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ACCA
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ACCA
PAPER F7
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FINANCIAL REPORTING
(INTERNATIONAL)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(i)
No responsibility for loss occasioned to any person acting or refraining from action as a result of any
material in this publication can be accepted by the author, editor or publisher.
This training material has been prepared and published by Becker Professional Development
International Limited:
16 Elmtree Road
Teddington
TW11 8ST
United Kingdom
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No part of this training material may be translated, reprinted or reproduced or utilised in any form either
in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented,
including photocopying and recording, or in any information storage and retrieval system without
express written permission. Request for permission or further information should be addressed to the
Permissions Department, DeVry/Becker Educational Development Corp.
Acknowledgement
Past ACCA examination questions are the copyright of the Association of Chartered Certified
Accountants and have been reproduced by kind permission.
(ii)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
Page
Answer
Marks
1001
12
1
1
1
2
2
2
1002
1003
1004
1004
1005
1006
6
8
8
5
16
8
2
3
1007
1008
12
8
3
4
5
6
8
1009
1010
1012
1014
1016
20
22
17
26
18
1018
20
10
1020
25
11
12
1023
1023
8
13
13
13
1025
1026
12
15
14
14
15
1028
1030
1032
15
14
20
16
1033
Date worked
CONCEPTUAL FRAMEWORK
Nette (ACCA J04)
Limitations
Framework
Regulatory Framework
Four Concepts (ACCA D98)
Comparability (ACCA J04)
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2
3
4
5
6
7
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10
11
12
13
14
IAS 18 REVENUE
16
Jenson
IAS 2 INVENTORY
17
18
Allrights Inc
Sampi (ACCA J98)
William
Merryview
Adjustments
Fam
Stoat (ACCA D99)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(iii)
Page
Answer
Marks
16
1033
12
17
1035
13
18
19
1037
1039
15
20
Date worked
Sponger
Monet
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27
28
Davis
19
1040
20
1041
21
21
1042
1044
9
15
IAS 17 LEASES
31
32
XYZ
Snow
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33
22
1046
22
23
1047
1048
13
12
24
25
26
26
27
1049
1050
1051
1052
1052
27
29
1053
1055
10
10
30
30
1056
1056
5
4
Earley
Accounting treatment
Shep (I)
Shep (II)
Shep (III)
Shep (IV)
Broken dreams
FINANCIAL INSTRUMENTS
41
42
Simpkins
Iota
REGULATORY FRAMEWORK
43
44
Danny
Picant
(iv)
Consolidations
Haggis
30
33
1057
1061
19
12
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
Page
Answer
Marks
34
36
37
1063
1065
1067
12
12
15
38
1070
13
39
40
41
42
1072
1073
1075
1077
12
10
10
13
43
44
45
1079
1081
1082
10
10
16
46
47
48
1084
1086
1089
20
18
10
49
50
1090
1093
20
20
51
1095
14
54
55
56
59
61
63
63
65
66
68
70
72
1098
1101
1102
1105
1107
1109
1110
1111
1114
1117
1120
1124
25
10
25
25
15
12
15
25
25
21
25
25
Date worked
INTER-COMPANY ADJUSTMENTS
47
48
49
Hatton
Hammer
Hat
Hut
51
52
53
54
Honey
Humphrey
High
Happy
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Haley
Hamish
Hydrogen
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58
59
60
Standard
Fallen
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(v)
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(vi)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
State the objectives of the International Accounting Standards Board (IASB). (4 marks)
(b)
Explain how the IASB approaches the task of producing a standard, with particular
reference to the way in which comment or feedback from interested parties is obtained.
(8 marks)
(12 marks)
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Question 2 NETTE
Nette, a public limited company, manufactures mining equipment and extracts natural gas. The
directors are uncertain about the role of the IASBs Conceptual Framework for Financial Reporting
(the Framework) in corporate reporting. Their view is that accounting is based on the transactions
carried out by the company and these transactions are allocated to the companys accounting period by
using the matching and prudence concepts. The argument put forward by the directors is that the
Framework does not take into account the business and legal constraints within which companies
operate.
Required:
Explain the importance of the Framework to the reporting of corporate performance and
whether it takes into account the business and legal constraints placed upon companies.
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(6 marks)
Question 3 LIMITATIONS
Financial statements identify position, performance and changes in position over a period of time. The
main statements include Statement of Financial Position, Statement of Comprehensive Income and
Statement of Cash Flows. These statements are intended to show how well a company has performed
and give an indication of the value of the business. However, many accountants feel that the financial
statements are limited in their value to the users of financial statements.
Required:
(8 marks)
State the main purpose of the Conceptual Framework for Financial Reporting (The
Framework) adopted by the International Accounting Standards Board (IASB).
(4 marks)
(b)
(c)
(2 marks)
(8 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(a)
(b)
(c)
(d)
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Define the following accounting concepts and explain for each their implications for the
preparation of financial statements:
The entity concept
Going concern
Materiality
Fair presentation (true and fair view)
(4 marks)
(4 marks)
(4 marks)
(4 marks)
(16 marks)
Question 7 COMPARABILITY
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Required:
(a)
(b)
Explain TWO ways in which the IASBs Conceptual Framework for Financial Reporting
and the requirements of accounting standards aid the comparability of financial
information.
(4 marks)
(8 marks)
The accounting treatment and disclosure of the vast majority of transactions will remain the same
whether they are accounted for on the basis of substance or form. However, some transactions will
have a commercial effect not fully indicated by their legal form, and where this is the case, it will not be
sufficient to account for them merely by recording that form.
Required:
Discuss the proposal that accounts should always reflect the commercial substance of
transactions.
(12 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
On 10 December 2012, Hughes sold inventory with a production cost of $30 million to the
Wodwo Bank for $36 million cash. Hughes has a call option (an option to repurchase) on the
goods exercisable on 10 January 2013 at a price of $37.8 million. The Wodwo Bank has a
put option (an option to resell to the seller) exercisable on 10 February 2013 at a price of
$39.7 million.
Required:
Discuss how the transaction should be accounted for in the accounts of Hughes at 31
December 2012.
(4 marks)
Custom Cars customises standard sports cars purchased from a major manufacturer, Sigma,
by fitting extras (spoilers, skirts, tinted windows, etc) at its workshop premises. It sells them
from its showroom on the same site, which it owns. During the year, the showroom was
renovated and enlarged by means of an extension to the existing building. Sigma contributed
many of the interior fitments, such as display stands for the cars, free of charge and also made
a cash payment toward the total costs.
Required:
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(b)
Discuss whether or not the extension and fittings should be shown in the statement of
financial position of Custom Cars.
(4 marks)
(8 marks)
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Question 10 OBJECTIVES
The objective of financial statements is to provide information about financial position, performance
and changes in financial position of an entity that is useful to a wide range of users in making economic
decisions.
Required:
(a)
State five potential users of company published financial statements, briefly explaining
for each one their likely information needs from those statements.
(10 marks)
(b)
Briefly discuss whether you think that the company published financial statements,
prepared in accordance with IFRS, achieve the objective stated above, giving your
reasons.
Include in your answer two ways in which you think the quality of the information disclosed
in financial statements could be improved.
(10 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(20 marks)
450
300
900
135
1,020
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7% Preferred shares of $1
Ordinary shares of 50 cents
Share premium account
Retained earnings, at 1 July 2012
Inventory, 1 July 2012
Land at cost
Buildings at cost
Buildings, accumulated depreciation, 1 July 2012
Plant at cost
Plant, accumulated depreciation, 1 July 2012
Trade payables
Trade receivables
Allowance for doubtful debts, at 1 July 2012
Purchases
Administrative expenses
Revenue
Distribution costs
Other expenses
Bank balance
Ordinary dividend paid
10% Loan notes
Cr
$000
500
250
180
70
370
900
600
25
2,030
205
3,000
240
50
110
25
_____
500
_____
5,930
5,930
(ii)
Plant is to be depreciated at 20% per year using the reducing balance method and included in
distribution costs.
(iii)
(iv)
(v)
(vi)
Interest on the loan notes has not been paid during the year.
(vii)
During June, a bonus (or scrip) issue of two for five was made to ordinary shareholders. This
has not been entered into the books. The bonus shares do not rank for dividend for the
current financial year.
(viii)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(8 marks)
(5 marks)
(9 marks)
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Question 12 SULPHUR
The balances listed below were extracted from the records of Sulphur Co on 30 June 2013:
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Revenue
Purchases
Returns (inwards)
Delivery vehicles (carrying amount)
Factory plant and equipment (carrying amount)
Land and buildings (carrying amount)
Factory overheads
Administrative expenses
Rent received
Investments (unlisted)
Investment income
Inventory at 1 July 2012
Trade receivables
Trade payables
Distribution costs
Cash in hand
Bank overdraft
Ordinary shares ($1 each)
Retained earnings at 1 July 2012
$
530,650
298,400
1,880
19,230
24,000
350,000
66,420
18,710
12,000
30,000
1,500
24,680
15,690
34,700
44,280
410
4,820
150,000
160,030
The following transactions and events occurred on 30 June 2013, after the above balances had been
extracted:
(1)
(2)
(3)
Sulphur received an electricity bill for $1,240 relating to the factory for the three months to
30 June 2013. The bill was paid in July 2013.
(4)
(5)
The companys land and buildings were valued by a chartered surveyor at $390,000 and the
new value is to be included in the statement of financial position.
(6)
Depreciation was provided on the reducing balance basis at the following annual rates:
Delivery vehicles
Factory plant and equipment
20%
10%
(7)
Bonus shares were issued on the basis of one for every two held on 29 June 2013.
(8)
Income tax for the financial year ended 30 June 2013 was estimated at $38,100.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
a statement of total comprehensive income using the cost of sales (i.e. function of
expense) method;
(7 marks)
(ii)
(3 marks)
(iii)
(7 marks)
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(17 marks)
Cayman prepares annual financial statements to 30 September. At 30 September 2012, the companys
list of account balances was as follows:
$000
7,400
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Revenue
Production costs
Inventory at 1 October 2011
Distribution costs
Administrative expenses
Loan interest expense
Land at valuation
Buildings cost
4,140
695
540
730
120
5,250
4,000
1,065
6,400
$000
1,240
2,060
1,120
40
7,000
______
2,000
1,500
1,570
1,000
______
23,935
23,935
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(2)
Inventory at 30 September 2012 amounted to $780,000 at cost before adjusting for the
following:
(i)
Items which had cost $40,000 and which would normally sell for $60,000 were
found to be faulty. $10,000 needs to be spent on these items in order to sell them
for $45,000.
(ii)
Goods sent to a customer on a sale or return basis have been omitted from inventory
and included as sales in September 2012. The cost of these items was $8,000 and
they were included in revenue at $12,000. The goods were returned by the
customer in October 2012.
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(1)
2% per year
20% per year
80% of the depreciation is to be charged to cost of sales and 10% to each of distribution costs
and administrative expenses.
(3)
(4)
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Accrued expenses
$000
Distribution costs
Administrative expenses
95
35
Prepayments
$000
60
30
(5)
During the year 4 million ordinary shares were issued at 75 cents each. The directors of
Cayman declared an interim dividend of 2 cents per share in September 2012. No dividends
were paid during the year.
(6)
Required:
(10 marks)
(10 marks)
(6 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(26 marks)
Administrative expenses
Share capital (ordinary shares of $1 fully paid)
Receivables
Bank overdraft
Income tax (overprovision in 2012)
Provision for pollution costs
Distribution costs
Listed financial asset investments
Investment income
Plant and machinery: Cost
Accumulated depreciation (at 31 March 2013)
Retained earnings (at 1 April 2012)
Purchases
Inventory (at 1 April 2012)
Trade payables
Sales revenue
Interim dividend paid
600
470
80
25
180
420
560
75
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Additional information
$000
750
220
180
960
140
260
2,010
120
3,630
3,630
(2)
The following items are already included in the balances listed in the above trial balance:
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(1)
Distribution
costs
$000
27
20
Administrative
expenses
$000
5
15
30
45
(3)
(4)
The income tax charge based on the profits for the year is estimated to be $74,000.
(5)
(6)
(7)
(8)
The market value of the listed financial asset investments, which are classed as fair value
through profit or loss as at 31 March 2013 was $580,000. There were no purchases or sales
of such investments during the year.
Required:
Insofar as the information permits, prepare the companys statement of profit or loss for the year
to 31 March 2012 and a statement of financial position as at that date in accordance with IAS 1.
(18 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
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The closing inventory amounted to $4,190,000, before allowing for the adjustments required by items
(2) and (3) below.
In the course of preparing the financial statements at 31 December 2012, the need for a number of
adjustments emerged, as detailed below:
The opening inventory was found to have been overstated by $418,000 as a result of errors in
calculations of values in the inventory sheets.
(2)
Some items included in closing inventory at cost of $16,000 were found to be defective and
were sold after the end of the reporting period for $10,400. Selling costs amounted to $600.
(3)
Goods with a sales value of $88,000 were in the hands of customers at 31 December 2012 on
a sale or return basis. The goods had been treated as sold in the records and the full sales
value of $88,000 had been included in trade receivables. After the end of the reporting
period, the goods were returned in good condition. The cost of the goods was $66,000.
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(1)
(4)
(5)
An allowance for doubtful debts is to be set up for 5% of the accounts receivable total.
(6)
The manager of the main selling outlet of Perseus is entitled, from 1 January 2012, to a
commission of 2% of the companys profit after charging that commission. The profit
amounted to $1,101,600 before including the commission, and after adjusting for items (1) to
(5) above. The manager has already received $25,000 on account of the commission due
during the year ended 31 December 2012.
Required:
(a)
(b)
(i)
Explain how adjustment should be made for the error in the opening
inventory, according to IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors. (Assume that it constitutes a material error.)
(ii)
Show how the final figures for current assets should be presented in the statement of
financial position at 31 December 2012.
(14 marks)
(20 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
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In the past the critical event approach has been used to determine the timing of revenue recognition.
The International Accounting Standards Board in its Conceptual Framework for Financial Reporting
(the Framework) has defined the elements of financial statements, and it uses these to determine
when a gain or loss occurs.
Required:
Explain what is meant by the critical event in relation to revenue recognition and
discuss the criteria used in the Framework for determining when a gain or loss arises.
(5 marks)
(b)
For each of the stages of the operating cycle identified above, explain why it may be an
appropriate point to recognise revenue and, where possible, give a practical example of
an industry where it occurs.
(12 marks)
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(a)
(c)
Jenson has entered into the following transactions/agreements in the year to 31 March 2013:
(i)
Goods, which had cost of $20,000, were sold to Wholesaler for $35,000 on 1 June
2012. Jenson has an option to repurchase the goods from Wholesaler at any time
within the next two years. The repurchase price will be $35,000 plus interest
charged at 12% per year from the date of sale to the date of repurchase. It is
expected that Jenson will repurchase the goods.
(ii)
Jenson owns the rights to a fast food franchise. On 1 April 2012 it sold the right to
open a new outlet to Mr Cody. The franchise is for five years. Jenson received an
initial fee of $50,000 for the first year and will receive $5,000 per year thereafter.
Jenson has continuing service obligations on its franchise for advertising and
product development that amount to approximately $8,000 per year per franchised
outlet. A reasonable profit margin on rendering the continuing services is deemed
to be 20% of revenues received.
(iii)
Required:
Describe how Jenson should treat each of the above examples in its financial statements
in the year to 31 March 2013.
(8 marks)
(25 marks)
10
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
Stevie Striver
Charlie Chatty
Gordon Gloome
(managing)
(sales)
(production)
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$
38
5
8
2
For 1,000 radio sets, the other overhead costs are $14,000 made up as follows:
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$
4,000
2,500
7,500
The advertised selling price of the model has recently been reduced to $60 because of intensive
competition.
The three directors have expressed the following views on the most appropriate method of valuing the
companys closing inventories:
(1)
Stevie Striver
A most prudent approach is necessary, particularly as the company has a cash flow problem
which means that the amount locked up in inventory should be kept as low as possible. I
propose a valuation of $43 per set.
(2)
Charlie Chatty
All the functions of the company are directed towards the production and sale of a good
finished product and therefore I think each set should be valued at the total cost involved,
including the other overhead costs.
(3)
Gordon Gloome
$47 per set, because thats what the production cost would have been if we had been more
efficient and kept in line with budgets.
Required:
Draft, for inclusion in a report, your opinions on the views expressed by each director, stating the
principles involved.
(8 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
11
IAS 2 Inventories requires inventories of raw materials and finished goods to be valued in
financial statements at the lower of cost and of net realisable value.
Required:
Describe three methods of arriving at cost of inventory which are acceptable
under IAS 2 and explain how they are regarded as acceptable.
(5 marks)
(ii)
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(b)
(i)
Sampi is a manufacturer of garden furniture. The company has consistently used FIFO (first
in, first out) in valuing inventory, but it is interested to know the effect on its inventory
valuation of using weighted average cost instead of FIFO
At 28 February 2013 the company had inventory of 4,000 standard plastic tables, and has
computed its value on each side of the two bases as:
Basis
FIFO
Weighted average
Unit
cost
$
16
13
Total
value
$
64,000
52,000
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During March 2013 the movements on the inventory of tables were as follows:
Received from factory:
Date
8 March
22 March
Revenue:
12 March
18 March
24 March
28 March
Number
of units
3,800
6,000
Production
cost per
unit
$
15
18
Number of
units
5,000
2,000
3,000
2,000
Required:
Compute what the value of the inventory at 31 March 2013 would be using weighted
average cost
(5 marks)
In arriving at the total inventory values you should make calculations to two decimal
places (where necessary) and deal with each inventory movement in date order.
(13 marks)
12
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
Required:
2010
$000
3,000
7,750
5,000
2011
$000
4,200
1,550
11,000
2012
$000
1,150
12,500
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2009
$000
2,750
7,750
3,000
Show how the above would be disclosed in the statement of profit or loss and statement of
financial position of William for each of the four years ended 31 December 2012.
(12 marks)
Question 20 MERRYVIEW
Merryview specialises in construction contracts. One of its contracts, with Better Homes, is to build a
complex of luxury flats. The price agreed for the contract is $40 million and its scheduled date of
completion is 31 December 2013. Details of the contract to 31 March 2012 are:
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Commencement date
Contract costs:
Architects and surveyors fees
Materials delivered to site
Direct labour costs
Overheads are apportioned at 40% of direct labour costs
Estimated cost to complete (excluding depreciation see below)
1 July 2011
$000
500
3,100
3,500
14,800
Plant and machinery used exclusively on the contract cost $3,600,000 on 1 July 2011. At the end of the
contract it is expected to be transferred to a different contract at a value of $600,000. Depreciation is to
be based on a time apportioned basis.
Inventory of materials on site at 31 March 2012 is $300,000.
20,400
6,600
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
13
(8 marks)
(7 marks)
(15 marks)
Question 21 ADJUSTMENTS
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Adjustments manufactures items for use in engineering products. You note that amongst its many
tangible non-current assets it has the following:
A lathe was purchased on 1 January 2006 for $150,000. The plant had an estimated useful
life of twelve years, residual value of nil. Depreciation is charged on the straight line basis.
On 1 January 2012, when the assets carrying amount is $75,000, the directors decide that the
assets total useful life is only 10 years.
(b)
A grinder was purchased on 1 January 2009 for $100,000. The plant had an estimated useful
life of 10 years and a residual value of Nil. Depreciation is charged on the straight line basis.
On 1 January 2012, when the assets carrying amount is $70,000, the directors decide that it
would be more appropriate to depreciate this asset using the sum of digits approach. The
remaining useful life is unchanged.
(c)
The company purchased a fifty year lease some years ago for $1,000,000. This was being
depreciated over its life on a straight line basis. On 1 January 2012, when the carrying
amount is $480,000 and twenty-four years of the lease are remaining, the asset is revalued to
$1,500,000. This revised value is being incorporated into the accounts.
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(a)
Required:
As the companys financial accountant, prepare a memorandum for the attention of the board
explaining the effects of these changes on the depreciation charge and indicating what additional
disclosures need to be made in the accounts for the year to 31 December 2012.
(15 marks)
Question 22 FAM
Land
Buildings
Plant and machinery
Fixtures and fittings
Assets under construction
14
Cost
$000
500
400
1,613
390
91
2,994
Depreciation
$000
80
458
140
678
Carrying amount
$000
500
320
1,155
250
91
2,316
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
Further costs of $53,000 are incurred on buildings being constructed by the company. A
building costing $100,000 is completed during the year.
(2)
A deposit of $20,000 is paid for a new computer system which is undelivered at the year end.
(3)
(4)
Additions to fixtures, excluding the deposit on the new computer system, are $40,000.
(5)
Plant
Fixtures
Depreciation
brought forward
$000
195
31
Proceeds
pl
e
Cost
$000
277
41
$000
86
2
(6)
Land and buildings were revalued at 1 January 2012 to $1,500,000, of which land is worth
$900,000. The revaluation was performed by Messrs Jackson & Co, Chartered Surveyors, on
the basis of existing use value on the open market.
(7)
The useful economic life of the buildings is unchanged. The buildings were purchased 10
years before the revaluation.
(8)
Depreciation is provided on all assets in use at the year end at the following rates:
2% per year straight line
20% per year straight line
25% per year reducing balance
Sa
m
Buildings
Plant
Fixtures
Required:
Show the disclosure under IAS 16 in relation to non-current assets in the notes to the published
accounts for the year ended 31 December 2012.
(14 marks)
Question 23 STOAT
The directors of Stoat, a limited liability company, are reviewing the companys draft financial
statements for the year ended 30 June 2013.
Two matters under discussion are depreciation and non-current asset valuation several directors are of
the opinion that the companys depreciation methods and rates are unsatisfactory, and that the statement
of financial position values of some of the non-current assets are unrealistic.
Required:
Draft a memorandum for the directors dealing with the following matters:
(a)
The purpose of depreciation and the factors affecting the assessment of useful life
according to IAS 16 Property, Plant and Equipment.
(7 marks)
(b)
Three items of evidence obtainable from inside or outside the company, to check
whether the companys depreciation rates are in fact likely to be too low.
(3 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
15
(b)
Objectives
Producing an IFRS
pl
e
(a)
The Steering Committee identifies and reviews all the accounting issues associated
with the topic. These will include:
the application of the IASB Conceptual Framework for Financial
Reporting; and
Sa
m
After receiving comments from the Board, the Steering Committee prepares and
publishes a Draft Statement of Principles. Comments are invited from all interested
parties during an exposure period, usually between four and six months.
The Steering Committee prepares a draft Exposure Draft for approval by the Board.
After revision, and with the approval of at least 9 members of the board, the
Exposure Draft is published. Comments are invited from all interested parties
during an exposure period, usually six months.
The Steering Committee reviews the comments and prepares a draft IFRS for
review by the Board. After revision, and with the approval of at least 9 members of
the board, the IFRS is published.
During the process, the Board may decide to issue a Discussion Paper for comment, or to
issue more than one Exposure Draft.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
1001
pl
e
Sa
m
The Framework adopts an approach which builds corporate reporting around the definitions of assets
and liabilities and the criteria for recognising and measuring them in the statement of financial position.
This approach views accounting in a different way to most companies. The notion that the
measurement and recognition of assets and liabilities is the starting point for the determination of the
profit of the business does not sit easily with most practising accountants who see the transactions of
the company as the basis for accounting. The Framework provides a useful basis for discussion and is
an aid to academic thought. However, it seems to ignore the many legal and business roles that
financial statements play. In many jurisdictions, the financial statements form the basis of dividend
payments, the starting point for the assessment of taxation, and often the basis for executive
remuneration. A statement of financial position, fair value system which the IASB seems to favour
would have a major impact on the above elements, and would not currently fit the practice of
accounting. Very few companies fit this practice of accounting. Very few companies take into account
the principles embodied in the Framework unless those principles themselves are embodied in an
accounting standard. Some International Financial Reporting Standards are inconsistent with the
Framework primarily because they were issued earlier than the Framework. The Framework is a useful
basis for financial reporting but a fundamental change in the current basis of financial reporting will be
required for it to have any practical application. The IASB seems intent on ensuring that this change
will take place.
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors makes reference to the use of
the Framework where there is no IFRS or IFRIC in issue. The standard says in making the judgement,
management shall refer to, and consider the applicability of, the following sources in descending order:
the requirements and guidance in Standards and Interpretations dealing with similar and
related issues; and
the definitions, recognition criteria and measurement concepts for assets, liabilities, income
and expenses in the framework.
1002
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
The values used in financial statements are mixed in nature. Some transactions and balances
are accounted for at historic cost whilst others are incorporated at fair value. Without detailed
knowledge of how these figures have been determined, their meaning can be difficult to
construe.
The financial statements are mainly historic in nature and summarise what has happened, not
what is going to happen. They cannot be used to make predictions about the future.
Many items are excluded from the financial statements. For example, many internallygenerated intangible assets (e.g. a brand name) can never be recognised in the statement of
financial position of the reporting entity. The only way in which such assets can be
recognised is if the entity is acquired, but even then they are recognised only in the
consolidated statement of financial position of the acquiring company.
Management may be very creative in how information is presented in the financial statements.
Much of the information which is required to be disclosed is subjective in nature and
management may interpret the accounting requirements to portray information in a particular
light. Enron is the classic example of management being creative and, in doing so, the
financial statements not showing a realistic picture.
How the financial market perceives an entity cannot be recognised in the financial statements.
The market value of a company is very different to the carrying value presented in the
financial statements because market value reflects, for example, shareholders expectations of
future returns.
It can be quite difficult to judge at what point revenue should be recognised. When complex
contractual agreements are made between parties it may also be difficult to specify an
appropriate amount of revenue to be included. Therefore the statement of comprehensive
income may be inadequate in reflecting the amount of profit made in a period.
Financial statements are drawn up at a specified point in time. A cut-off therefore has to be
established to be able to prepare the financial statements. The point of cut-off could be in the
middle of a very detailed or complex transaction or related transactions which again the
financial statements may not be able to reflect fully.
From the end of the reporting period to when the statements are authorised for publication is
usually a minimum of three months. A lot can happen in that three-month period, so the
statements become out of date very quickly.
Many transactions take place between related parties. Although certain disclosures should be
made regarding related party transactions it is still difficult for the financial statements to fully
reflect the impact of these transactions.
Sa
m
pl
e
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
1003
(b)
Main purpose
To provide those who are interested in the work of the IASB with information about
its approach to the formulation of standards.
Status
Sa
m
1 per point to
max 4
pl
e
(a)
(c)
Underlying assumption
Going concern
A regulatory framework has been defined as a system of regulations and the means to enforce them,
usually established by a governing body to regulate a specific activity. Without such a framework the
system would fail to function properly and ad hoc rules and regulations would emerge which
individuals and bodies would not be able to understand fully. There would be no direction or
guidelines governing the content, or rules, that should be followed and parties would devise their own
rules.
1004
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
1
1
1
___
max 2
___
1
1
1
___
max 2
___
8
___
pl
e
Under IFRS the IASB has issued the Conceptual Framework for Financial Reporting. This is a
conceptual framework which is used by the IASB to assist relevant parties in the needs and
requirements of users of financial statements. It is used in conjunction with International Financial
Reporting Standards to form a set of principles with which reporting entities should comply when
preparing and presenting their financial statements. The conceptual framework is not in itself a
regulatory framework as there is no formal means of enforcing the issued standards, and as they are
principles-based they are open to interpretation.
Other GAAPs have formed regulatory frameworks in order to regulate the financial reporting activities
of their members. UK GAAP is formed of company law issued by the UK government and accounting
standards issued by the Accounting Standards Board. The ASB has a body within it, the Financial
Reporting Review Panel, whose function is to police the financial statements issued by UK
companies. It aims to ensure that published financial statements are prepared in conformity with the
UK regulatory framework.
Sa
m
Entity concept
In accounting, it is necessary to define the boundaries of the entity concerned. In the case of a
limited liability company, only transactions of that company must be included. There must be
no confusion between the transactions of the company and the transactions of its owners and
managers.
If the entity concept is not followed, the profit, financial position and cash flow may all be
distorted to the point where they become meaningless.
A limited liability company is therefore a separate entity which can sue and be sued in its own
name.
(b)
The going concern is that financial statements are prepared on the basis that the entity will
continue for the foreseeable future that there is no intention or necessity to liquidate or
curtail the scale of operations.
If the going concern concept is followed when it is not appropriate, assets may be overstated,
liabilities may continue to be shown as non-current when the collapse of the going concern
status of the entity renders them current liabilities, and the profit is likely to be overstated.
(c)
Materiality
Information is material if its omission from, or misstatement in, the financial statements could
influence the economic decisions of users. Materiality cannot always be measured in
monetary or percentage terms, but a commonly used measure is 5% of normal pre-tax profit.
Above that level, for example, the transaction would need to be disclosed in the financial
statements.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
1005
pl
e
Fair presentation really means that all figures in financial statements have been arrived at
accurately when accuracy is possible (true) and that when judgement or estimation is needed
it has been exercised without bias (fair). Compliance with generally accepted concepts and
principles will normally result in fair presentation.
Failure to present information fairly will obviously mean that users may be misled by the
financial statements.
Answer 7 COMPARABILITY
(a)
Comparability means that users are able to draw conclusions about the performance or
financial position of a business by relating amounts for a particular period to other relevant
amounts. Possible types of comparison are with:
figures for the same business for earlier periods;
figures for other businesses for the same period;
budgets or forecasts.
Sa
m
(b)
Aid to comparability
The IASBs Framework and the requirements of accounting standards aid comparability by:
1006
requiring businesses to treat similar items in the same way in each period and from
one period to the next (unless a change is required to comply with accounting
standards or to ensure that a more appropriate presentation of events or transactions
is provided).
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
pl
e
Many other countries adopt similar requirements for financial statements, particularly in Europe
where the requirements of directives state that all member states financial statements should give a
true and fair view. This is, for example, translated as donner une image fidele in France. Some
countries interpret this as meaning in accordance with their own legislation, particularly in Germany,
but generally speaking, legislatures and accounting standard setters increasingly recognise an
overriding notion of truth and fairness.
Sa
m
One of the fundamental qualitative characteristics required by the Framework is that of faithful
representation. To faithfully represent a transaction the entity must reflect the economic reality
(substance) rather than its legal form, if there is a difference. It gives the example of an entity
disposing of an asset in such a way that the documentation purports to pass legal ownership to a
third party, but where agreements exist to ensure that the entity continues to enjoy the future
economic benefits embodied in the assets. In such circumstances the reporting of a sale would not
represent faithfully the transaction entered into.
Application of the principle
IAS 17 Leases requires that finance leases be capitalised in the statement of financial position where
certain conditions are met. In such cases the legal form of the transaction is that the lessor retains
the legal title to the assets. The economic substance of the transaction however is that the lessee is
the true owner of the asset as the lease transfers substantially all the risks and rewards incident to
the ownership of the asset. The lessee therefore includes it in its financial statements. Not to do so
would distort gearing ratios.
IFRS 10 Consolidated Financial Statements requires that group accounts be prepared to show
information about the group as that of a single entity, without regard for the legal boundaries of the
separate legal entities.
IAS 32 Financial Instruments: Presentation recognises that some financial instruments take the legal
form of equity, but are liabilities in substances and requires that classification of an instrument is
made on the basis of an assessment of its substance when it is first recognised.
IAS 1 Presentation of Financial Statements states the importance of prudence, substance over form
and materiality in the selection and application of accounting policies and the preparation of
financial statements.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
1007
pl
e
Another argument put forward against the use of substance over form is that it introduces yet more
subjectivity into accounts (the judgment of the true substance). It is argued that if transactions were
accounted for on a legal basis, there would be greater certainty and objectivity in the preparation of
accounts and hence more comparability. It may be true that the certainty of legal form would
increase, but this does not mean the comparability. In fact most accountants would say that it is the
substance over form principle which is designed to increase comparability by making transactions of
a similar nature treated in similar ways.
It may introduce another element of subjectivity, but accounts preparation inevitably does involve
many judgmental decisions. It is these judgments that make accounts fair as well as true, and hence
duly comparable.
Accounting or extra disclosure
A further argument against the proposal is that it may not be essential to account on the basis of
substance over form, but merely to provide additional disclosure.
Sa
m
The argument here rests on whether any amount of disclosure can compensate for a transaction
which is fundamentally misleadingly treated in the accounts. If additional disclosure is not so much
addition as contradictory to the accounting treatment, then surely the result is confusing the user and
hence still misleading and not true and fair.
Conclusion
Broadly speaking, the Anglo-Saxon world regards economic substance as being more important than
legal form. This is at least in part due to the historical separation of fiscal and financial accounting.
Countries with civil, as opposed to common law legal traditions place more emphasis on the fiscal
correctness of financial statements. With increasing globalisation of capital markets the trend, at the
moment seems to be away from legal form, and towards economic substance. However, the inherent
uncertainties in the notion of economic substance mean that there is an ever increasing volume of
accounting standards on what exactly is meant by substance as it is very easily abused.
Answer 9 HUGHES AND CUSTOM CARS
(a)
Hughes
The Conceptual Framework for Financial Reporting states that financial statements should
show the economic substance of transactions over their legal form.
Hughes has entered into a sale and repurchase agreement with the Wodwo Bank. Hughes
has received $36 million now. If Hughes exercises its call option after one month, it will
repurchase the inventory at a premium of $1.8 million which represents a finance charge of
5% for the month. If the Wodwo Bank exercises its put option after two months, Hughes
will repurchase the inventory at a premium of $3.7 million which represents a finance
charge of 5% for each of the two months.
1008
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
Custom Cars
pl
e
Unless Sigmas cash contribution is very substantial (say 80% as opposed to 20% of the
expenditure incurred by Custom Cars), there should be no doubt that Custom Cars owns
the extension (and has the risks and rewards of ownership).
The fittings supplied free of charge by Sigma could be excluded from the statement of
financial position on the grounds that they are not owned by Custom Cars. Also their
economic benefit is primarily to Sigma in promoting Sigmas product.
Answer 10 OBJECTIVES
(a)
Users
Information needs
asset values.
Sa
m
(1)
(2)
(3)
(b)
Employees
Lenders
(4)
(5)
Customers
Achieving objectives
Users of financial statements are interested in three main areas in their use of company
financial statements:
profitability;
solvency/liquidity;
the risk of the operation.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
1009
pl
e
The leverage ratio (percentage of total assets financed by debt) provides a reasonably reliable
assessment of the financial risk of the companys operation.
Two ways in which the quality of information disclosed in financial statements could be
improved:
Answer 11 MERCURY
$000
Sa
m
(a)
$000
3,000
Revenue
Opening inventory
Purchases
450
2,030
_____
2,480
(500)
_____
Cost of sales
1,980
_____
Gross profit
1,020
Distribution costs
(240 + (20% (1,020 370)) + 30)
Administrative expenses (205 + (5% 900))
Other expenses (50+ 5 (W1))
1010
400
250
55
___
315
50
35
(85)
___
230
55
___
175
___
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(c)
250
100
180
(100)
Retained
earnings
$000
70
_____
_____
175
(25)
_____
350
80
220
Total
$000
500
175
(25)
_____
650
pl
e
Share
premium
$000
$000
300
900
1,020
_____
Accumulated
depreciation
$000
2,220
_____
680
___
500
570
110
_____
Sa
m
Current assets
Inventory
Trade receivables (600 30)
Bank
180
500
___
Total assets
Non-current liabilities
10% Loan notes
7% Preferred shares of $1
Current liabilities
Trade payables
Income tax
Accrued expenses (50 + 30)
Dividends
Total equity and liabilities
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
900
55
80
35
_____
Net book
value
$000
300
720
520
_____
1,540
1,180
_____
2,720
_____
350
80
220
_____
650
500
500
1,070
_____
2,720
_____
1011
$000
30
(25)
__
5
___
Answer 12 SULPHUR
Statement of total comprehensive income for the year ended 30 June 2013
Profit or loss
pl
e
(i)
528,770
(363,960)
______
164,810
13,500
______
178,310
(48,126)
(18,710)
______
Sa
m
Gross profit
Other operating income (1,500 + 12,000)
111,474
(38,100)
______
73,374
40,000
______
(ii)
Share
capital
$
1012
113,374
______
150,000
Revaluation
surplus
$
40,000
Retained
earnings
$
Total
$
310,030
113,374
_______
423,404
_______
75,000
_______
______
160,030
73,374
(75,000)
_______
225,000
_______
40,000
______
158,404
_______
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
390,000
15,384
21,600
426,984
30,000
pl
e
Investments
Current assets
Inventories
Trade receivables ($15,690 $460)
Cash
Total assets
29,170
15,230
410
______
Sa
m
Current liabilities
Trade payables ($34,700 $700)
Accrued expenses
Bank overdraft ($4,820 + $690 $460)
Income tax
44,810
501,794
225,000
40,000
158,404
423,404
34,000
1,240
5,050
38,100
______
78,390
501,794
WORKING
(1)
Cost analysis
Cost of sales
$
Opening inventory
24,680
Purchases
298,400
Discount received
(10)
Closing inventory
(29,170)
Factory overheads (66,420 + 1,240) 67,660
Per trial balance
Depreciation (as calculated in (a))
2,400
_______
363,960
_______
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
Distribution
$
Administrative
$
44,280
3,846
______
18,710
______
48,126
______
18,710
______
1013
Gross profit
Distribution costs (W2)
Administrative expenses (W2)
2,248
(711)
(871)
_____
pl
e
666
(120)
_____
546
(250)
_____
Cost of sales
Sa
m
(1)
296
_____
$000
Opening inventory
Production costs
Depreciation 80% ([2% $4m] + [20% $6.4m])
Less: Closing inventory (780k 5k + 8k)
(2)
5,140
Cost classification
1014
695
4,140
1,088
(783)
_____
Distribution
$000
Admin
$000
540
(60)
95
730
(30)
35
8
128
___
8
128
___
711
871
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
$000
ASSETS
Non-current assets
Property, plant and equipment (W3)
11,735
Current assets
Inventory (W1)
Trade receivables (2,060 12)
Prepayments (60 + 30)
2,921
______
14,656
pl
e
Total assets
783
2,048
90
7,000
2,000
1,250
1,836
______
12,086
Non-current liabilities
Interest bearing borrowings 12% Loan (2019)
Sa
m
Current liabilities
Trade payables
Operating overdraft
Accrued expenses (95 + 35)
Interim dividend (14m 2c)
1,000
1,120
40
130
280
1,570
______
14,656
Share
premium
$000
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
Revaluation
surplus
$000
Retained
earnings
$000
1,500
(250)
1,570
546
(280)
_____
_____
9,070
296
(280)
3,000
______
1,250
1,836
12,086
Total
$000
1015
5,000
2,855
3,880
______
11,735
(a)
pl
e
Answer 14 OSCAR
Profit or loss for the year ended 31 March 2013
$000
Sales
Operating costs $(140 + 960 150 + 420 + 210 + 16)
Operating profit before interest
Income from investments $(75 + 20)
Profit before taxation
Income tax
(2)
(1)
(3)
Sa
m
2,010
(1,596)
414
95
509
(49)
460
Notes
1016
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
$000
530
580
Notes
(4)
(5)
1,110
Current assets
Inventory
Receivables
150
470
pl
e
620
1,730
600
520
Non-current liabilities
Provisions for liabilities and charges
Sa
m
Current liabilities
(8)
1,120
196
(7)
414
1,730
(6)
(1)
(2)
32
45
(3)
$000
$000
75
20
Income tax
Income tax based on the profits for the year at a rate of 33%
Over provision for tax in the previous year
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
$000
74
(25)
49
1017
750
Accumulated depreciation
At 31 March 2012
Charge for the year $(27 + 5)
188
32
220
At 31 March 2013
(5)
530
pl
e
$000
The financial asset investments are classed as fair value though profit or loss,
their fair value at 31 March 2013 was $580,000. The gain in value of $20,000
has been credited to profit or loss.
(6)
Current liabilities
$000
Sa
m
Trade payables
Income tax
Bank overdraft
(7)
260
74
80
414
$000
Pollution costs
At 1 April 2012
Provided in the year
180
16
196
At 31 March 2013
(8)
Authorised
$000
Issued
$000
1,000
600
Answer 15 PERSEUS
(a)
1018
Adjustments to be made
(i)
For inventory
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(b)
(ii)
The amount of the correction for the current period and for each prior period
presented.
The fact that comparative information has been restated or that it is impracticable to
do so.
Current assets
$
4,249,800
2,674,300
773,400
940,000
WORKINGS
(1)
Inventory
pl
e
Inventory (W1)
Trade receivables (W2)
Prepayments
Cash at bank
As originally taken
Sa
m
(i)
(ii)
(2)
(6,200)
66,000
_________
4,249,800
_________
Trade receivables
As originally stated
Accounts receivable ledger
Less:
Goods on sale or return
Less:
16,000
9,800
$
4,190,000
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
2,980,000
88,000
_________
2,892,000
92,000
_________
2,800,000
140,000
_________
2,660,000
14,300
_________
2,674,300
_________
1019
Prepayments
$
As originally stated
Payments on account
Less: Commission due
2
/102 $1,101,600
$
770,000
25,000
21,600
______
3,400
_______
773,400
_______
(a)
Critical event
pl
e
Answer 16 JENSON
Sa
m
In its Framework, the IASB advocates a different approach; it takes a balance sheet
approach to the process of revenue recognition. It chooses to define the elements of financial
statements, principally assets and liabilities, and uses these to determine income (gains) and
expenses (losses). Recognition of gains and losses takes place when there is an increase or
decrease in equity other than from contributions to, or withdrawals of, equity. Thus increases
in economic benefits in the form of enhancements of assets or decreases in liabilities result in
income, and decreases in economic benefits in the form of outflows or depletions of assets or
incurrences of liabilities results in losses (expenses). Recognition is the incorporation of an
item in the financial statements. It involves the depiction of the item in words and at a
monetary amount. For a transaction to be recognised as giving rise to a new asset or liability,
or to add to an existing one, it must meet the following recognition criteria:
1020
(i)
it is probable that any future economic benefit associated with the item will flow to
the entity; and
(ii)
the item has a cost or value that can be measured with reliability.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
pl
e
Again for most industries this is not the critical event. Normally there would be far too many
uncertainties remaining in the operating cycle. For example the manufacturing process could
be flawed and therefore not produce saleable goods. Even if the goods are manufactured
properly, it does not necessarily mean someone will buy them. It could be argued that where
there is a firm order for the goods this would overcome some of the uncertainties, but it would
still be imprudent to recognise firm orders as sales. There are however some industries
where, due to a long production period, revenues are recognised during the production or
manufacturing period. The most common example of this is the percentage of completion
method of profit recognition for construction contracts under IAS 11 Construction Contracts.
Where companies adopt this approach to revenue (and profit) recognition it is generally
referred to as the accretion approach.
Delivery/acceptance of the goods
Sa
m
For the vast majority of businesses this is the point at which revenue is recognised, and it
usually coincides with the transfer of the legal title to the goods and represents the point of
full performance. Although there may be some uncertainties beyond this point (e.g. the goods
may prove to be faulty or the customer may not be able to pay for them), these can usually be
quantified and provided for with reasonable accuracy based on past experience.
When a condition has been satisfied after the goods have been delivered
The most common occurrence of this type of sale is where the customer has the right to return
goods and not incur a liability for them. In most cases the condition is the passage of time
(e.g. goods may be returned within three months of delivery), but it may also occur in relation
to some other event such as their subsequent resale to another party. Traditionally with this
type of sale, its recognition is delayed until the condition has been met, however one could
argue that the substance of these transactions should be considered. Although a customer
may have the right to return goods, if it can be demonstrated that in practice this never
actually occurs, then recognising the sale before the expiry of the return period could be
justified. Another example of this type of condition is where the terms of a sale of say an
item of equipment required the seller to install and test the equipment. If this involves
significant expense or risk then recognition of this type of sale would be deferred until
completion of the installation.
Collection of cash
For most (credit) sales the risk of non-payment is relatively low. Revenue recognition would
only be delayed to the point of receipt of cash if its collection was perceived to be particularly
difficult or risky. Revenues (and profits) from high risk credit sale agreements may be
examples of this. Another possibility is sales made to risky overseas countries/customers,
particularly if they are in non-convertible currencies or the country has strict exchange
controls.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
1021
(ii)
It appears that the on-going fees after the first initial payment are insufficient to
cover Jensons servicing cost and provide a reasonable profit.
In these
circumstances IAS 18 Revenue requires part of the initial fee of $50,000 to be
deferred and recognised in future periods as the servicing costs are incurred. As
there is a requirement to earn a (reasonable) profit of 20% on revenues, with ongoing servicing costs of $8,000, revenues of $10,000 would need to be recognised
in the next four years. The actual fees receivable are $5,000; therefore Jenson will
have to defer $20,000 ($5,000 four years) of the initial fee. Thus in the year to 31
March 2013 Jenson would recognise $30,000 ($50,000 $20,000) of the initial
franchise fee.
(iii)
Profit
12,000
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(i)
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(c)
The problem with the above approach is that the deferred income does not seem to fit the
definition of liability in the Framework and IAS 37 Provisions, Contingent Liabilities and
Contingent Assets. A liability is defined as an obligation of an entity to transfer economic
benefits as a result of past transactions or events. The Framework effectively says that a
statement of financial position comprises only of assets, liabilities and equity. Deferred
income does not satisfy the definition of any of the elements. The liability of Jenson is to
produce and deliver the next 18 publications. The cost of this liability is $144,000 ($192,000
18/24). Thus adopting the balance sheet approach to revenue recognition advocated in the
Framework would mean recognising only $144,000 as a liability on the statement of financial
position instead of $180,000 as deferred income under the accruals approach. The balance
sheet approach would mean that Jenson would recognise all of the profit on the publications
on receipt of the subscriptions. Many commentators have criticised the Framework for its
lack of prudence in reporting profit and being contrary to existing accounting practice and, in
some cases IFRS.
A similar argument to the above could be applied to the deferred franchise fees in (ii) above.
1022
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Inventories should be valued at the lower of cost and net realisable value under IAS 2 Inventories.
Cost means all costs of purchase, of conversions and other costs incurred in bringing inventories to
their present location and condition. They include a systematic allocation of fixed and variable
production overheads including depreciation and maintenence of factory buildings and the cost of
factory management and administration. The allocation of these overheads must however be based
on the normal capacity of production facilities such that the value of inventories is not increased as a
result of inefficiencies.
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In this case, Gloom indicates that there may have been some inefficiencies and these should be noted
carefully before any final decision is made.
Costs to be included are therefore as follows:
$
38
5
8
4
55
Net realisable value means the selling price to be obtained on sale in the normal course of business
less any costs inevitably incurred on sale (i.e. $60 less royalty $2 and commission $4 = $54).
Inventories therefore should be valued at $54.
Answer 18 SAMPI
(a)
IAS 2 treatment
(i)
(1)
Unit cost
Inventory is priced at the actual amount paid for each individual item of inventory
held
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1023
(3)
Average cost
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Inventory is priced at the moving weighted average price at which each inventory
line was purchased during the accounting period, or brought forward from the
previous period.
All three of these methods are acceptable under IAS 2 because they are either the
actual cost of the inventory (method 1) or a reasonably close approximation to that
actual cost (methods 2 and 3).
(ii)
The cost of the inventory of finished goods would normally be arrived at by taking the labour
and materials consumed in manufacturing the items plus an allocation of overheads. The
overhead allocation should be based on the normal level of production and should exclude
selling expenses and general management expenses.
(b)
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Number
of units
Weighted
average
cost
$
13.00
15.00
Opening inventory
8 March
4,000
3,800
_____
Balance
12 March
7,800
(5,000)
_____
13.97
13.97
18 March
2,800
(2,000)
_____
22 March
800
6,000
_____
13.97
18.00
6,800
(3,000)
_____
17.53
24 March
3,800
(2,000)
_____
17.53
28 March
1,800
_____
17.53
Total value
of closing
inventory
$
31,554
_____
1024
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
393
(1,893)
1,933
967
Revenue(W3)
Cost of sales
Gross profit/(loss) (W1)
Statement of financial position (extracts)
as at 31 December
2009
2010
2011
$000
$000
$000
2012
$000
3,143
1,968
5,272
2,117
3,143
4,250
10,383
12,500
143
Nil
Nil
Nil
Nil
750
617
Nil
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(b)
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WORKINGS
(1)
Expected profit
2009
$000
Contract price
12,000
Less Costs to date (2,750) (2,750+3,000)
Est. future costs (7,750)
1,500
Allocate on
costs basis
393
(loss in full)
(see W3 for fraction)
Less prior periods
393
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
2010
$000
12,000
(5,750) (5,750+4,200)
(7,750)
(1,500)
2011
2012
$000
$000
12,000
12,500
(9,950)(9,950+1,150) (11,100)
(1,550)
500
1,400
(1,500)
433
(393)
(1,893)
1,500
1,933
1,400
(433)
967
1025
Disclosure workings
2009
2,750
393
3,143
2010
2011 2012
5,750
9,950 11,100
(1500)
433
1,400
4,250 10,383 12,500
(3)
Revenue
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Billings
2010
$000
2011
$000
5,750
(5,750+7,750)
9,950
(9,950+1,550)
2012
$000
Costs to date
Total costs
2,750
(2,750+7,750)
% complete
tender value
26%
12,000
43%
12,000
3,143
5,111
10,383
12,500
(3,143)
1,968
(5,111)
5,272
(10,383)
2,117
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Revenue to date
Less taken
in prior periods
Revenue in year
3,143
86%
12,000
11,100
11,100
100%
Actual (12,500)
Answer 20 MERRYVIEW
(i)
$000
14,000
(9,100)
______
Profit on contract
4,900
______
Non-current assets
Plant and machinery (3,600 900 (W2))
Current assets
Amount due from customer (W3)
1026
2,700
1,500
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
$000
16,000
(13,400)
_______
Profit on contract
2,600
_______
1,500
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1,000
500
2,800
3,500
1,400
900
______
9,100
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14,800
2,100
______
16,900
_______
26,000
_______
35%
20,400
2,100
_______
22,500
6,600
900
______
7,500
_______
30,000
_______
75%
The plant has a depreciable amount of $3,000 (3,600 600 residual value)
Its estimated life on this contract is 30 months (1 July 2011 to 31 December 2013)
Depreciation would be $100 per month i.e. $900 for the period to 31 March 2012;
$1,200 for the period to 31 March 2013; and a further $900 to completion.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
1027
9,400
4,900
_______
14,300
(12,800)
_______
1,500
_______
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22,500
7,500
_______
30,000
(12,800)
(16,200)
_______
(29,000)
_______
1,000
_______
Internal memorandum
Re
Adjustments to depreciation
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To
From
Date
At the board meeting on 1 January 2012 it was decided to modify the depreciation charge on a
number of assets of the company. Set out below is the effect that these modifications will have on
the accounts for the year to 31 December 2012.
(a)
Lathe
The lathe was purchased in 2006 and was originally being written off over an estimated
useful life of 12 years. As at 1 January 2012 six of the years have elapsed with a further
six years remaining. It was decided that the machine will now only be usable for a further
four years.
IAS 16 Property, Plant and Equipment requires that where the original estimate of useful
life is revised, adjustments should be made in current and future periods (not in prior
periods). I therefore propose that the unamortised cost of the asset should be charged to
revenue over the remaining useful life of the asset. The carrying amount of $75,000
should therefore be charged over the remaining four years of useful life, giving an annual
depreciation charge of $18,750.
The revision is not a change in accounting policy, or an error. It is merely a refinement of
an existing policy to reflect changed circumstances. It is therefore not appropriate to deal
with any excess depreciation by adjusting opening retained earnings.
1028
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Project Management
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