Sec A

33
Ethic 6, unknown 2, Consol 20
Sec B
Q2
Q3

33

28
(50)

11 ++
11 ++
44

Sec B
(a)

Easy, diff

(b)
(c)

PL

SOFP

1st 3 notes are for consol (cannot drop)

Next 3 or 4 notes are IFRS(may drop max 2 notes)

Impairment
Definition
Frequency

CGU
Reversal

Q2 (a)

Q2 (b)

Q3

Q2 (b)

Marchant pg 10
(a)
Workings ($m)
1. Investment in Nathan
Goodwill
Consideration transferred
Non controlling interest (NCI)
Fair value of net assets

80
45
(110)
15

Impairment loss of last year = 20% x 15 = 3

Remove revaluation of goodwill = 3 + 2 = 5
Gain or loss to be removed = 18 - (95 / 60% x 8%) = 5.3 Gain
Remove fair value gain on inv in Nathan = 95 - 90 = 5 OCI

2. Investment in Option
Goodwill
Consideration transferred

70

NCI
Fair value of net assets

28
(86)
12

Gain or loss on disposal (group)

Proceeds
Fair value of remaining stake
Net assets derecognised
Goodwill derecognised
NCI derecognised
Gain to profit or loss

50
40
90
(90)
(12)
34

(68)
22

Share of profit from assoc = 15 x 6/12 x 20% =

1.50

3. Intra group
Dr Revenue
Cr Purchases

12
12

Unrealised loss is not reversed in this case as the sale of $12m is

at fair value. Reversal of loss will lead to inventory to be carried
at above net realisable value.

4. Pension costs
Reported in PL
Current service cost
Net interest cost (expense) (50 - 48) x 10%
Past service cost

4.0
0.2
3.0
7.2

Reported in OCI
Remeasurement loss

5. PPE
Date
1 May 2012

Details
Cost
(-) Depn 10 yrs

$m
12.0
(1.2)

30 Apr 2013

30 Apr 2014

10.8
2.2
13.0
(1.4)
11.6
(4.6)
7.0

Gain (bal fig) OCI

Revalued
(-) Depn 9 yrs
Loss (bal fig) N1
Revalued

N1
Cr PPE
Dr OCI
Dr Other exp

4.6
2.2
2.4

6. Share options
Year
30 Apr 2013

Calculation
CumulativeCurrent
8,000 options x $100 x 4 directors
x 1/3
1.07
1.07

30 Apr 2014

8,000 options x $100 x 6 directors

x 2/3

3.20

2.13

7. Hedge loss
Effect of cash flow hedge loss is recognised to OCI, not finance cost.

Answer (a) (ii)

Changes in stake
Proceeds
Worth of 8% in Nathan transferred
Net asset as at year end
Fair value adjustment
(110 - 25 s cap - 65 RE - 6 OCE)
Goodwill (15 - 3) W1

$m

120
14
12
146

$m
18.00

x 8%
Accretion

11.68
6.32

Retained control after disposal will not give rise to gain or loss in
consolidated financial statements. The difference of $6.32 is to be
recognised within equity, and not in profit or loss.
Goodwill is not remeasured as there is not significant economic
event.
After disposal profit or loss will be shared between Marchant and
NCI based on 52 : 48.

(b) It is true that IFRS encourage fair value model to be in line

with the qualitative characteristic of "relevance" in Conceptual
Framework for Financial Reporting.
Fair values are used extensively in various IFRSs, namely revaluation
model in property, plant and equipment, fair value model in
investment properties, fair value of financial assets and financial
liabilties, etc.
However, IFRS is not implementing full fair value model. Cost model
remains as an accounting policy choice, and it is popular even in
today's accounting. Plus, there are several areas where use of fair
value is restricted :i) Equity cannot be remeasured to fair value
ii) For intangible assets, revaluation model is allowed only
if the asset is quoted in an active market
It is not true to say IFRS implements a fair value model.
In today's business acquisition, financial value of an entity is
established by refering to share prices and separate negotiations.
The value cannot be decided by looking at financial statement.
This is because the purpose of the financial statements are to
present the financial performance and position of an entity, which

mainly based on past transactions. It hardly gives prospective

information.
Also, to maintain certain level of reliability, assets and liabilities
which are not measured reliably cannot be recognised in financial
statement, for example, internally generated goodwill, which is an
important element to establish the financial value of an entity.
At the end, financial statements do not fail user's need, as it is never
designed to report financial value.
(c) A lease is a finance lease if it transfers substantially all risks and
rewards of the ownership to the lessee. An operating lease is a lease
other than finance lease.
An entity can make any arrangement to maximise tax benefits, but
the reporting of the lease must be based on the substance of the
arrangement, rather than the legal form.
The finance director must be independent when assessing the
classification of the lease, and should not be influenced by the tax
position and loan application.
Financial controller should have a discussion with the finance director
to decide the lease classification. If the outcome is not satisfactory,
then financial controller can seek advice from audit committee and
the external auditor.

Mock Q1
Pentagon
Workings ($m)
1. Investment in Smooth
Goodwill

Consideration transferred
Non controlling interests (NCI) 30% x 116.67
Fair value of net assets
Deferred tax liability (100 - 90) x 30% tax rate

Fair value adjustment

Fair value of net assets
Book value
Share capital
Retained earnings (pre)
Brand name

90
35
(100)
3
28

100
(38)
(23)
39

Add to intangible asset = 39 - (39 / 10 yrs x 14/12 = 4.55 post RE (s))

= 34.45
Add to deferred tax liability = 3
Remove gain on fair value of inv in S = 94 - 90 = 4 (RE of P)

2. Investment in Flora
Goodwill
Consideration transferred
NCI (25% x 112 )
Fair value of net assets
Share capital
Retained earnings (pre)

Dinar m
120
28

Rate
2.5
2.5

$m
48.00
11.20

(112)
2.5
36
Gain on exchange diff (OCE of P) partial goodwill
At YE
36
2.1

(44.80)
14.40
2.74
17.14

32
80

Correction to Flora's account

Dr Post RE of Flora (2.2 - 2) x $6m
Cr Current liabilities

Retranslate Flora's SOFP to $

Tangible NCA
Current assets

Dinar m
146
102

1.2m Dinar
1.2m Dinar

Rate
2.1
2.1

$m
69.52
48.57

248

118.10

Ordinary shares
32
Retained earnings pre
80
post
(95 - 80 - 1.2)
13.80
OCE (post)
20
Gain on exchange diff (post OCE of Flora)

2.5
2.5

12.80
32.00

2.0
2.0

6.90
10.00
7.73

Non current liab

Current liab (60 + 1.2)

2.1
2.1

19.52
29.14
118.10

41
61.20
248

Eliminate URP
Dr RE of P ($6m x 20% x 1/2)
Cr Inventory

3. Foreign property
1 Dec 2014 Cost
Depn 20 yrs

$0.6m
$0.6m

Dinar m
30

Gain on revaluation (OCE of P)

30 Nov 2015
35

Rate
2.5

2.1

4. Pension
Cr RE of P (11 - 9)
Cr Net plan liab (non current liab)
Dr Remeasurement (OCE of P)

2
3
5

5. Provision
No provision as no obligation
Dr Current liab
Cr RE of P

6. Redeemable shares

2
2

$m
12.00
(0.60)
11.40
5.27
16.67

These shares create obligation to Pentagon. They are non current

liabilities
Dr Ordinary shares
Cr Non current liab

20
20

7. Group RE as at YE
Pentagon
(-) Gain on fair value (W1)
(-) URP (W2)
(+) Pension (W4)
(+) Provision (W5)
Smooth
Post acqn
(56 - 23)
(-) Amortisation (W1)

360.00
(4.00)
(0.60)
2.00
2.00

33.00
(4.55)
28.45
x 70%

Flora 6.9 (W2) x 75%

5.18 NCI 25%

384.50
1.73

8. Group OCE as at YE
Pentagon
(+) Goodwill retranslation (W2)
(+) Gain on revaluation (W3)
(-) Pension (W4)

50.00
2.74
5.27
(5.00)
NCI 30%
2.80
1.20

Smooth post acqn 4 x 70%

Flora post acqn
Existing (W2)
From translation of financial
statement (W2)

9. NCI as at YE
In Smooth
At acqn (W1)

NCI 30%
19.92
8.54

10.00
7.73
17.73
x 75%

NCI 25%
13.30
4.43
69.11

35.00

Share of post
RE (W7)
OCE (W8)
In Flora
At acqn (W2)
Share of post
RE (W7)
OCE (W8)

8.54
1.20

11.20
1.73
4.43
62.10

(b) Fair value is measured frommarket participant's point of view.

Entity's specific assumption does not affect the fair valuation of
assets and liabilitites.
Pentagon cannot measured the value of net assets of the acquiree
based on what it was prepared to pay, and cannot be based on
future business plan.
As to the customer relationships, although the apprear to be valueless
to Pentagon, an independent market participant will still be willing
to pay a price to acquire such relationships. The intangible assets
cannot be valued at zero.
Pentagon's aggressive negotiation could be due to trying to reduce
the offer price. While this could save Pentagon some monies and
increase profit, the long run shareholders' wealth will be damaged as
the reputation of the group will be affected.
Also, improper valuation of assets will not show a true and fair view
and will affect users' decision making.
Directors of Pentagon should follow IFRS and exercise proper
business ethic in the acquisition.

Jocatt pg 11
Answer (a)
Jocatt
Consolidated statement of cash flow for the year ended 30 Nov 2010

Note
Cash flow from operating activities
Profit before tax
Adjustments (12)
Gain on remeasurement (5 - 4)
Amortisation (W1)
Pension expenses 10 + (6/3yrs) - 8
Contribution paid (W2)
Heating system written off
Fair value gain (W3)
Gain on disposal of land (15 + 4 - 10)
Depreciation
Impairment loss (W5)
Share of profit from assoc
Finance cost

$m

$m

59
(i)
(iv)
(v)

(vi)
PL
PL

(1)
17
4
(7)
0.5
(1.5)
(9)
27
31.5
(6)
6

Operating profit before working capital changes (4)

Decrease in inventory (105 - 128)
Decrease in receivables (62 - 5 Tigret) - 113
Increase in payables (144 - 55)

120.5
23
56
89

Cash from operation (3)

Tax paid (W7)
Interest paid

288.5
(16.5)
(6)

PL

Net cash from operating activities

266.0

Cash flow from investing activities (8)

(i)
Addition to intangible assets (8 + 4)
(iii)
Addition to investment property
(v)
Proceeds from disposal of land
(vi)
Purchase of property, plant and equipment (W4)
Purchase of AFS investment (W6)
Purchase of investment in assoc (54 YE - 6)
Purchase of investment in subsidiary (15 - 7)

(8)
(12)
(1)
15
(98)
(5)
(48)

Net cash from investing activities

(157)

Cash flow from financing activities (5)

Proceeds from rights issue (NCI portion) 5 x 40%

Repayment of borrowing (67 - 71)

Dividend paid
Dividend paid to NCI

(ii)

2
(4)
(5)
(13)

Net cash from financing activities

(20)

Net increase in cash and cash equivalent (C&CE)

C&CE b/f
C&CE c/f

89
143
232

Workings ($m)

Bal b/f
Addition
Tigret

1. Intangible assets
72 Bal c/f
12 Amortisation (bal fig)
18

85
17

2. Defined benefit plan

Past service cost

New syllabus
Immediate

Old syllabus
Over vesting
period

Return on plan asset

OCI

PL

Bal c/f
Return on plan asset
Contribution paid
(bal fig)

Bal b/f
Addition
Gain (bal fig)

Pension liab
25 Bal b/f
8 Current service cost
Past service cost (old)
(6 / 3 yrs)
7 Actuarial loss

3. Investment property
6 Bal c/f
1 Write off
1.5

22
10
2
6

8
0.5

Bal b/f
Tigret
Plant exchanged
Addition (bal fig)

4. PPE
254 Bal c/f
15 Depreciation
4 Disposal
98 Loss on revaluation

327
27
10
7

5. Impairment
New goodwill in Tigret
Consideration transferred (34 + 1)
Non controlling interest
Fair value of net assets
Others (15 + 18 + 5 + 7)
Deferred tax liability
(45 - 40) x 30%

Bal b/f
Tigret

Bal b/f
Gain (2 + 1)
Addition (bal fig)

Bal c/f DT
CT
Tax paid (bal fig)

35
20
(45)
1.5

(43.5)
11.5

Goodwill
68 Bal c/f
11.5 Impairment loss (bal fig)

48
31.5

6. AFS investment
90 Bal c/f
3 Reclassify Tigret to sub
5

7. Taxes
35 Bal b/f DT
33
CT
Tigret W5
16.5 AFS
Income tax expense

94
4

41
30
1.5
1
11

(b) (i) IFRS allows operating activities of statement of cash flow to

be presented using direct method or indirect method.

Major classes of cash flow such as cash received from customers

and cash paid to suppliers are presented in direct method. Indirect
method starts with profit before tax and adjust the non cash items
and working capital changes to arrive in cash from operations.
While two methods give the same cash balance, direct method is
generally regarded as a more useful presentation as it is clear and
concise.
The directors are wrong to support indirect method. It could be their
interest to keep the statement of cash flow in a more complicated
presentation so that a manipulation can be done easily.

(b) (ii) The reason for director to argue the proceeds from loan
is an operating cash flow could be motivated by the extra income
for meeting targets. Operating cash flow are those relate to
principal revenue producing activities, while financing cash flow
are those relate to composition of equity and non current liabilities.
The proposal of the directors is not acceptable.
Directors have responsibilities to act in the best interest of the
owners and other stakeholders. Putting directors' self interest before
others is not an acceptable action. If such manipulation happens,
the financial statements will not show a true and fair view. This will
affect the users' decision making and breaking the trust between
the company and its stakeholders.

Ethical issue 1 pg 16
An accountant must discharge his or her responsibilities
professionally. An accountant must comply with the instructions
given by the directors. However, if the accountant has doubt on
such instruction, the accoutant must handle such matter with the
mind of integrity and objectivity.
An accountant is a highly educated, highly trained with high skills.
An accountant is able to exercise judgement for appropriateness,
and is able to have self-governance.

Manipulation suggested by directors of Ribby will mislead the users.

Although it could lead to a higher selling price of Hall, such action
will bring damage to the reputation and trust.
Society regards accountant as an individual with higher social
status. The respect from society on the profession must not be
abused. The company accountant must take appropriate action to
ensure such manipulation does not exist.
Ethical issue 2 pg 16
Ethics of corporate social responsibities are the moral beliefs of
an entity towards the society. Besides making daily routines, a
corporate may choose to contribute to its surrounding by doing
donations, charities, and rebuild a community.
These actions often receive less appreciation from shareholders,
who are looking for maximum monetary return. Performing
corporate social responsibilities requires resources of the entity,
but often such contribution does not generate tangible and measurable
returns.
Corporate social responsibilities must be fulfilled by all entities, as
in the past history, such action generate long term benefits to the
entity and the society surrounding the entity. Director should
disclosure such information to educate the shareholders than
such action is part of enhancing the shareholders' wealth.
Ethical issue 3 pg 16
A sale and repurchase of asset is recorded based on its substance
rather than its legal form. In the case of Robby, the transaction
is a loan in substance as :i) No sale will be agreed at ($16m) far below the asset's market value
($25m)
ii) The option is most likely to be exercise as after paying the premium
of 3%, the buy back is still worthy
Robby should record the proceeds as a current liability, without
derecognising the land.

Although such manipulation could be used to stablise stakeholders'

considence, this will lead to unreliable information being published
which will affect the decision making of users. If this is found out
it will damage the reputation of Robby and the trust between the
company and its stakeholders will be broken.
As a company accountant, one must follow code of ethics, such
as integrity and objectivity to ensure such manipulation does not
occur. The accountant should discuss with the director on this.

Sub book
Dr Bank
Cr Property
Dr Loss

$1m
$2m
$1m
"hidden dividend paid only to P"

Parent book
Dr Property
Cr Bank

$1m
$1m

Ethical issue 4 pg 17
Bower changed its accounting policy to revalue the property prior
to the sale can be interpreted as trying to maximise the losses in its
financial statements. This is one of the indirect way to pay dividend
to Minny, by avoiding the payment to non controlling interests of
Bower.
To Minny, the property is most likely to be recorded at its purchase
price of $1m. The gain was hidden, and might be able to avoid taxes.
This might create certain legal issues.
Also, recording the property at $1m in the financial statements of
Minny might raise conflict to IFRS 13, which generally requires
assets to be initially carried at fair value determined by market
approach.

There are benefits to the group in this arrangement : Bower can

save cash by avoiding payment of dividend to non controlling interest,
and Minny could avoid tax payment.
However, such manipulation leads to unreliable financial information
which will affect the decision making of the users. If this is found out
it will break the reputation and trust between the group and its
stakeholders. Such manipulation is not acceptable.
Ethical issue 5 pg 17
Profit is used in many cases to judge the performance of an entity.
It is understandable that the director of Angel regards profit
as first priority. However, profit is short term, and it is only a small
part of the overall shareholders' wealth.
Doing business ethically will promote values and reputation of the
company. It ensures long term prospect of an entity. Ethic and
profit can actually co-exist. The director argues that these two are
conflicting could be due to the director is trying to obtain unfair
profit, which could only be achieved by performing unethical action.
Codes of ethics are written principles to guide an accountant on
appropriateness. Codes of ethics are particularly important when
there is conflicting situation facing the accountant (eg : self-interest).
The codes serve as a declaration that the accounting profession
will hold the highest professionalism in discharging responsibilities.
It is wrong to say the codes are unimportant.

Ethical issue 6 pg 17
The director should not give an empty promise to bank without a
good basis. Although the loan is essential to meet the assets
replacement plan, giving fake promises and trying to present
manipulated information to bank is unethical, and could break the
trust between bank and Joey. To make it worse, this could raise
legal issue for misrepresenting the bank.
The chief accountant's decision in presenting information could be
influenced by his job security issues. He should refer to the codes
of ethics to search for solution. A professional accountant must
have the mind of integrity and objectivitiy when doing his job, and

must not be influenced by self-interest.

The chief accountant should discuss this matter with the directors,
and if the outcome is not satisfactory, he should consult the matter
with the audit committee.

Practice 1 pg 18
A sale of asset is recognised if the significant risks and rewards of
the asset are transferred to the buyer. This is assessed based on the
economic substance of the arrangement, and not based on its legal
form.
To Norman, the risks and rewards were not passed to Conquest :i) Norman continues to enjoy significant rewards by using
the hotel for the remaining useful life of 15 years, and
ii) Norman bears significant risks to guarantee a minimum
income of $15m to Conquest
Norman should not derecognise the hotel assets, and should recognise
the proceeds from sale as a non current liability.

If a sale transaction contains multiple elements, each element

is treated as a distinct performance obligation if each element
is independent from another.
Norman's customers pay to get a room to stay, and a discount
voucher for future redemption. The voucher is regarded as a
distinct performance obligation as the use of voucher does not
depend on the use of room.
Voucher can only be recognised if it is probable that customer will
use it. In this case, it is $20m x 1/5 = $4m.
The proceeds from customers of $300m is allocated to room sales
and voucher sales based on their respective observable prices :-

Room sales = $300m / ($300m + $4m) x $300m = $296m

Voucher sales = $300m / ($304m) x $4m = $4m
Grant received can be income related or asset related.
If a grant relates to income, the grant is recognised to profit or loss
in the year where the performance is satisfied.
If the grant relates to asset, the grant could be (as an accounting
policy choice) offset to cost of asset, or deferred to liability and
amortise over the asset's useful life.
To Norman, although the grant was to create jobs (income related),
the condition to be satisfied in order to keep the grant is actually
the cost of building, which is asset related.
A provision for repayment is set up only it is probable that the
condition cannot be achieved.
DCP

DBP

Obligation restricted to
contribution

Other than DCP

Practice 2
There are two types of retirement benefits :i) Defined contribution plan (DCP) : the employer's legal and
constructive obligation are restricted to contribution paid.
ii) Defined benefit plan (DBP) : plan other than DCP. Employer has
to bear extra obligation other than contribution.
Sirus need to look into more details to decide the appropriate
classification for the plans as the accounting treatments are different
for each plan.
Retirement benefits are often difficult to be measured as it involves
complex assumptions. Actuarial valuation is needed.

The cost of retirement should be recognised based on accrual

basis throughout the service period of the directors, and not a lump
sum cost after their retirement.

(c) The key issue in the question is to decide if the payment is

for director's remuneration, or is for consideration transferred to
previous owners of Marne. Based on the facts, the profit sharing
does not require employment service, but to serve as an incentive to
accept purchase offer, will make the payment a consideration
transferred.
As the payment is conditional upon the post acquisition performance
of Marne, this is contingent consideration. Such consideration is
recognised regardless the likelihood of occurrence. Sirus should
measure the payment at present value discounted at an appropriate
discount rate.
(d) Loan is a financial liability because Sirus has a contractual
obligation to pay cash under the arrangement. There are two
accounting models available for financial liabilities :i) Amortised cost (default model) : carrying amount of
the liability is added with finance cost charged using
effective rate, and reduced by any payment made
(ii) Fair value model : the carrying amount of the liability
is added with finance cost and reduced by payment made,
then at every year end it is remeasured to latest fair value
with difference to profit or loss
Sirus should use amortised cost model as there is no reason to opt
for fair value model. The effective rate may be 8% or 9.1%
depending on the duration of the loan they choose.
The loan is a non current liability as at year end as Sirus has, via
original agreement, an unconditional right to defer the repayment of
loan to more than 12 months in the future. As the discussion with
bank has not reach to a conclusion as at year end, such right is still
retained by Sirus.

Practice 3 pg 19
Inventory is to be carried at the lower of costs and net realisable
value (NRV). Johan purchases the handset at $200, but expected
NRV is only $150 - $1 = $149. Any unsold handset is to be value
at $149, with a loss of $51 recognised to profit or loss.
If a sale transaction contains multiple elements, each element is
regarded as a distinct performance obligation if the elements are
independent of each other. Johan's package of selling handset with
call card contains two distinct performance obligations as the
performance for selling handset is independent from provision of
mobile network services.
Revenue from sale of handset is recognised as soon as the handset is
delivered, while the revenue from call credit is recognised over the
six months period. The expected usage of $21 -$3 = $18 is
recognised prgressively, while the average unused credit of $3
becomes revenue once the card expires.

The arrangement between Johan and dealer is a principal - agent

arrangement because :i) Dealer bears no risks in the arrangement
ii) Dealer's return is in a form of commission
iii) Johan is the main party to fulfill obligation towards the
customers
Revenue from sale of handset should not be recognised when it is
transferred to dealer, but when it is transferred to a customer.
Cost of handset of $150 and commission of $130 are recognised as
cost of sales upon the customer signs the service contract.
The network subscription receivable from customer is recognised
over the 12 month contract period.

Practice 4 pg 20
There are sometimes an option embedded in a bond. The embedded
feature is to be separated from the bond and accounted for separately
if the embedded feature is not closely related to the bond.
To Aron, the option is convertible to ordinary shares, which is equity

in nature, while the bond is liability in nature.

The two elements are separated on the issue date by the following
calculation :$m
9%
$m
Year
Cashflow
D factor
Present value
2007 - 2009
6
2.5313
15.19
2009
100
0.7722
77.22
Present value of bond
92.41
Fair value of equity option
7.59
Total proceeds
100.00
The issue cost of $1m is to be allocated to liability and equity
based on their sizes :Bond : $92.41m - ($1m x 92.41%) = $91.49m
Equity option : $7.59m - ($1m x 7.59%) = $7.51m
Equity option is not to be remeasured after the initial recognition.
Bond is to be carried at amortised cost model :9.38%
Year
Start Finance Interest End
cost
paid
$m
$m
$m
$m
2007
91.49
8.58 (6.00) 94.07
2008
94.07
8.82 (6.00) 96.90
2009
96.90
9.10 (6.00) 100.00
Upon settlement, when 25 million units of shares were issued, the
accounting is as follows :$m
$m
Dr Bond
100.00
Dr Equity option
7.51
Cr Ordinar shares ($1)
25.00
Cr Share premium (bal fig)
82.51

Practice 5 pg 20
A sale and repurchase arrangement is recorded in the financial

statement based on its economic substance, rather than the legal

arrangement.
A revenue is recognised if substantially all risks and rewards of
the goods are transferred to buyer upon the sale. If not, the proceeds
are recognised as liability.
To Carpart, the sale can be recognised as revenue as :i) Risks of maintenance of car were passed to customer, and
ii) Rewards from using the car (4 years out of 5 years useful life)
were enjoyed by customers.
iii) Risks of residual value was passed to customer as the repurchase
price payable by Carpart is significantly less than the fair value of
the car

To the other arrangement, substantially all risks and rewards of

the car were not passed to customer, as :i) The usage of 2 years out of 5 years useful life does not seem
to be a significant reward, and
ii) Risk of residual value is still with Carpart.
The arrangement in substance should be a lease as the customer
get a chance to use the asset for two years, and indirectly "pays"
30% of the car price as lease payment.
Car rented out is a property, plant and equipment. Carpart should
depreciate the car over the expected useful life. The lease income
is recognised to profit or loss over 2 years on straight line basis.

Mock Q2
(a) A joint arrangement exist when parties to the arrange has
joint control. Joint control is where decision on relevant activities
of the arrangement requires unanimous consent of all the parties
to the arangement.
The arrangement of Joey with CP is a joint arrangement, as joint

control exists. Joint arrangement can be in one of the following two

forms :i) Joint operation : parties to the arrangement have rights
and obligation to the assets and liabilities of the arrangemnt,
ii) Joint veture : parties to the arrangement have rights and
obligation to the net assets of the arrangement.
Without a separate vehicle, the arrangement is a joint operation.
The arrangement of Joey and CP up to 1 November 2011 is a joint
operation, and after 1 November is joint venture.
The following accounting treatments are relevant :First half year
$m
2.50 90%
(1.00)
1.50

Sales ($5m x 6/12)

Cost of sales ($2m x 6/12)
Gross profit
(-) GP allocated to CP (30% x 1.5)
Net profit
Dr Sales (2.5 x 10%)
Dr Profit to CP (expenses)
Cr Payable (CP)

To Joey
$m
2.25
(1.00)
1.25
(0.45)
0.80

0.25
0.45
0.70

Second half year

Profit to Joey = $1.50m x 50% = $0.75m
Dr Inv in JV
Dr Sales (50% x 2.5)
Cr COS (50% x 1)
Cr Payable

$0.75m
$1.25m
$0.5m
$1.5m

(b) Revenue is recognised if there is a contract with customer.

An contract exists if the terms of performance and payment are
set, the collection is probable, and the contract has commercial

substance (in terms of timing and risks).

Joey may recognise the revenue starting 1 Oct 2011, as a contract
seems to exist.
Revenue is recognised if control of the goods and services is
transferred to customer. To services, the control is transferred
over the time. Revenue is recognised over the service period based
on stage of completion. To Joey, this will be accrued evenly over the
three years.
However, the stage of completion method should not be used if the
outcome of the service is not certain. Cost incurred todate is
recognised immediately to profit or loss, and revenue is recognised
up to the lower of amount expected to be recovered, or total
cost incurred.

For a sale arrangement which contains multiple performance

obligations, the package price is allocated to each obligation
based on its observable price.
To Joey, the following calculation applies :Hardward = $500,000 x (360 / (360+240)) = $300,000
Support service = $500,000 x (240 / (360+240)) = $200,000
As discussed previously, revenue is recognised when control of the
goods and services are transferred to customer. To hardware, it is
upon delivery, and to services, it will be recognised over the
service period based on stage of completion.

(c )
A finance lease is a lease where the substantially all risks and
rewards of the asset is transferred to the lessee. An operating lease
is a lease other than finance lease.
The lease of computer equipment seems to be an operating lease :i) The present value of minimum lease payment ($40m) does not
seem to be a substantial part of the fair value of the asset ($70m)

ii) The beneficial ownership is still with the lessor (Joey). Also,
Joey can terminate the lease at anytime by paying a relatively small
compensation.
Joey should recognise the lease income over the lease period, and
not a lump sum of net present value to profit or loss.
The deposit is recognised as a liability, and amotised over the lease
term.
If the termination is decided and communicated, Joey should
recognise a provision liability of $10m.

Q3
Report to Directors of Electron
From : Accountant
Date: 16 Nov 2015
Re : Matters to be considered for financial reporting
I am delighted to have this opportunity to clarify the following
matters that arise within our financial year end of 30 April 2015 :i) Financial guarantee
The financial guarantee given on behalf of our subsidiary is to be
acconunted for under IFRS 9, as it involves default risks.
The financial guarantee, which is a financial liability, is to be
accounted for using amortised cost by default. Fair value model
is available as an accounting policy choise of the fair value can be
measured reliably.
The liability is recognised to profit or loss at its fair value when the
guarantee is given :Dr Profit or loss
Cr Liability

$1.2m
$1.2m

After the first installment was paid by subsidiary, the liability is

to be reduced, says, by 1/3 :Dr Liability ($1.2m / 3)

Cr Profit or loss

$0.4m
$0.4m

However, the financial liability must be fair valued at $40m (the

balance of loan) as Electron feels that it is probable that the loan
will be repaid by them. The carrying amount of the liability is
revised with the difference recognised to profit or loss :Dr Profit or loss
Cr Liability
(1.2 - 0.4 - 40)

$39.2m
$39.2m

Donation received by subsidiary after year end is an evidence to

prove Electron's estimated fair value of $40m is inappropriate. This
adjusting event will reverse the addition to liability :Dr Liability
(39.2 + (1.2 / 3)
Cr Profit or loss

$39.6m
$39.6m

ii) Power station

The power station is a property, plant and equipment as it is used
in main operation. The cost includes construction cost, plus initial
estimated provision for dismantling.
The capitalised cost is to be depreciated over the useful life of the
asset of 20 years.
Provision is recognised if :- present obligation to pay
- paymment is probable
- amount can be estimated reliably.
The $15m is a provision for the reason discussed above. As 95% of
the $15m relates to the station, $14.25m is debited to the cost of
power station. The remainder 5% of $0.75m will be recognised to
cost of sales throughout the 20 years operation.

Any unwinding to the present value if to be recognised to profit

or loss.

iii) Hedged accounting

Hedge is common risk management technique to use a hedging
instrument to minimise or eliminate the exposure to the risk of
fluctuation in a hedged item.
In a cash flow hedge, there is no current accounting for future
cash flow movement. The fair value changes of the hedging
instrument is then recognised to other comprehensive income, and
retained in hedged reserve.
In the event of prematured termination of hedge relationship, the
hedge reserve is reclassified immediately to profit or loss if the
hedge item is not expected to occur.
However, to Electron, since the hedged item is expected to occur,
the reserve is retained in equity, and will be released to profit or
loss when the future cash flow affects the profit or loss in the future.

Hedge of a foreign operation cannot be accounted for as fair value

hedge, because IFRS does not permit the investment in associate
to be accounted for using a fair value value. It is to be accounted for
by equity accounting.
Electron should defer the exchange difference arising from
translating the hedging instrument to other comprehensive income
(rather than to profit or loss), and retained in a hedged reserves.
Such reserve will be realised to profit or loss if the foreign operation
is disposed.

iv) Share option

Employee benefit given in the form of share option is equity settled
share based payment. The fair value of the option is recognised
over the vesting period on a straight line basis. The fair value of
option is estimated after considering the staff turnover, where such
estimation is revised at the end of each reporting period.

To Electron, the following calculation applies :Employee benefit cost for the year
($3m x 94% x 1/3)

$0.94m

Lessor
FV $10m
Lease asset (life = 5 yrs)

IAS 17

ED

Lease term 2 yrs

OL

Performance ob

Lease term 4 yrs

FL

Derecognition

Lease term 5 yrs

FL

IFRS 15

Cr Asset 4/5 x $10m

Dr Rights to receive payment
Cr Asset
Dr Residual asset
(no depn)

016 440 8157

$8m
$8m
$2m
$2m