FINANCIAL & CORPORATE REPORTING

Transcription

1 FINANCIAL & CORPORATE REPORTING Time allowed 3 hours Total marks 100 N.B. Questions must be answered in English. Figures in the margin indicate full marks. All workings are to be submitted. Examiner will take account of the quality of language and of the manner in which the answers are presented. Different parts, if any of the same questions must be answered in one place in order of sequence. Marks 1. (a) Discuss whether an agreed international framework for financial reporting is needed in order to resolve practical accounting issues. 6 (b) Turag is a company that complies with the minimum requirements of BAS 24. The following transactions took place during the year 2015: (1) Turag sells goods on credit to Jomuna Ltd. which is owned by the son of Mr. Babor, a director of Turag. At the year end there was a trade receivable of Tk.500,000 owing from Babor to Turag. It was decided to write off Tk.150,000 of this receivable, and make full provision of the remainder. Debt collection costs incurred by Turag were Tk.20,000. (2) Turag purchased goods from Meghna for Tk.3,000,000, which was deemed to be an arm s length price. Turag owns 40% of the ordinary share capital of Meghna. (3) An amount of Tk.450,000 is due to one of Turag s distributor companies, Padma. (4) A house owned by Turag with a carrying value of Tk.2,000,000 and a market value of Tk. 4,500,000, was sold to one of its directors, Mr. Humaiyun for Tk.4,250,000. Turag guaranteed the loan taken out by Mrs. Humaiyun to purchase the property. Explain what disclosure, if any, would be required by BAS 24 in the financial statements of Turag in respect of each of the above transactions. 6 (c) XYZ Ltd. accounts for deferred tax by recognizing deferred tax assets and liabilities on all temporary differences. The carrying amounts of assets and liabilities and their corresponding tax bases as at 31 December 2014 together with the recognized deferred tax assets and liabilities are as follows: Carrying amount Tax base Temporary difference Plant, machinery and equipment 40,000 25,000 15,000 Trade debtors, net of general provision for bad debts of 4,00,000 Provisions for retirement benefits ( 24,000 8,000) 28,000 0 ( 4,000) ( 8,000) 3,000 Deferred tax liability 15,000x40% 6,000 Deferred tax assets 12,000x40% ( 4,800) Net deferred tax liability 1,200 During the year ended 31 December 2015, some plant with a net book value of Tk.15,000,000 are revalued upward to Tk.25,000,0000. At the date of the revaluation, the remaining useful life of the revalued asset is five years. As at 31 December 2015, the carrying amounts of assets and liabilities in the statement of financial position and their corresponding tax bases are as follows: Carrying amount Tax base Plant, machinery and equipment 45,000 22,000 Trade debtors, net of general provision of Tk.5,000,000 26,000 31,000 Provision for retirement benefits Income tax rate for the year ended is reduced to 35%. ( 9,000) 0 Compute the amount of deferred tax asset deferred tax liability that should be recognized by XYZ Ltd. as at 31 December Also, show the movement and the components of the deferred tax account. 8 Page1 of 6

2 2. Eden Ltd is the parent company of a group which operates a chain of department stores. You work for a firm of Chartered Accountants and have been seconded to the company as a temporary replacement for the Finance Director, who retired on 30 June Your firm does not provide assurance services to the group. The Finance Director continues to hold a small number of shares in Eden Ltd. As part of his retirement benefits package, he will receive a bonus which is linked to the amount by which reported earnings per share for the year ended 30 June 2016 exceeds 60p. The Board of Directors has asked you to finalize the consolidated financial statements for the year ended 30 June 2016 and to document your findings in a memorandum addressed to them. They are particularly concerned about the gearing of the group. They have provided you with the following summary of the draft consolidated statement of comprehensive income and consolidated statement of financial position. Draft Consolidated Statement of Comprehensive Income for the year ended 30 June 2016 (extract) Amount in BDT'000 Profit before tax 6,373 Tax (668) Profit for the period 5,705 Attributable to: Equity holders of parent 5,289 Minority interest 416 5,705 Draft Consolidated Statement of Financial Position 30 June 2016 Non- current assets Property plant and equipment 26,100 Goodwill - Haider Ltd 9,000 Other intangible assets 4,000 Investment ,800 Current assets 3,715 Total assets 43,515 Capital and reserves Issued capital 3,000 Retained earnings 11,570 Revaluation reserve 6,525 Minority Interest 2,590 Equity 23,685 Non-current liabilities Long-term borrowing 12,400 Provisions 5,000 Current liabilities 2,430 Total equity and liabilities 43,515 You have also been provided with information about three issues: (a) On 1 January 2016 Eden Ltd acquired 80% of Hider Ltd which also operates department stores. The rationale behind the acquisition was that Hider Ltd s stores are in locations where Eden Ltd Page2 of 6

3 is not represented. The purchase price for Hider Ltd was Tk 35 mn plus a further cash payment of Tk 10 mn on 1 July There are no conditions attached to this further payment. The amount of goodwill in respect of the acquisition of Hider Ltd included in the draft financial statements has been calculated as follows: Tk 000 Cost of investment 45,000 Less group share of net fair value of the identified assets & liabilities as acquired (36,000) (80%x Tk 45mn) 9,000 At 1 January 2016, the identifiable assets and liabilities of Hider Ltd included the following items: (i) The brand name of Hider Ltd s line of own brand clothing. This was provisionally valued at TK 4 mn for the purpose of the sale agreement. An independent valuations specialist has since advised that the fair value of the brand was TK 6 mn at the acquisition date. However, Eden Ltd s directors have decided to phase out Hider Ltd s own brand clothing over the next three years and therefore, they propose that the brand name should not be recognized as a separate intangible assets. Because the benefits that Eden Ltd will receive from the acquisition will mainly result from synergies, the directors believe that the vaue of the brand should be subsumed within goodwill. The brand has not been recognized in the separate financial statements of Hider Ltd. In the consolidated financial statements, the brand is carried at Tk 4 mn. (ii) A provision for reorganization costs of Tk 5 mn. The reason for this was that Hider Ltd would have had to carry out a restructuring in order to continue to trade, had it not been acquired by Eden Ltd. It has since been confirmed that the directors of Hider Ltd did fully intend to restructure the company had the acquisition not gone ahead. However, no detailed plan had been drawn up and no announcement had been made to employees or customers by 1 January This provision is still recognized in both the separate financial statements of Hider Ltd and the group financial statements for the year ended 30 June The rate of interest applicable to the long term borrowings of the group is 10%. The directors are of the opinion that goodwill arising on the acquisition had not suffered any impairment at 30 June (b) Eden Ltd s long term investments include debentures in Kader Ltd which it purchased for TK 500,000 at 1 July No interest is receivable in respect of the bonds, but they are redeemable at a premium on 30 June The effective rate of interest on the bonds is 8% and the current market rate for similar bond is 6%. On 15 July 2016, the directors of Eden Ltd heard that Kader Ltd was in financial difficulties and would undergo a financial reorganization. On the basis of discussions with their investment advisors, the directors believe that they are unlikely to receive more than Tk 250,000 on 30 June The debenture have been classified as loans and receivables and are included in the consolidated balance sheet at a carrying amount of Tk 583,200. (c) Eden Ltd is currently renovating one of its stores. On 1 April 2016 the store buildings are on the freehold land on which they stand were sold to Delwar Ltd for Tk 6 mn. At that date the land and buildings had a carrying amount of TK 3.5mn (of which TK 1.5mn related to freehold land) and an estimated remaining useful life of twenty years. The open market value of the land and buildings was Tk 10mn. Under the terms of the sale agreement Eden Ltd retains the right to continue to occupy and renovate the site. Eden Ltd has an option to repurchase the land and buildings for Tk 8mn on 1 April The store is expected to re open in Autumn Eden Ltd has removed the store from its statement of financial position and has recognized a profit on sale of Tk 2.5mn. Work to redevelop the site had not yet started at 3o June The issued share capital on 1 July 2015 was 2,400,000 ordinary shares. On 1 April Eden Ltd made a 1 for 4 right issue at Tk 5 per share. The market value of one ordinary share immediately prior to the rights issue was Tk 6 per share. This share transaction has been correctly reflected in the draft financial statements. Requirements: Draft a memorandum to the Board of Directors of Eden Ltd that include: (i) An explanation of the required IFRS accounting treatment of these in the individual financial statements of Hider Ltd and in the consolidated financial statements of the Eden Group, preparing relevant calculations where applicable. 12 Page3 of 6

4 (ii) A revised draft of the consolidated statement of comprehensive income for the year ended 30 June 2016 and a revised draft of the consolidated financial statement at that date. 8 (iii) A calculation of the following financial ratios before and after the accounting adjustments: 3 a. Basic EPS b. Theoretical ex-right price. (iv) A discussion of the ethical issues arising from the adjustments to the financial statements (a) The directors of North-bengal, a public limited company, have seen many different ways of dealing with the measurement and disclosure of the fair value of assets, liabilities and equity instruments. They feel that this reduces comparability among different entities financial statements. They would like advice on several transactions where they currently use fair value measurement as they have heard that the introduction of IFRS 13 Fair Value Measurement, while not interfering with the scope of fair value measurement, will reduce the extent of any diversity and inconsistency. (i) North-bengal owns several farms and also owns a division which sells agricultural vehicles. It is considering selling this agricultural retail division and wishes to measure the fair value of the inventory of vehicles for the purpose of the sale. Three markets currently exist for the vehicles. North-bengal has transacted regularly in all three markets. At 30 April 2015, North-bengal wishes to find the fair value of 150 new vehicles, which are identical. The current volume and prices in the three markets are as follows: Market Sales price/unit Tk. vehicle sold by Young Unit Total vehicles sold Unit Transaction costs/unit Tk. Transport cost/unit Tk. Barisal 40, , Rajshai 38, , Sylhet 34, , North-bengal wishes to value the vehicles at Tk. 39,100 per unit as these are the highest net proceeds per unit, and Barisal is the largest market for North-bengal s product. Advise as to whether this valuation would be acceptable under IFRS 13 Fair Value Measurement. 8 (ii) The company uses quarterly reporting for its farms as they grow short-lived crops such as wheat. North-bengal planted the wheat fields during the quarter to 31 October 2014 at an operating cost of Tk. 10 million. The fields originally cost Tk. 20 million. There is no active market for partly grown fields of wheat and therefore North-bengal proposes to use a discounted cash flow method to value the wheat fields. As at 31 October 2014, the following were the cash flow projections relating to the wheat fields: 3 months to 31 3 months to 30 Total January 2015 April 2015 Tk. million Tk. million Tk. million Cash inflows Cash outflows (8) (19) (27) Notional rental charge for land usage (1) (1) (2) Net cash flows (9) In the three months to 31 January 2015, the actual operating costs amounted to Tk. 8 million and at that date North-bengal revised its future projections for the cash inflows to Tk. 76 million for the three months to April At the point of harvest at 31 March 2015, the wheat was worth Tk. 82 million and it was sold for Tk. 84 million (net of costs to sell) on 15 April In the measurement of fair value of the wheat, North-bengal includes a notional cash flow expense for the rent of the land where it is self-owned. Page4 of 6

5 The directors of North-bengal wish to know how they should have accounted for the above biological asset at 31 October 2014, 31 January 2015, 31 March 2015 and when the produce was sold. Assume a discount rate of 2% per quarter as follows: 8 Factor Period Period (b) On January 1, 2015, UBL sold equipment with a carrying amount of BDT 100m, and a remaining useful life of ten years, to Maco Ltd. for BDT 150 m. UBL immediately leased the equipment back under a ten year finance lease with a present value of BDT 150 m. UBL follows the straight line method of depreciation. UBL made the first annual lease payment of BDT m in December Calculate the unearned gain on equipment sale that should be recognized for presentation in UBL s December 31, 2015 statement of financial position. 5 (c) On September 1, 2014, UBL sold merchandise to Hindustan Liver for IRS 250 m. Terms of the sale require payment in IRS on February 1, On September 1, 2014, the spot exchange rate was BDT 2 per IRS. At December 31, 2014, UBL s year-end, the spot rate was BDT 1.9, but the rate increased to BDT 2.2 by February 1, 2015, when payment was received. How much should UBL report as foreign exchange transaction gain or loss as part of 2015 income? 5 (d) On 1 January 2015, UBL issued a BDT 100 m 4% convertible debenture for BDT 100 m. The fair market interest rate was 6% pa and a straight debenture with a face value of BDT 100 m and coupon rate of 4% could be sold for BDT 90 m. UBL applies the split accounting provisions of IAS 32. How will the issuance of convertible debenture be split between the liability and equity components and how much interest expense will be charged in 2015? Pass the required journal entries (a) ABC Ltd s forecasted 2017 financial statements follow, along with industry average ratios. Forecasted Statement of Financial Position as at December 31, 2017 Cash 72,000 Accounts receivable 439,000 Inventories 894,000 Total current assets 1,405,000 Land and building 238,000 Machinery 132,000 Other fixed assets 61,000 Total assets 1,836,000 Accounts and notes payable 432,000 Accruals 170,000 Total current assets 602,000 Long-term debt 404,200 Ordinary share capital 575,290 Retained earnings 254,710 1,836,000 Page5 of 6

6 Forecasted Statement of Comprehensive Income for 2017 Sales 4,290,000 Cost of goods sold (3,580,000) Gross operating profit 710,000 General administrative and selling expenses ( 236,320) Depreciation ( 159,000) Miscellaneous ( 134,000) Earnings before taxes (EBT) 180,680 Taxes (40%) ( 72,272) Net income 108,408 Number of shares outstanding 23,000,000 Per-Share Data EPS Tk Cash dividends per share P/E ratio Tk x Market price (average) Tk Industry Financial Ratios (2017) a Quick ratio 1.0x Current ratio 2.7x Inventory turnover b 5.8x Days sales outstanding 32.0 days Fixed assets turnover b 13.0x Total assets turnover b 2.6x Return on assets 9.1% Return on equity 18.2% Debt ratio 50.0% Profit margin on sales 3.5% P/E ratio 6.0x a Industry average ratios have been constant for the past four years. b Based on year-end financial position figures. Requirements: (i) Calculate ABC Ltd s 2017 forecasted ratios, compare them with the industry average data, and comment briefly on ABC s projected strengths and weaknesses. 12 (ii) What do you think would happen to ABC s ratios if the company initiated cost-cutting measures that allowed it to hold lower levels of inventory and substantially decrease the cost of goods sold? No calculations are necessary. Think about which ratios would be affected by changes in these two accounts. 6 (b) Is the indirect method for preparing a statement of cash flows more useful to users than the direct method? Why? 4 Page6 of 6