University of Economics, Prague

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1 University of Economics, Prague Faculty of Finance and Accounting Department of Financial Accounting and Auditing Lesson 8: Examples and Case studies Lecturer: David Procházka Contact: Web: 1FU486 IFRS

2 1 Examples Example 1: FX on settlement of monetary assets I A leading Czech producer YUP sells goods to PUY, a leading French wholesaler, for 10,000 on 10 October 2X05. The customer settles the liability on 10 December 2X05. Account for all relevant transactions, if: - YUP s functional currency is CZK - relevant FX rates are 25 CZK/ on 10 October 2X05; 26 CZK/ on 10 December 2X05; 27.5 CZK/ on 31 December 2X05 What amount would be shown on statement of cash flows for 2X05? Example 2: FX on settlement of monetary assets II A leading Czech producer YUP sells goods to PUY, a leading French wholesaler, for 10,000 on 10 October 2X05. The customer settles the liability on 10 January 2X06. Account for all relevant transactions, if: - YUP s functional currency is CZK - relevant FX rates are 25 CZK/ on 10 October 2X05; 27.5 CZK/ on 31 December 2X05; 28 CZK/ on 10 January 2X05 What amount would be shown on statement of cash flows for 2X05 and 2X06? David Procházka p. 2/17

3 Example 3: Monetary vs non-monetary items I PENGUIN makes following transactions on 1 November 2X05: sells goods and invoicing 10,000 makes prepayment for material at 1,000 receives an invoice from its tax advisor for services provided at 2,000 pays rental of offices for 2X06 at 5,000 pays 20,000 for a land (will be recognised under IAS 16 basic model) pays 20,000 for a land (will be recognised under IAS 16 alternative model) pays 20,000 for a land (will be recognised under IAS 40 basic model) Decide, which of above elements is a monetary and which one is a non-monetary item Determine respective amounts on the transaction date and on the reporting date, if: - functional currency of PENGUINS is CZK - relevant FX rates are 25 CZK/ on 1 November 2X05; 26 CZK/ on 31 December 2X05 Type CZK November Trade receivable 10, ,000 Prepayment 1,000 25,000 Trade payable 2,000 50,000 Deferred expense 5, ,000 Land IAS 16 basic 20, ,000 Land IAS 16 alternative 20, ,000 Land IAS 40 basic 20, ,000 CZK December David Procházka p. 3/17

4 Example 4: 1FU486/Lesson 08 Monetary vs non-monetary items II SEAL concludes a contract for purchase of machinery on 10 October 2X03. An advance payment of 50,000 is paid on the same date. Remaining 50,000 is paid on 11 November 2X03. The machinery is put into use on 2 February 2X04. What amount is presented under heading advance payments given on 31 December 2X03? What is acquisition cost of the machinery on 2 February 2X04, if relevant exchange rates are following: - 25 CZK/ on 10 October 2X03-26 CZK/ on 11 November 2X03-27 CZK/ on 31 December 2X03-28 CZK/ on 2 February 2X04 Example 5: Non-monetary assets at fair value I In June 2X05, ISLANDERS purchased land, which is classified as an investment property, for 1,000,000. The functional currency is CZK and the exchange rate on the date of purchase was 25 CZK/. At December 2X05, the first remeasurement of land is made according to IAS 40 guidance. What would be an impact on comprehensive income at remeasurement date under various scenarios, if fair values and exchange rates are following: - [Scenario A]: FV = 1,100,000 and FX = 22 CZK/ - [Scenario B]: FV = 1,100,000 and FX = 24 CZK/ - [Scenario C]: FV = 900,000 and FX = 26 CZK/ - [Scenario D]: FV = 900,000 and FX = 28 CZK/ [Scenario A] [Scenario B] [Scenario C] Transaction date (CZK) Reporting date (CZK) Difference (CZK) To be recognised in [Scenario D] David Procházka p. 4/17

5 Example 6: 1FU486/Lesson 08 Non-monetary assets at fair value II In June 2X05, RANGERS purchased land, which is classified as PPE, for 1,000,000. The functional currency is CZK and the exchange rate on the date of purchase was 25 CZK/. At December 2X05, the first remeasurement of land is made according to IAS 16 guidance on alternative treatment. What would be an impact on comprehensive income at remeasurement date under various scenarios, if fair values and exchange rates are following: - [Scenario A]: FV = 1,100,000 and FX = 22 CZK/ - [Scenario B]: FV = 1,100,000 and FX = 24 CZK/ - [Scenario C]: FV = 900,000 and FX = 26 CZK/ - [Scenario D]: FV = 900,000 and FX = 28 CZK/ [Scenario A] [Scenario B] [Scenario C] [Scenario D] Transaction date (CZK) Reporting date (CZK) Difference (CZK) To be recognised in Example 7: Non-monetary assets at fair value III DEVILS trading on grocery products bought 1,000 pieces of merchandise at cost of 10/piece. This type of merchandise is being resold to foreign customers and all sales are denominated in. At the year-end, DEVILS evidences 600 pieces of unsold merchandise in its storage. The functional currency of DEVILS is CZK and the exchange rate on the date of purchase was 25 CZK/. What would be an impact on comprehensive income at remeasurement date under various scenarios, if net realisable values and exchange rates are following: - [Scenario A]: NRV = 6,250 and FX = 26 CZK/ - [Scenario B]: NRV = 6,250 and FX = 24 CZK/ - [Scenario C]: NRV = 6,250 and FX = 22 CZK/ - [Scenario D]: NRV = 5,750 and FX = 28 CZK/ - [Scenario E]: NRV = 5,750 and FX = 26 CZK/ David Procházka p. 5/17

6 [Scenario A] Transaction date (CZK) Reporting date (CZK) Difference (CZK) To be recognised in [Scenario B] [Scenario C] [Scenario D] [Scenario E] Example 8: Functional currency vs. booking currency I BLACKHAWKS has purchased merchandise for 800 on 1 August 2X05. Half of the merchandise was sold for 1,000 on 10 November 2X05. The customer pays for sold goods on 31 December 2X05 and on the same date, the payable to supplier is settled. Prepare an extract from the balance sheet and comprehensive income statement, if: - BLACKHAWKS s accounting software records transactions in CZK and the functional currency is CZK - relevant FX rates are 25 CZK/ on 1 August 2X05; 26 CZK/ on 10 November 2X05; 28 CZK/ on 31 December 2X05 Balance sheet as at 31 December 2X05 CZK CZK Inventory Cash Total Retained earnings (P&L) OCI Total Comprehensive income statement for the period (CZK) Sales Cost of sales FX differences P&L for period 2X05 FX differences Other comprehensive income Comprehensive income for the period David Procházka p. 6/17

7 Example 9: Functional currency vs. booking currency II BLACKHAWKS has purchased merchandise for 800 on 1 August 2X05. Half of the merchandise was sold for 1,000 on 10 November 2X05. The customer pays for sold goods on 31 December 2X05 and on the same date, the payable to supplier is settled. Prepare an extract from the balance sheet and comprehensive income statement, if: - BLACKHAWKS s accounting software records transactions in CZK and the functional currency is - relevant FX rates are 25 CZK/ on 1 August 2X05; 26 CZK/ on 10 November 2X05; 28 CZK/ on 31 December 2X05 Balance sheet as at 31 December 2X05 Inventory Cash Total Retained earnings (P&L) OCI Total Comprehensive income statement for the period ( ) Sales Cost of sales FX differences P&L for period 2X05 FX differences Other comprehensive income Comprehensive income for the period David Procházka p. 7/17

8 Example 10: Functional currency vs. presentation currency I BLACKHAWKS has purchased merchandise for 800 on 1 August 2X05. Half of the merchandise was sold for 1,000 on 10 November 2X05. The customer pays for sold goods on 31 December 2X05 and on the same date, the payable to supplier is settled. Prepare an extract from the balance sheet and comprehensive income statement, if: - BLACKHAWKS s the functional currency is CZK and the presentation currency is - relevant FX rates are 25 CZK/ on 1 August 2X05; 26 CZK/ on 10 November 2X05; 28 CZK/ on 31 December 2X05 Balance sheet as at 31 December 2X05 Inventory Cash Total Retained earnings (P&L) OCI Total Comprehensive income statement for the period ( ) Sales Cost of sales FX differences P&L for period 2X05 FX differences Other comprehensive income Comprehensive income for the period David Procházka p. 8/17

9 Example 11: Functional currency vs. presentation currency II BLACKHAWKS has purchased merchandise for 800 on 1 August 2X05. Half of the merchandise was sold for 1,000 on 10 November 2X05. The customer pays for sold goods on 31 December 2X05 and on the same date, the payable to supplier is settled. Prepare an extract from the balance sheet and comprehensive income statement, if: - BLACKHAWKS s the functional currency is and the presentation currency is CZK - relevant FX rates are 25 CZK/ on 1 August 2X05; 26 CZK/ on 10 November 2X05; 28 CZK/ on 31 December 2X05 Balance sheet as at 31 December 2X05 CZK CZK Inventory Cash Total Retained earnings (P&L) OCI Total Comprehensive income statement for the period (CZK) Sales Cost of sales FX differences P&L for period 2X05 FX differences Other comprehensive income Comprehensive income for the period David Procházka p. 9/17

10 Example 12: First-time adoption of IFRS 1FU486/Lesson 08 INTERNATIONAL prepares its first financial statements in compliance of IFRS. The date of transition is 1 January 2X07. The balance sheet according to local GAAP is as follows. INTERNATIONAL Consolidated statement of financial position in compliance with local GAAP 31 Dec 2X06 Non-current assets Property, plant and equipment 360,020 Goodwill 91,200 Setup costs 10,770 Capitalised research & development 227,470 Other intangible assets 256, ,460 Current assets Inventories 132,500 Trade receivables 110,800 Other current assets 12,540 Cash and cash equivalents 322, ,740 Total assets 1,524, Dec 2X06 EQUITY AND LIABILITIES Equity Share capital 648,600 Retained earnings 182, ,500 Non-current liabilities Long-term borrowings 160,000 Deferred tax 26,040 Long-term provisions 52, ,280 Current liabilities Trade and other payables 187,620 Short-term borrowings 220,000 Current tax payable 42,000 Short-term provisions 4, ,420 Total equity and liabilities 1,524,200 David Procházka p. 10/17

11 The differences between local GAAP and IFRS are as follows: Property, plant, equipment: - an asset acquired by a finance lease is not recognised by local GAAP - the value of the asset is 15,756 - unpaid balance of lease liability is 20,000 with instalment of 5,000 payable during 2X07 Goodwill: - accumulated amortisation (not applicable under IFRS) is recognised under local GAAP at 25,000 - impairment test carried out according to IAS 36 showing that recoverable amount is 84,300 Setup cost: - IAS 38 guidance shall be applied R&D: - the amount of 135,898 relates to research and development phase I Inventory: - include some major components to machinery under PPE at 9,450 Long-term borrowings: - under local GAAP recognised in nominal value; present value is 125,000 Long-term provision: - provision for dismantling PPE at 44,240 - provision for future operating losses at 8,000 Prepare the opening balance sheet in compliance with IFRS as at 1 January 2X07 David Procházka p. 11/17

12 2 Case studies Case 1: Multiple choice questions 1. For the recognition of FX differences, assets and liabilities shall be distinguished as: a) current vs non-current b) short-term vs long-term c) monetary vs non-monetary d) one-time vs recurring 2. FX differences arise, if: a) a transaction is denominated in functional currency and it is settled in functional currency as well b) a transaction is denominated in foreign currency and it is settled in foreign currency as well c) a transaction is denominated in functional currency, but it is settled in foreign currency d) a transaction is denominated in foreign currency, but it is settled in functional currency 3. Functional currency of is: a) the currency of a country, where the entity has its jurisdiction b) the currency of a country, where majority of the entity s owners have their domicile c) the currency, in which the entity settles its tax liabilities d) the currency, in which majority of the entity s transactions are made 4. LIVERPOOL has provided REAL with a loan of Ł100,000 on 10 March 2X05. On given date, the FX rate is 2 /Ł. The loan is repaid back on 10 September 2X05. On this day, the FX rate is 2.2 /Ł. LIVERPOOL s functional currency is Ł; REAL functional currency is. On the settlement, LIVERPOOL would recognise: a) no exchange differences b) realised FX gain of Ł20,000 c) unrealised FX gain of Ł20,000 d) realised FX loss of Ł20,000 e) unrealised FX loss of Ł20, LIVERPOOL has provided REAL with a loan of Ł100,000 on 10 March 2X05. On given date, the FX rate is 2 /Ł. The loan is repaid back on 10 September 2X05. On this day, the FX rate is 2.2 /Ł. LIVERPOOL s functional currency is Ł; REAL functional currency is. On the settlement, REAL would recognise: a) no exchange differences b) realised FX gain of 20,000 c) unrealised FX gain of 20,000 d) realised FX loss of 20,000 e) unrealised FX loss of 20,000 David Procházka p. 12/17

13 6. LIVERPOOL has provided REAL with a loan of Ł100,000 on 10 March 2X05. On given date, the FX rate is 2 /Ł. The loan is repaid back on 10 March 2X06. On this day, the FX rate is 2.2 /Ł. LIVERPOOL s functional currency is Ł; REAL functional currency is. On December 2X05, LIVERPOOL would recognise: a) no exchange differences b) realised FX gain of Ł20,000 c) unrealised FX gain of Ł20,000 d) realised FX loss of Ł20,000 e) unrealised FX loss of Ł20, LIVERPOOL has provided REAL with a loan of Ł100,000 on 10 March 2X05. On given date, the FX rate is 2 /Ł. The loan is repaid back on 10 March 2X06. On this day, the FX rate is 2.2 /Ł. LIVERPOOL s functional currency is Ł; REAL functional currency is. On December 2X05, REAL would recognise: a) no exchange differences b) realised FX gain of 20,000 c) unrealised FX gain of 20,000 d) realised FX loss of 20,000 e) unrealised FX loss of 20, The differences between local GAAP and IFRS are recognised in case of the first time adoption of IFRS in: a) continuing operations of profit & loss b) discontinued operations of profit & loss c) other comprehensive income d) retained earnings 9. ACM has made initial public offering at the stock exchange, which requires the submission of financial statements in compliance with IFRS. Previously, ACM used local GAAP in its statutory accounts. The first annual financial statements will be submitted to the stock exchange for the period ending on 30 June 2X05. ACM provides the users with just minimum comparative information (i.e. only for one previous period). What is the date of transition to IFRS? a) 30 June 2X05 b) 1 July 2X04 c) 30 June 2X04 d) 1 July 2X03 David Procházka p. 13/17

14 10. INTER has made initial public offering at the stock exchange, which requires the submission of financial statements in compliance with IFRS. Previously, INTER used local GAAP in its statutory accounts. The first annual financial statements will be submitted to the stock exchange for the period ending on 30 June 2X05. INTER provides the users with two years of comparative information. What is the date of transition to IFRS? a) 30 June 2X05 b) 1 July 2X04 c) 30 June 2X04 d) 1 July 2X03 e) 30 June 2X03 f) 1 July 2X PORTO evidences following exchange rate difference, which shall be presented on the face of consolidated statement of comprehensive income: FX gains on trade receivables 20,000; FX losses on trade payables 15,000; FX gains on long-term loans 7,000; FX losses on translation of foreign subsidiary 13,000 and FX loss relating to the discontinued operations 4,000. Which of the following accounting treatments captures the most appropriate presentation of the FX difference regarding the aggregation and offsetting principles and the usefulness of accounting information for users? a) all FX differences have to be presented separately b) all FX differences shall be offset together and only net FX loss at amount of 5,000 shall be presented in P&L c) all FX gains shall be summed up (i.e. 27,000) and presented separately from the total of all FX losses (i.e. 32,000) d) FX losses on translation of foreign subsidiary have to be presented separately under OCI; other FX shall be presented on aggregate under P&L e) FX losses on translation of foreign subsidiary have to be presented separately under OCI; FX loss relating to the discontinued operations shall be presented separately; other FX difference shall be aggregated and presented under one item within continuing operations in P&L f) FX losses on translation of foreign subsidiary have to be presented separately under OCI; FX loss relating to the discontinued operations shall be presented separately; FX gains on long-term loans shall be presented separately; FX gains on trade receivables could be offset against FX losses on trade payables and presented within the same line item in P&L David Procházka p. 14/17

15 Case 2: FX differences on the reporting date 1FU486/Lesson 08 PENGUINS makes following transactions on 1 December 2X03: sells goods and invoicing 50,000 (paid on 31 January 2X04) receives prepayment for its services to be rendered in 2X04 at 1,500 receives an invoice from its auditors for services provided during 2X03 at 3,000 (paid on 31 January 2X04) receives rental for hired offices from the lessee for the year 2X04 at 5,000 pays 10,000 for a land (will be recognised under IAS 16 basic model) pays 40,000 for a land (will be recognised under IAS 40 basic model) Decide, which of above elements is a monetary and which one is a non-monetary item Determine respective amounts on the transaction date and on the reporting date, if: - functional currency of PENGUINS is CZK - relevant FX rates are 24 CZK/ on 1 December 2X03; 25 CZK/ on 31 December 2X03; 27 CZK/ on 31 January 2X04 David Procházka p. 15/17

16 Case 3: First time adoption of IFRS 1FU486/Lesson 08 DYNAMICS prepares its first financial statements in compliance of IFRS. The date of transition is 1 July 2X08. The balance sheet according to local GAAP is as follows. DYNAMICS Consolidated statement of financial position in compliance with local GAAP 30 June 2X08 Non-current assets Property, plant and equipment 580,020 Goodwill (11,200) Setup costs 10,770 Other intangible assets 256, ,590 Current assets Inventories 132,500 Trade receivables 110,800 Other current assets 12,540 Cash and cash equivalents 322, ,740 Total assets 1,414, June 2X08 EQUITY AND LIABILITIES Equity Share capital 500,000 Retained earnings 178,182 Social fund 88, ,070 Provisions Provisions for future operating losses 100,000 Provisions for employee benefits 55, ,400 Non-current liabilities Long-term borrowings 160,000 Long-term provisions 52, ,240 Current liabilities Trade and other payables 187,620 Short-term borrowings 50,000 Current tax payable 42, ,620 Total equity and liabilities 1,414,330 David Procházka p. 16/17

17 The differences between local GAAP and IFRS are as follows: Property, plant, equipment: - component approach to depreciation not applied under local GAAP; if applied IFRS rules, the carrying amount of PPE would decrease by 250,000 Goodwill: - according to local GAAP, negative goodwill is recognised on the balance sheet - under IFRS, any negative goodwill shall be immediately written-off into P&L Setup cost: - IAS 38 guidance shall be applied Other intangible assets: - under local GAAP, all expenditures on R&D have to be expensed - entity uses intangible assets as a result of its internal development at amount of 15,000; this are to be shown on IFRS balance sheet Provisions: - provision for future operating losses at 100,000 (provision for repairs of PPE) - provision for short-term employee benefits is 12,400, long-term benefits are 40,000 Prepare the opening balance sheet in compliance with IFRS as at 1 July 2X08 David Procházka p. 17/17

University of Economics, Prague

University of Economics, Prague Faculty of Finance and Accounting Department of Financial Accounting and Auditing Lesson 9: Examples and Case studies Lecturer: David Procházka Contact: Email: prochazd@vse.cz