SBR SEPT 2018

Q2) Farham co.

Part a
Subsidence
Value in use would be calculated by estimating the present value of the future cashflows
generated from the production facility discounted at suitable rate of interest to reflect the risks to
the business.
If the impairment has occurred it will be allocated to reduce the carrying amount of the asset and
will be recorded as an expense in the SOPL and will not be deducted from the gain in the
revaluation surplus account because the revaluation gain does not belong to the production
facility and IAS 36 does not allow gain of one asset to be used against the loss of the other asset.
No provision will be recognized in this case of the major repairs to the factory because the asset
can be replaced hence there is no legal or constructive obligation on the entity and these costs
will be recognize as an expense only when they are incurred in the future.
Sale of Newall
According to IFRS 5 asset held for sale should be recorded the lower of carrying amount and fair
value less cost to less and if the fair value – CTS is lower than the carrying amount then an
impairment charge will be recognized in the financial statements.
Since the subsidiary is considered to be a CGU the impairment will first be allocated to any
specific asset then to the goodwill and then to the remaining non-current asset on pro rata basis.
The COO is wrong to remove the restructuring provision from the financial statements because
there is a detailed formal plan in place approved by the board, and it has been communicated in
the media therefore, a constructive obligation exists, and a provision should be recognized.
No provision will be created for the future operating losses and impairment of owned assets and
only directly entailed cost should be included in the provision which is as follows:
Legal costs- $2m
Redundancy cost- $5m
Lease penalty- $6m
Total- $13m
Part b
At many points in the scenario, it is observed that the COO would want to manipulate the FS for
personal benefits. She is not willing to account for impairment, she is reluctant to recognize the
impairment as a result of asset being HFS and she is also not willing to recognize restructuring
provision.
All the above adjustments should be recorded in the financial statements in order to provide an
objective and transparent financial statement and it appears that the COO is motivated by the
bonus target, and this is a clear self-interest threat.
The COO is also acting unethical by threating to dismiss the accountant if he tries to correct the
FS which is an intimidation threat and against the ethical principles of professional behavior.
The accountant is intimated as he has to prepare objective FS but at the same time, he has fear to
losing his job. The accountant should try to remind the COO of the ethical responsibilities and
ethical principles but if the situation is not resolved then the accountant should seek external
help.
Q3)
Part a (2)
If there are any doubts about the recoverability of the economic benefits of the asset, then Skizer
should have assessed the asset for impairment and conduct an impairment test as per IAS 36.
The classification of an intangible asset to research and development does not constitute a
change in estimate because according to IAS 8 Change in estimate is a change in assumed
judgements which is not the case here.
If the criteria were not met since the beginning, then Skizer would have recognized a correction
of error on retrospective basis as per IAS 8.
Part a (3)
The business model of Skizer is to develop the project and then leave the production with the
partners and being a pharmaceutical company their business model is selling medicine and drugs
to generate revenue.
The sale of intangible asset will not be considered as revenue because it is not being sold in the
ordinary course of the business.
Since the company has already impaired the asset to 0 carrying amount the proceeds received to
sell the asset will be recognized a gain on disposal in the statement of profit or loss as per IAS
38.
Part b (1)
However, is it unlikely that all the intangibles will be same for example amortization of patent
with finite useful life makes sense but for other intangibles like customer list or brand value it
would make more sense to include it in the goodwill, but the standard does not allow this.
According to IAS 38 assets can either follow cost model or revaluation model for each class of
assets. Revaluation can only be done if there is an active market existing for the asset.
It is not common to find an active market for the intangibles and if the cost model is used there is
possibility that assets value might be outdated or understated as compared to their fair value.
IAS 38 requires all research and development to be expensed out in the SOPL, but the
development cost can be capitalized once the project has become technically feasible and
commercially viable.
The problem for the investor is that there is no consistent approach to capitalization by the
companies it is often unclear from the disclosures how the accounting policy in respect of
research and development has been applied specially when distinguishing between research and
development phase of a particular project.
Q1)
Part a
W1 Goodwill
Share consideration- 68,000
Contingent consideration- 16,000*25%= 4,000
FV of NCI at acq- 17,000
Total- 89,000
FV of net assets at acq- (70,000+5,000)- 75,000
Goodwill at acq- 14,000
Accounting entry
Goodwill DR 2m
Land DR 5m
Cont. liability CR 4m
NCI CR 3m
Part b
A process is a system, standard, convention or a rule that with the inputs contributes to the
creation of output.
Output are the results of input and processes. Outputs provide goods and services to the
customers generate investment income and generate income from ordinary activities of the
business.
If the acquired set of activities and assets are generating revenue at the date of acq. it is
considered to have an output.
It is clear that melon has input and processes. The license is the input within the control of melon
which is capable of producing output once the processes are applied to it, processes are in place
through research activities, integration with management company and supervisory & admin
function performed. Since the research activities are at a very early stage there is no output
attainable yet.
To meet the criteria of IFRS 3 the activities must have substantive processes that can contribute
to the creation of the output and in the case of melon they do not have an organized workforce to
be considered as substantive therefore due to absence of substantive process melon failed to meet
the criteria of IFRS 3 and it will be treated as asset acquisition rather than business combination.
Part c
Banana has not transferred the rights as the third party is obliged to pay the coupon interest to
banana and any additional amount on the increase in the fair value of the bonds.
Banana still holds the risk and rewards regarding the financial asset as they are the ones who will
be benefitting from the increase in the fair and will be the ones who will lose the money if the
bond devalues.
If the sale would have been a genuine sale the transaction would have been conducted as the
market value but it in this case the transaction is being done at $8m which is lower than the fair
value at the date of sale and also it is highly likely that the repurchase will be exercised hence it
will not be considered as a sale.
The transaction does not qualify as a sale of the bond and the financial asset remains in the books
of Banana co. and $8m borrowed from the third party will be recognized as a financial liability
for banana company, the extra $0.8m will be considered as finance cost which will be recognized
as an expense over the duration of the liability.
Q4)
Part b (3)
The incorrect treatment of $12m should be eliminated and correct adjustment of $4m should be
shown as a reversal of non-cash item in the cash generated from operating activities.
Unrealized foreign exchange gains and losses are non-cash items and as a result should be
reversed in the calculations of cash generated from operating activities.
The pension payments are correctly included but since the tax benefits received has not been
considered the cash generated from operating activities will be adjusted with an inflow of $6m.
The interest paid which is capitalized as a part of PPE should be included in the investing
activities where as for inventories it should be a part of operating activities therefore $18 should
reclassified from operating to investing cash flows.