讲义教案真题p2int dec

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SectionA–THISONEquestioniscompulsoryandMUSTbeattempted

1 (a)Joey,apubliclimitedoperatesinthemediasector.Joeyhasinveststatementsoffinancial

Assets:

Non-currentassetsProperty,

InvestmentsinsubsidiariesandotherMargy

Hulty

–––

,200–––––

Currentassets 150

––––––

Totalassets 1,350

––––––

Equityandliabilities:

Sharecapital 0 600

Retainedearnings 80 350

Othercomponentsofequity 80 40

––––– ––––––

Totalequity 4 2,080 990

––– –––––– ––––––

Non-currentliabilities 1,89 675 200

–––––– –––––– ––––––

Currentliabilities 320 106 160

––––– –––––– ––––––

Totalliabilities 2,2 781 360

––– –––––– ––––––

Totalequityandliabilities 6 ,861 1,350

– ––– ––––––

Thefollowinginformationisrelevanttothepreparationoftheg ents:

On1December2011,Joeyacquired30%oftheordi acashconsiderationof

$600millionwhenthefairvalueofMargy’sidentifiabl on.JoeytreatedMargy

asanassociateandhasequityaccountedforMarg y’sshareofMargy’s

undistributedprofitamountedto$90millionandi edto$10million.

On1December2013,Joeyacquiredafurther40 shconsiderationof$975millionandgainedcontrolofthe totheequity

accountedbalanceforMargyat1December r2014.

At1December2013,thefairvalueofMar ecember

2013,thefairvalueoftheequityintere nwas

$705millionandthefairvalueofthen The

retainedearningsandothercompone d

$70millionrespectively.Itisgroup

AtthetimeofthebusinesscombinationwithMargy,JoeyhasincludedinthefairvalueofMargy’sidentifiablenetassets,anunrecognisedcontingentliabilityof$6millioninrespectofawarrantyclaiminprogressagainstMargy.InMarch2014,therewasarevisionoftheestimateoftheliabilityto$5million.TheamounthasmetthecriteriatoberecognisedasaprovisionincurrentliabilitiesinthefinancialstatementsofMargyandtherevisionoftheestimateisdeemedtobeameasurementperiodadjustment.

Additionally,buildingswithacarryingamountof$200millionhadbeenincludedinthefairvaluationofMargyat1December2013.Thebuildingshavearemainingusefullifeof20yearsat1December2013.However,JoeyhadcommissionedanindependentvaluationofthebuildingsofMargywhichwasnotcompleteat1December2013andthereforenotconsideredinthefairvalueoftheidentifiablenetassetsattheacquisitiondate.Thevaluationswerereceivedon1April2014andresultedinadecreaseof

$40millioninthefairvalueofproperty,ntandequipmentatthedateofacquisition.Thisdecreasedoesnotaffectthefairvalueofthenon-controllinginterestatacquisitionandhasnotbeenenteredintothefinancialstatementsofMargy.Buildingsaredepreciatedonthestraight-linebasisanditisgrouptoleaverevaluationgainsondisposalinequity.Theexcessofthefairvalueofthenetassetsovertheirngvalue,at1December2013,isduetoanincreaseinthevalueofnon-depreciablelandandthecontingentliability.

On1December2013,Joeyacquired80%oftheequityinterestsofHulty,aprivateent ngeforcashof$700million.BecausetheformerownersofHultyneededtodisposeofthe ,theydidnothavesufficienttimetomarkettheinvestmenttomanypotentialb fthe

identifiablenetassetswas$960million.Joeydeterminedthatthefair olling

interestinHultyatthatdatewas$250million.Joeyreviewedthepr sure

theassetsacquiredandliabilitiesassumedandtomeasurethef rest

andtheconsiderationtransferred.Afterthatreview,Hulty ting

measureswereappropriate.Theretainedearningsand ber

2013were$300millionand$40millionrespec ed

franchiseright,whichJoeyhadgrantedto he

acquisition,thefranchiserightcould e

non-controllinginterestatfairvalueAllgoodwillarisingonacqui

Joeyislookingtoexppubliclimitedpublications.

CPisentitledtoaroyaltycalculatedas10%ofsalesand30%ofgrossprofitofthepublications.Joeyhassoleresponsibilityforallprinting,binding,andtformmaintenanceoftheonlinewebsite.Theagreementstatesthatkeystrategicsalesandmarketingdecisionsmustbeagreedjointly.JoeyselectsthecontenttobecoveredinthepublicationsbutCPhastherightofvetooverthiscontent.Howeveron1June2014,JoeyandCPdecidedtosetupalegalentity,JCP,withequalsharesandvotingrights.CPcontinuestocontributecontentintoJCPbutdoesnotreceiveroyalties.Joeycontinuestheprinting,bindingandtformmaintenance.Thesalesandcostofsalesintheperiodwere$5millionand$2millionrespectively.ThewholeofthesaleproceedsandthecostsofsaleswererecordedinJoey’sfinancialstatementswithnoaccountingentriesbeingmadeforJCPoramountsduetoCP.Joeycurrentlyfundstheoperations.AssumethatthesalesandcostsaccrueevenlythroughouttheyearandthatallofthetransactionsrelatingtoJCPhavebeenincash.

At30November2013,Joeycarriedapropertyinitsstatementoffinancialpositionatitsrevaluedamountof$14millioninaccordancewithIAS16Property,ntandEquipment.Depreciationischargedat

$300,000peryearonthestraightlinebasis.InMarch2014,themanagementdecidedtosellthepropertyanditwasadvertisedforsale.By31March2014,thesalewasconsideredtobehighlyprobableandthecriteriaforIFRS5Non-currentAssetsHeldforSaleandDisOperationsweremetatthisdate.Atthatdate,theasset’sfairvaluewas$15·4millionanditsvalueinusewas$15·8million.Coststoselltheassetwereestimatedat$300,000.On30November2014,thepropertywassoldfor$15·6million.Thetransactionsregardingthepropertyaredeemedtobematerialandnoentrieshavebeenmadeinthefinancialstatementsregardingthispropertysince30November2013asthecashreceiptsfromthesalewerenotreceiveduntilDecember2014.

Required:

PreparethegroupconsolidatedstatementoffinancialpositionofJoeyasat30November2014.

(35marks)

TheJoeyGroupwishestoexpanditsoperations.Aspartofthisexpansion,ithasgrantedoptionstotheemployeesofMargyandHultyoveritsownsharesasat7December2014.Thevestimmediay.Joeyisnotproposingtomakeachargetothesubsidiariesfortheseoptions.

Joeydoesnotknowhowtoaccountforthistransactioninitsown,thesubsidiaries,andthegroupfinancialstatements.

Required:

ExintoJoeyhowtheabovetransactionshouldbedealtwithinitsown,thesubsidiaries,andthegroupfinancialstatements. (8marks)

Joey’sdirectorsfeelthattheyneedasignificantinjectionofcapitalinordertomodernise

asthehasbeenpromisednewordersifitcanproducegoodstoaninternationalquality.Thebank’scurrentlendingpoliciesrequireborrowerstodemonstrategoodprojectedcashflow,aswellasalevelofprofitabilitywhichwouldindicatethatrepaymentswouldbemade.However,thecurrentprojectedcashflowstatementwouldnotsatisfythebank’scriteriaforlending.Thedirectorshavetoldthebankthattheisinanexcellentfinancialposition,thatthefinancialresultsandcashflowprojectionswillmeetthecriteriaandthatthechiefaccountantwillforwardareporttothiseffectshortly.ThechiefaccountanthasonlyrecentlyjoinedJoeyandhasopenlystatedthathecannotaffordtolosehisjobbecauseofhisfinancialcommitments.

Required:

Discussthepotentialethicalswhiayariseintheabovescenarioandtheethicalprincipleswhichwouldguidehowaprofessionalaccountantshouldrespondinthissituation. (7marks)

(50marks)

SectionB–TWOquestionsONLYtobeattempted

2(a)Coatminisaernment-controlledbank.Coatminwastakenoverbythecrisis.Coatmindoesnotdirectlytradewithother

developmentofthenationallyownedrailwayandpostalservice.ThedirectorsofCoatminareconcernedaboutthevolumeandcostofdisclosingitsrelatedpartyinterestsbecausetheyextendtheoreticallytoallotherernment-controlledenterprisesandbanks.Theywishgeneraladviceonthenatureandimportanceofthedisclosureofrelatedpartyrelationshipsandspecificadviceonthedisclosureoftheaboverelationshipsinthefinancialstatements. (5marks)

Atthestartofthefinancialyearto30November2013,Coatmingaveafinancialguaranteecontractonbehalfofoneofitssubsidiaries,acharitableorganisation,committingittorepaytheprincipalamountof$60millionifthesubsidiarydefaultedonanypaymentsdueunderaloan.Theloanrelatedtothefinancingoftheconstructionofnewofficepremisesandhasatermofthreeyears.Itisbeingrepaidbyequalannualinstalmentsofprincipalwiththefirstpaymenthavingbeenpaid.Coatminhasnotsecuredanycompensationinreturnforgivingtheguarantee,butassessedthatithadafairvalueof$1·2million.Theguaranteeismeasuredatfairvaluethroughprofitorloss.Theguaranteewasgivenonthebasisthatitwasprobablethatitwouldnotbecalledupon.At30November2014,Coatminbecameawareofthefactthatthesubsidiarywashavingfinancialdifficultieswiththeresultthatithasnotpaidthesecondinstalmentofprincipal.Itisassessedthatitisprobablethattheguaranteewillnowbecalled.However,justbeforethesigningofthefinancialstatementsfortheyearended30November2014,thesubsidiarysecuredadonationwhichenabledittomakethesecondrepaymentbeforetheguaranteewascalledupon.Itisnowanticipatedthatthesubsidiarywillbeabletomeetthefinalpayment.DiscountingisimmaterialandthefairvalueoftheguaranteeishigherthanthevaluedeterminedunderIAS37Provisions,ContingentLiabilitiesandContingentAssets.CoatminwishestoknowtheprinciplesbehindaccountingfortheaboveguaranteeunderIFRSandhowthetransactionwouldbeaccountedforinthefinancialrecords. (7marks)

Coatmin’screditworthinesshasbeenworseningbutithasenteredintoaninterestrateswapagreementwhichactsasahedgeagainsta$2million2%bondissuewhiatureson31May2016.Thenotionalamountoftheswapis$2millionwithsettlementevery12months.Thestartdateoftheswapwas1December2013anditmatureson31May2016.Theswapisenactedfornilconsideration.Coatminreceivesinterestat1·75%ayearandpaysonthebasisofthe12-monthLIBORrate.Atinception,Coatmindesignatestheswapasahedgeinthevariabilityinthefairvalueofthebondissue.

Fairvalue

Fairvalue

1December2013

30November2014

$000

$000

Fixedinterestbond

2,000

1,910

Interestrateswap

Nil

203

Coatminwishestoknowthecircumstancesinwhichitcanusehedgeaccountingandneedsadviceontheuseofhedgeaccountingfortheabovetransactions. (7marks)

Coatminprovidesloanstocustomersandfundstheloansbysellingbondsinthemarket.Theliabilityisdesignatedasatfairvaluethroughprofitorloss.Thebondshaveafairvalueincreaseof$50millionintheyearto30November2014ofwhich$5millionrelatestothereductioninCoatmin’screditworthiness.ThedirectorsofCoatminwouldlikeadviceonhowtoaccountforthismovement. (4marks)

Required:

Discuss,withsuitablecalculationswherenecessary,theaccountingtreatmentoftheabovetransactionsinthefinancialstatementsofCoatmin.

Note:Themarkallocationisshownagainsteachofthequestionsabove.

Professionalmarkswillbeawardedinquestion2forclarityandqualityofpresentation. (2marks)

(25marks)

3 (a)Kayteoperatesintheshipindustryandownsvesselsfortransportation

Ceemonewhoseassetswere mpanieseachownedand

operatedoneortwoshiperenoemployeesinCeemon

acquisitiondate,therewereonly es

wereoutsourced.Allthe The

companiesowningthevesselshadan ewith

chartering,purchaseandsaleofvessels useda

shipbrokertoassistwithsomeofthesetas

KayteaccountedfortheinvestmentinCeemo aidandrelated

transactioncostswererecognisedastheacquisit vesselswereonlypassiveinvestmentsandthatCeemonedidnoto ,sinceallactivities

regardingcommercialandtechnicalmanagementwer .Asaresult,theacquisitionwasaccountedforasifthevesselswereacq

Additionally,Kaytehadborrowedheavilytopurchases strugglingtomeetitsdebtobligations.Kaytehadsoldsomeofthesevesselsbutinsom kdidnotwishKaytetosellthevessel.Inthesecases,thevesselwastransferredtoanewentit ebankretainedavariableinterestbasedupontheleveloftheindebtedness.Kayte’sdirectorsfelttha itywasasubsidiaryofthebankandareuncertainastowhethertheyhavecompliedwiththerequiremeofIFRS3BusinessCombinationsandIFRS10ConsolidatedFinancialStatementsasregardstheabovetransactions. (12marks)

(b)Kayte’svesselsconstituteamaterialpartofitstotalassets.The lifeofthevesselsisestimatedtobe30years,buttheusefullifeofsomeofthevesselsisonly10y yte’sistosellthesevesselswhentheyare10yearsold.Kayteestimatedtheresidualv atsaletobehalfofacquisitioncostandthisvaluewasassumedtobeconstantdurin arguedthattheestimatesof

residualvalueusedwereconservativeinviewofani degreeofuncertaintyand

presented siderablyabovecarrying

value.Brokervaluationsoftheresidualvaluewer yKayte.Kayteargued

againstbrokervaluationsonthegroundsthatit .

Kaytekeepssomeofthevesselsforthew dergoanengine

overhaulindrydockevery10yearstore ofthevessels

aresold.Theresidualvalueoftheve esselatthe

endofitseconomiclife.Atthetim storedby

theengineoverhaulismeasured eofthe

vessel.Inthecurrentperiod, ears.

Normally,engineslastforth sel

washavingitsfunnelsre

(11marks)

Required:

DiscusstheaccountingtreatmentoftheabovetransactionsinthefinancialstatementsofKayte.

Note:Themarkallocationisshownagainsteachoftheelementsabove.

Professionalmarkswillbeawardedinquestion3forclarityandqualityofpresentation. (2marks)

(25marks)

4(a)Anassessmentofaccountingpracticesforassetimpairmentsisespeciallyimportantinthecontextoffinancialreportingqualityinthatitrequirestheexerciseofconsiderablemanagementjudgementandreportingdiscretion.Theimportanceofthisissueisheightenedduringperiodsofongoingeconomicuncertaintyasaresultoftheneedforcompaniestoreflectthelossofeconomicvalueinatimelyfashionthroughthemechanismofassetwrite-downs.Therearemanyfactorswhichcanaffectthequalityofimpairmentaccountinganddisclosures.Thesefactorsincludechangesincircumstanceinthereportingperiod,themarketcapitalisationoftheentity,theallocationofgoodwilltocashgeneratingunits,valuationissuesandthenatureofthedisclosures.

Required:

DiscusstheimportanceandsignificanceoftheabovefactorswhenconductinganimpairmenttestunderIAS36ImpairmentofAssets. (13marks)

(b)(i)Estoilisaninternationalprovidingpartsfortheautomotiveindustry.Itoperatesinmanydifferentjurisdictionswithdifferentcurrencies.During2014,Estoilexperiencedfinancialdifficultiesmarkedbyadeclineinrevenue,areorganisationandrestructuringofthebusin