(a) Klancet produces and sells its range of drugs through three separate divisions. In addition, there are two laboratories which carry out research and development activities.
In the first of these laboratories, the research and development activity is funded internally and centrally for each of the three sales divisions. It does not carry out research and development activities for other entities. Each of the three divisions is given a budget allocation which it uses to purchase research and development activities from the laboratory. The laboratory is directly accountable to the division heads for this expenditure.
The second laboratory performs contract investigation activities for other laboratories and pharmaceutical companies. This laboratory earns 75% of its revenues from external customers and these external revenues represent 18% of the organisation’s total revenues.
The performance of the second laboratory’s activities and of the three separate divisions is regularly reviewed by the chief operating decision maker (CODM). In addition to the heads of divisions, there is a head of the second laboratory. The head of the second laboratory is directly accountable to the CODM and they discuss the operating activities, allocation of resources and financial results of the laboratory.
Klancet is uncertain as to whether the research and development laboratories should be reported as two separate segments under IFRS 8 Operating Segments, and would like advice on this issue. (8 marks)
(b) Klancet has agreed to sell a patent right to another pharmaceutical group, Jancy. Jancy would like to use the patent to develop a more complex drug. Klancet will receive publicly listed shares of the Jancy group in exchange for the right. The value of the listed shares represents the fair value of the patent. If Jancy is successful in developing a drug and bringing it to the market, Klancet will also receive a 5% royalty on all sales.
Additionally, Klancet won a competitive bidding arrangement to acquire a patent. The purchase price was settled by Klancet issuing new publicly listed shares of its own.
Klancet’s management would like advice on how to account for the above transactions. (7 marks)
(c) Klancet is collaborating with Retto Laboratories (Retto), a third party, to develop two existing drugs owned by Klancet.
In the case of the first drug, Retto is simply developing the drug for Klancet without taking any risks during the development phase and will have no further involvement if regulatory approval is given. Regulatory approval has been refused for this drug in the past. Klancet will retain ownership of patent rights attached to the drug. Retto is not involved in the marketing and production of the drug. Klancet has agreed to make two non-refundable payments to Retto of $4 million on the signing of the agreement and $6 million on successful completion of the development.
Klancet and Retto have entered into a second collaboration agreement in which Klancet will pay Retto for developing and manufacturing an existing drug. The existing drug already has regulatory approval. The new drug being developed by Retto for Klancet will not differ substantially from the existing drug. Klancet will have exclusive marketing rights to the drug if the regulatory authorities approve it. Historically, in this jurisdiction, new drugs receive approval if they do not differ substantially from an existing approved drug.
The contract terms require Klancet to pay an upfront payment on signing of the contract, a payment on securing final regulatory approval, and a unit payment of $10 per unit, which equals the estimated cost plus a profit margin, once commercial production begins. The cost-plus profit margin is consistent with Klancet’s other recently negotiated supply arrangements for similar drugs.
Klancet would like to know how to deal with the above contracts with Retto. (8 marks)
Required:
Advise Klancet on how the above transactions should be dealt with in its financial statements with reference to relevant International Financial Reporting Standards.
Note: The mark allocation is shown against each of the three issues above.
Professional marks will be awarded in question 3 for clarity and quality of presentation. (2 marks)
第1题
the context of financial reporting quality in that it requires the exercise of considerable management judgement and reporting discretion. The importance of this issue is heightened during periods of ongoing economic uncertainty as a result of the need for companies to reflect the loss of economic value in a timely fashion through the mechanism of asset write-downs. There are many factors which can affect the quality of impairment accounting and disclosures. These factors include changes in circumstance in the reporting period,the market capitalisation of the entity, the allocation of goodwill to cash generating units, valuation issues and the nature of the disclosures.
Required:
Discuss the importance and significance of the above factors when conducting an impairment test under IAS 36 Impairment of Assets. (13 marks)
(b) (i) Estoil is an international company providing parts for the automotive industry. It operates in many different jurisdictions with different currencies. During 2014, Estoil experienced financial difficulties marked by a decline in revenue, a reorganisation and restructuring of the business and it reported a loss for the year. An impairment test of goodwill was performed but no impairment was recognised. Estoil applied one discount rate for all cash flows for all cash generating units (CGUs), irrespective of the currency in which the cash flows would be generated. The discount rate used was the weighted average cost of capital (WACC) and Estoil used the 10-year government bond rate for its jurisdiction as the risk free rate in this calculation. Additionally, Estoil built its model using a forecast denominated in the functional currency of the parent company. Estoil felt that any other approach would require a level of detail which was unrealistic and impracticable. Estoil argued that the different CGUs represented different risk profiles in the short term, but over a longer business cycle, there was no basis for claiming that their risk profiles were different.
(ii) Fariole specialises in the communications sector with three main CGUs. Goodwill was a significant component of total assets. Fariole performed an impairment test of the CGUs. The cash flow projections were based on the most recent financial budgets approved by management. The realised cash flows for the CGUs were negative in 2014 and far below budgeted cash flows for that period. The directors had significantly raised cash flow forecasts for 2015 with little justification. The projected cash flows were calculated by adding back depreciation charges to the budgeted result for the period with expected changes in working capital and capital expenditure not taken into account.
Required:
Discuss the acceptability of the above accounting practices under IAS 36 Impairment of Assets. (10 marks)
Professional marks will be awarded in question 4 for clarity and quality of presentation. (2 marks)
第2题
ial instruments to spread the risk of fl uctuation in the price of the edible oils. The entity operates in an environment where the transactions are normally denominated in dollars. The functional currency of Seltec is the dollar.
(a) The entity uses forward and futures contracts to protect it against fl uctuation in the price of edible oils. Where forwards are used the company often takes delivery of the edible oil and sells it shortly afterwards. The contracts are constructed with future delivery in mind but the contracts also allow net settlement in cash as an alternative. The net settlement is based on the change in the price of the oil since the start of the contract. Seltec uses the proceeds of a net settlement to purchase a different type of oil or purchase from a different supplier. Where futures are used these sometimes relate to edible oils of a different type and market than those of Seltec’s own inventory of edible oil. The company intends to apply hedge accounting to these contracts in order to protect itself from earnings volatility. Seltec has also entered into a long-term arrangement to buy oil from a foreign entity whose currency is the dinar. The commitment stipulates that the fi xed purchase price will be denominated in pounds sterling.
Seltec is unsure as to the nature of derivatives and hedge accounting techniques and has asked your advice on how the above fi nancial instruments should be dealt with in the fi nancial statements. (14 marks)
(b) Seltec has decided to enter the retail market and has recently purchased two well-known brand names in the edible oil industry. One of the brand names has been in existence for many years and has a good reputation for quality. The other brand name is named after a famous fi lm star who has been actively promoting the edible oil as being a healthier option than other brands of oil. This type of oil has only been on the market for a short time. Seltec is fi nding it diffi cult to estimate the useful life of the brands and therefore intends to treat the brands as having indefi nite lives.
In order to sell the oil, Seltec has purchased two limited liability companies from a company that owns several retail outlets. Each entity owns retail outlets in several shopping complexes. The only assets of each entity are the retail outlets. There is no operational activity and at present the entities have no employees.
Seltec is unclear as to how the purchase of the brands and the entities should be accounted for. (9 marks)
Required:
Discuss the accounting principles involved in accounting for the above transactions and how the above transactions should be treated in the fi nancial statements of Seltec.
Professional marks will be awarded in this question for clarity and quality of discussion. (2 marks)
The mark allocation is shown against each of the two parts above.
第3题
hased from the manufacturer.
Carpart has entered into supply arrangements for the supply of car seats to two local companies, Vehiclex and Autoseat.
(i) Vehiclex
This contract will last for five years and Carpart will manufacture seats to a certain specification which will require the construction of machinery for the purpose. The price of each car seat has been agreed so that it includes an amount to cover the cost of constructing the machinery but there is no commitment to a minimum order of seats to guarantee the recovery of the costs of constructing the machinery. Carpart retains the ownership of the machinery and wishes to recognise part of the revenue from the contract in its current financial statements to cover the cost of the machinery which will be constructed over the next year. (4 marks)
(ii) Autoseat
Autoseat is purchasing car seats from Carpart. The contract is to last for three years and Carpart is to design, develop and manufacture the car seats. Carpart will construct machinery for this purpose but the machineryis so specific that it cannot be used on other contracts. Carpart maintains the machinery but the know-how has been granted royalty free to Autoseat. The price of each car seat includes a fixed price to cover the cost of the machinery. If Autoseat decides not to purchase a minimum number of seats to cover the cost of the machinery, then Autoseat has to repay Carpart for the cost of the machinery including any interest incurred.
Autoseat can purchase the machinery at any time in order to safeguard against the cessation of production by Carpart. The purchase price would be the cost of the machinery not yet recovered by Carpart. The machinery has a life of three years and the seats are only sold to Autoseat who sets the levels of production for a period.
Autoseat can perform. a pre-delivery inspection on each seat and can reject defective seats. (9 marks)
(iii) Vehicle sales
Carpart sells vehicles on a contract for their market price (approximately $20,000 each) at a mark-up of 25%
on cost. The expected life of each vehicle is five years. After four years, the car is repurchased by Carpart at 20% of its original selling price. This price is expected to be significantly less than its fair value. The car must be maintained and serviced by the customer in accordance with certain guidelines and must be in good condition if Carpart is to repurchase the vehicle.
The same vehicles are also sold with an option that can be exercised by the buyer two years after sale. Under this option, the customer has the right to ask Carpart to repurchase the vehicle for 70% of its original purchase price. It is thought that the buyers will exercise the option. At the end of two years, the fair value of the vehicle is expected to be 55% of the original purchase price. If the option is not exercised, then the buyer keeps the vehicle.
Carpart also uses some of its vehicles for demonstration purposes. These vehicles are normally used for this
purpose for an eighteen-month period. After this period, the vehicles are sold at a reduced price based upon their condition and mileage. (10 marks)
Professional marks will be awarded in question 3 for clarity and quality of discussion. (2 marks)
Required:
Discuss how the above transactions would be accounted for under International Financial Reporting Standards in the financial statements of Carpart.
Note. The mark allocation is shown against each of the arrangements above.
第4题
ar ended 31 March 2005. The
company applies newly issued IFRSs at the earliest opportunity. The group comprises three companies, Ashlee, the
holding company, and its 100% owned subsidiaries Pilot and Gibson, both public limited companies. The group
financial statements at first appeared to indicate that the group was solvent and in a good financial position. However,
after the year end, but prior to the approval of the financial statements mistakes have been found which affect the
financial position of the group to the extent that loan covenant agreements have been breached.
As a result the loan creditors require Ashlee to cut its costs, reduce its operations and reorganise its activities.
Therefore, redundancies are planned and the subsidiary, Pilot, is to be reorganised. The carrying value of Pilot’s net
assets, including allocated goodwill, was $85 million at 31 March 2005, before taking account of reorganisation
costs. The directors of Ashlee wish to include $4 million of reorganisation costs in the financial statements of Pilot for
the year ended 31 March 2005. The directors of Ashlee have prepared cash flow projections which indicate that the
net present value of future net cash flows from Pilot is expected to be $84 million if the reorganisation takes place
and $82 million if the reorganisation does not take place.
Ashlee had already decided prior to the year end to sell the other subsidiary, Gibson. Gibson will be sold after the
financial statements have been signed. The contract for the sale of Gibson was being negotiated at the time of the
preparation of the financial statements and it is expected that Gibson will be sold in June 2005.
The carrying amounts of Gibson and Pilot including allocated goodwill were as follows at the year end:
The fair value of the net assets of Gibson at the year end was $415 million and the estimated costs of selling the
company were $5 million.
Part of the business activity of Ashlee is to buy and sell property. The directors of Ashlee had signed a contract on
1 March 2005 to sell two of its development properties which are carried at the lower of cost and net realisable value
under IAS 2 ‘Inventories’. The sale was agreed at a figure of $40 million (carrying value $30 million). A receivable of
$40 million and profit of $10 million were recognised in the financial statements for the year ended 31 March 2005.
The sale of the properties was completed on 1 May 2005 when the legal title passed. The policy used in the prior
year was to recognise revenue when the sale of such properties had been completed.
Additionally, Ashlee had purchased, on 1 April 2004, 150,000 shares of a public limited company, Race, at a price
of $20 per share. Ashlee had incurred transaction costs of $100,000 to acquire the shares. The company is unsure
as to whether to classify this investment as ‘available for sale’ or ‘at fair value through profit and loss’ in the financial
statements for the year ended 31 March 2005. The quoted price of the shares at 31 March 2005 was $25 per share.
The shares purchased represent approximately 1% of the issued share capital of Race and are not classified as ‘held
for trading’.
There is no goodwill arising in the group financial statements other than that set out above.
Required:
Discuss the implications, with suitable computations, of the above events for the group financial statements of
Ashlee for the year ended 31 March 2005.
(25 marks)
第5题
es. The plan provides a
pension of 1% of the final salary for each year of service. The cost for the year is determined using the projected unit
credit method. This reflects service rendered to the dates of valuation of the plan and incorporates actuarial
assumptions primarily regarding discount rates, which are based on the market yields of high quality corporate bonds.
The expected average remaining working lives of employees is twelve years.
The directors have provided the following information about the defined benefit plan for the current year (year ended
31 October 2005):
(i) the actuarial cost of providing benefits in respect of employees’ service for the year to 31 October 2005 was
$40 million. This is the present value of the pension benefits earned by the employees in the year.
(ii) The pension benefits paid to former employees in the year were $42 million.
(iii) Savage should have paid contributions to the fund of $28 million. Because of cash flow problems $8 million of
this amount had not been paid at the financial year end of 31 October 2005.
(iv) The present value of the obligation to provide benefits to current and former employees was $3,000 million at
31 October 2004 and $3,375 million at 31 October 2005.
(v) The fair value of the plan assets was $2,900 million at 31 October 2004 and $3,170 million (including the
contributions owed by Savage) at 31 October 2005. The actuarial gains recognised at 31 October 2004 were
$336 million.
With effect from 1 November 2004, the company had amended the plan so that the employees were now provided
with an increased pension entitlement. The benefits became vested immediately and the actuaries computed that the
present value of the cost of these benefits at 1 November 2004 was $125 million. The discount rates and expected
第6题
n 1 April 2006. The
purchase consideration was one million ordinary shares of Leigh which had a market value of $2·50 per share
at that date and the fair value of the net assets of Handy was $9 million. The retained earnings of Handy were
$4 million and other reserves of Handy were $3 million at that date. Leigh appointed two directors to the Board
of Handy, and it intends to hold the investment for a significant period of time. Leigh exerts significant influence
over Handy. The summarised balance sheet of Handy at 31 May 2007 is as follows:
第7题
3 On 1 June 2005, Egin, a public limited company, was formed out of the re-organisation of a group of companies with
foreign operations. The directors require advice on the disclosure of related party information but are reluctant to
disclose information as they feel that such transactions are a normal feature of business and need not be disclosed.
Under the new group structure, Egin owns 80% of Briars, 60% of Doye, and 30% of Eye. Egin exercises significant
influence over Eye. The directors of Egin are also directors of Briars and Doye but only one director of Egin sits on the
management board of Eye. The management board of Eye comprises five directors. Originally the group comprised
five companies but the fifth company, Tang, which was a 70% subsidiary of Egin, was sold on 31 January 2006.
There were no transactions between Tang and the Egin Group during the year to 31 May 2006. 30% of the shares
of Egin are owned by another company, Atomic, which exerts significant influence over Egin. The remaining 40% ofthe shares of Doye are owned by Spade.
During the current financial year to 31 May 2006, Doye has sold a significant amount of plant and equipment to
Spade at the normal selling price for such items. The directors of Egin have proposed that where related party
relationships are determined and sales are at normal selling price, any disclosures will state that prices charged to
related parties are made on an arm’s length basis.
The directors are unsure how to treat certain transactions relating to their foreign subsidiary, Briars. Egin purchased
80% of the ordinary share capital of Briars on 1 June 2005 for 50 million euros when its net assets were fair valued
at 45 million euros. At 31 May 2006, it is established that goodwill is impaired by 3 million euros. Additionally, at
the date of acquisition, Egin had made an interest free loan to Briars of $10 million. The loan is to be repaid on
31 May 2007. An equivalent loan would normally carry an interest rate of 6% taking into account Briars’ credit rating.
The exchange rates were as follows:
Euros to $
1 June 2005 2
31 May 2006 2·5
Average rate for year 2·3
Financial liabilities of the Group are normally measured at amortised cost.
One of the directors of Briars who is not on the management board of Egin owns the whole of the share capital of a
company, Blue, that sells goods at market price to Briars. The director is in charge of the production at Briars and
also acts as a consultant to the management board of the group.
Required:
(a) (i) Discuss why it is important to disclose related party transactions, explaining the criteria which determine
a related party relationship. (5 marks)
(ii) Describe the nature of any related party relationships and transactions which exists:
– within the Egin Group including Tang (5 marks)
– between Spade and the Egin Group (3 marks)
– between Atomic and the Egin Group (3 marks)
commenting on whether transactions should be described as being at ‘arm’s length’.
第8题
are-based Payment’ on the
financial statements for the year ended 31 May 2005 as they wish to adopt the IFRS early. However, the directors of
Vident are unhappy about having to apply the standard and have put forward the following arguments as to why they
should not recognise an expense for share-based payments:
i. they feel that share options have no cost to their company and, therefore, there should be no expense charged
in the income statement.
ii. they do not feel that the expense arising from share options under IFRS2 actually meets the definition of an
expense under the ‘Framework’ document.
iii. the directors are worried about the dual impact of the IFRS on earnings per share, as an expense is shown in
the income statement and the impact of share options is recognised in the diluted earnings per share calculation.
iv. they feel that accounting for share-based payment may have an adverse effect on their company and may
discourage it from introducing new share option plans.
The following share option schemes were in existence at 31 May 2005:
The price of the company’s shares at 31 May 2005 is $12 per share and at 31 May 2004 was $12·50 per share.
The performance conditions which apply to the exercise of executive share options are as follows:
Performance Condition A
The share options do not vest if the growth in the company’s earnings per share (EpS) for the year is less than 4%.
The rate of growth of EpS was 4·5% (2003), 4·1% (2004), 4·2% (2005). The directors must still work for the
company on the vesting date.
Performance Condition B
The share options do not vest until the share price has increased from its value of $12·50 at the grant date (1 June
2004) to above $13·50. The director must still work for the company on the vesting date.
No directors have left the company since the issue of the share options and none are expected to leave before June
2007. The shares vest and can be exercised on the first day of the due month.
The directors are unsure as to whether the share options granted to Van Heflin on 1 June 2002 should be accounted
for using IFRS2 as they were granted prior to the publication of the original Exposure Draft (7 November 2002).
Additionally the directors are also uncertain about the deferred tax implications of adopting IFRS2. Vident operates in
a country where a tax allowance will not arise until the options are exercised and the tax allowance will be based on
the option’s intrinsic value at the exercise date.
Assume a tax rate of 30%.
Required:
Draft a report to the directors of Vident setting out:
(a) the reasons why share-based payments should be recognised in financial statements and why the directors’
arguments are unacceptable; (9 marks)
第9题
ign supplier on 30 June
2007. The purchase price is 4 million euros. A non-refundable deposit of 1 million euros was paid on signing
the contract on 31 July 2006 with the balance of 3 million euros payable on 30 June 2007. Misson was
uncertain as to whether to purchase a 3 million euro bond on 31 July 2006 which will not mature until 30 June
2010, or to enter into a forward contract on the same date to purchase 3 million euros for a fixed price of
$2 million on 30 June 2007 and to designate the forward contract as a cash flow hedge of the purchase
commitment. The bond carries interest at 4% per annum payable on 30 June 2007. Current market rates are
4% per annum. The company chose to purchase the bond with a view to selling it on 30 June 2007 in order
to purchase the plant and equipment. The bond is not to be classified as a cash flow hedge but at fair value
through profit or loss.
Misson would like advice as to whether it made the correct decision and as to the accounting treatment of the
items in (c) above for the current and subsequent year. (10 marks)
第10题
ds (IFRS) in its financial
statements for the year ended 31 May 2005. The directors of the company are worried about the effect of the move
to IFRS on their financial performance and the views of analysts. The directors have highlighted some ‘headline’
differences between IFRS and their current local equivalent standards and require a report on the impact of a move
to IFRS on the key financial ratios for the current period.
Differences between local Generally Accepted Accounting Practice (GAAP) and IFRS
Leases
Local GAAP does not require property leases to be separated into land and building components. Long-term property
leases are accounted for as operating leases in the financial statements of Handrew under local GAAP. Under the terms
of the contract, the title to the land does not pass to Handrew but the title to the building passes to the company.
The company has produced a schedule of future minimum operating lease rentals and allocated these rentals between
land and buildings based on their relative fair value at the start of the lease period. The operating leases commenced
on 1 June 2004 when the value of the land was $270 million and the building was $90 million. Annual operating
lease rentals paid in arrears commencing on 31 May 2005 are land $30 million and buildings $10 million. These
amounts are payable for the first five years of the lease term after which the payments diminish. The minimum lease
term is 40 years.
The net present value of the future minimum operating lease payments as at 1 June 2004 was land $198 million
and buildings $86 million. The interest rate used for discounting cash flows is 6%. Buildings are depreciated on a
straight line basis over 20 years and at the end of this period, the building’s economic life will be over. The lessee
intends to redevelop the land at some stage in the future. Assume that the tax allowances on buildings are given to
the lessee on the same basis as the depreciation charge based on the net present value at the start of the lease, and
that operating lease payments are fully allowable for taxation.
Plant and equipment
Local GAAP requires the residual value of a non-current asset to be determined at the date of acquisition or latest
valuation. The residual value of much of the plant and equipment is deemed to be negligible. However, certain plant
(cost $20 million and carrying value $16 million at 31 May 2005) has a high residual value. At the time of
purchasing this plant (June 2003), the residual value was thought to be approximately $4 million. However the value
of an item of an identical piece of plant already of the age and in the condition expected at the end of its useful life
is $8 million at 31 May 2005 ($11 million at 1 June 2004). Plant is depreciated on a straight line basis over
eight years.
Investment properties
Local GAAP requires investment property to be measured at market value and gains and losses reported in equity.
The company owns a hotel which consists of land and buildings and it has been designated as an investment
property. The property was purchased on 1 June 2004. The hotel has been included in the balance sheet at 31 May
2005 at its market value on an existing use basis at $40 million (land valuation $30 million, building $10 million).
A revaluation gain of $5 million has been recognised in equity. The company could sell the land for redevelopment
for $50 million although it has no intention of doing so at the present time. The company wants to recognise holding
gains/losses in profit and loss. Local GAAP does not require deferred tax to be provided on revaluation gains and
losses.
The directors have calculated the following ratios based on the local GAAP financial statements for the year ended
The issued share capital of Handrew is 200 million ordinary shares of $1. There is no preference capital. The interest
charge and tax charge in the income statement are $5 million and $25 million respectively. Interest and rental
payments attract tax allowances in this jurisdiction when paid. Assume taxation is 30%.
Required:
Write a report to the directors of Handrew:
(a) Discussing the impact of the change to IFRS on the reported profit and balance sheet of Handrew at 31 May
2005. (18 marks)
(b) Calculate and briefly discuss the impact of the change to IFRS on the three performance ratios. (7 marks)
(Candidates should show in an appendix calculations of the impact of the move to IFRS on profits, taxation and
the balance sheet. Candidates should not take into account IFRS1 ‘First time Adoption of International Financial
Reporting Standards’ when answering this question.)
(25 marks)
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