ADRAC BUSINESS SCHOOL

IFRS TRAINING SESSION ON 11TH & 12TH AUGUST 2018.

SUGGESTED SOLUTIONS ON TUTORIAL QUESTIONS
IFRS 5 QUESTIONS

QUESTION 1

Zoom- Reclassification of a Disposal Group as a Non-Current Asset Held For Sale

The business must be reclassified as a NCA held for sale on 1 July, 2011 as all the criteria has been met.

The assets has to be reclassified at the lower of carrying amount on 1 July, 2011 and the NRV on item by
item basis, after which the sum of the lower of NBV and NRV value of the business unit will be
compared with its NRV on that date (1st July, 2011) as follows:

Recoverable
NBV MKT Value Cost to sale NRV amount
$'m $'m $'m $'m $'m
Land and building (wk 1) 120 124 (3) 122 120
Equipment (wk 1) 40 55 - 55 40
Trade receivables 30 26 - 26 26
Inventories 20 28 1.4 27 20
Trade payables (26) - - (26) (26)
Total 184 180

As the recoverable amount is lower than the NBV, the asset will reclassified to current assets at the
lower of $184m and $180m. The write down of $4m will be written off to profit or loss at 1 July, 2011.
At each year end before its disposal the item will be tested for possible further impairment.

Question 2

Determine the recoverable amount of each item which is within the sc of IFRS 5. It should be noted that
investment property held under the fair value model is not within the scope of IFRS 5. The recoverable
amount of other within-scope items will be determined as follows:
 Recoverable
items NBV MKT ValueSelling costs
NRV amount
$'m $'m $'m $'m $'m
Land 98 101 (2) 99 98
Trade receivable 28 24 (1) 23 23
Plant 14 10 (1) 9 9
Total 140 135 (4) 131 130

These items will be reclassified to current assets as NCA held for sale at their respective NRV. The
excess of the carrying amounts of trade receivables and plant of ($28m-$23m) of $5m and ($14m-$9m)
of $5m will be written off to profit or loss as impairment loss.

Question 4

Insha Chemicals Limited (ICL)

This question requires the determination of whether the criteria to classify the Lahore Division
(LD) as a disposal group has been met.

Given the circumstances of the situations, it appears that the criteria under under IFRS 5 has
been met based on the following:

1. The announcement of the has been made before the reporting date of 30th June, 2009.
This is arguably a show of commitment on the side of management possibly pointing to a
highly probable sale,
2. The sale is expected within a few months,
3. Negotiations are ongoing with a possible acquirer. This is an indication of active search
for a buyer,
4. The assets will be sold at 95% of their fair values. This indicates that the price at which
the CGU is marketed is reasonable.

As these indicators are in line with a highly probale sale, the CGU’s operating results and cash
flows relating to the CGU for the reporting period ended June 30, 2009 should be presented
separately from the results of the continuing operations in both the statement of profit or loss
and other comprehensive income and the cash flow statement.

In the statement of profit or loss, the profit or loss from the continued operations shall be
presented after the profit or loss of the continued operations. The figure to be presented shall
be the aggregate of:

- Impairment loss from the reclassification of the assets and liabilities of the discontinued
operations as NCA held for sale,
- The profit or loss from the CGU’s operations from the date the reclassification criteria is
met to the reporting date, and
 - The associated tax implications

Any other comprehensive items relating to the discontinued operations net of associated taxes
shall also be presented as a single figure separately from the other comprehensive income items
from the continuing operations in the statement of other comprehensive income.

In the cash flow statement, the cash flows arising from the discontinued operations shall be
presented separately in its relevant cash flow classification (operating, investing and financing
activities).

The main reason for this separation is to enable the users of the FS to estimate the future profits
and cash flows of the reporting entity if the operation is finally disposed.

Question 5

Global Air Limited

As GLA is committed to the disposal of 90% of its interest in MPL, MPL will be reclassified as a
NCA held for sale in its consolidated statement of financial position. On the date of
reclassification, the gain or loss from the reclassification will be written of to profit or loss as
follows:

Carrying amount of net assets of MPL BV on 30/6/2013 Adj NBV

Non current assets 195.0 - 195.0
Current assets 50.0 (24.0) 26.0
Liabilities 90.0 (34.0) (56.0)
Goodwill 15.0 - 15.0
Net assets of the subsidiary 180.0
90% thereon (90% x 180m) 162.0
NRV of the subsidiary (140m-3.5m) 136.5
Impairment loss written of to profit or loss (162m-136.5m) 25.5

The fair value of the remaining 10% shall be retained in the group SOFP, however, the
investment shall be held at fair value per IFRS 9 (as an ordinary investment).

The impairment loss arising from the reclassification shall be written off to profit or loss
including the net loss from the subsidiary and the sales expenses incurred so far in aggregate as
follows:
 $m
Reclassification loss 25.5
Net loss after tax 30
Selling expenses 1.5
57

The net figure of $57m shall be expensed to profit or loss as profit or loss from discontinued
operations.

The NRV which is the effective recoverable amount shall be reclassified to current assets as NCA
held for sale.

Question 6

Kids Limited

“Boss” qualifies to be classified as a discontinued operation on both 2 May 2002 and 31 March
2003, however, on 2 May 2002, the carrying amount of the net assets were higher than the
recoverable amount by $250,000 (impairment loss) thus:

$'000
Assets 5,250
Liabilties (750)
Net assets 4,500
Recoverable amount (4,250)
Impairment loss 250

On 31 March 2003, an additional impairment loss of $2,000,000 shall be recognised as the NRV
of the unit dropped to $1,500,000 against a carrying amount of $3,500,000. Consequent to the
above, the profit of loss of Kids Ltd will appear as follows:
Statement of profit or loss for the year ended 31 March, 2003
2003 2002
Continuing operations: $'000 $'000
Revenue 5,000.00 4,500.00
Opera ti ng cos ts (2,000.00) (3,250.00)
Interes t (1,000.00) (500.00)
Profi t before ta x 2,000.00 750.00
Ta x expens e (700.00) (262.50)
Profi t from conti nui ng opera ti ons 1,300.00 487.50
Discontinued operations:
Profi t/(l os s ) net of ta x from di s conti nued opera ti ons (wk(1,138)
3) 423
Profit for the year 163 910

The profit or loss recognised in the income statement regarding the discontinued operation is
arrived at in both years as follows:

Profit/(Loss) from discontinued operations: 2003 2002

Operations for the year: $'000 $'000
Revenue 2,000 2,500
Operating costs (1,500) (1,350)
Interest cost (250) (250)
Profit from operations 250 900
Impairment loss on reclassification (2,000) (250)
Profit before tax (1,750) 650
Income tax (expense)/refund 613 (228)
Profit/(Loss) for the year (1,138) 423

QUESTIONS ON IAS 38

Question 1

Foxtrot

The involved in this scenario involves the recognition of an intangible asset arising from
development expenditure.
The agreement between Foxtrot and Tecla indicates that Foxtrot has developed a Pilot plant
which is not feasible for commercial production as the equipment developed will only be used
to produce for Tecla. However, it is clear that the criteria for capitalization as a development
cost have been met given the following facts:

1. The cost can be measured reliably, evidenced by the resources invested by Foxtrot in
assembling the machine,
2. The machine will be used as a proprietary equipment to produce tablet PCs to Tecla’s
design, thus enabling Foxtrot to generate economic benefits,
3. Foxtrot can the ability of the machine to generate economic benefit because he charges a
fixed price per unit produced and also recovers a minimum fee even if no production
takes place.

In view of the fact that the cost of manufacturing the equipment cab ne covered in three years,
Foxtrot has to amortize the cost of the machine at a period not above this period; possibly, on a
straight line basis.

Question 2

Architex

This question requests for the classification, accounting treatment and relevant calculations
with respect to the financial statements of Architex for the year ended 31 December 2013.

The table below shows the classification of the items in the question:

Items Classifications Accounting treatment

Desktop computer and  This shall be The cost shall be capitalized
monitor classified as a and depreciated over four
tangible non-current years.
asset
Windows 8 license  As this license is not The license shall be
acquired as an amortised over four years
integral part of a
hardware, the cost
shall be capitalized as
an intangible asset
Microsoft Office Professional  This shall be As the software has an
Plus 2013 licenses classified as an indefinite useful life, it shall
intangible asset with not be amortised but shall be
an indefinite useful tested to impairment
life. annually in line with IAS 36.
 The period based If the period based license is
license shall be capitalized, it shall be
capitalized if it is amortised over the period
intended to be used covered if it is not
for more than one capitalized, it shall be
accounting period. expensed in the period

Autodesk AutoCAD Design
Suite Ultimate 2014
incurred.
 The cost of the The cost shall be capitalized
original software and amortised over four
shall be capitalized as years.
an intangible asset.
 The upgrade cost
shall be expensed as
the cost seem to be
immaterial following
the fact that the cost
is substantially lower
than the cost of a new
version.

Following the above situations, the depreciation and amortization charges, including the
carrying amounts of the items above in financial statements of Architex for the year ended 31
December 2013 shall be as follows:

Items Cost Dep/amortisation BV

Desktop computer & Monitor 1,320.00 (165.00) 1,155.00
Windows 8 License 206.80 (25.85) 180.95
Microsoft Office Professional Plus 2013 Licenses 558.80 - 558.80
Autodesk AutoCAD Design Suite Ulimate 2014 7,617.50 (952.19) 6,665.31
9,703.10 (1,143.04) 8,560.06

The depreciation and amortization charge of $1,143.04 shall be expensed to profit or loss and
credited to accumulated depreciation account.

The carrying amount of the Desktop & monitor of $1,155 shall be presented as property, plant
and equipment; while the sum of $7,405.06 shall be presented as intangible assets in the SOFP
as 31 December, 2013.

Notice that the depreciation and amortization charges have been prorated for only six months.
The period from 1 July 2013 to 31 December 2013 as follows:
 Annual Half year
Items UL Cost charge charge
Desktop computer & monitor 4 1,320.00 330.00 165.00
Window 8 License 4 206.80 51.70 25.85
Microsoft Office professional Plus 2013 - - - -
Autodesk AutoCAD Design Suite Ultimate 2014 4 7,617.50 1,904.38 952.19

The 10% sales tax will not be recoverable as these items are not meant for resale rather usage;
therefore, the amounts will also be capitalized.

Questions 3

Capperri

Computation of amortization charges on intangible assets at 31 December 2013.

1. The cost of the new website shall be determined as follows:

Items Amount Capitalise Expense

Planning of the website 8.00 8.00
Registration of domain names 18.00 18.00
Internal design costs 85.00 85.00
External contractor design costs 112.00 112.00
New content development 38.00 38.00
Advertising of the new website 22.00 22.00
283.00 215.00 68.00

2. The additional cost for extending the lifespan of the Classic film right shall be capitalized
and amortised over the extension period of twenty years separately from the existing
right over the film of the remaining period of two years.
3. The old website shall be derecognised and the carrying amount written off to profit or
loss as a loss on disposal.
4. Consequent to the above, the amortization charges shall be computed as follows:

Annual Prorated
Items Cost UL charge charge
Existing film 10,000 5 2,000 2,000
Film extension right 70 20 4 4
Old website 150 5 30 15
New website 215 5 43 22
 5. The sum $68m of the new website cost shall be expensed on 31 December 2013 as they
are recurrent expenditure.
6. The fixed assets schedule showing the movement in intangible assets shall appear as
follows:

Cost/Valuations Classic Film Website Total

Cost 10,000 150 10,150
Addittions 70 215 285
Disposals - (150) (150)
(a) 10,070 215 10,285
Accumulated amortisation:
Balance at 31 December 2012 6,000 90 6,090
Charge for the year 2,004 37 2,041
Disposals - (105) (105)
(b) 8,004 22 8,026
Net Book Value (a-b) 2,066 193 2,259

7. The loss on the disposal of the old website is computed as follows:

$'000
Cost of website 150.00
Accumulated depreciation (105.00)
Carrying amount on disposal date 45.00
Sales proceeds -
Loss on disposal (45.00)

Question 4 A

1. The survey cost of $1m incurred in the year 2001 shall be expensed in full to the profit or loss
for the year ended December 31, 2001. The cost of survey is a research cost and thus does not
qualify capitalization as an intangible asset.
2. The cost of $5m incurred to acquire a trade mark on January 1, 2002 shall be capitalized as an
intangible asset as it satisfies the criteria for capitalization because the trademark has been
used to develop a new model which has achieved marketability locally and internationally. This
is an evidence of generation of economic benefits, and a confirmation of the ability of the
company to demonstrate availability of market for the item (trademark). As the trade mark has
 an indefinite useful life, the cost shall not be amortised but shall be tested to impairment
annually irrespective of whether there is an indication of impairment or not.
3. The 1% payable on sales proceeds annually shall be expensed as it is a recurrent and variable
expenditure; hence does not qualify for capitalization.

Question 4 B

1. The event of 2008 and 2009 are confirmations that there are external indications of
impairment. Market forces (completion) has led to a disappearance or lowering of demand for
the products leading to decrease in economic benefits flowing from the item.
2. In view of the above, management need to carry out an impairment test on the asset and
invariable write its carrying amount down to its recoverable amount at the end of 2008.
3. As management have decided to discontinue the operation in 2009, the item will need to be
reclassified as a NCA held for sale and its results presented as the results of a discontinued
operation.
4. In view of discontinuance of the operation, the results of the operation shall be incorporated
into the profit or loss of 2009 as such described in IFRS 5.
5. In writing down the item to its recoverable amount, $0.5m shall be written off to profit and loss
as impairment loss while the recoverable amount of $4.5m shall become the carrying amount of
the asset.
6. The disclosure notes shall explain the circumstances behind the write down to recoverable
amount, the fact that the useful life has been reassessed as definite and the fact that the
operations shall be discontinued from January 1, 2011.

Question 5

1. The costs already expensed to profit or loss prior to 2010 can no longer be reversed. However,
all the costs incurred in 2010 qualify for capitalization as the criteria has been meet for the two
projects.
2. However, project Y will not be amortised as it is not yet in use. But project Y will be amortised
using the unit of output method as the projected net revenue during the life of the project has
been estimated.
3. Therefore, the cost to be capitalized for each project are:

X Y
$'000 $'000
Cost incured in 2010 200 150
Cost incured in the year 600 250
Capitalised cost 800 400

7. The amortization charge for project Y in the year shall be $160,000 (6000/3000 x 800).
This amount shall be charged to profit or loss and the carrying amount of the intangible assets
shall be $1,040 in the SOFP ($800+$400-$160).

IAS 19 QUESTIONS
Question 1

Alphatex

The opening and closing balances of net plan obligations (assets) must be reconciled at the year end, 31
December, 2013. In doing this the adjustable items arising from the changes in actuarial valuations will
be accounted for.

In the case of Aphatex, the changes in the net plan obligations shall be accounted for as below:

Plan Plan Net

Details assets liabilities amount Remarks
$'m $'m $'m
Balance at 1/1/2013 (260) 225 (35) Opening net plan (asset)
Interest @ 5% (13) 11 (2) Finance (income) to P or L
Current service cost - 36 36 Staff cost to P or L
Contributions paid (32) - (32) Cash flow
Benefits paid 4 (4) - No impact
Past service cost (note) - 24 24 Staff cost to P or L
Return on assets/Actuarial loss on obligations
9 (4) 5 Staff cost reduction to OCI
Balance at 31/12/2013 (310) 296 (14) Closing net plan (asset)

The affected financial statements have been highlighted in the remarks column. The actuarial
loss/(gain) of $5m shall be taken to other comprehensive as an item that will never reclassified to
profit or loss.

The net defined benefit plan liability (asset) of $14m shall be recognised as a long term asset or
(liability) in the SOFP while the sum of service costs (sum of current service cost and past service cost)
of $60m shall be charged to profit or loss as staff cost. The net finance (income) shall be a reduction to
finance cost.

The contributions paid of $32m are presented as a cash flow from operating activities in the cash flow
statement.

The benefits paid reduce the plan liabilities and plan assets at the same amount and thus has no net
impact on the scheme.

Question 2
The defined benefit plan measurements shall be rolled over from one reporting year to another to
determine changes in the plan assets and liabilities and amounts chargeable to profit or loss and other
comprehensive income.

Year 2013 remeasurement:

Plan assets Plan liabilities Net amount

$ $ $
Balance at 1/1/2013 (1,000) 1,000 -
Interest @ 10% (100) 100 -
Current service cost - 130 130
Benefits paid 150 (150) -
Contributions paid (90) - (90)
Remeasurements (ß) (52) 61 9
Balance at 31/12/2013 (1,092) 1,141 49

Year 2014 remeasurement:

Details Plan assets Plan liabilities Net amount

$ $ $
Balance on 1/1/2014 (1,092) 1,141 49
Interest @ 9% (98) 103 4
Current service cost - 140 140
Benefits paid 180 (180) -
Contributions paid (100) - (100)
Past service cost - 80 80
Settlements 200 (230) (30)
Remeasurements (ß) (199) 143 (55)
Balance @ 31/12/2014 (1,109) 1,197 88

The net movements shall be posted to the relevant financial statements as in example 1 above. The only
new item here is the settlement which to place. Liabilities having present value of $230 were settled in
full with assets with a fair value of $200, leading to a net reduction in liabilities of $30. This shall be
treated as reduction of staff costs or other income in the profit or loss.
Question 3 (Savage)

The movements in net defined benefit obligation (asset) are computed as follows:

Plan Plan Net

Details assets liabilities amount
$'m $'m $'m
Balances @ 1/11/2014 (2,900) 3,000 100
Interest @ 6% (174) 180 6
Current service cost - 40 40
Benefits paid 42 (42) -
Contributions (note 1) (28) - (28)
Past service cost - 125 125
Return on plan assets @ 7% (203) - (203)
Remeasurements (ß) 93 72 165
Balances @ 31/10/2015 (3,170) 3,375 205

Note 1: The unpaid contribution has been recognised because the reporting entity is obliged to make
the payment into the fund when cash flow improves. Its non-inclusion will not reflect the true position
of the scheme.

Note 2: Notice that the return on plan asset has been measured using the return rate provided in the
question of 7% is recognised separately from remeasurement balances.

Note 3: The movements in the plan net obligation shall be treated in the relevant financial statements
as usual noting the closing met obligation of $205m to SOFP, finance cost of $6m, service costs of
$165m in profit or loss and an actuarial loss of $165m to be reported in OCI.

Question 4 (Tanzeem Ltd)

The pension plan net obligation movement on 31 December, 2013 is computed as follows:
 Plan Plan Net
assets liabilities amount
$'m $'m $'m
Balances at 1/1/2013 (1,995) 2,050 55
Interest @ 8% (160) 164 4
Current service cost - 143 143
Contributions paid (108) - (108)
Benefits paid 110 (110) -
Past service cost ($5m + $8m) - 13 13
Return on pla asset @ 9% (180) - (180)
Remeasurements (ß) 182 40 222
Balance at 31/12/2013 (2,150) 2,300 150

The movement in plan (assets) and liabilities on 31 December 2014 is as follows:

Balance at 1/1/2014 (2,150) 2,300 150

Interest @ 9% (194) 207 14
Current service cost - 125 125
Benefits paid 99 (99) -
Contributions made (105) (105)
Settlements 240 (280) (40)
Return on plan asset @ 10% (215) - (215)
Cash paid (note 1) - (20) (20)
Remeasurements (ß) (1,784) 2,040 256
Balance at 31/12/2015 (1,784) 2,040 256

The settlement resulted in a reduction in plan liabilities by $300m because of the additional $20m paid
in cash by Tanzeem to Sachai Limited.

IAS 23 QUESTIONS

Question 1 Ejidius

Borrowing costs on construction of a stadium for a Local Authority

From the point of view of IAS 23 (borrowing costs), this stadium is a qualifying assets because it is
inventory not produced on repetitive bases.

The carrying amount of the stadium before the sale to the Local Authority is the sum of the cost of the
construction and the borrowing cost legible for capitalization.
This borrowing is a specific borrowing, having been obtained specifically for the construction of the
stadium for sale. Given this, the borrowing cost legible for capitalization will be determined at 7%
interest and the income from reinvestment of surplus funds shall be computed at 5%.

It should also be noted that the whole funds were not drawn down at once neither was the amount
drawn down utilized at once; hence a systematic approach has to be applied to determine the correct
interest and income at each relevant date. A suggested approach follows:

Interest cost on borrowed funds:

Amt Cumulative Period used Ineterst @

Date borrowed Borrowing (months) 7% p.a
$'m $'m $'m
1/1/2008 to 31/3/2008 100 100 3 1.75
1/4/2008 to 30/8/2008 120 220 6 7.70
1/9/2008 to 31/10/2008 80 300 2 3.50
1/11/2008 to 31/12/2008 Suspension of capitalisation
1/1/2009 to 29/2/2009 300 2 3.50
Total interest costs 16.45

Income from investment of surplus:

Periods Interest
Amt Cumulative invested income
Date invested/(divested) investment (months) at 5% p.a
$'m $'m $'m
1/1/2008 to 28/2/2008 50 50 2 0.42
1/3/2008 to 31/3/2008 (30) 20 1 0.08
1/4/2008 to 31/5/2008 70 90 2 0.75
1/6/2008 to 31/8/2008 (60) 30 3 0.38
1/9/2008 to 31/10/2008 60 90 2 0.75
1/11/2008 to 31/12/2008 Suspension of capitalisation -
1/1/2009 to 29/2/2009 (90) - -
Total interest income 2.38

The carrying amount of stadium before sale:

$'m
Cost of construction 300.00
Total interest 16.45
Interest income (2.38)
314.07
Question 2

Spin Industries Limited

This involves the determination of the amount of borrowing cots legible for capitalization with respect
to the construction of office building by SIL which started on 1/9/2014 and completed on 21/5/2015.

The construction was financed by a mix of specific borrowing a general borrowing; therefore, the
amounts paid for the project shall be first using specific borrowing while the excess shall be from the
existing (general borrowing)

IAs 23 provides that borrowing cost on specific borrowing shall be interest cost less income from
reinvestment of surplus funds. Thus, the specific borrowing taken out 1/9/2014 of $25m shall be
treated as such. The .05% commitment fee shall be deducting from gross proceeds and treated as
borrowing cost, however, the effective interest shall be computed on net amount borrowed at 8%
interest per annum prorated for a six monthly period.

The capitalization rate on the general borrowing shall be computed based on the sum of interest cost
on outstanding borrowings of $45m. Thereafter, the capitalization rate shall be applied on the actual
amount expended on the qualifying asset in the period under review.

As usual, a methodical approach shall be applied to calculate all the variables needed to determine the
borrowing costs for capitalization as follows:

Specific borrowing:

Interest costs on specific borrowing

Amt Period Interest

Date borrowed outstandin @ 6% Working
$'m Months $'m
1/9/2014 to 31/1/2015 25 5 0.63 5/12 x 6% x $25m
1/2/2015 to 31/5/2015 20 4 0.40 4/12 x 6% x$20m
Total Interest costs 1.03
Commitment fee (0.5% x $25m) 0.13
Total borrowing cost 1.15

The income from reinvestment of surplus funds:

 $'m
Gross borrowing 25.00
Commitment fee (0.5% x $25m) (0.13)
Net proceeds 24.88
Amtpaid on 1/9/2014 (18.00)
Amount reinvested 6.88
Interest income from 1/9/2014 to 30/11/2014
(3/12 x 8% x $6.88) 0.14

Utilization of specific and general borrowing:

General
Date Amt paid Specific borrowing borrowing Total
$'m $'m $'m $'m
1/9/2014 18 18.0 - 18.0
1/12/2014 15 6.9 8.1 15.0
1/2/2015 12 - 12.0 12.0
1/6/2015 9 - 9.0 9.0
24.9 29.1 54.0

Capitalization rate on general borrowing:

Oustandin Interest for the

Facility Amt borrowed g amt period Workings
$'m $'m $'m
1 28 25.0 2.4 9/12 x 13% x $25m
2 25 20.0 3.0 not applicable
Total interest costs 45.0 5.4
Capitalisation rate (%) 12.08 5.4/45 x 100%

Eligible borrowing cost on general borrowing:

Amt spent on Capitalisation

projet rate Borrowing cost Working
$'m % $'m
29.1 12.08 3.51528 12.08% x $29.1m
Total borrowing cost eligible for capitalization:

$'m
Borrowing cost on specific borrowing 1.15
Borrowing cost on general borrowing 3.52
4.67

Question 3

Granite Corporation

This involves the capitalization of borrowing costs from a range of borrowings, one from specific
borrowing and one from a single outstanding borrowing. The question requested for eligible
borrowing costs for two dates, that is, on 30 June, 2014 and 30 June 2015.

As usual, a methodical approach will be applied to determine interest costs and income from
reinvestment of surplus funds as follows:

Borrowing costs eligible for capitalization on 30 June 2014

Only the specific 7 year loan of $70m will apply at this date. The interest cost and income from
reinvestment of surplus funds is determined.

Dates Details Months Amount Workings

$'m
1/3/2014 Arrangement fee 0.70 1% x $70m
1/3/2014 to 30/6/2014 Interest incurred 4 3.03 4/6 x 6.5% x $70m
1/3/2014 to 30/6/2014 Income from surplus funds4 (1.18) 4/12 x 8% $44.3m
2.55

Borrowing costs eligible for capitalization on 30 June 2015

 Amount
Dates borrowed Months Interest Workings
$'m $'m
1/7/2014 to 31/8/2014 70 2 1.52 2/6 x 6.5% x $70m
1/9/2014 to 31/1/2015 65 4 2.82 4/6 x 6.5% x $65m
1/2/2015 to 28/2/2015 suspension of capitalisation
1/3/2015 to 30/6/2015 60 4 2.60 4/6 x 6.5% x $60m
6.93

Interest from reinvestment of surplus funds

Amount Interest
Dates invested Months income Workings
$'m $'m
1/7/2014 - 31/8/3014 44.3 2 0.59 2/12 X 8% X $44.3m
1/9/2014 - 31/1/2014 39.3 4 1.05 4/12 X 8% X $39.3m
1/2/2015 -28/2/2015 Suspension of capitalisation
1/3/2015 - 30/6/2015 39.3 4 1.05 4/12 X 8% X $39.3m
2.69

Utilization of outstanding borrowing:

 Dates Amt paid Specific Outstanding Total
$'m $'m $'m $'m
1/1/2014 25.0 25.0 - 25.0
31/1/2014 65.0 44.3 20.7 65.0
90.0 69.3 20.7 90.0

Borrowing cost on outstanding borrowing:

$'m
Interest cost (5/12 X 14% X $20.7m) 1.21
Income from invested $10m (5/12 X 8% X $10m) (0.33)
0.87

Total borrowing costs eligible for capitalization on 30/6/2015:

$'m
Interest on specific borrowing 6.93
Surplus on reinvested specific borrowing (2.69)
Inerest on outstanding borrowing 1.21
Income from oustanding borrowing reinvested (0.33)
5.12

IAS 23 QUESTIONS
Question 1 Missive

Questions 1 A

Grant related assets and repayment of government grant

This is a grant related asset treated as a reduction from cost of the asset due for repayment. Notice that
the amount to be repaid is only 10% of the original cost.

IAS 23 states that when a grant related asset treated as a reduction from cost of asset becomes
repayable, the following adjustments should be carried out:

 The carrying amount of the asset should be debited with the amount repayable,
 The entity should create a provision should for grant repayable per IAS 37, and
 The depreciation undercharged because of reduction in cost of asset shall be fully charged to
profit or loss and credited to carrying amount of assets or provision for depreciation in the
reporting period in which the grant becomes repayable.

The relevant journals evidencing the events occurring with the asset and the grant received can be
journalized as follows:

Date Details $'m $'m Remarks

1/2/2011 Grant receivable 4.8
To evidence the right to the grant and the
Grant related asset 4.8 treatment of grant
1/4/2011 Specialised equipment 12
Cash/Payable 12 To record purchase of asset
1/7/2011 Cash 4.8
Grant receivable 4.8 To record receipt of grant
31/12/2011 Profit or loss 0.54
Provision for depreciation 0.54 To record depreciation for first 9 months
31/12/2012 Profit or loss 0.084
To recognise under depreciation for
Provision for depreciation 0.084 31/12/2011
31/12/2012 Profit or loss 0.048
Provision for grant payable 0.048 To recognise the liability
31/12/2012 Profit or loss 1.2
Provision for depreciation 1.2 To record full depreciation on 31/12/2012

The above journals reflect the matters arising from the award of grant for acquisition of specialized
equipment.

At various dates, the remarks column explains the reason for each journal. The carrying amount of the
asset under both scenarios is shown as follows:
Dates Details With grant Without grant
$'m $'m
1/4/2011 Cost of assets 12.00 12.00
Grant received (40% x $12m) (4.80) -
Net amount 7.20 12.00
31/12/2011Depreciation charge (9 months) (0.54) (0.90)
1/1/2012 Carrying amount 6.66 11.10
31/12/2012Depreciation charge (12 months) (0.72) (1.20)
Carrying amount b/4 default 5.94 9.90
31/12/2012Dep written back ($2.1m - $1.26m) x 10% 0.08 -
6.02 9.90

Note1: The depreciation for the year ended 31/12/2011 is based on 9 months. The date of acquisition
(1/4/2011) to the reporting date and not on the date the grant was received because the recognition of
the grant is not based on whether the grant has been received or not but rather on when the entity
qualifies to receive the grant.

Note 2: The depreciation charge in the year ended 31/12/2012 was based on the full 12 months.
However, depreciation based on the portion of grant repayable (10%) of the undercharged
depreciation has been added back to the carrying amount of asset on default at 31/12/2012. The
depreciation charge based on full cost at 31/12/2012 is $1.2m while the depreciation based on the
reduced cost is $1.26m.

Note 3: Grant repayable which has been provided for in line with IAS 37 is (10% x $4.8m) which is
$0.48m.

Question 1 B

The grant from the regional government for setting up its operations in that specified area is an
unconditional grant related income. Since the grant is unconditional and the entity has already
complied with the requirement to set up in the specified location, then the full amount can be
recognised in profit or loss as other income at the year ended 31 December, 2012.

Question 1 C

The interest free loan received by Missive from the regional government towards the replacement of
the factory roofing for $2m have given rise to a grant income. The grant income is the interest that
would have been paid had Missive obtained financing from its bank at 5%. Given this, the loan shall be
amortised at its Present Value over five years.

The present value of the loan is $1,731,792 ($400,000 x $4.32948), the difference between this amount
and $2,000,000 shall be amortised over five years as follows:
Amortisation of $268,208 over five years
Years Bal b/f Amt paid Principal Int @ 5% Bal c/f
$ $ $ $ $
1 1,731,792.00 400,000.00 313,410.40 86,589.60 1,418,381.60
2 1,418,381.60 400,000.00 329,080.92 70,919.08 1,089,300.68
3 1,089,300.68 400,000.00 345,534.97 54,465.03 743,765.71
4 743,765.71 400,000.00 362,811.71 37,188.29 380,954.00
5 380,954.00 400,000.00 380,952.30 19,047.70 1.70
268,209.70

The journal entries to amortise the interest income are as follows:

Date Details $ $
1/7/2012 Cash 268,209.70
Deferred Income 268,209.70
31/12/2012 Deferred Income 43,294.80
Profit or loss 43,294.80

It should be noted that at 31/12/2012, only six months of the deferred interest income is recognised.
The rest of the income is held as a deferred income to be released to profit or loss over the five years of
the loan.

The roofing will be depreciated over shorter of its useful life or the remaining useful life of the building.

Question 1 section B

The treatment of government grant in IAS 20 is in line with the matching concept and supports accrual
accounting depending on the specific type of grant and the accounting treatment adopted, IAS 20
matches the use of an asset with the grant received in support of the acquisition of the asset and
recognises grant related income over the period conditions underlying the grant are satisfied.

IAS 20 also requires grant to be recognised as a receivable when the entities qualifies to receive the
grant and not when the grant is actually received. This position also supports accrual accounting, which
is one of the underlying principles of the Conceptual Framework.

Question 2 A
As Brightspark Limited has treated the grant as deferred income, the sum of $300,000 received shall be
credited to deferred income and released to profit or loss over the two years to produce 10,000 lights
bulbs for the parliament building.

At 31 December 2008, there have been no default on the conditions, therefore the $150,000 income will
be recognised but on 31 December 2009, a default occurred, thus, the balance outstanding on the
deferred income account will be prorated to the portion repayable as a result of the default. An
equivalent liability will be recognised to that extent.

The relevant journals are:

Date Details Debit Credit Remarks

$ $
1/1/2008 Cash 300,000
Deferred income 300,000 To receive the grant
31/12/2008 Deferred income 150,000
Profit or loss 150,000 To recognise income& reduce liability
31/12/2009 Deferred income 60,000
Profit or loss 60,000 To recognise income& reduce liability
31/12/2009 Deferred income 90,000
Grant repayable 90,000 To recognise amount repayable
Note that the amount repayable has been prorated as follows (3000/5000 x $150,000) for $90,000.

This is using the quantity of bulbs unproduced as a fraction of the bulbs expected to be produced. The
amount recognised in come is calculated as (2000/5000 x $150,000) for $60,000.

Question 2 B

Where the grant has been used to net off the assets, the journals to be passed are:

Date Details Debit Credit Remarks

$ $
1/1/2008 Cash 300,000
Glass blower 300,000 To receive grant & reduce cost of asset
31/12/2008Profit or loss 40,000
Provision for dep 40,000 To recognise dep & prov for dep
31/12/2009Profit or loss 100,000
To recognise full dep + undercharged
100,000 dep in 2008 as a result of default
31/12/2009Glass blower 90,000
Grant payable 90,000 To recognise liability from default

Question 3 A
Potato Limited has obtained two grants; one a grant related asset and the other an unconditional grant
related income. The $200,000 unconditional grant related income must be recognised in income in full
on 31 December 2005 as there are no associated future costs.

For the grant related assets, assuming the grant is treated as deferred income, the asset will be
recognised at its full cost of $900,000 and depreciated over five years on straight line, thus charging
depreciation expenses of $170,000 per annum while an annual amount of $60,000 is recognised as
income.

The impact on income statement and statement of financial position over the five years will be

Statement of financial position (extracts)

Years 2005 2006 2007 2008 2009
Property,Plant & Equipment: $ $ $ $ $
Cost 900 900 900 900 900
Accumulted depreciation (170) (340) (510) (680) (850)
NBV 730 560 390 220 50
Deferred income 240 180 120 60 -

Statement of profit or loss (extracts)

Years 2005 2006 2007 2008 2009 Total
Depreciation charge (170) (170) (170) (170) (170) (850)
Grant income 60 60 60 60 60 300
Net impact (110) (110) (110) (110) (110) (550)

Question 3 B

Where the grant has been accounted as a reduction in cost of asset, the impact on the income statement
and statement of financial position over the five years:

Years 2005 2006 2007 2008 2009

$ $ $ $ $
Property, plant $ equipment 600 600 600 600 600
Accumulated depreciation (110) (220) (330) (440) (550)
NBV 490 380 270 160 50

There will be no deferred income.

Income statement (extracts)
2005 2006 2007 2008 2009 Total
$ $ $ $ $ $
Depreciation charge (110) (110) (110) (110) (110) (550)

It should be noted that no matter the treatment of the asset, the impact on profit or loss and cash flows
is the same.

Question 4 A

Tukumu Limited has obtained a grant related to income because the conditions underlying the grant
does not relate to the acquisition of an asset rather to employ local population and receive a 20%
refund for salary costs. Since the grant of $150,000 was awarded on 1/1/2006, the amount awarded
shall be held as deferred income and released to profit or loss as from 31/12/2006 at 20% of wages
incurred each year as follows:

Wages incured & Qualifying grant

Year ends paid @ 20%
$ $
31/12/2006 200,000 40,000
31/12/2007 250,000 50,000
31/12/2008 400,000 80,000

Tukumu Limited has the choice of treating the grants as reduction in wages cost or stating them as
other income while recognising the full wages cost as follows:

Treating the grant as grant income:

Income statement (extracts)

Year ended 31 December: 2006 2007 2008
$ $ $
Wages costs (200,000) (250,000) (400,000)
Grant income 40,000 50,000 40,000
(160,000) (200,000) (360,000)

Statement of financial position (extracts)

Year ended 31 December: 2006 2007 2008
Deferred income 110,000 60,000 20,000

Treating the grant as adjustment to expenses:

Income Statement (extracts)
Years ended 31 December 2006 2007 2008
$ $ $
Wages costs (160,000) (200,000) (320,000)

Statement of finacial position extracts:

As at 31 December 2006 2007 2008
$ $ $
Deferred Income 110,000 60,000 20,000

Notice that irrespective of the accounting policy of treating the grant income, on both occasions, a
deferred is recognised to hold the unamortized grant to ensure that the whole amount received is not
recognised in income at once in line with accrual accounting.

In relation to the above, at each year end, the deferred income balance is reduced by the amount
recycled to income statement either as “other income” or as reduction in expenses. Both methods are
permitted by IAS 20; however, any method adopted should be applied with sufficient consistency.

IAS 28 QUESTIONS

Question 1 Pumice

Question 1 A Treatment of investments acquired by Pumice on 1 October 2005:

Investment in Silverton

As Pumice has acquired 80% of the equity of Silverton, Pumice has acquired a controlling interest
therefore Silverton becomes a subsidiary of Pumice; at least by quantitative measures. The investment
shall be consolidated from 1 October to the reporting date of 31 March 2006 (6 months post acquisition
period.

As a consequence, the goodwill or bargain purchase arising from this investment shall be computed.
The goodwill/bargain purchase if the difference between the purchase consideration plus non
controlling interest and the fair value of the net assets acquired.

In determining the net assets acquired, the fair value adjustments from the land and plant has to be
accounted for. The depreciation arising from the fair value adjustment of plant shall be considered in
the post acquisition period both in the group retained earnings and the carrying amount of plant. Land
is not depreciated therefore their will not be any post adjustments arising from there.

Other post acquisition adjustments shall be considered as well as in solutions 1B below.

Investment in Amok:
The investment in Amok constitutes 40% of the equity of Amok; thus making Amok an associate of
Pumice. This involves the application of equity accounting per IAS 28. The carrying amount of the
investment in Amok shall be the initial cost adjusted for post-acquisition events arising from Pumices’
post acquisition share of the profit or loss from Amok, less dividend received, less any impairment and
less any unrealized profit or loss from inter group trading between investor and investee to the extent
of the investor’s interest in the investee.

This will be demonstrated in the suggested solution 1B below:

Investment in Silverton:
1. Purchase consideration: $'000
Cash payment 13,600
Non controlling interest 3,000
16,600
2. Net assets acquired: $'000
Share capital 3,000
Retained earnings: ($,8000-(6/12 x $2,000)) 7,000
Fair value increase in land 400
Fair value increase in plant 1,600
12,000

3. Goodwill on acquisition of Silverton: $'000

Purchase consideration (wk 1) 16,600
Net assets acquired (12,000)
4,600

4. Movement in net assets of Silverton: Pre acq'n Post acq'n Mov't

$'000 $'000 $'000
Share capital 3,000 3,000
Retained earnings 7,000 8,000
Land 400 400
Plant 1,600 1,400
12,000 12,800 800
5. Group retained earnings: $'000
Pumice retained earnings 37,000
Share of post acquisition profit of Silverton:
(80% x $800) 640
Unrealised profit on inventory:
(1/2 x ($6m-$4m)) (1,000)
Share of impairment of goodwill:
(80% x $400) (320)
Share of profit of Amok:
(40% x 6/12 x $8,000) 1,600
Impairment of Amok (200)
37,720

6. Non controlling interest: $'000

Fair value on acquisition date 3,000
Share of profit of Silverton:
(20% x $800) 160
Share of impairment of goodwill:
(20% x $400) (80)
3,080
7. Carrying amount of investment in Amok:
Cost of investment $'000
(1,600 x $6.25) 10,000
Share of profit (40% x 6/12 x $8,000) 1,600
Impairment of investment (200)
11,400
Pumice

Consolidated Statement of Financial Position as at 31 March, 2006

Assets: $'000
Property,plant & equipment ($20,000+$8,500+$400+$1,600-$200) 30,300
Other investments ($26,000-$13,600-$10,000-(50%x$2,000)) 1,400
Investment in Amok 11,400
Current assets ($15,000+$8000-$1,000(UP)-$1,500(IGD)) 20,500
Goodwill ($4,600-$400) 4,200
Total assets 67,800

Equity & Liabilities: $'000

Share capital 10,000
Retained earnings 37,720
Non controlling interest 3,080
8% Loan notes 4,000
10% Loan notes ($2,000-$1,000) 1,000
Current liabilities ($10,000 +$3,500- $1,500 (IGD)) 12,000
67,800