Sec A 33 Ethic 6, unknown 2, Consol 20 28

Sec B 33 (50)Q2 11 ++Q3 11 ++

44

Sec B

(a) Easy, diff

(b)

(c)

PL SOFP

1st 3 notes are for consol (cannot drop)

Next 3 or 4 notes are IFRS(may drop max 2 notes)

Impairment

DefinitionFrequency

CGUReversal

Q2 (a)

Q2 (b)

Q3

Q2 (b)

Marchant pg 10

(a)

Workings ($m)

1. Investment in Nathan

GoodwillConsideration transferred 80 Non controlling interest (NCI) 45 Fair value of net assets (110)

15

Impairment loss of last year = 20% x 15 = 3

Remove revaluation of goodwill = 3 + 2 = 5

Gain or loss to be removed = 18 - (95 / 60% x 8%) = 5.3 Gain

Remove fair value gain on inv in Nathan = 95 - 90 = 5 OCI

2. Investment in Option

GoodwillConsideration transferred 70

NCI 28 Fair value of net assets (86)

12

Gain or loss on disposal (group)Proceeds 50 Fair value of remaining stake 40

90 Net assets derecognised (90)Goodwill derecognised (12)NCI derecognised 34 (68)Gain to profit or loss 22

Share of profit from assoc = 15 x 6/12 x 20% = 1.50

3. Intra group

Dr Revenue 12 Cr Purchases 12

Unrealised loss is not reversed in this case as the sale of $12m isat fair value. Reversal of loss will lead to inventory to be carriedat above net realisable value.

4. Pension costs

Reported in PLCurrent service cost 4.0 Net interest cost (expense) (50 - 48) x 10% 0.2 Past service cost 3.0

7.2

Reported in OCIRemeasurement loss 2

5. PPE

Date Details $m1 May 2012 Cost 12.0

(-) Depn 10 yrs (1.2)

10.8 Gain (bal fig) OCI 2.2

30 Apr 2013 Revalued 13.0 (-) Depn 9 yrs (1.4)

11.6 Loss (bal fig) N1 (4.6)

30 Apr 2014 Revalued 7.0

N1 Cr PPE 4.6 Dr OCI 2.2 Dr Other exp 2.4

6. Share options

Year Calculation CumulativeCurrent30 Apr 2013 8,000 options x $100 x 4 directors

x 1/3 1.07 1.07

30 Apr 2014 8,000 options x $100 x 6 directors x 2/3 3.20 2.13

7. Hedge loss

Effect of cash flow hedge loss is recognised to OCI, not finance cost.

Answer (a) (ii)

Changes in stake $m $mProceeds 18.00

Worth of 8% in Nathan transferred Net asset as at year end 120 Fair value adjustment (110 - 25 s cap - 65 RE - 6 OCE) 14 Goodwill (15 - 3) W1 12

146

x 8% 11.68 Accretion 6.32

Retained control after disposal will not give rise to gain or loss inconsolidated financial statements. The difference of $6.32 is to berecognised within equity, and not in profit or loss.

Goodwill is not remeasured as there is not significant economicevent.

After disposal profit or loss will be shared between Marchant andNCI based on 52 : 48.

(b) It is true that IFRS encourage fair value model to be in linewith the qualitative characteristic of "relevance" in ConceptualFramework for Financial Reporting.

Fair values are used extensively in various IFRSs, namely revaluationmodel in property, plant and equipment, fair value model in investment properties, fair value of financial assets and financialliabilties, etc.

However, IFRS is not implementing full fair value model. Cost modelremains as an accounting policy choice, and it is popular even intoday's accounting. Plus, there are several areas where use of fairvalue is restricted :-

i) Equity cannot be remeasured to fair value

ii) For intangible assets, revaluation model is allowed onlyif the asset is quoted in an active market

It is not true to say IFRS implements a fair value model.

In today's business acquisition, financial value of an entity is established by refering to share prices and separate negotiations.The value cannot be decided by looking at financial statement.

This is because the purpose of the financial statements are topresent the financial performance and position of an entity, which

mainly based on past transactions. It hardly gives prospective information.

Also, to maintain certain level of reliability, assets and liabilitieswhich are not measured reliably cannot be recognised in financialstatement, for example, internally generated goodwill, which is animportant element to establish the financial value of an entity.

At the end, financial statements do not fail user's need, as it is neverdesigned to report financial value.

(c) A lease is a finance lease if it transfers substantially all risks andrewards of the ownership to the lessee. An operating lease is a leaseother than finance lease.

An entity can make any arrangement to maximise tax benefits, butthe reporting of the lease must be based on the substance of thearrangement, rather than the legal form.

The finance director must be independent when assessing theclassification of the lease, and should not be influenced by the taxposition and loan application.

Financial controller should have a discussion with the finance directorto decide the lease classification. If the outcome is not satisfactory,then financial controller can seek advice from audit committee andthe external auditor.

Mock Q1

Pentagon

Workings ($m)

1. Investment in Smooth

Goodwill

Consideration transferred 90 Non controlling interests (NCI) 30% x 116.67 35 Fair value of net assets (100)Deferred tax liability (100 - 90) x 30% tax rate 3

28

Fair value adjustmentFair value of net assets 100 Book value Share capital (38) Retained earnings (pre) (23)Brand name 39

Add to intangible asset = 39 - (39 / 10 yrs x 14/12 = 4.55 post RE (s))= 34.45

Add to deferred tax liability = 3

Remove gain on fair value of inv in S = 94 - 90 = 4 (RE of P)

2. Investment in Flora

Goodwill Dinar m Rate $mConsideration transferred 120 2.5 48.00 NCI (25% x 112 ) 28 2.5 11.20 Fair value of net assets Share capital 32 Retained earnings (pre) 80 (112) 2.5 (44.80)

36 14.40 Gain on exchange diff (OCE of P) partial goodwill 2.74 At YE 36 2.1 17.14

Correction to Flora's account

Dr Post RE of Flora (2.2 - 2) x $6m 1.2m Dinar Cr Current liabilities 1.2m Dinar

Retranslate Flora's SOFP to $ Dinar m Rate $mTangible NCA 146 2.1 69.52 Current assets 102 2.1 48.57

248 118.10

Ordinary shares 32 2.5 12.80 Retained earnings pre 80 2.5 32.00

post(95 - 80 - 1.2) 13.80 2.0 6.90

OCE (post) 20 2.0 10.00 Gain on exchange diff (post OCE of Flora) 7.73

Non current liab 41 2.1 19.52 Current liab (60 + 1.2) 61.20 2.1 29.14

248 118.10

Eliminate URP

Dr RE of P ($6m x 20% x 1/2) $0.6m Cr Inventory $0.6m

3. Foreign property Dinar m Rate $m1 Dec 2014 Cost 30 2.5 12.00

Depn 20 yrs (0.60)11.40

Gain on revaluation (OCE of P) 5.27 30 Nov 2015 35 2.1 16.67

4. Pension

Cr RE of P (11 - 9) 2 Cr Net plan liab (non current liab) 3 Dr Remeasurement (OCE of P) 5

5. Provision

No provision as no obligation

Dr Current liab 2 Cr RE of P 2

6. Redeemable shares

These shares create obligation to Pentagon. They are non currentliabilities

Dr Ordinary shares 20 Cr Non current liab 20

7. Group RE as at YEPentagon 360.00 (-) Gain on fair value (W1) (4.00)(-) URP (W2) (0.60)(+) Pension (W4) 2.00 (+) Provision (W5) 2.00

Smooth Post acqn (56 - 23) 33.00 (-) Amortisation (W1) (4.55)

28.45 NCI 30%x 70% 19.92 8.54

Flora 6.9 (W2) x 75% 5.18 NCI 25%384.50 1.73

8. Group OCE as at YEPentagon 50.00 (+) Goodwill retranslation (W2) 2.74 (+) Gain on revaluation (W3) 5.27 (-) Pension (W4) (5.00)

NCI 30%Smooth post acqn 4 x 70% 2.80 1.20

Flora post acqn Existing (W2) 10.00 From translation of financial statement (W2) 7.73

17.73 NCI 25% x 75% 13.30 4.43

69.11

9. NCI as at YEIn SmoothAt acqn (W1) 35.00

Share of post RE (W7) 8.54 OCE (W8) 1.20

In FloraAt acqn (W2) 11.20 Share of post RE (W7) 1.73 OCE (W8) 4.43

62.10

(b) Fair value is measured frommarket participant's point of view.Entity's specific assumption does not affect the fair valuation ofassets and liabilitites.

Pentagon cannot measured the value of net assets of the acquireebased on what it was prepared to pay, and cannot be based onfuture business plan.

As to the customer relationships, although the apprear to be valuelessto Pentagon, an independent market participant will still be willingto pay a price to acquire such relationships. The intangible assetscannot be valued at zero.

Pentagon's aggressive negotiation could be due to trying to reducethe offer price. While this could save Pentagon some monies andincrease profit, the long run shareholders' wealth will be damaged asthe reputation of the group will be affected.

Also, improper valuation of assets will not show a true and fair viewand will affect users' decision making.

Directors of Pentagon should follow IFRS and exercise properbusiness ethic in the acquisition.

Jocatt pg 11

Answer (a)JocattConsolidated statement of cash flow for the year ended 30 Nov 2010

Note $m $mCash flow from operating activitiesProfit before tax 59 Adjustments (12) Gain on remeasurement (5 - 4) (i) (1) Amortisation (W1) 17 Pension expenses 10 + (6/3yrs) - 8 (iv) 4 Contribution paid (W2) (7) Heating system written off (v) 0.5 Fair value gain (W3) (1.5) Gain on disposal of land (15 + 4 - 10) (9) Depreciation (vi) 27 Impairment loss (W5) 31.5 Share of profit from assoc PL (6) Finance cost PL 6

Operating profit before working capital changes (4) 120.5 Decrease in inventory (105 - 128) 23 Decrease in receivables (62 - 5 Tigret) - 113 56 Increase in payables (144 - 55) 89

Cash from operation (3) 288.5 Tax paid (W7) (16.5) Interest paid PL (6)

Net cash from operating activities 266.0

Cash flow from investing activities (8)Purchase of investment in subsidiary (15 - 7) (i) (8)Addition to intangible assets (8 + 4) (iii) (12)Addition to investment property (v) (1)Proceeds from disposal of land (vi) 15 Purchase of property, plant and equipment (W4) (98)Purchase of AFS investment (W6) (5)Purchase of investment in assoc (54 YE - 6) (48)

Net cash from investing activities (157)

Cash flow from financing activities (5)Proceeds from rights issue (NCI portion) 5 x 40% (ii) 2 Repayment of borrowing (67 - 71) (4)Dividend paid (5)Dividend paid to NCI (13)

Net cash from financing activities (20)

Net increase in cash and cash equivalent (C&CE) 89 C&CE b/f 143 C&CE c/f 232

Workings ($m)

1. Intangible assetsBal b/f 72 Bal c/f 85 Addition 12 Amortisation (bal fig) 17 Tigret 18

2. Defined benefit planNew syllabus Old syllabus

Past service cost Immediate Over vesting period

Return on plan asset OCI PL

Pension liabBal c/f 25 Bal b/f 22 Return on plan asset 8 Current service cost 10

Past service cost (old)Contribution paid (6 / 3 yrs) 2 (bal fig) 7 Actuarial loss 6

3. Investment propertyBal b/f 6 Bal c/f 8 Addition 1 Write off 0.5 Gain (bal fig) 1.5

4. PPEBal b/f 254 Bal c/f 327 Tigret 15 Depreciation 27 Plant exchanged 4 Disposal 10 Addition (bal fig) 98 Loss on revaluation 7

5. Impairment

New goodwill in TigretConsideration transferred (34 + 1) 35 Non controlling interest 20 Fair value of net assets Others (15 + 18 + 5 + 7) (45) Deferred tax liability (45 - 40) x 30% 1.5 (43.5)

11.5

GoodwillBal b/f 68 Bal c/f 48 Tigret 11.5 Impairment loss (bal fig) 31.5

6. AFS investmentBal b/f 90 Bal c/f 94 Gain (2 + 1) 3 Reclassify Tigret to sub 4 Addition (bal fig) 5

7. TaxesBal c/f DT 35 Bal b/f DT 41

CT 33 CT 30 Tigret W5 1.5

Tax paid (bal fig) 16.5 AFS 1 Income tax expense 11

(b) (i) IFRS allows operating activities of statement of cash flow tobe presented using direct method or indirect method.

Major classes of cash flow such as cash received from customersand cash paid to suppliers are presented in direct method. Indirectmethod starts with profit before tax and adjust the non cash itemsand working capital changes to arrive in cash from operations.

While two methods give the same cash balance, direct method isgenerally regarded as a more useful presentation as it is clear andconcise.

The directors are wrong to support indirect method. It could be theirinterest to keep the statement of cash flow in a more complicatedpresentation so that a manipulation can be done easily.

(b) (ii) The reason for director to argue the proceeds from loanis an operating cash flow could be motivated by the extra incomefor meeting targets. Operating cash flow are those relate toprincipal revenue producing activities, while financing cash floware those relate to composition of equity and non current liabilities.The proposal of the directors is not acceptable.

Directors have responsibilities to act in the best interest of theowners and other stakeholders. Putting directors' self interest beforeothers is not an acceptable action. If such manipulation happens,the financial statements will not show a true and fair view. This willaffect the users' decision making and breaking the trust betweenthe company and its stakeholders.

Ethical issue 1 pg 16

An accountant must discharge his or her responsibilities professionally. An accountant must comply with the instructionsgiven by the directors. However, if the accountant has doubt onsuch instruction, the accoutant must handle such matter with themind of integrity and objectivity.

An accountant is a highly educated, highly trained with high skills.An accountant is able to exercise judgement for appropriateness,and is able to have self-governance.

Manipulation suggested by directors of Ribby will mislead the users.Although it could lead to a higher selling price of Hall, such actionwill bring damage to the reputation and trust.

Society regards accountant as an individual with higher socialstatus. The respect from society on the profession must not beabused. The company accountant must take appropriate action toensure such manipulation does not exist.

Ethical issue 2 pg 16

Ethics of corporate social responsibities are the moral beliefs ofan entity towards the society. Besides making daily routines, a corporate may choose to contribute to its surrounding by doingdonations, charities, and rebuild a community.

These actions often receive less appreciation from shareholders,who are looking for maximum monetary return. Performingcorporate social responsibilities requires resources of the entity,but often such contribution does not generate tangible and measurablereturns.

Corporate social responsibilities must be fulfilled by all entities, asin the past history, such action generate long term benefits to the entity and the society surrounding the entity. Director shoulddisclosure such information to educate the shareholders thansuch action is part of enhancing the shareholders' wealth.

Ethical issue 3 pg 16

A sale and repurchase of asset is recorded based on its substancerather than its legal form. In the case of Robby, the transactionis a loan in substance as :-

i) No sale will be agreed at ($16m) far below the asset's market value($25m)

ii) The option is most likely to be exercise as after paying the premiumof 3%, the buy back is still worthy

Robby should record the proceeds as a current liability, withoutderecognising the land.

Although such manipulation could be used to stablise stakeholders'considence, this will lead to unreliable information being publishedwhich will affect the decision making of users. If this is found outit will damage the reputation of Robby and the trust between thecompany and its stakeholders will be broken.

As a company accountant, one must follow code of ethics, suchas integrity and objectivity to ensure such manipulation does notoccur. The accountant should discuss with the director on this.

Sub book

Dr Bank $1m Cr Property $2mDr Loss $1m

"hidden dividend paid only to P"Parent book

Dr Property $1m Cr Bank $1m

Ethical issue 4 pg 17

Bower changed its accounting policy to revalue the property priorto the sale can be interpreted as trying to maximise the losses in itsfinancial statements. This is one of the indirect way to pay dividendto Minny, by avoiding the payment to non controlling interests ofBower.

To Minny, the property is most likely to be recorded at its purchaseprice of $1m. The gain was hidden, and might be able to avoid taxes.This might create certain legal issues.Also, recording the property at $1m in the financial statements ofMinny might raise conflict to IFRS 13, which generally requiresassets to be initially carried at fair value determined by marketapproach.

There are benefits to the group in this arrangement : Bower cansave cash by avoiding payment of dividend to non controlling interest,and Minny could avoid tax payment.

However, such manipulation leads to unreliable financial informationwhich will affect the decision making of the users. If this is found outit will break the reputation and trust between the group and its stakeholders. Such manipulation is not acceptable.

Ethical issue 5 pg 17

Profit is used in many cases to judge the performance of an entity.It is understandable that the director of Angel regards profitas first priority. However, profit is short term, and it is only a smallpart of the overall shareholders' wealth.

Doing business ethically will promote values and reputation of thecompany. It ensures long term prospect of an entity. Ethic andprofit can actually co-exist. The director argues that these two areconflicting could be due to the director is trying to obtain unfairprofit, which could only be achieved by performing unethical action.

Codes of ethics are written principles to guide an accountant onappropriateness. Codes of ethics are particularly important whenthere is conflicting situation facing the accountant (eg : self-interest).The codes serve as a declaration that the accounting professionwill hold the highest professionalism in discharging responsibilities.It is wrong to say the codes are unimportant.

Ethical issue 6 pg 17

The director should not give an empty promise to bank without agood basis. Although the loan is essential to meet the assetsreplacement plan, giving fake promises and trying to presentmanipulated information to bank is unethical, and could break thetrust between bank and Joey. To make it worse, this could raiselegal issue for misrepresenting the bank.

The chief accountant's decision in presenting information could beinfluenced by his job security issues. He should refer to the codesof ethics to search for solution. A professional accountant musthave the mind of integrity and objectivitiy when doing his job, and

must not be influenced by self-interest.

The chief accountant should discuss this matter with the directors,and if the outcome is not satisfactory, he should consult the matterwith the audit committee.

Practice 1 pg 18

A sale of asset is recognised if the significant risks and rewards ofthe asset are transferred to the buyer. This is assessed based on theeconomic substance of the arrangement, and not based on its legalform.

To Norman, the risks and rewards were not passed to Conquest :-

i) Norman continues to enjoy significant rewards by usingthe hotel for the remaining useful life of 15 years, and

ii) Norman bears significant risks to guarantee a minimumincome of $15m to Conquest

Norman should not derecognise the hotel assets, and should recognisethe proceeds from sale as a non current liability.

If a sale transaction contains multiple elements, each elementis treated as a distinct performance obligation if each elementis independent from another.

Norman's customers pay to get a room to stay, and a discountvoucher for future redemption. The voucher is regarded as adistinct performance obligation as the use of voucher does notdepend on the use of room.

Voucher can only be recognised if it is probable that customer willuse it. In this case, it is $20m x 1/5 = $4m.

The proceeds from customers of $300m is allocated to room salesand voucher sales based on their respective observable prices :-

Room sales = $300m / ($300m + $4m) x $300m = $296mVoucher sales = $300m / ($304m) x $4m = $4m

Grant received can be income related or asset related.

If a grant relates to income, the grant is recognised to profit or lossin the year where the performance is satisfied.

If the grant relates to asset, the grant could be (as an accounting policy choice) offset to cost of asset, or deferred to liability andamortise over the asset's useful life.

To Norman, although the grant was to create jobs (income related), the condition to be satisfied in order to keep the grant is actuallythe cost of building, which is asset related.

A provision for repayment is set up only it is probable that thecondition cannot be achieved.

DCP DBP

Obligation restricted to Other than DCP contribution

Practice 2

There are two types of retirement benefits :-

i) Defined contribution plan (DCP) : the employer's legal andconstructive obligation are restricted to contribution paid.

ii) Defined benefit plan (DBP) : plan other than DCP. Employer hasto bear extra obligation other than contribution.

Sirus need to look into more details to decide the appropriateclassification for the plans as the accounting treatments are differentfor each plan.

Retirement benefits are often difficult to be measured as it involvescomplex assumptions. Actuarial valuation is needed.

The cost of retirement should be recognised based on accrualbasis throughout the service period of the directors, and not a lumpsum cost after their retirement.

(c) The key issue in the question is to decide if the payment isfor director's remuneration, or is for consideration transferred toprevious owners of Marne. Based on the facts, the profit sharingdoes not require employment service, but to serve as an incentive toaccept purchase offer, will make the payment a consideration transferred.

As the payment is conditional upon the post acquisition performanceof Marne, this is contingent consideration. Such consideration isrecognised regardless the likelihood of occurrence. Sirus shouldmeasure the payment at present value discounted at an appropriatediscount rate.

(d) Loan is a financial liability because Sirus has a contractualobligation to pay cash under the arrangement. There are twoaccounting models available for financial liabilities :-

i) Amortised cost (default model) : carrying amount ofthe liability is added with finance cost charged usingeffective rate, and reduced by any payment made

(ii) Fair value model : the carrying amount of the liabilityis added with finance cost and reduced by payment made,then at every year end it is remeasured to latest fair valuewith difference to profit or loss

Sirus should use amortised cost model as there is no reason to optfor fair value model. The effective rate may be 8% or 9.1% depending on the duration of the loan they choose.

The loan is a non current liability as at year end as Sirus has, viaoriginal agreement, an unconditional right to defer the repayment ofloan to more than 12 months in the future. As the discussion withbank has not reach to a conclusion as at year end, such right is stillretained by Sirus.

Practice 3 pg 19

Inventory is to be carried at the lower of costs and net realisable value (NRV). Johan purchases the handset at $200, but expectedNRV is only $150 - $1 = $149. Any unsold handset is to be valueat $149, with a loss of $51 recognised to profit or loss.

If a sale transaction contains multiple elements, each element isregarded as a distinct performance obligation if the elements areindependent of each other. Johan's package of selling handset withcall card contains two distinct performance obligations as theperformance for selling handset is independent from provision ofmobile network services.

Revenue from sale of handset is recognised as soon as the handset isdelivered, while the revenue from call credit is recognised over thesix months period. The expected usage of $21 -$3 = $18 is recognised prgressively, while the average unused credit of $3 becomes revenue once the card expires.

The arrangement between Johan and dealer is a principal - agentarrangement because :-

i) Dealer bears no risks in the arrangementii) Dealer's return is in a form of commissioniii) Johan is the main party to fulfill obligation towards thecustomers

Revenue from sale of handset should not be recognised when it istransferred to dealer, but when it is transferred to a customer.Cost of handset of $150 and commission of $130 are recognised ascost of sales upon the customer signs the service contract.The network subscription receivable from customer is recognisedover the 12 month contract period.

Practice 4 pg 20

There are sometimes an option embedded in a bond. The embeddedfeature is to be separated from the bond and accounted for separatelyif the embedded feature is not closely related to the bond.To Aron, the option is convertible to ordinary shares, which is equity

in nature, while the bond is liability in nature.

The two elements are separated on the issue date by the followingcalculation :-

$m 9% $mYear Cashflow D factor Present value2007 - 2009 6 2.5313 15.19 2009 100 0.7722 77.22 Present value of bond 92.41 Fair value of equity option 7.59 Total proceeds 100.00

The issue cost of $1m is to be allocated to liability and equitybased on their sizes :-

Bond : $92.41m - ($1m x 92.41%) = $91.49mEquity option : $7.59m - ($1m x 7.59%) = $7.51m

Equity option is not to be remeasured after the initial recognition.Bond is to be carried at amortised cost model :-

9.38%Year Start Finance Interest End

cost paid$m $m $m $m

2007 91.49 8.58 (6.00) 94.07 2008 94.07 8.82 (6.00) 96.90 2009 96.90 9.10 (6.00) 100.00

Upon settlement, when 25 million units of shares were issued, theaccounting is as follows :-

$m $mDr Bond 100.00 Dr Equity option 7.51 Cr Ordinar shares ($1) 25.00 Cr Share premium (bal fig) 82.51

Practice 5 pg 20

A sale and repurchase arrangement is recorded in the financial

statement based on its economic substance, rather than the legalarrangement.

A revenue is recognised if substantially all risks and rewards ofthe goods are transferred to buyer upon the sale. If not, the proceedsare recognised as liability.

To Carpart, the sale can be recognised as revenue as :-

i) Risks of maintenance of car were passed to customer, andii) Rewards from using the car (4 years out of 5 years useful life) were enjoyed by customers.iii) Risks of residual value was passed to customer as the repurchaseprice payable by Carpart is significantly less than the fair value of the car

To the other arrangement, substantially all risks and rewards ofthe car were not passed to customer, as :-

i) The usage of 2 years out of 5 years useful life does not seemto be a significant reward, and

ii) Risk of residual value is still with Carpart.

The arrangement in substance should be a lease as the customerget a chance to use the asset for two years, and indirectly "pays"30% of the car price as lease payment.

Car rented out is a property, plant and equipment. Carpart shoulddepreciate the car over the expected useful life. The lease incomeis recognised to profit or loss over 2 years on straight line basis.

Mock Q2

(a) A joint arrangement exist when parties to the arrange hasjoint control. Joint control is where decision on relevant activitiesof the arrangement requires unanimous consent of all the partiesto the arangement.

The arrangement of Joey with CP is a joint arrangement, as joint

control exists. Joint arrangement can be in one of the following twoforms :-

i) Joint operation : parties to the arrangement have rightsand obligation to the assets and liabilities of the arrangemnt,

ii) Joint veture : parties to the arrangement have rights andobligation to the net assets of the arrangement.

Without a separate vehicle, the arrangement is a joint operation.The arrangement of Joey and CP up to 1 November 2011 is a jointoperation, and after 1 November is joint venture.

The following accounting treatments are relevant :-

First half year To Joey $m $m

Sales ($5m x 6/12) 2.50 90% 2.25 Cost of sales ($2m x 6/12) (1.00) (1.00)Gross profit 1.50 1.25 (-) GP allocated to CP (30% x 1.5) (0.45)Net profit 0.80

Dr Sales (2.5 x 10%) 0.25 Dr Profit to CP (expenses) 0.45 Cr Payable (CP) 0.70

Second half year

Profit to Joey = $1.50m x 50% = $0.75m

Dr Inv in JV $0.75mDr Sales (50% x 2.5) $1.25m Cr COS (50% x 1) $0.5m Cr Payable $1.5m

(b) Revenue is recognised if there is a contract with customer.An contract exists if the terms of performance and payment areset, the collection is probable, and the contract has commercial

substance (in terms of timing and risks).

Joey may recognise the revenue starting 1 Oct 2011, as a contractseems to exist.

Revenue is recognised if control of the goods and services is transferred to customer. To services, the control is transferredover the time. Revenue is recognised over the service period basedon stage of completion. To Joey, this will be accrued evenly over thethree years.

However, the stage of completion method should not be used if theoutcome of the service is not certain. Cost incurred todate isrecognised immediately to profit or loss, and revenue is recognisedup to the lower of amount expected to be recovered, or totalcost incurred.

For a sale arrangement which contains multiple performanceobligations, the package price is allocated to each obligationbased on its observable price.

To Joey, the following calculation applies :-

Hardward = $500,000 x (360 / (360+240)) = $300,000Support service = $500,000 x (240 / (360+240)) = $200,000

As discussed previously, revenue is recognised when control of thegoods and services are transferred to customer. To hardware, it isupon delivery, and to services, it will be recognised over the service period based on stage of completion.

(c )

A finance lease is a lease where the substantially all risks andrewards of the asset is transferred to the lessee. An operating leaseis a lease other than finance lease.

The lease of computer equipment seems to be an operating lease :-

i) The present value of minimum lease payment ($40m) does notseem to be a substantial part of the fair value of the asset ($70m)

ii) The beneficial ownership is still with the lessor (Joey). Also,Joey can terminate the lease at anytime by paying a relatively smallcompensation.

Joey should recognise the lease income over the lease period, andnot a lump sum of net present value to profit or loss.

The deposit is recognised as a liability, and amotised over the leaseterm.

If the termination is decided and communicated, Joey shouldrecognise a provision liability of $10m.

Q3

Report to Directors of ElectronFrom : AccountantDate: 16 Nov 2015

Re : Matters to be considered for financial reporting

I am delighted to have this opportunity to clarify the followingmatters that arise within our financial year end of 30 April 2015 :-

i) Financial guaranteeThe financial guarantee given on behalf of our subsidiary is to beacconunted for under IFRS 9, as it involves default risks.The financial guarantee, which is a financial liability, is to be accounted for using amortised cost by default. Fair value modelis available as an accounting policy choise of the fair value can bemeasured reliably.

The liability is recognised to profit or loss at its fair value when theguarantee is given :-

Dr Profit or loss $1.2m Cr Liability $1.2m

After the first installment was paid by subsidiary, the liability is

to be reduced, says, by 1/3 :-

Dr Liability ($1.2m / 3) $0.4m Cr Profit or loss $0.4m

However, the financial liability must be fair valued at $40m (thebalance of loan) as Electron feels that it is probable that the loanwill be repaid by them. The carrying amount of the liability isrevised with the difference recognised to profit or loss :-

Dr Profit or loss $39.2m Cr Liability $39.2m (1.2 - 0.4 - 40)

Donation received by subsidiary after year end is an evidence toprove Electron's estimated fair value of $40m is inappropriate. Thisadjusting event will reverse the addition to liability :-

Dr Liability $39.6m (39.2 + (1.2 / 3) Cr Profit or loss $39.6m

ii) Power station

The power station is a property, plant and equipment as it is usedin main operation. The cost includes construction cost, plus initialestimated provision for dismantling.

The capitalised cost is to be depreciated over the useful life of theasset of 20 years.

Provision is recognised if :-

- present obligation to pay- paymment is probable- amount can be estimated reliably.

The $15m is a provision for the reason discussed above. As 95% ofthe $15m relates to the station, $14.25m is debited to the cost ofpower station. The remainder 5% of $0.75m will be recognised tocost of sales throughout the 20 years operation.

Any unwinding to the present value if to be recognised to profitor loss.

iii) Hedged accounting

Hedge is common risk management technique to use a hedginginstrument to minimise or eliminate the exposure to the risk offluctuation in a hedged item.

In a cash flow hedge, there is no current accounting for futurecash flow movement. The fair value changes of the hedging instrument is then recognised to other comprehensive income, andretained in hedged reserve.

In the event of prematured termination of hedge relationship, thehedge reserve is reclassified immediately to profit or loss if thehedge item is not expected to occur.

However, to Electron, since the hedged item is expected to occur,the reserve is retained in equity, and will be released to profit orloss when the future cash flow affects the profit or loss in the future.

Hedge of a foreign operation cannot be accounted for as fair valuehedge, because IFRS does not permit the investment in associateto be accounted for using a fair value value. It is to be accounted forby equity accounting.

Electron should defer the exchange difference arising fromtranslating the hedging instrument to other comprehensive income(rather than to profit or loss), and retained in a hedged reserves.Such reserve will be realised to profit or loss if the foreign operationis disposed.

iv) Share option

Employee benefit given in the form of share option is equity settledshare based payment. The fair value of the option is recognisedover the vesting period on a straight line basis. The fair value ofoption is estimated after considering the staff turnover, where suchestimation is revised at the end of each reporting period.

To Electron, the following calculation applies :-

Employee benefit cost for the year $0.94m ($3m x 94% x 1/3)

LessorFV $10mLease asset (life = 5 yrs) IAS 17 ED

Lease term 2 yrs OL Performance ob

Lease term 4 yrs FL Derecognition

Lease term 5 yrs FL IFRS 15

Cr Asset 4/5 x $10m $8mDr Rights to receive payment $8m

Cr Asset $2mDr Residual asset $2m(no depn)

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