Case Study Session 1 Property, plant and equipment, Leases, Income taxes and Business combinations

Similar documents
Annual Financial Report KONAMI CORPORATION and its subsidiaries Consolidated Financial Statements For the fiscal year ended March 31, 2015

Introduction to Ind-AS By Neeraj Sharma

Notes to the Consolidated Financial Statements

Continuing operations Revenue 3(a) 464, ,991. Revenue 464, ,991

Prepared by Cyberian

The notes on pages 7 to 59 are an integral part of these consolidated financial statements

A.G. Leventis (Nigeria) Plc

NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 SEPTEMBER 2014

GASUM CONSOLIDATED (IFRS) FINANCIAL STATEMENTS 2013

CONSOLIDATED FINANCIAL STATEMENTS

MANAGEMENT S RESPONSIBILITY FOR FINANCIAL REPORTING

Linamar Corporation December 31, 2012 and December 31, 2011 (in thousands of dollars)

Notes to the financial statements appendices

NESTE Financial Statements

BLUESCOPE STEEL LIMITED FINANCIAL REPORT 2011/2012

Group Income Statement For the year ended 31 March 2015

JAMAICAN TEAS LIMITED CONSOLIDATED FINANCIAL STATEMENTS 30 SEPTEMBER 2017

A7 Accounting policies

IFRS-compliant accounting principles

C ONSOLIDATED FINANCIAL STATEMENTS. Algeco Scotsman Global S.à r.l. Years Ended December 31, 2012, 2011 and 2010 With Report of Independent Auditors

Monetary figures in the financial statements are expressed in millions of euros unless otherwise stated.

Accounting policies Year ended 31 March The numbers

Tornado Global Hydrovacs Ltd. Consolidated Financial Statements

Notes to the Financial Statements

Oracle Financial Services Software Chile Limitada. Directors Report

Financial review Refresco Financial review 2017

NOTES TO THE FINANCIAL STATEMENTS

Learn Africa Plc. Quarter 1 Unaudited Financial Statement 1 st January to 31 st March 2018

Oracle Financial Services Software (Shanghai) Limited. Directors Report. FINANCIAL PERFORMANCE (Rs. in lacs) Particulars

Accounting Policies. Key accounting policies

Group Income Statement

Homeserve plc. Transition to International Financial Reporting Standards

OUR GOVERNANCE. The principal subsidiary undertakings of the Company at 3 April 2015 are detailed in note 4 to the Company balance sheet on page 109.

THE GALA CORAL GROUP PRELIMINARY INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) TRANSITION STATEMENTS

Performance 81. Group structure 101

Pearson plc IFRS Technical Analysis

Group accounting policies

Notes To The Financial Statements For the year ended 31 December 2014

Notes to the Consolidated Financial Statements For the year ended 31 December 2017

Consolidated financial statements Financial Year. Publicis Groupe consolidated financial statements financial year ended December 31,

MATRIX IT LTD. AND ITS SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS

Georgian Leasing Company LLC Consolidated financial statements

Notes to Consolidated Financial Statements

Notes. annual report 2012 notes all amounts in SEKm unless otherwise stated

Springer Nature GmbH, Berlin

ACCOUNTING POLICIES Year ended 31 March The numbers

Notes to the Consolidated Financial Statements

Royal DSM Integrated Annual Report 2017

Consolidated Financial Statements

IFRS. Lifetime Performance. Financial information for 2004 according to IFRS standards

Notes to the Consolidated Financial Statements

Maria Perrella. Andrew Hider. Chief Executive Officer. Chief Financial Officer

2005 Financial Statements. Consolidated Financial Statements of the Nestlé Group Annual Report of Nestlé S.A.

Financial statements

INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements

Notes to the financial statements

PASHA YATIRIM BANKASI A.Ş. FINANCIAL STATEMENTS AS AT 31 DECEMBER 2017 TOGETHER WITH INDEPENDENT AUDITOR S REPORT

For the 52 weeks ended 2 May 2010

F83. I168 other information. financial report

FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET PROVISIONS CONSOLIDATED INCOME STATEMENT TRADE AND OTHER PAYABLES 84

CONVENIENCE TRANSLATION INTO ENGLISH OF CONDENSED FINANCIAL STATEMENTS FOR THE INTERIM PERIOD 1 JANUARY 30 SEPTEMBER 2018

ANNUAL REPORT. Contents. Consolidated Financial Statements 001. Notes to Consolidated Financial Statements 009. Independent Auditor s Report

KELANI TYRES PLC FINANCIAL STATEMENTS 31 MARCH 2017

AS 1 DISCLOSURE OF ACCOUNTING POLICIES

Interpretations effective in the year ended 28 February 2009 Standards and interpretations not yet effective

Translation from Russian original. JSC Sheremetyevo International Airport. Consolidated financial statements

CONSOLIDATED FINANCIAL STATEMENTS

Oracle Financial Services Software Pte ltd. Directors Report

Financial statements NEW ZEALAND POST LIMITED AND SUBSIDIARIES INCOME STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009

Professional Level Essentials Module, Paper P2 (INT)

NASCON ALLIED INDUSTRIES PLC. Unaudited Financial Statements

FINANCIAL STATEMENTS

EVERTZ TECHNOLOGIES LIMITED

PAO SIBUR Holding. International Financial Reporting Standards Consolidated Financial Statements and Independent Auditor s Report.

INFORMA 2017 FINANCIAL STATEMENTS 1

Massy Holdings Ltd. Consolidated Financial Statements. 30 September (Expressed in Thousands of Trinidad and Tobago Dollars)

WS Atkins plc Transition to International Financial Reporting Standards ( IFRS ) Restatement of financial information for the year ended 31 March 2005

Oracle Financial Services Software S.A.


MATRIX IT LTD. AND ITS SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS

Institute of Certified Management Accountants of Sri Lanka Operational Level May 2018 Examination

RAS AL KHAIMAH POULTRY & FEEDING CO. P.S.C. Financial statements and independent auditor s report for the year ended 31 December 2016

Contents. Orascom Development Holding AG Income statement F-85 Statutory balance sheet F-86 Notes to the financial statements F-87 F-1

P2 CORPORATE REPORTING

Overview of Transition to IND-AS. CA Sanjeev Maheshwari

Consolidated Financial Statements and Independent Auditor s Report

NASCON ALLIED INDUSTRIES PLC. Unaudited Financial Statements

MANAGEMENT S REPORT TO THE SHAREHOLDERS

IAS 1 Presentation of Financial Statement

Financial statements. Consolidated financial statements. Company financial statements

Takeda Pharmaceutical Company Limited and its Subsidiaries Consolidated Financial Statements Under IFRSs and Independent Auditor's Report

Empire Company Limited Consolidated Financial Statements May 5, 2018

EVERTZ TECHNOLOGIES LIMITED MANAGEMENT S DISCUSSION AND ANALYSIS For the Year ended April 30, 2018

Professional Level Essentials Module, Paper P2 (IRL)

Notes to the consolidated financial statements (forming part of the financial statements)

WIRC Study Ind AS Study Circle. Practical issues of Ind AS 11 and Ind AS

VESTEL BEYAZ EŞYA SANAYİ VE TİCARET ANONİM ŞİRKETİ

CONSOLIDATED FINANCIAL STATEMENTS

YIOULA GLASSWORKS S.A. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2012

Transcription:

Property, plant and equipment Case Study 1 At the beginning of the year the entity, domiciled in the UK, has a $1m foreign currency loan. The interest rate on the loan is 4% and is paid at the end of the period. An equivalent borrowing in sterling would carry an interest rate of 6%. The spot rate at the beginning of the year is C1 = US$ 1.55 and at the end of the year it is C1 = US$ 1.50. The expected interest cost on a sterling borrowing would be C645,161 at 6% = C38,710. 1 P a g e Question: What amount of exchange difference can be treated as interest/borrowing cost? The actual cost of the $ loan is: Loan at the beginning of the year: $1,000,000 at 1.55 = Loan at the end of the year: $1,000,000 at 1.50 Exchange loss Interest paid: $1,000,000 at 4% = $40,000 at 1.50 = Total Interest on sterling equivalent: C645,161 at 6% = Difference The total actual cost of the loan exceeds the interest cost on a sterling equivalent loan by C9,463. Therefore, only C12,043 (C21,506 C9,463) of the exchange difference of C21,506 may be treated as interest. C 645,161 666,667 21,506 26,667 48,173 38,710 9,463 Case study 2 Entity A exchanges surplus land with a book value of C100,000 for cash of C200,000 and plant and machinery valued at C250,000. The transaction has commercial substance. Question: At what value should be the plant and machinery be recorded? The plant and machinery would be recorded at C250,000, which is equivalent to the fair value of the land of C450,000 less the cash received of C200,000. Case study 3 Entity A exchanges car X with a book value of C13,000 and a fair value of C13,250 for cash of C150 and car Y which has a fair value of C13,100. The transaction lacks commercial substance as the company s cash flows are not expected to change as a result of the exchange; it is in the same position as it was before the transaction. Question: At what amount the entity recognises the assets? The entity recognises the assets received at the book value of car X. Therefore, it recognises cash of C150 and car Y as property, plant and equipment with a carrying value of C12,850. Case study 4 Entity A is a large manufacturing group. It owns a considerable number of industrial buildings, such as factories and warehouses and office buildings in several capital cities. The industrial buildings are located in industrial zones, whereas the office buildings are in central business districts of the cities. Entity A's management want to apply the IAS 16 revaluation model to the subsequent measurement of the office buildings but continue to apply the historical cost model to the industrial buildings. Question: Is this acceptable under IAS 16, 'Property, plant and equipment'? Entity A's management can apply the revaluation model to just the office buildings. The office buildings can be clearly distinguished from the industrial buildings in terms of their function, their nature and their general location. IAS 16 permits assets to be revalued on a class-by-class basis. The different characteristics of the buildings

enable them to be classified as different PPE classes. The different measurement models can, therefore, be applied to these classes for subsequent measurement. All properties within the class of office buildings must, therefore, be carried at revalued amount. Separate disclosure of the two classes must be given. Case study 5 Entity B constructs a machine for its own use. Construction is completed on 1 November 20X6 but the company does not begin using the machine until 1 March 20X7. Case study 6 Multiple choice questions Question: From when should the entity start charging depreciation? The entity should begin charging depreciation from the date the machine is ready for use, that is 1 November 20X6. The fact that the machine was not used for a period after it was ready to be used is not relevant in considering when to begin charging depreciation. 1. Healthy Inc. bought a private jet for the use of its top-ranking officials. The cost of the private jet is $15 million and can be depreciated either using a composite useful life or useful lives of its major components. It is expected to be used over a period of 7 years. The engine of the jet has a useful life of 5 years. The private jet s tires are replaced every 2 years. The private jet will be depreciated using the straight-line method over (a) 7 years composite useful life. (b) 5 years useful life of the engine, 2 years useful life of the tires, and 7 years useful life applied to the balance cost of the jet. (c) 2 years useful life based on conservatism (the lowest useful life of all the parts of the jet). (d) 5 years useful life based on a simple average of the useful lives of all major components of the jet. 2. An entity imported machinery to install in its new factory premises before yearend. However, due to circumstances beyond its control, the machinery was delayed by a few months but reached the factory premises before year-end. While this was happening, the entity learned from the bank that it was being charged interest on the loan it had taken to fund the cost of the plant. What is the proper treatment of freight and interest expense under IAS 16? (a) Both expenses should be capitalized. (b) Interest may be capitalized but freight should be expensed. (c) Freight charges should be capitalized but interest cannot be capitalized under these circumstances. (d) Both expenses should be expensed. 3. XYZ Inc. owns a fleet of over 100 cars and 20 ships. It operates in a capitalintensive industry and thus has significant other property, plant, and equipment that it carries in its books. It decided to revalue its property, plant, and equipment. The company s accountant has suggested the alternatives that follow. Which one of the options should XYZ Inc. select in order to be in line with the provisions of IAS 16? (a) Revalue only one-half of each class of property, plant, and equipment, as that method is less cumbersome and easy compared to revaluing all assets together. (b) Revalue an entire class of property, plant, and equipment. (c) Revalue one ship at a time, as it is easier than revaluing all ships together. (d) Since assets are being revalued regularly, there is no need to depreciate. 4. An entity installed a new production facility and incurred a number of expenses at 2 P a g e

the point of installation. The entity s accountant is arguing that most expenses do not qualify for capitalization. Included in those expenses are initial operating losses. These should be (a) Deferred and amortized over a reasonable period of time. (b) Expensed and charged to the income statement. (c) Capitalized as part of the cost of the plant as a directly attributable cost. (d) Taken to retained earnings since it is unreasonable to present it as part of the current year s income statement. 5. IAS 16 requires that revaluation surplus resulting from initial revaluation of property, plant, and equipment should be treated in one of the following ways. Which of the four options mirrors the requirements of IAS 16? (a) Credited to retained earnings as this is an unrealized gain. (b) Released to the income statement an amount equal to the difference between the depreciation calculated on historical cost vis-à-vis revalued amount. (c) Deducted from current assets and added to the property, plant, and equipment. (d) Debited to the class of property, plant, and equipment that is being revalued and credited to a reserve captioned revaluation surplus, which is presented under equity. 1 b; 2 c; 3 b; 4 - b; 5 d 3 P a g e

Leases Case study 1 What are the 2 conditions required to qualify a transaction as a lease under IFRIC 4 Under IFRIC 4, determining whether an arrangement is, or contains, a lease is based on the substance of the arrangement, which means assessing if: fulfilment of the arrangement is dependent on the use of a specified asset or assets; and the arrangement conveys a right to use the asset or assets. Case study 2 An entity has entered into a 5 year non cancellable lease agreement to use a building from another entity. The lease rentals are Rs. 100,000 p.m. for the first year with a 10% escalation clause. The management is expected to continue the lease for the 5 year period. Question: What should be the lease expense in the first year and the last year? What other accounting implication will this transaction have? Please explain for the 1 st year. The lease expense for all the years will be Rs. 122,102 per month. The second impact will be on the deferred taxes. Case study 3 A car is leased under a three year contract. The lease rentals during the three years are fixed provided the mileage does not exceed a maximum amount during that period. Any mileage incurred above the maximum is subject to an additional charge. Case study 4 Multiple choice questions Question: How should the minimum lease rentals be calculated? The minimum lease payments should include only the fixed rent. The charges for excess mileage are contingent and should not be included in the minimum lease payments. 1. The classification of a lease as either an operating or finance lease is based on (a) The length of the lease. (b) The transfer of the risks and rewards of ownership. (c) The minimum lease payments being at least 50% of the fair value. (d) The economic life of the asset. 2. The accounting concept that is principally used to classify leases into operating and finance is (a) Substance over form. (b) Prudence. (c) Neutrality. (d) Completeness. 3. Which of the following situations would prima facie lead to a lease being classified as an operating lease? (a) Transfer of ownership to the lessee at the end of the lease term. (b) Option to purchase at a value below the fair value of the asset. (c) The lease term is for a major part of the asset s life. (d) The present value of the minimum lease payments is 50% of the fair value of the asset. 4. Where there is a lease of land and buildings and the title to the land is not transferred, generally the lease is treated as if (a) The land is a finance lease, the building is a finance lease. (b) The land is a finance lease, the building is an operating lease. 4 P a g e

5 P a g e (c) The land is an operating lease, the building is a finance lease. (d) The land is an operating lease, the building is an operating lease. 5. Which is the correct accounting for a finance lease in the accounts of the lessee (assuming fair value is used)? (a) Option 1 Dr Asset account Cr Liability account } with fair value Dr Income statement Cr Asset account } with depreciation of asset Dr Income statement Cr Liability account } finance charge for period Cr Cash } cash paid in period (b) Option 2 Cr Asset account } with fair value Dr Income statement Cr Asset account } with depreciation of asset Cr Income statement } finance charge for period Cr Cash } cash paid in period (c) Option 3 Dr Asset account Cr Liability account } with fair value Dr Asset account Cr Income statement } with depreciation of asset Cr Income statement } finance charge for period Cr Cash } cash paid in period (d) Option 4 Dr Asset account Cr Liability account } with fair value Dr Income statement Cr Asset account } with depreciation of asset Cr Income statement } finance charge for period Cr Cash } cash paid in period 1 b; 2 a; 3 d; 4 c; 5 a

Income taxes Case study 1 An asset that cost C150 has a carrying amount of C100. Cumulative depreciation for tax purposes is C90 and the tax rate is 30%. Question: What is the deferred tax asset/liability? Case study 2 What is the difference between Indian GAAP and IFRS for recognition of deferred tax assets? Losses virtual certainty under Indian GAAP and probability under IFRS Other DTA reasonable certainty under Indian GAAP and probability under IFRS Case study 3 Multiple choice questions 6 P a g e 1. A subsidiary has sold goods costing $1.2 million to its parent for $1.4 million. The entire inventory is held by the parent at year-end. The subsidiary is 80% owned, and the parent and subsidiary operate in different tax jurisdictions. The parent pays taxation at 30%, and the subsidiary pays taxation at 30%. Calculate any deferred tax asset that arises on the sale of the inventory from the subsidiary entity to the parent. (a) $ 60,000 (b) $200,000 (c) $ 48,000 (d) $ 80,000 2. An entity issued a convertible bond on January 1, 20X4, that matures in five years. The bond can be converted into ordinary shares at any time. The entity has calculated that the liability and equity components of the bond are $3 million for the liability component and $1 million for the equity component, giving a total amount of the bond of $4 million. The interest rate on the bond is 6%, and local tax legislation allows a tax deduction for the interest paid in cash. Calculate the deferred tax liability arising on the bond as at the year ending December 31, 20X4. The local tax rate is 30%. (a) $1.2 million. (b) $900,000 (c) $300,000 (d) $4 million. 3. An entity is undertaking a reorganization. Under the plan, part of the entity s business will be demerged and will be transferred to a separate entity, Entity Z. This also will involve a transfer of part of the pension obligation to Entity Z. Because of this, Entity Z will have a deductible temporary difference at its year-end of December 31, 20X4. It is anticipated that Entity Z will be loss-making for the first four years of its existence, but thereafter it will become a profitable entity. The future forecasted profit is based on estimates of sales to intergroup companies. Should Entity Z recognize the deductible temporary difference as a deferred tax

asset? (a) The entity should recognize a deferred tax asset. (b) Management should not recognize a deferred tax asset as future profitability is not certain. (c) The entity should recognize a deferred tax asset if the authenticity of the budgeted profits can be verified. (d) The entity should recognize a deferred tax asset if the intergroup profit in the budgeted profit is eliminated. 4. An entity has revalued its property and has recognized the increase in the revaluation reserve in its financial statements. The carrying value of the property was $8 million, and the revalued amount was $10 million. Tax base of the property was $6 million. In the country, the tax rate applicable to profits is 35% and the tax rate applicable to profits made on the sale of property is 30%. Where will the tax liability be recognized and at what amount? (a) In the income statement at $600,000. (b) In equity at $1.2 million. (c) In statement of recognized income and expense at $1.4 million. (d) In retained earnings at $700,000. 5. The current liabilities of an entity include fines and penalties for environmental damage. The fines and penalties are stated at $10 million. The fines and penalties are not deductible for tax purposes. What is the tax base of the fines and penalties? (a) $10 million. (b) $3 million. (c) $13 million. (d) Zero. 1 a; 2 c($4m-$3m)x30%; 3 b; 4 b; 5 a 7 P a g e

Business combinations Case study 1 Entity A has been formed to design video games for the next generation of video game systems. Entity A s current activities include researching and developing its first product, obtaining contracts to fabricate and package its product, and developing a market for the product. Since its inception, entity A has produced no revenues and has received funding from third parties. With a workforce comprised primarily of engineers, entity A has the intellectual property needed to design the video game as well as the software and fixed assets required to develop it. Entity A does not have any commitments from customers to buy the video game. The entity is being purchased by a financial investor, a venture capital fund, with the purpose of making an initial public offering. Question: Is the entity a business? Yes, entity A is a business. Step 1 the elements in the acquisition contain both inputs and processes. These include the intellectual property to design the software, fixed assets, employees, and strategic and operational processes to develop the software. Step 2 the integrated set includes all of the inputs and processes necessary to manage and produce outputs. As the standard only requires the necessary inputs and processes to be present, the lack of outputs, such as products and customers, will not inherently disqualify entity A from being considered a business. Case study 2 Please pass the general accounting entries for a business combination for the following information Particulars Book Value Fair Value Fixed Assets Rs. 1,000,000 Rs. 1,500,000 Sundry Debtors Rs. 500,000 Rs. 500,000 Cash Rs. 100,000 Rs. 100,000 Liabilities Rs. 750,000 Rs. 750,000 Case study 3 Multiple choice questions Tax rate 30% Purchase consideration Rs. 1,600,000 FA Dr. Rs. 1,500,000 SDrs Dr. Rs. 500,000 Cash Dr. Rs. 100,000 Goodwill Dr. Rs. 400,000 To Liabilities Rs. 750,000 To deferred tax liabilities Rs. 150,000 To Bank Rs. 1,600,000 1. Which of the following accounting methods must be applied to all business combinations under IFRS 3, Business Combinations? (a) Pooling of interests method. (b) Equity method. (c) Proportionate consolidation. (d) Purchase method. 2. Purchase accounting requires an acquirer and an acquiree to be identified for every business combinations. Where a new entity (H) is created to acquire two preexisting entities, S and A, which of these entities will be designated as the acquirer? (a) H. 8 P a g e

(b) S. (c) A. (d) A or S. 3. An acquirer should at the acquisition date recognize goodwill acquired in a business combination as an asset. Goodwill should be accounted for as follows: (a) Recognize as an intangible asset and amortize over its useful life. (b) Write off against retained earnings. (c) Recognize as an intangible asset and impairment test when a trigger event occurs. (d) Recognize as an intangible asset and annually impairment test (or more frequently if impairment is indicated). 4. If the impairment of the value of goodwill is seen to have reversed, then the company may (a) Reverse the impairment charge and credit income for the period. (b) Reverse the impairment charge and credit retained earnings. (c) Not reverse the impairment charge. (d) Reverse the impairment charge only if the original circumstances that led to the impairment no longer exist and credit retained earnings. 5. On acquisition, all identifiable assets and liabilities, including goodwill, will be allocated to cash-generating units within the business combination. Goodwill impairment is assessed within the cash-generating units. If the combined organization has cash-generating units significantly below the level of an operating segment, then the risk of an impairment charge against goodwill as a result of IFRS 3 is (a) Significantly decreased because goodwill will be spread across many cashgenerating units. (b) Significantly increased because poorly performing units can no longer be supported by those that are performing well. (c) Likely to be unchanged from previous accounting practice. (d) Likely to be decreased because goodwill will be a smaller amount due to the greater recognition of other intangible assets. 1 d; 2 d; 3 d; 4 c; 5 b 9 P a g e