College of Business, Hospitality

and Tourism Studies

School of Accounting
ACC702 International Corporate Reporting
Trimester III, 2016

Group Assignment
Weighting: 10%

GROUP MEMBERS

Solution
Question 1

ID #

The journal entries to be recorded in the books of account are:

Dr. Accumulated amortisation
4,000
Cr. Asset cost
4,000
(Being elimination of accumulated amortisation against the cost of the asset)
Dr. Asset cost
Cr. Revaluation reserve
(Being uplift of net asset value to fair value)

6,000
6,000

The net result is that the asset has a carrying amount of $12,000: $10,000 $4,000 + $6,000

Question 2
A patent is considered as an intangible asset; this is because a patent does not have physical
substance, and provides long-term value to the owning entity. As such, the accounting for a
patent is the same as for any other intangible fixed asset, which is:

Initial recordation- Record the cost to acquire the patent as the initial asset cost. If a
company files for a patent application, this cost will include the registration,
documentation, and other legal fees associated with the application. If the company
instead bought a patent from another party, the purchase price is the initial asset cost.

Consider the following additional points when considered the accounting for patents:

R&D expenditures- Note that the research and development (R&D) costs required to
develop the idea being patented cannot be included in the capitalized cost of a patent.
These R&D costs are instead charged to expense as incurred; the basis for this treatment is
that R&D is inherently risky, without assurance of future benefits, so it should not be
considered an asset.
Useful life- A patent asset should not be amortized for longer than the life span of the
protection afforded by the patent. If the expected useful life of the patent is even shorter,
use the useful life for amortization purposes. Thus, the shorter of a patent's useful life and
its legal life should be used for the amortization period.
Capitalization limit- In practice, the costs of obtaining a patent may be so small that they
do not meet or exceed a company's capitalization limit. If so, charge these costs to expense
as incurred. In many larger companies with higher capitalization limits, this means that
patents are rarely recorded as assets unless they have been purchased from other entities.

Question 3

It is hard to tell if the research will actually result in real profits. If research was capitalized
then companies would have to book massive, unpredictable write downs whenever they
found out that a research project didn't pay off. It's better not to give investors false hope that's why we have the accounting principle of conservatism

Question 4
i.

Acquisition Analysis:
Net fair value of identifiable assets and liabilities acquired:
Land
Plant
Inventory
Cash

ii.

Accounts Payable
Loans
Net Assets

340,000
295,000
85,000
15,000
735,000
(20,000)
(80,000)
635,000

Consideration transferred 100,000 shares @ $6.10

610,000

Bargain Purchases/Revaluation Reserve (610,000 635,000)

(25,000)

Journal Entries
Dr Land
340,000
Dr Plant
295,000
Dr Inventory
85,000
Dr Cash
15,000
Cr Bargain Purchase/ Revaluation Reserve
Cr Accounts Payable
Cr Loans
Cr Share Capital
(To record acquisition of the assets & liabilities of Small Ltd)

iii. Journal Entries in records of Small Ltd if FV of shares is $7.50

Fair Value of acquires net assets

635,000

25,000
20,000
80,000
610,000

Goodwill

115,000

Consideration transferred 100,000 @ 7.50

750,000

Dr
Dr
Dr
Dr
Dr
Cr
Cr
Cr

340,000
295,000
85,000
15,000
115,000

Land
Plant
Inventory
Cash
Goodwill
Accounts Payable
Loans
Share Capital

20,000
80,000
750,000

Question 5
Nature of goodwill
Is it an asset?
2 types: Internal vs external/acquired goodwill
Nature of internal goodwill: undervalued/unrecorded assets, core goodwill
Nature of acquired goodwill? Core goodwill: going concern & combination
Why did acquirer pay for goodwill? Synergy extra benefits
How to account for it
Internal goodwill IAS 38: not recognised as cannot determine a cost
Acquired goodwill
Recognised only in a business combination
Measured as a residual under para 32
Subject to annual impairment test
If allocated to CGU, write off first if impairment loss
If reversal of impairment loss, no reinstatement of goodwill Future effects on
Statement of Comprehensive Income
No cause for concern
No annual amortisation
Only expense if impairment loss
Impairment loss cushioned by various accounting treatments such as use of cost
method for PPE, non-recognition of internally generated goodwill & internally
generated intangibles

Question 6
The fair value less cost of sell is:

= 16,000,000 2,000,000
= $14,000,000

The carrying amount is:

= 20,000,000 10,000,000
= $10,000,000

The value in use of the platform is:

= 24,000,000 10,000,000
= $14,000,000
The recoverable amount of the cash-generating unit is $14,000,000; which exceeds the
carrying amount therefore the asset is not impaired.

Question 7
The fair value less cost of sell is:
= 20,000,000 1,000,000
= $19,000,000

The carrying amount is:

= 28,000,000 8,000,000
= $20,000,000

The value in use of the platform is:

= 26,000,000 8,000,000
= $18,000,000
The recoverable amount of the cash-generating unit is $19,000,000; which is less than the
carrying amount $20,000,000 therefore the asset is impaired.

Question 8

Office
Building
(10:15)

Carrying
Value

Total

Recoverable
Amount

Impairment
Loss

10

12

15

18

18

Total

25

30

The impairment loss will be allocated on the basis of 2/12 against the building ($0.5 million)
and 10/12 ($2.5 million) against all other assets.

Question 9
The main objective of IAS 19 is to prescribe the accounting and disclosure for employee
benefits. IAS 19 requires and entity to recognize:

a liability when an employee has provided service in exchange for employee benefits
to be paid in the future; and
an expense when the entity consumes the economic benefit arising from service
provided by an employee in exchange for employee benefits

If unused entitlements to sick leave are to be paid out when the employee leaves the
organisation then these sick leave entitlements are generally referred to as vesting sick leave
entitlements. If the entitlements continue to accrue as the employee continues to work for
the employer, then the accounting treatment is the same as that used to account for annual
leave. A liability will be recognised which will not be dependent upon assigning
probabilities to the likelihood that the employee will actually take the leave. If sick leave is
considered to be non-vesting, entitlements will only be paid when the employee is sick, and
they will not be paid out when the employee ceases employment. For non-vesting sick
leave, accounting entries must be made which recognise the employees entitlements to sick
leave based on past service, and the probability that the sick leave will actually be taken.
For example, if an individual employee on a salary of $100 000 has an entitlement to two
weeks sick leave and it is expected that the employee has a 50 per cent probability of taking
one week leave, and a 50 per cent probability of taking no leave, then the accounts would
need to recognise a liability of $100 000 x 1/52 x 0.50 = $962 in relation to the employee.

Question 10

DEFINED BENEFIT PLANS

IAS 19 requires an entity to account not only for its legal obligation to defined benefit plans
but also for any constructive obligation that arises. In accounting for defined benefit plans, an
entity should determine the present value of any defined benefit obligation and the fair value
of any plan assets with such regularity that the amount shown in the financial statements does
not differ materially from the amounts that would be determined at the balance sheet date.
Defined benefit plans should use the projected unit credit method to measure their obligations
and costs.
DEFINED CONTRIBUTION PLANS
Under a defined contribution plan, payments or benefits provided to employees may be
simply a distribution of total fund assets or a third party; for example, an insurance entity
may assume the obligation to provide the agreed level of payments or benefits to the
employees. The employer is not required to make up any shortfall in the funds assets.
DEFINED CONTRIBUTION AND DEFINED BENEFIT PLANS CLASSIFICATION
In defined contribution plans, an entity pays a fixed contribution into a separate entity (fund)
and will have no legal or constructive obligation to pay further contributions if the fund does
not have sufficient assets to pay employee benefits relating to employee service in the current
and prior periods. An entity should recognize contributions to a defined contribution plan
where an employee has rendered service in exchange for those contributions.
All other post-employment benefit plans are classified as defined benefit plans. Defined
benefit plans can be unfunded, partly funded, or wholly funded.
CONTRASTING DEFINED BENEFIT AND DEFINED CONTRIBUTION
Under the defined benefits scheme, the benefits payable to the employees are not based solely
on the amount of the contributions, as in a defined contribution scheme; rather, they are
determined by the terms of the defined benefit plan. This means that the risks remain with the
employer, and the employers obligation is to provide the agreed amount of benefits to
current and former employees. The benefits normally are based on such factors as age, length
of service, and compensation. The employer retains the investment and actual risks of the
plan. The accounting for defined benefit plans is more complex than defined contributions
plans.

Question 11

Formal or informal arrangements based on which an enterprise provides benefits for its
employees on or after termination of service, which usually are referred to as termination
benefits. These could take the form of annual pension payments or lump-sum payments. Such
benefits, or the employers contributions toward them, should however be determinable or
possible of estimation in advance of retirement from the provisions of a document (i.e., based
on a formal arrangement) or from the enterprises practices (which is referred to as an
informal arrangement).
ABC Ltd on June 2016 decided to close down a branch of the companys operations when the
lease expired in the following February. Termination benefits of $2.0 million are likely to be
paid. Should the company recognize a liability for termination benefits in its financial
statements for the year ended June 2016?
It is a defined benefit plan, as the employer is obliged to pay and therefore carries the risk. As
of June 2016 ABC Ltd can only recognize a liability of a reliably estimated amount of the
benefit that the employees have earned in the current and prior period for service rendered.
The entity must account not only for its legal obligation but also for any constructive
obligation that arises from any informal practices. For example, the situation could arise
wherein the entity has no realistic alternative but to pay employee benefits even though the
formal terms of a defined benefit plan may permit an entity to terminate its obligation under
the plan.

Question 12
The IASB decided that fair value provided more relevant information and that this
information was more comparable and understandable. It also decided that fair value could
usually be reliably determined but made an exception for cases where this was not possible
(AASB 141 paragraph 30). If an active market for a biological asset does not exist, the most
recent market transaction price, or market price for similar assets, can be used in determining
fair values. However, if market-determined prices are not available, an enterprise may use the
present value of expected net cash flows from the asset in determining its fair value.
Historical cost is permitted in cases where fair values cannot be determined reliably. The
most contentious aspect of IAS 41 is the requirement that increments or decrements in the
fair value of biological assets, less estimated point-of-sale costs, be recognised as revenues or
expenses in the income statement for the financial year in which the increments or
decrements occur.
Fair value accounting in the agricultural sector is likely to involve considerable subjective
judgment, and may be more subject to bias and manipulation than historic cost based
information. Furthermore, the leeway for exercising subjective judgment when ascertaining
fair values, or estimates thereof, might undermine the prospects for harmonization, thus
subverting the raison dtre of IAS 41 which was designed to promote global convergence of
farm accounting practices. Hence, there is a need to investigate the potential impediments to
implementation of the standard.