ADRAC IFRS TRAINING PROGRAM

Suggested Solutions to Case Studies

Question 1

Issue of share capital

This question is bothering on the treatment of cost of issue of share capital to the reporting entity. IAS
32 provides that the cost of issuing share capital should be deducted from the share premium and NOT
expensed to profit or loss.

In view of this the sum of $0.2m incurred in issuing the shares share deducted from the premium on the
share issue. As the shares were issued above there nominal value, the premium of $100m ($0.2 x 500m)
shall be reduced by $0.2 m leaving a balance of $99.8m in that account as follows:

DR CR REMARKS
On issue of shares:
Bank $600m To record amount received from subscribers
Share capital $500m To record nominal value of shares issued
Share premium $100m To record premium on shares issued
On payment of issue costs:
Share premium $0.2m To record issue costs debited to share
premium account
Bank $0.2m To record payment for issue costs

Question 2

Loan from a director of the company

As the loan from the director has a conversion option, this will be split on initial recognition using the
present value technique as recommended by IAS 32. The liability portion will be remeasured at each
reporting date using the effective interest rate method (amortised cost). Thus, on initial recognition of
loan, the following split should be performed:

$
PV of principal amount 597,806,538
CPV of interest payment 101,096,731
LIABILITY 698,903,269
Equity (β) 101,096,731
AMOUNT BORROWED 800,000,000

On 31 December, 2017, the carrying amount of the liability will be remeasured as follows:

Initial Liability (from split accounting) 698,903,269.15

Interest paid (3% x $800,000,000) (24,000,000.00)
Effective Interest (6% x $698,903,269) 41,934,196.15
Carrying amount of Liability 716,837,465.30
The following journal entry is relevant to record the transaction:

DR CR REMARKS
On initial recognition of loan:
Bank $800m To receive the loan into the bank a/c
Liability $699m To recognise the obligation created
Equity option (OCE) $101m To record the equity option
On the reporting date:
Finance cost (profit or loss) $41.9m To recognise effective interest as FC
bank $24m To recognise interest paid as cash flow
Liability $17.9m To increase liability through amortization

Question 3

Acquisition of 20 years Operating License and Impairment Loss

Amortization of Operating License

The cost of this license will be capitalized as an intangible asset as per IAS 38 because the license met
the criteria for recognition as it is identifiable, it leads to operations which generates economic benefits
and the cost can be measured reliably having been purchased.

The license shall be amortised over 20 years (its useful life) or even less if need be (depending on BPE’s
policy for the amortization of intangible non-current assets). Therefore $1m shall be debited to profit or
loss and credited to provision for amortization account leaving a balance of $19m as the NBV of the
license.

Impairment loss of Operating License

As there is news of competition from a rival company who applies superior technology in the mining
business, this is an indication that the business activity might suffer from a downturn thereby leading to
the impairment of this intangible asset.

In view of this, the recoverable amount of this license needs to be determined and compared with the
carrying amount as prescribed by IAS 36. If the recoverable amount is less than the carrying amount of
$19m, the excess shall be written off in full to profit at 31 December 2017.

The recoverable amount is the higher of NRV and VIU. However, in this scenario, it is not possible to
determine the VIU; therefore, the NRV of $12m ultimately becomes the recoverable amount.

As the recoverable amount of $12 is less than the carrying amount of $19, the excess of $7m shall be
charged to profit or loss. Therefore, the carrying amount of the license reduces to $12m. Future
amortization of this license will be $0.63m ($12m/19).

Question 4

Defined Benefits Pension Plan

The sum of $70m staff cost will not all be debited to profit or loss. The amount of $5m contributed to a
defined benefit plan shall reduce the amount to be debited to profit or loss. Thereafter, an adjustment
shall be performed in line with IAS 19 to determine further expenses/(income) including net defined
benefits (assets) or obligation to be recognised as non-current (asset) or liabilities in the SOFP. However,
the actuarial (gain) or loss shall be recognised in OCI.

Therefore, the amounts to be debited to profit or loss are:

Details Amount ($) Remarks

Staff costs ($70m-$5) 65 Net of amount the amount paid and contribution
made to the fund to the plan
Current service cost 1.2 Representing the staff payable as a result of
services rendered by the employees in the current
year
Finance cost 0.07 The excess of interest on plan liabilities over
income on plan assets

The amount to be debited/(credited) to other comprehensive income is $4.73m representing the excess
of negative returns on plan assets over remeasurement (gain) or loss on plan liabilities.

The net defined benefits plan (assets) and liabilities of $3m is recognised as a non-current liability in the
SOFP.

These amounts have been computed in line with IAS 19 as follows:

Plan
Plan assets obligations Net Position Remarks
Opening balances (20,000,000) 22,000,000 2,000,000 Assets & liabilties inherited
Interest @ 3.5% p.a (700,000) 770,000 70,000 finance costs & income to P/L
Contribution paid (5,000,000) (5,000,000)Cash flows
Current Service Costs 1,200,000 1,200,000 Staff cost to P/L
Past Service Costs - Staff cost to P/L
Settlement/Curtailments - Gain or loss to P/L
Benefits piad Cash flows to Plan and entity
Returns on plan assets/Remeasrement gain or loss on plan laibilties 10,700,000 (5,970,000) 4,730,000 (Gain) or loss to OCI
CLOSING BALANCES (15,000,000) 18,000,000 3,000,000 Net (asset)/obligation to SOFP

Question 5

Investment properties

This is an investment held at fair value model as permitted by IAS 40. As the property value fell from
$75m to $73m in the year, a fair value loss of $2m shall be charged to profit or loss and the fair value
becomes the carrying amount in the SOFP as at 31 December 2017, while the rental income of $3m shall
also be credited to profit or loss as other income. No depreciation shall be charged on the property. IAS
36 does not apply to it as any possible impairment is reflected on the fair value at the reporting date.
The cost of servicing the property of $1m shall also be expensed. The amounts should not be net off as
they of different substance.
Question 6 and 7

Complex asset and Non-Current Asset Held for Sale

As this is an asset with three components that has different useful life, it will be componentized for the
purpose of computing depreciation charge (Q6) on a straight line basis (as the default depreciation
method). Thereafter, the component that is no longer needed will be treated as a NCA held for sale in
line with IFRS 5 (Q7).

Feeder Grinder Parker Total

Useful life (in years) 4 10 3
Cost/Valuation 80 40 30 150
Depreciation charge for the year (20) (4) (10) (34)
NBV before reclassification as held for sale 60 36 20 116
NCA held for sale:
NRV (18)
Impairment Loss to profit or loss 2 (2)
NBV after impairment write off 114
Amount reclassified NCA held for sale (18)
NBV of Non Current Assets in SOFP 96

This table summarizes the key issues raised by these scenarios (Q6 and Q7). As it can be seen, the
recoverable amount of the Parker is less than its carrying amount; hence it should be written down to its
carrying amount and reclassified as NCA held for sale.

The component will no longer be depreciated but will need to be reviewed for any possible impairment
until disposed. If management determines not to sale the item again, the reversal will be done so that
the item will be recognised at the lower of its historic carrying amount and the recoverable amount
under IFRS 5.

The total charged to profit or loss on 31 December 2017 is $36m comprising $34m depreciation charge
and $2m impairment write down of asset held for sale.

The parker has been rightly classified as held for sale because the criteria under IFRS 5 for reasonability
of price including launching an active program to locate a buyer seem to have been met by the
negotiation of price and the probable delivery of the item in less than one year from year end.

Question 8

Lease of Mining Site/Right of Use Asset

This is a qualifying lease under IFRS 16 and BPE ltd is a lessee. Therefore, the right of use of the mining
site shall be capitalized as follows:
 $m
PV of rentals over the 10 years period 154
Direct costs (agency fee) 5
PV of decommissioning costs 3
Total Capitalised Cost 162

The assets shall be amortised over its useful life of 10 years at the rate of $16.2m and charged to profit
or loss. Thereafter, at each reporting date, there will be unwinding of discount of the PV of rentals and
the decommissioning cost to increase the amounts to their nominal amounts.

The amounts to be recognised as finance costs on the PV of rentals and the reduction in liability of the
ten years period is as follows:

Years Bal b/f Amount paid Principal Interest @ 5% Bal c/f

1 154 20 12 8 142
2 142 20 13 7 129
3 129 20 14 6 116
4 116 20 14 6 102
5 102 20 15 5 87
6 87 20 16 4 71
7 71 20 16 4 54
8 54 20 17 3 37
9 37 20 18 2 19
10 19 20 19 1 0

The amounts that will be charged as finance costs and increase in decommissioning liability for the ten
years period is as follows:

Years Bal b/f Interest at 5% Bal c/f

1 3.07 0.15 3.22
2 3.22 0.16 3.38
3 3.38 0.17 3.55
4 3.55 0.18 3.73
5 3.73 0.19 3.92
6 3.92 0.20 4.11
7 4.11 0.21 4.32
8 4.32 0.22 4.54
9 4.54 0.23 4.76
10 4.76 0.24 5.00

Based on the above, the finance cost to be charged to profit or loss for the year ended 31 December
2017 is $8.15m while the PV of obligation arising from the right of use asset reduces to $142m and the
decommissioning liability increases to $3.22m. The carrying amount of asset in the SOFP will be $145.8m
as 31 December 2017.