MASTER IN ACCOUNTING AND MANAGEMENT CONTROL

Course:
International Financial Reporting
&
Analysis

Proposed solutiond to study cases

Chapter 2

Ana Isabel Lopes

Department of Accounting

2023-2024
 STUDY CASE 4
Non-current assets of Navigator

http://thenavigatorcompany.com/external/relatorio-de-contas-2022/docs/en/Navigator_RC_Digital_Final_ENG.pdf

International Financial Reporting & Analysis - Ana Isabel Lopes 2

1) Usually, all the companies make judgements and estimates that affect the amount of revenue, expenses, assets,
liabilities and disclosures at the date of the consolidated statement of financial position. Identify the more
significant estimates and judgments made by the Navigator at the end of 2022.

Proposed answer:

Note 1.6 give the answer.

The most significant estimates and judgments are related to:

a) Recoverability of goodwill  then, note 3.1 says that most assumptions are related to the activity, namely, sales volumes, average
sales prices and variable costs used in projection periods (…)

b) Uncertainty over tax treatment  then, notes 6.1 and 6.2 refers the excess/insufficiency of tax estimates, the favourable outcome
of some cases related to matters with high uncertainty, as well as requests for binding information, claims to the Tax
Administration and jurisprudence of the courts
c) Actuarial assumptions  then, note 7.2 explains how the liability for Post-employment benefits is calculated

d) Biological assets  then, note 3.8 indicates the productivity of the forest, the wood sale price, and other situations, namely, the
existence of an internal model to identify the fair value of the forest.

e) Provisions  then, note 10.1, indicates that they are made in accordance with the risk assessments carried out internally by the
Group with the support of its legal advisers, based on the probability of the decision being favourable or unfavourable to the
Group

f) Useful life and depreciation of PPE then, note 3.3 explains that they use the best judgement of the Board of Directors for the
assets and businesses in question, also considering the practices adopted by companies of the sector at the international level
and the evolution of the economic conditions in which the Group operates (using also external independence experts)
2) The Navigator applies the same accounting police to investment properties, to property, plant and equipment
and to intangible assets. Do you agree? Could they use other accounting policies? Explain.

Proposed answer:

See Notes 3.2, 3.3 e 3.4.

Yes, The Navigator applies the same accounting police to investment properties, to property, plant and equipment and to intangible assets; all them are
recorded at acquisition cost less depreciation and impairment losses, thus, they use the cost model (for subsequent measurement).

However, they could use other accounting policies:

- PPE and intangible assets could use revaluation model;
- Investment Property could use fair value.
3) In 2022, the Navigator did not acquire any new buildings for use in the production or for headquarters, nor
new buildings for capital appreciation or generation of income. True or false? Justify.

Proposed answer:

It is true.

New buildings for use in the production or for headquarters are PPE, thus, Note 3.3 details the acquisitions. They are null for
“Buildings and other constructions”

New buildings for capital appreciation or generation of income are Investment Property, thus, Note 3.4 details the acquisitions. They
are null for “Buildings and other constructions” as well.
4) How does Navigator treats the “subsequent costs” with equipment incurred after the acquisition? Explain the
effects in the financial statements.

Proposed answer:

They have the following treatment (see note 3.3):

a) Scheduled maintenance expenses are considered a component of the acquisition cost of PPE and are fully depreciated by the
next forecasted maintenance date.
b) All other repairs and maintenance costs are charged in the financial period in which they are incurred.

There is also mention to “Spare and maintenance parts”. Spare parts are depreciated from the moment they become available for use
and are assigned a useful life that follows the nature of the equipment, where they are expected to be integrated, not exceeding the
remaining useful life of these, and they are accounted for as property, plant and equipment if they are material and used for more
than one period, or if they are used only in relation to an item of property, plant and equipment. In other situations, spare parts are
accounted for as part of inventories and recognized in the period when consumed.
4) How does Navigator treats the “subsequent costs” with equipment incurred after the acquisition? Explain the
effects in the financial statements.

Proposed answer:

They have the following treatment (see note 3.3):

a) Scheduled maintenance expenses are considered a component of the acquisition cost of PPE and are fully depreciated by the
next forecasted maintenance date.
b) All other repairs and maintenance costs are charged in the financial period in which they are incurred.

There is also mention to “Spare and maintenance parts”. Spare parts are depreciated from the moment they become available for use
and are assigned a useful life that follows the nature of the equipment, where they are expected to be integrated, not exceeding the
remaining useful life of these, and they are accounted for as property, plant and equipment if they are material and used for more
than one period, or if they are used only in relation to an item of property, plant and equipment. In other situations, spare parts are
accounted for as part of inventories and recognized in the period when consumed.
5) What is the gross amount and the carry amount of PPE at the end of 2022?

Proposed answer:

Carrying amount = Gross amount – accumulated depreciation – accumulated impairment losses

=4,479,622,399 - 3,379,932,992 = 1,099,689,407

6) Looking to investment properties, lands have the same carrying amount since December 2021, while buildings
have been decreasing. Why?

Proposed answer:

Compare note 3.4 with 3.3

Because buildings are the only suffering impairment losses over time.

7) Most of the industrial property and other rights of Navigator is internally developed. True or false? Justify.

Proposed answer:

True (see Note 3.2). The amount in this category (industrial property and other rights) are not acquired, but we see the transfers from
work in progress to this category, thus, they are internally developed.
8) All the companies need to disclosure in Notes information that adds to, and complements, information
presented in the other financial statements. Based on the disclosures according with the accounting standards in
use by Navigator, critically analyse the content of Note 3.4.
Proposed answer:

See the list of disclosures required at the end of IAS 40.

Not applicable

?
 yes
yes
yes

yes
Not applicable
Not applicable
yes
yes

Not applicable
Not applicable
NO

?
?
?
9) Assume…. Prepare the impacts non financial statements…

Proposed answer:

R:
Mainframe computers: assets  definition, recognition criteria
At the initial recognition  cost

2023:
Cost of FTA? 4.000+50.000+2.000+3.000+5.000 =64.000, drepreciable during useful life (8 years).
Depreciation in 2023 = 64.000/8 * 6/12m = 4.000

Spare parts? They exist  inventories: 500

Trianing costs? Expenses not capitalized, imediately recognized: : 1.000

Em 2024:
Depreciation in 2024 = 8.000; or: (64.000-4000)/7,5 anos = 8.000
9) Assume…. Prepare the impacts non financial statements…

Proposed answer:

2025:

Revision of useful life, in 31/12/2024 for the next periods, from that moment propectively  The remaining useful
lide turns to 4 years instead of 6,5 years
Depreciation in 2025: (64.000-4.000-8.000) / 4 years = 13.000€

2026:
Expenses to increase capacity  capitalized  add to FTA, and depreciate
AFT:+9.000€
Depreciation of this componente: 9.000/2years= 4.500
Depreciation of FTA (main componente) = (64.000-4.000-8000-13.000)/3 anos= 13.000
Expenses for maintenance (fix bugs)  expenses imediately  6.000€
 Impacts on the statement of financial position

2023 2024 2025 2026

Assets:
Property, plant and xxxxxx xxxxxx Xxxxxx Xxx
equipment + 64.000 :+9.000€
-4.000 -8.000 -13.000 -13.000
-4.500
(…)
Inventories xxxxxx xxxx xxxxxx
+500
Cash and cash xxxxxx Xxxx xxxxxx Xxx
equivalents -14.000 -50.000 -9.000€
-500-1.000
-6.000€

…
SE:
Net profit for the period xxxxxx xxxx xxxxxx xxxxxx
-1.000
-4.000 -8.000 -13.000 -6.000€
-13.000
-4.500
…
Liabilities:
Current payable… xxxxxx
+ 50.000 -50.000

…
 Impacts on the cash flows statement

2023 2024 2025 2026

OPERATING ACTIVITIES:
Payments to suppliers xxxxxx -6.000€
-500-1.000

INVESTING ACTIVITIES:
Outflows: Property, xxxxxx -50.000 -9.000
plant and equipment -14.000

CASH AND CASH xxxxxx Xxx Xxx

EQUIVALENTS AT THE -14.000 -50.000 -9.000
END OF THE PERIOD -500-1.000 -6.000€
 Impacts on the income statement

2023 2024 2025 2026

External supplies and (xxxxxx Xxx
services + (1.000) + (6.000€)

(…)
Depreciation, amortisation xxxxxx Xxx + (13.000)
and impairment losses in + (8.000) +(13.000) + (4.500)
non-financial assets + (4.000)

Net profit for the period xxxxxx Xxx Xxxx Xxx

-1000 -6.000€
-4.000 -8.000 -13.000 -13.000
-4.500
STUDY CASE 5 - Revaluation model

This case is supported in financial statements of a Portuguese Group

applying IFRS in the preparation of financial statements.
Take home

International Financial Reporting & Analysis - Ana Isabel Lopes 16

1) Present an explanation of the accounting process in the moment of the revaluation and at the end of the
remaining years until the new revaluation. Is there any difference between IFRS and SNC on this topic
(revaluation)?.

Proposed answer:

Qe= 204.678.247 vs FV=210.000.000 Surplus revaluation (other comprhensive income, shareholders equity)
= 5.321.753

Apply the following accounting procedure:

The accumulated depreciation is cancelled in return for the gross amount of the buildings, so that a new
depreciation period begins, based on a new revalued amount that has replaced the cost up to that point:

Accounts in debit Accounts in Credit Amount

FTA – accum. depreciation FTA - buildings 329.246.156

At the end of the following year (31/12/2019) the new carrying amount of the FTA is depreciated, and part of
the revaluation surplus is transferred to retained earnings (a matter only required in the SNC, since NCRF 7
states that this transfer must be made, while IAS 16 states that it can be made). The amount of surplus
transferred will be the difference between depreciation based on the revalued carrying amount of the asset
and depreciation based on the original cost of the asset.
 New depreciation of the year= 210,000,000 / 20 years = 10,500,000
Now, the annual depreciation if it had not been revalued would be = 204,678,247 / 20 years = 10,233,912.4
Then, the difference in depreciation will be = 266,087.6, and this is the amount to be transferred from the revaluation
surplus to retained earnings.

This value coincides with the transfer of this surplus during the remaining useful life, i.e. 5,321,753/20 years = 266,087.5

Conta a débito Conta a crédito Valor

Depreciation expense FTA – Accumulated depreciation 10.500.000
Revaluation surplus Retained earnings 266.087,5

At the end of 2020,2021,2022, 2023 the same procedures are always done, with the same values (unless there is a
change in useful life or in residual value).
Attention:
The proposed solution is supported by the application of paragraph 35(b) of IAS 16. If 35(a) was applied, the
accumulated depreciation would have to be treated differently, not by eliminating against the cost, but by increasing it
proportionately. How?
Calculate index= 210,000,000/204,678,247= 1.026...
Increase accumulated cost and depreciation by 1.026 in return for the revaluation surplus
329,246,156x1,026...=337,806,747 increase of 8,560,590
533,924,403x1,026...=547,806,747 increase of 13,882,343

Accounts in debit Accounts in credit Amount

FTA - buildings 13.882. 343

FTA - accumulated depreciation 8.560. 590

Surplus revaluation 5.321.753

 2 - Simulate a fair value and explain the effects on financial statement to obtain a gain and/or a loss in the second
revaluation moment (2023).

Proposed answer:

At the end of 2023, a new revaluation. At this time, Qe = 210,000,000 – 5x10,500,000=157,500,000, and the
revaluation surplus has a balance of 5,321,753-5x266,087.5=3,991,315.5
Simulations (example):
- if new FV is greater than 157,500,000 (Qe), do as previous process;
- if new FV is less than 157,500,000 (Qe), then:

• eliminate accumulated depreciation against the cost of buildings;

• The loss decreases the value of the revaluation surplus balance, but can only be a maximum loss of 3,991,315.5
(revaluation surplus account balance)
• If the loss is greater than 3,991,315.5 (revaluation surplus account balance), the remainder is recognized as an
impairment loss on profit or loss
• For example, if FV=120,000,000 and Qe=157,500,000, revaluation loss is 37,500,000
STUDY CASE 6 - INTANGIBLE ASSETS –
RESEARCH PAPER

International Financial Reporting & Analysis - Ana Isabel Lopes 21

 Turlington, J., fafatas, S. & Oliver, E.G. (2019). Is it US GAAP or IFRS?
Understanding how R&D cost affect ratio analysis. Business Horizons,
62(4), 427-436. https://doi.org/10.1016/j.bushor.2019.03.011

This case has not a specific proposed solution. It is a real example of how different
accounting policies can influence and cause bias in ratio analysis
STUDY CASE 7 - PROPERTY INVESTMENTS &
FIXED TANGIBLE ASSETS

International Financial Reporting & Analysis - Ana Isabel Lopes 23

1.What measurement models are used by the entity?

Proposed solution:

Property acquired in April: IP measured at fair value model

Property acquired in June: AFT measured to the cost model

2. Present the Financial Statements (Statement of Financial Position and Income Statement) on 31.12.N.

Property depreciation Variation of fair

end of period
Statement of financial position 202x acquisition of FTA value
Assets
Tangible assets 1.650.000.000 502.000 -11.713 1.650.490.287
Investment property 1.650.000.000 502.000 98.000 1.650.600.000
Intangible assets 400.000.000 400.000.000
Other current assets 800.000.000 800.000.000
Cash and cash equivalents 200.000.000 -1.004.000 198.996.000
Total Assets 4.700.000.000 0 -11.713 98.000 4.700.086.287
Equity
Share capital 1.230.000.000 1.230.000.000
Reserves 200.000.000 200.000.000
Surplus revaluation 20.000.000 20.000.000
Retained earnings 600.000.000 600.000.000
Net income 150.000.000 -11.713 98.000 150.086.287
Total equity
Liabilities
Other accounts payables 2.500.000.000 2.500.000.000
…
Total liabilities and equity 4.700.000.000 -11.713 98.000 4.700.086.287
 Property depreciation Variation of fair
end of period
Income Statement 202x acquisition of FTA value
2.000.000.00
2.000.000.000
Sales and services rendered 0
Costs of goods sold and materials
-925.000.000
consumed -925.000.000
External supplies and services -350.000.000 -350.000.000
Staff costs -400.000.000 -400.000.000
Provisions for the period -10.000.000 -10.000.000
Increases/decreases in fair value 325.000.000 +98.000 325.098.000
Other income and gains 10.000.000 10.000.000
Other costs and losses -20.000.000 -20.000.000
Operating Cash Flow (current EBITDA) 630.000.000 630.000.000
Depreciation -460.000.000 -11.713 -460.011.713
Impairment -20.000.000 -20.000.000
Operating Profit (current EBIT) 150.000.000 150.000.000
… -
Net Income 150.000.000 -11.713 +98.000 150.086.287
STUDY CASE 8 - INTANGIBLE ASSETS -
NOVABASE

International Financial Reporting & Analysis - Ana Isabel Lopes 27

1 - Identify if there is any intangible asset and explain the accounting process.

Proposed solution:

Does in-house developed software development project fulfill definition of asset? Do they meet the criteria for recognition
of an asset? Does it meet the definition of what an intangible asset is?

Web-base time keeping system: Managers have already identified what should be recognized as an expense and what
should be capitalized:
• Recognized as expense: 57,700
• Capitalized: Intangible asset, €100,000, subject to amortization for a period of 60 monthss

New module for e-mail reminder: Additional functionality with added benefits:
• Added to the value of the Intangible Asset initially recognized
• Capitalized at €22,438, subject to amortization over a period of 48 months

New module for enter date: Functionality not successfully achieved in a timely manner:
• Recognized as spent: 13,000
 2 – Identify the amount at which the intangible asset is presented in financial statements and the amount of the expenses, in
2019-2021.

Proposed solution:

Assuming the straight-line method for amortization:

Statement of financial position (only for new situations):

Impact 2019 Impact 2020 Impact 2021

Intangible assets 90.000* 86.828,5** 61.119

*90.000 = 100.000 – (100.000/60m * 6m)

** 86.978,5 = [100.000 – 10.000 - 100.000/60m * 12] + [22.438 – 22438/48m*12] = 70.000 + 16.828,5

Income statement (only for new situations):

Impact 2019 Impact 2020 Impact 2021
Ext. supplies and 57.700 -- 13.000
services or other

Deprec. and 10.000 25.609,5 25.609,5

amortization
STUDY CASE 9 - IMPAIRMENT OF ASSETS –
ABC COMPANY

International Financial Reporting & Analysis - Ana Isabel Lopes 30

Comment on this situation, explaining the effects on the recognition and measurement of this 4G licence

Proposed solution:

The 4G license is initially recognized as an intangible asset (because a license to use falls under contractual rights or other legal
rights, cf. one of the definitions of AI), at the time of its acquisition (2022:
Useful life? 8 years (period in which it is estimated to generate economic benefits)
Amortization in the 1st year? 200 million / 8 million = 25 million/year.

The decline in market performance is an indicator that the asset may be in impairment. A test must be performed. Thus, at the end
of the 1st year of operations, at the end of 2022:

Carrying amount is 175 million (=200-25).

Recoverable amount:
value in use of the 4G license: based on cash flows over the next 5 years = 30/1.1 + 30/(1.1)^2+ 30/(1.1)^3+ 30/(1.1)^4+ 30/(1.1)^5 =
113.72 million
Fair value less costs of selling = 0 (not transferable by sale, but is intangible due to the nature of contractual rights)
Recoverable amount = value in use = 113.72 million
Impairment loss = 175 – 113.72 = 61.28 million
Accounting procedures with effect on Financial statements:

At the time of acquisition:

Increases intangible assets by 200, and decreases assets (cash, if paid) or increases liabilities (other accounts payable, if owed)

At the end of 2022:

By the amortization of the year:

Decreases the value of intangible assets by 25 (due to the increase in accumulated depreciation) and decreases the net income
(due to the increase in amortization expenses)

By the recognition of impairment:

Decreases the value of intangible assets by 61.28 (due to the increase in accumulated impairment) and decreases net income
(due to increased impairment losses)

With this procedure, the carrying amount of Intangible Assets decreases from 175 to 113.72 millions.
STUDY CASE 10 - BIOLOGICAL ASSETS OF
IZIDORO

International Financial Reporting & Analysis - Ana Isabel Lopes 33

 Explain how to measure these assets at the end of the period and the effects on the financial statements in accordance with
IFRS.

Proposed solution:

Fair value at the beginning of the period: 100 animals aged 25 months and 50 with 7 months.

=100x700 + 50x500 = 95.000€  ativo biológico, ativo corrente/não corrente

Fair value at the end of the period: 100 animals aged 37 months (the same, but now are cows and not younger), 50 calves with
19 months, and 30 new calves with 2 months
 =100x800 + 50x750 + 30x550= 134.000

Change in fair value in the year= 39.000

What to do at the end of the period? Increase biological asset by 39.000 while simultaneously recognising a fair value gain
directly in profit or loss (income statement).

Please note that in the NOTES, the information to be disclosed in accordance with IAS 41 is extensive, mainly related with
changes in physical and monetary aspects of the cattle.
STUDY CASE 11 – NON-CURRENT ASSETS
HELD FOR SALE

International Financial Reporting & Analysis - Ana Isabel Lopes 35

 Discuss how the above item should be dealt with in the financial statements of the company for the year ended 30 December
20x4.

Proposed solution:

• The criteria of IFRS 5 are met on 31 April 20X4. The property is depreciated until the date of reclassification
(€300.000 × 4/12 = €100.000). Therefore, the carrying value is €13.900.000 (€14.000.000 − €100.000).
• On 31 March 20X4, the property is revalued to its fair value of €15.400.000. The revaluation increase of €1.500.000
is recognized in other comprehensive income (surplus revaluation).
• The value-in-use (€15.800.000) is greater than the fair value less costs to sell of €15.100.000 (€15.400.000 −
€300.000), therefore there is no impairment.
• The property is transferred to non-current assets held for sale at €15.100.000, with a loss of €300.000 recognized
in profit or loss (i.e. cost to sell).
• When the property is disposed of, a profit on disposal of €200.000 is recognized (net sale price is 15.300.000, ie,
15.600.000− 300.000, and the carrying amount is €15.100.000).
• A profit is recognized in 20x4, but no impact exist in cash flow statement.

• The remaining balance in the revaluation reserve may be transferred to retained earnings.
STUDY CASE 12 – PROVISIONS AND
CONTINGENT LIABILITIES

International Financial Reporting & Analysis - Ana Isabel Lopes 37

 Scenario A:
What is the expected value of the provision to be recorded on the statement of financial position of the entity at the
reporting date?

Proposed solution:

• The expected value is:

80%X0 +15 %X5 + 5% X15 = €1,5 m

• So, in fact, for a large group of possible obligations, we weigh all possible outcomes by their associated probabilities. In the case of a single obligation,
the individual most likely outcome is taken as the best estimation.
 Scenario B:
Based on the previous data, propose a value for the Provision to be recognized in the Liabilities as of December 31, 2020?

Proposed solution:

• Best estimate (a single obligation): 100.000

• At the reporting date, calculate its present value
• So, for example, in Dec/2020, the amount that is expected to settle will be:
• present value= 100.000/((1+0.07) )=93,458
• Create the liability (provision) and accrual expense for the period (DR) at 93.458
STUDY CASE 13 – PROVISIONS AND
CONTINGENT LIABILITIES

International Financial Reporting & Analysis - Ana Isabel Lopes 40

Proposed solution:

Statement of financial position

20X1 Impacts 20x2 Impacts 20x3
Assets:

Cash/cash dep. -40.000* -60000

Total assets 500.000 xxxxx xxxx

SE:

90.000 -50.000** -10.000

Net income

Liabilities

Provisions 40.000 -40.000* +50.000** +10.000 -60.000

TOTAL SE and equity 500.000 xxxx xxxx

• *Assuming the company was ordered to pay the claimed lawsuit in 2022: use of provisions
• **The company created a provision for plaintiff damages in 2022: creation of provisions
• *** Reinforce provisions, and then use.
Proposed solution:

Income statement:
20x1 Impacts 20x2 Impacts 20x3

Other income and expenses 130000 xxxx

(40.000) (+50.000)** (+10.000)

Provisions and reversals of provisions

90.000 -50.000** -10.000

Net income
STUDY CASE 14 – RIGHT OF USE ASSETS
AND LEASES

International Financial Reporting & Analysis - Ana Isabel Lopes 43

How much is the right-of-use? How much is the liability? What are the impacts in financial statements over time?

Proposed solution:

First, we need to calculate the lease liability (because we do not have the amounts calculated), and then the right-of-use
asset.

Lease liability  present value of 9 instalments of 50.000/each, using an incremental interest rate of 5%/year.

Lease liability = 50.000(1+0,02)+ 50.000(1+0,02)^2 + 50.000(1+0,02)^3 + …+ 50.000(1+0,02)^9 = 355.931,08

Right-of-use = present value of lease liability + advanced payments + direct costs=

= 355.931,08 + 50.000 + 15.000 = 420.391,08
The impacts over time are as follows:

 The asset  The Right-of-Use (ROU) is initially recognized by 420.391,08, and then is going to be amortized over 10 years
(the shorter between useful life and term contract; the company does not intend to renew the contract)  each year,
decrease the asset and recognize amortization.

 The liability  The lease liability is initially recognized by 355.931,08, and then is going to be increased by the interests
every year and decreased by the lease payments every year.

 At the initial recognition, the difference between the ROU and the lease liability is the payment made in cash at the initial
moment.
Thank you.