Corolla
 Avalon

Example 3.2
 As per IFRS 8, the operating segment is a component of an
entity that:
o earns revenue and incurs expenses, and
o whose performance is regularly reviewed by a Chief
Operating Decision Maker.
o It should also have separate financial information
available.
 A Segment is reportable if it qualifies the 10% test which
means that either the revenue, assets or profits of the
segment must be above 10% of the total of the entity
 Two or more segments can be aggregated together if they
have similar economic characteristics.

 The Second laboratory has a revenue of more than 10% of


the total revenue of the company(18%) and its
Performance is directly evaluated by the Chief Operating
Decision maker, and the head of the 2nd Laboratory is
directly accountable to the CODM. Therefore the 2nd
laboratory meets the criteria to be a reportable segment

 The first laboratory does not meet the criteria to be a


segment. They don’t earn revenue and do not have
separate financial information available. Their
performance is directly overseen by the division heads and
not the Chief Operating Decision maker
Financial Instruments

Example 4.1
 As per the standard relating to financial instruments, a
liability is a contractual obligation to deliver cash or
another financial instrument to another entity.

 Equity is any agreement that gives access to the investor


to a residual interest in the total assets of the business
after deducting all liabilities.

 1
In case of B shares, SKYE has no right to oblige to transfer
cash to or another asset to the holders of the instruments.

o Even though SKYE has not refused a request to


redeem the shares, they still don’t have any
obligation to pay back in the future. Therefore, there
is no contractual obligation and B is an equity
instrument

 2
In case of preference shares, the holders have the right to
ask for repayment of the principal at any time.
o Even though Skye is only obliged to payback if they
have sufficient reserves, the obligation still exists and
they must accept the holders’ request in the future
when they possess sufficient reserves. Therefore
contractual obligation still exists and this preference
shares is classified as a financial liability.

Example 4.2

Under the financial instruments standard, states that a financial


liability is any contract that may be settled through the entity’s
own equity instrument for which the entity is obliged to deliver
a variable number of shares of its own equity instruments
1) Coasters is obliged to redeem the first set of preference
shares by issuing their own equity shares which is equal to
the value of $3million shares.
The actual number of shares is variable and is dependent
upon future share price information.
This means that $3m Preference shares should be
classified as a financial liability

2) $3 million preference shares will be classified as equity as


any contract that gives the right to the investor over the
net assets of the company is an equity instrument.
Because there is no varioation in the number of shares to
be issued after 2 years, this $5.6million can be classified as
an equity instrument.

Example 4.3

Initial recognition 1/1/2020


Cas received $20,000
Liability $20,000
In reference to the spreadsheet, the initial liability will be
$20,000. This Liability will increase with the effective interest
rate of 8%. This Effective interest of $1600 will be expensed out
to the P/L statement. The Liability will reduce with the cash
outflow of coupon payments of 6%. This $1200 will be recorded
as a cash outflow in the cash flow statement
The Closing Liability of $20,400 will be recorded as a liability in
the statement of financial position

Example 4.4

Initial Accounting 1st Oct 20x5


 Dr. Cash $20m
Cr. Liability
Cr. Equity

 Year Payments DR PV
1 800,000 0.909 727,200
2 (800,000 + 20m) 0.826 17,180,800
(Coupon+Principal)
Total PV 17,908,000

 At Oct 20x5 Hill received $20m and this will be recorded as


cash inflow from financing activities.
As this is a convertible bond it has a characteristic of both
a financial liability and an equity instrument.
The Liability is the Present value of Payments which come
to $17.9m. The equity amount will be the difference
between the liability and the cash amount (17,908,000 –
20,000,000 = 2,092,000) and be recorded as a bablancinf
figure and charged as part of shares to be issued
 As of 30 Sept 20x6, the financial liability will be amortized
and the equity value will remain the same
 Year Opening Payments Interest Closing
1 17,908,000 (800,000) 1,790,800 18,898,800

 Lease liability will be increased by an effective interest of


$1.79 million and be reduced by payments paid of
$800,000. The Effective Interest will be expensed out to
the P/L Statement and $800,000 will be recorded as cash
outflow.
Example 4.5

 A
 If David wants to hold the bonds till redemption date, the
bond will be amortized
 Initially on 1 January 2021, David will record cash outflow (
investing activity ) of $100,000, representing the
investment and a corresponding entry as financial asset.
 Dr. Financial Asset 100,000
Cr. Cash 100,000
 Subsequently as David’s model is to hold the bond till
maturity, the bonds will be amortized
 Year Opening Interest Cash Inflow Closing
1 100,000 (7000) 5,000 102,000

 7,000 interst income will be recorded in the P/L as Income


increasing the asset value. Cash inflow of 5,000 will be
recorded in the cash flow statement and reduce the value
of the asset. The Value of the asset at 31st Dec 2021 will be
$ 102,000.
 B
 If David wants to hold the bonds till redemption date, the
bond will be measured through fair value through OCI
 Initially on 1 January 2021, David will record cash outflow
(investing activity ) of $100,000, representing the
investment and a corresponding entry as financial asset.
 Dr. Financial Asset 100,000
Cr. Cash 100,000
 Subsequently, as David’s model is to hold bonds until
maturity but also to sell them if investments with higher
returns, then Fair value through OCI will be used.
 Year Opening Interest Cash Inflow Closing
1 100,000 (7000) 5,000 102,000

 7,000 interst income will be recorded in the P/L as Income


increasing the asset value. Cash inflow of 5,000 will be
recorded in the cash flow statement and reduce the value
of the asset.

 The Value of the asset at 31st Dec 2021 will be $ 102,000


which will then be compared to the fair value of the asset
at 31st Dec 2021 (110,000) which results in a gain of $8000
which will be recorded in the P/L
 The Value of the asset in the SOFP will be an amount t of
$110,000

Example 4.6
 A
 Initially these shares purchased will be recorded as a
financial asset at fair value $ 40 Million. The Cash will be
treated as cash outflow from investing activities.
 At the year end 31st Dec 2021, the fair value of the
financial asset must be recorded as $60 million. The
difference of $20m will be recorded in Other
Comprehensive Income.
 B
 Initially these shares purchased will be recorded as a
financial asset at fair value $ 40 Million. The Cash will be
treated as cash outflow from investing activities.
 At the year-end 31st Dec 2021, the fair value of the
financial asset must be recorded as $60 million. The
difference of $20m will be recorded in the P/L statement.
Example 4.7

 Initially on 1 January 2020, Kim will record a financial asset


of $1m and a corresponding entry of cash outflow from
investing activities of the same amount.
 It will subsequently be held at amortized cost ( Increase
interest income recieved and Decrease cash inflow from
payments)
 Year Opening Interest Payments Closing
1 1000 100 (90) 1010
 During 2020, interest income of $100,000 will increase the
value of the asset and be recorded in the P/L and the cash
inflow of $90,000 will decrease the value of the asset and
be recorded in the cash flow statement and the CV of the
asset will be $1,010,000.
 At the end of the year Kim has to do an impairment loss
test based on the expected credit loss ( Pv of Cash
shortfalls x Probability )
 Year Cash shortfall DR PV
2021 90,000 0.91 81,900
2022 690,000 0.83 572,700
Total PV of cash shortfall 654,600

 Therefore the expected credit loss will be ( 654,600 x 0.5%


= 3273. This will be expensed in the P/L statement and a
provision will be created in the SOFP
 Dr. Expense 3273
Cr. Provision for credit loss 3273

Example 4.8

 Financial Assets are derecognized if the contractual


cashflows expire or when the risks and rewards are
transferred.
 Legally banana sold the bond for $8m in cash that was
received. Banana will still receive the coupon payments
and therefore contractual cashflows have not expired.
 If there is an increase in the value of the bonds the third
party will pay banana the increase in price . And if there is
a reduction in price, Banana will have to compensate the
third party which means that the risks and rewards are still
retained by banana.
 Also Banana will repurchase the bond after 2 years,
therefore they should not derecognize the bond. The $8m
received is practically a loan.
 Dr. Cash $8m
Cr. Liability $8m

Related Parties & IFRS for sme’s

Example 5.1
 Bing must disclose its parent companies (G) and should
also disclose its ultimate parents, ie., Roberto Duffy
 The company in which Franchesca Tribianni has a 23%
shareholding rather significant influence is related to Bing
as its significantly influenced by a close family of the
ultimate president. As result the sales, any outstanding
balances, bad and doubtful debts must be disclosed even if
the sales were held at market price
Bing can lose this sale in the future, if Roberto’s wife were
to sell her shares in company x. This need to be disclosed
to the users of Bing’s financial statements since its not a
organic transaction
 Interest free loans on its own are not a related party
transaction even though it’s a benefit to the employees.
Therefore, no disclosure needs to be done.
 Bing is dependent upon R plc as 30% of their revenue
comes from transaction with them. However its not a
related party issue since the relationship is organic and a
significant customer cannot be a related party just due to
the volume of business.

Example 5.2
 The accounting standard IAS
 \ 24 is to ensure that an entity’s financial statements
contain any disclosure which are necessary to draw the
attention of the users towards any possibility that the
company’s profit/loss or financial position has been
affected by the existence of a related party.
 If there has been any related party transactions there
should be a disclosure of the nature, amounts and
description along with any other outstanding balances.
 The Director is a key management personnel of Abby and
therefore is a related party
 Arwight is jointly owned by the director and his wife and
therefore Arwight and his wife is a related party to Abby
 Even though the transaction is made at an arms length
basis the disclosure is still required.
 The Director is incorrect in his reasoning that other entities
also do not disclose such information. This either brings
the director’s integrity in question or brings his
professional knowledge regarding the accounting
standards in question.
 The accountant should discuss with the director to the
risks relating to not making a disclosure however given to
the fact the accountant is a working under the finance
director he might be rather tempted to hide the disclosure
to keep the job.n

TAX

Example 6.1
1. Accounting : The investment initially recorded at $10
million. At the year end, a gain of $8m will be recorded

Tax : The $8m is an unrealized gain for tax purposes. This


will give rise to a Temporary difference of $8m and a
Deferred tax liability will be required
8m x 30% = $2.4m
Dr. Tax expense 2.4m
Cr. Deffered tax liability 2.4m

2. The expected credit loss is a temporary difference which


will reverse when the unidentified loans go bad. This will
give rise to a Deferred tax asset.

2m x 30% = 600,000
Dr. Deferred Tax Asset 600,000
Cr. Tax Expense 600,000

3. The PPE is initially recorded at $10,000 at revaluation


model, and a gain of $30,000 ( 40,000 – 10,000 ) will be
recorded

The Carrying Value ( 40,000 ) is greater than the tax base


of the asset ( 10,000). This will lead to a taxable temporary
difference

The $30,000 is an unrealized gain and will lead to a taxable


temporary difference and will be expensed out through
the OCI as Laura is following the revaluation model
A Deferred tax liability will be recorded
30,000 x 30% = 9,000

Dr. Tax Expense 9,000


Cr. Deferred Tax Liability 9,000

Example 6.2

Share Option that are equity settled are recorded in the p/l as
an expense over the vesting period with a corresponding entry
on equity – shares to be issued
5000 x 3 x ½ = 7500
The value of the options will take into account the fv of the
options at grant date that will not change and and will also
consider the number of employees and potential leavers and it
will be spread over the vesting period
Dr. Expense 7500
Cr. Shares to be issues 7500

The tax authorities is providing tax benefit based on the


intrinsic value that is the MV – exercise price ( 4 – 2.8 = 1.2 ).
This relief will be exercised at the exercise date of the share
options when they become vested. This creates a deductible
temporary difference creating a deferred tax asset
5000 x 1.2 x ½ = 3000
Defered tax asset = 3000 x 30% = 900
Dr. Defered tax asset 900
Cr. Deferred tax expense 900

Example 6.3

Due to the prudence principal, we can only recognize DTA on


unused losses brought forward when its probable that future
profits are available to offset the past losses.
Therefore, Chemical needs reasonable certainty that they will
be profitable in the future.
Looking at their past records it seems it seems they have been
making losses for the past 5 years which is not a good indicator
of good performance.
The forecast of 2015 to 2020 seems positive as it shows profits
due to product development and economic improvements that
will occur in the next 5 years.
However, it seems the management have inaccurate forecasts
as comparisons between the budget and actual results resulted
in material differences. Therefore, their ability to forecast and
their assumptions cannot be trusted.
Also, there is a material uncertainty regarding going concern
therefore Chemical has a doubt in their ability to continue in
business in the foreseeable future, therefore it is unlikely that
they can foresee 5 years of profit.
Therefore, the deferred tax asset of $15 million needs to be
reserved.
Practice Question 2
Due to the prudence principal, we can only recognize DTA on
unused losses brought forward when it’s probable that future
profits are available to offset the past losses.
The tax adjusted loss of $5m as of 31st December 2016 was
incurred due to a one of restructuring exercise that will most
probably not be performed again in the recent future.
The Loss incurred is a one-off loss and not due to previous
downward trend.
Blue has also brought forward forecasts that they will have
profits of $3m in the next 3 years and the data after that date
cannot be accurately recorded.
Considering, the above points, we can say that Blue will most
definitely will be making future profits of $3m.
Therefore, a temporary difference of $3m will occur, and Blue
will record a DTA of:
3,000,000 x 28% = 840,000
Dr. Deferred tax asset 840,000
Cr. Deferred Tax Expense 840,000
Pensions

 Defined Contribution Plan:


o Contribution : amount of funds that the company
puts into the fund in an annual basis = FIXED
o Amounts are invested in the fund and based on
interest rate and returns the benefit.
o What the employee gets at retirement = VARIABLE
o Employee bears the risk of the investment
o Dr. Expense (p/l) – Annual contribution

 Defined Benefit Plan


o Benefit : what employee gets at retirement = FIXED
(no. of years worked x final salary x 5% x years to live)
The fixed benefit = estimated by actuary ( will be
given in the question)
Remeasured every single year
o Company needs to ensure there is sufficient fund ( by
adding a variable contribution ) to meet the fixed
benefit
o The company bears the risk of investment
Example 7.1
Contribution
6% x 20m = $1.2m
Accounting entry
Dr. expense 1,200,000
Cr. Cash 960,000
Cr. Payable 240,000

Example 7.3

The increase in the pension settlement from 10% to 15% is a


past service cost and has to be recorded in the P/L.
Pension is an integral part of the company compensation and
company operation AS IT RELATES to the employees and the
ervices they provide therefore the correct treatment is that this
increase in settlement amount ( benefit ) will be recorded in the
P/L and not OCI
Only the remeasurement gain or loss are recorded in the OCI
Saying that the pensions are not an integral part of operations
and that it will make the financial statements more consistent
is incorrect and shows that the directors of Justin may lack
competence and lack expertise in financial reporting.

However, given the original policy was to expense the losses to


the P/L and the directors are proposing changing it to OCI, it
seems that they are doing so deliberately. They are likely to
receive a higher bonus as bonuses to the directors are based on
the operating profit . If the expense of the increase from 10% to
15% was recorded in the p/l as it should be done, the operating
profit would reduce and therefore there will be reduction in the
benefits they receive. Therefore the directors lack integrity and
objectivity

Practice question 7.1


The plan assets will generate a return in the pension plan that is
based on the discount rate available . The plan obligation would
also be undiscounted to include the discount interest element.
The Net interest (10) expense will be recorded as part of the p/l
Contributions paid to the fund would reduce JBR cashflows
from operating activities and this would reduce the net pension
liability (as the pension fund assets are increasing)
Pension of 50 paid to former employees who retired have no
impact on the JBR financial statements as the payment is made
by the fund
Service costs are the costs of the pension for the other
employees working for another year and therefore this would
increase the net pension liability and will be recorded as an
expense in the p/l
The remeasurement of the pension funds of assets and libilities
will be performed by an actuary at every year end. If there are
any remeasurement gain or loss (loss of 5) that will be recorded
in the OCI

Fair Value Measurement and revenue


Example 8.1

Step 1:
Identify the Principal market (industry). The market with the
highest sales volume throughout the industry is Asia selling
750,000 vehicles. Even if it’s not the subsidiary’s primary
market or the market with the highest sales, it’s still the
principal market.

Step 2: Calculate Fair Value


Fair Value is the selling price in the principal market less any
transport cost ( 38,000 – 700 = 37,300 )

Yami is incorrect in their treatment of fair value as 39,100 as


Europe is not the principal market.

What if the industry information is not available?


Step 1: identify the most advantageous market
to calculate the market that is most advantageous = Selling
price – transaction costs – transport costs ( Highest best net
income )
Europe = 40,000 – 500 – 400 =39,100
Asia = 38,000 – 400 – 700 = 36,900
Africa = 34,000 – 300 – 600 = 33,100

Europe is the most advantageous market for the subsidiary

Step 2: Calculate Fair value


Fair value will be the selling price – transport cost in the
advantageous market
40,000 – 400 = 39,600

Example 8.2
Fair value on asset is based on the highest and best use of the
asset. And the current usage of the land is considered the
highest and best use as long as no other evidence states
otherwise. If so then the agricultural value of the land is it sfair
value
However if an alternate exists that is legally permissible , then
that would be taken as the best use
There are potential buyers for the land if it was for residential
purposes and the planning permission is expected to be given.
Also the govt. is also encouraging the use of farm land for
residential purposes
Therefore the fair value of the assets will be based on the
residential value as it is the highest and best use and Twiggy
will record PV of the land at this value
There is no enough information to make certain that if the land
can be used for commercial purposes with legal purposes, and
therefore the FV will still be recorded as it s residential value.
If there were no restrictions set in place for commercial
projects, given that it would be the higher price . Then the FV of
the land will recorded on the basis if the commercial value
Example 8.3

For Zedtech Co. 2 revenue contracts can be identified –


0inventory and Inventory x
Performance obligations are promises to deliver goods or
services to the customers. A certain contract can have more
than one performance obligation and it needs to be identified if
to show them as a distinct performance obligation or to group
them together
In the 0inventory product package, three components can be
identified – the hardware component, professional services and
hosting service component.
Each of these components are usually sold separately by
Zedtech and not integrated together. Also the performance of
one element is not dependent on another
Therefore all the three componennts of the package must be
showcased as disctinct and separate performance obligations
However in the case of Inventory X, the hardware and hosting
service component are interdependent on each other. The
Hosting service is necessary to use the hardware and the
Example 8.3

O inventory:
For the first package the customer gets to buy the hardware,
professional service, and hosting services. Based on this
package each of these services can be sold separately under
separate contracts and are distinct to each other.

Each element of the contract can be bought and used without


impacting the performance of the others, meaning the
hardware, professional service and software can each function
on its own without needing the other services.

Also each of them are frequently sold on their own and do not
need to be integrated, and therefore there are 3 separate
performance obligations on this package.

The revenue relating to the hardware should be recognized


when the risks and rewards of them are transferred which is at
the point the hardware is delivered and installed.

For the hosting and professional services that are provided over
time, and as the customers benefit from them as they are
provided, the revenue would be spread throughout the terms
of the contract.

Inventory X:

For the second package, the hardware and hosting service


cannot be considered distinct as they are not separately
identifiable and cannot be sold and used individually

The customers cannot use the hardware on their own, and


cannot benefit from the hardware or the hosting service on
their own

The Professional package even though sold on this package, it


can also be sold as a stand alone product and is a distinct
service and is therefore a separate performance obligation
This means there are 2 professional obligation, the hardware
and hosting service, and the professional services.

The hardware and hosting service’s revenue will have to be


recognized when the hardware is installed and the revenue for
the professional services will be recorded through the term
period

Example 8.4

The $12 million consideration is while the $4 million dollars is


dependent on the number of mistakes made by Johny.

Johny does not expect that they will meet the target as they
have not usually achieved this in the past and most of the work
is outside is their control. Therefore the $4 million will not be
recognized and the transaction price will amount to $12 million

AS this is the service the revenue of $12m will be spread


throughout the term period of 12 months. AS of 31st dec 2021 2
months have passed and therefore 12 x 2/12 = $2 million will
be recognized as revenue for the year end
If the Mistake threshold was met, Johny would record an
additional $4 million on 1st November 2021

Exsmple 8.5

Due to the difference of the proceeds received on the


completion of the project and the proce received now if the
customer pays early, we can see the contract has a financing
component.
Revenue should be recognized when the performance
obligation is satisfied on dec 2023 which is the date the legal
title and CONTOL passes to the customer.
Therefore the revenue will only recorded on the date
irrespective if the customer paid on date or paid early
If payment is made upon completion of the project and when
the customer receives the title and control. Then the revenue
of $9.55 Million will be recognized corresponding to the cash
proceeds received.
If the payment was made upfront while signing the contract but
the amount received of $8.5 million will be recognized as a
contract liability/deferred income.
The difference between 9.55 million( revenue amount ) and
8.55 ( amount received )1 million is technically the interest
which would be spread over the 2 year period until the
construction of the project
December 2021
Dr. Cash 8.55
Cr. Contract liability 8.55
December 2022
8.55 x 6% = 0.5

Dr. Interest income 0.5


cr. Contract liability 0.5
December 2023
9.063 x 6% = 0.543

Dr. Interest income 0.5


Cr. Contract Liability 0.5
Dr. Contract liability 9.55
Cr. Revenue 9.55

Example 8.6

The Package Sold by Sameer Co. contains 2 distinct


performance obligations in respect to the machine and
technical support.
They are seen as separate performance obligations because
they both are sold and used by customers individually.
The total transaction price of the package of $100,000 needs to
be allocated separately to these components.
The standalone price of the machine and technical support is
$95,000 and $30,000 respectively, and the transaction price of
100,000 will spread over them in a pro rata basis
Amount allocated to Machine = 100,000 x 95,000/125,000 =
$76,000
Amount allocated to technical support = 100,000 x
30,000/125,000 = 24,000
Revenue of $76,000 relating to the machine will be recognized
when the performance obligation has been satisfied, ie., when
the machine has been delivered.
The revenue of 24,000 relating to the service component will
be recognized throughout the term period of 12 months.

Example 8.7

The performance obligation of providing the magazines should


be satisfied at every month end over a period of time when the
risks and rewards are transferred
Even though Claire makes a physical transfer of the magazines
to the supermarket in December 2021, this does not mean that
control has transferred to the supermarket
The Legal title still remains with Claire until the magazines are
sold to the end customers and Claire would have no right to
receive any payment until they are sold to the customers
In addition Claire still holds the risk and rewards relating to the
magazine. Meaning the more sales made in the supermarket
the more benefit Claire would gain. And if there are any
magazines remaining unsold the losses born will be incurred by
Claire
Therefore Claire will not recognize revenue in the year ended
31 December 2021

Group Accounting

Example 9.3

Refer to spreadsheet:
The FV of $20m shares given by Kutchen in exchange of
purchasing the 70% shares in House is $40m (20m*2)
The contingent consideration should be considered at its fair
value on the date of acquisition after taking account of the
probability of Kutchen meeting the profit target
The FV of contingent consideration is $2m (20%*5*2). This will
be recorded at acquisition and the goodwill will not change if
the actual value of shares is different in the future
The contingent consideration will be shown with other
components of equity ( shares to be issued)
The 20m shares will be recorded in the Share capital with
nominal value and the share premium will be shown as the
difference of the nominal value and the market price ie., 20m
(20*1)

The FV of NCI will be calculated as the no. of shares owned by


the NCI @ the date of acquisition ie., 13m*30% = 3.9m. The
value of these shares will be calculates using the FV of $4.20
per share and it will amount to $16.38m.
The Finance hasn’t accounted for the FV of NCI which give
indications to a bargain purchase. However, the Carrying value
of goodwill is $10.38 million and not a negative value and
therefore this error should be reversed.
Dr. Goodwill 10.38m
Dr. P/L 8m
Cr. NCI 16.38m
CR. Shares to be issued 2m

Example 9.4

The accounting standards define control as – power over the


operating and investing activities of the investee and having the
ability to use this power, to have exposure to generate variable
returns.
As Format holds 49.1% of Protect it doesn’t have a majority
shareholding. The next decision is if Format has control over
Format or not. If they have control, the directors of Foramt
should consolidate the statement of Protect along with theirs
Based on the indicators, it is very likely that Format has control
over Protect :
Format is the largest shareholder and has the ability to refuse
the sale of shares to anyone else, this indicates that have the
power to protect their own position in the company.
The management committee of Protect which comprises of 6
member include 4 members which are representatives of
Format as they have a major say in making the decision in the
company.
Furthermore, there has not been a full representation of the
shareholders in the AGM’s for the last 4 years. This means,
format can control/dominate such meetings.
Taking into account these indicators. We can conclude that
Protect is a subsidiary of Format and should be consolidated

Example 9.5

As per the accounting standard, an entity that can be


considered a business can be consolidated. A business consists
of Inputs, processes, outputs.
Conew is a separate entity in which Chemical has 65%
ownership. However, COnew only has one asset ie., intellectual
property of Yachton. As they don’t have any other assets as
they don’t have any employees, it indicates a lack of processes
and therefore does not meet the criteria of a business
Therefore we will record Conew as a purchase of an asset

Example 9.6

Refer to spreadsheet

Example 9.7

AS per the accounting standard, a joint operation is when there


is joint control over a particular product/facilty/operation
The entities, controlling the joint operation record their share
of assets, liabilities, income and expenses.
In this scenario, gasnature and gogas jointly own the facility
even though they have 55% and 45% shareholding respectively
as they both need to agree for a certain decision about the
facility to be implemented
Gasnature will account for 55% of all net assets and net income
from the underground facility
AS oer IAS 16, the initial value of any future dismantling should
also be recorded as an asset and a liability (provision)
Since the local legislation requires the decommissioning of the
facilty, a present obligation exists and must be recorded at its
present value

Step Acquisition and Disposal

Example 10.2
The sale of shares in Doyle results in loss of control. Therefore,
the goodwill, net assets

Before a profit or loss is calculated, an entity also has to


consider the FV of the shares retained (not sold)
The Gain on the sale of these shares is $43 million
Example 10.3
Voictoria remains a subsisary for David even after the sale of
these shares. There is no gain or loss to the group. The
difference is accounted in equity

Sale proceeds 5000


Increase in NCI (4500)
(5%*90,000)
Increase in the equity 500

Dr. Cash 5000


Cr. NCI 4500
Cr. Equity 500

Example 10.4
Refer to the spreadsheet

Joey has achieved control over Margy in stages. On the date


control was achieved, we will consider

The original cost of investment for the 25% shareholding was


$600m. At the date of control the Fv of this shareholding was
$705m. The gain of $105m will be reported in the statement of
profit and loss.
On the date of gaining control, the goodwill calculation will
include the Fv of $705m plus the cost of investment of
additional 40% shares purchased $975m.
We would then exclude the net assets at the acquisition date of
$2250m, giving us a goodwill of $50m
Foreign Transactions & Entities

Example 11.1

Refer to the spreadsheet

Goodwill is the difference between the Cost of investment and


Net assets of the acquired subsidiary at the date of acquisition
Goodwill arising on acquisition on foreign subsidiary is
translated using the closing exchange rate, ie., exchange rate at
the reporting date.
Goodwill is calculated first in the foreign subsidary’s currency
and then translated to the parent companies’s functional
currency
Goodwill is tested for impairment annually
Goodwill at acquisition is translated using the opening
exchange ratio of 8:1.
The impairment of goodwill will be translated using the average
rate of 8.5:1
The goodwill at reporting will be translated using the closing
exchange rate of 9.5:1
The difference (bal. figure) ie., the exchange difference loss
incurred due to the exchange rate translation of goodwill

Exchange rate difference arising on the translation will be


presented in the Other comprehensive income and be
accumulated in the other components of equity.
These forex losses can be reclassified to the p/l when the
foreign subsidiary is disposed
The opening net assets will be translated using the opening
exchange rate of 8:1
The movement during the year will be translated using the
average rate of exchange 8.5:1
The closing net assets will be translated using the closing rate
of 9.5:1

The balancing figure is the forex loss accumulated due to


exchange difference generated during the translation of the net
assets of the subsidiaries
The Forex loss arising on the translation, will be allocated to the
group and NCI
Only the forex loss related to the parent will be presented in
the OCI and other components of equity

You might also like