题目内容
A new or significantly changed accounting standard often provides the key focus for examination of the financial statements of listed companies by national enforcers who issue common enforcement priorities. These priorities are often highlighted because of significant changes to accounting practices as a result of new or changed standards or because of the challenges faced by entities as a result of the current economic environment. Recent priorities have included recognition and measurement of deferred tax assets and impairment of financial and non-financial assets.
Required:
(a) (i) Discuss the key practical considerations, and financial statement implications which an entity should consider when implementing a move to a new IFRS. (7 marks)
(ii) Discuss briefly the reasons why regulators might focus on the impairment of non-financial assets and deferred tax assets in a period of slow economic growth, setting out the key areas which entities should focus on when accounting for these elements. (8 marks)
(b) Pod is a listed company specialising in the distribution and sale of photographic products and services. Pod’s statement of financial position included an intangible asset which was a portfolio of customers acquired from a similar business which had gone into liquidation. Pod changed its assessment of the useful life of this intangible asset from ‘finite’ to ‘indefinite’. Pod felt that it could not predict the length of life of the intangible asset, stating that it was impossible to foresee the length of life of this intangible due to a number of factors such as technological evolution, and changing consumer behaviour.
Pod has a significant network of retail branches. In its financial statements, Pod changed the determination of a cash generating unit (CGU) for impairment testing purposes at the level of each major product line, rather than at each individual branch. The determination of CGUs was based on the fact that each of its individual branches did not operate on a standalone basis as some income, such as volume rebates, and costs were dependent on the nature of the product line rather than on individual branches. Pod considered that cash inflows and outflows for individual branches did not provide an accurate assessment of the actual cash generated by those branches. Pod, however, has daily sales information and monthly statements of profit or loss produced for each individual branch and this information is used to make decisions about continuing to operate individual branches.
Required:
Discuss whether the changes to accounting practice suggested by Pod are acceptable under International Financial Reporting Standards. (8 marks)
Professional marks will be awarded in question 4 for clarity and quality of presentation. (2 marks)
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(a) Emcee, a public limited company, is a sports organisation which owns several football and basketball teams. It has a financial year end of 31 May 2016. Emcee needs a new stadium to host sporting events which will be included as part of Emcee’s property, plant and equipment. Emcee therefore commenced construction on a new stadium on 1 February 2016, and this continued until its completion which was after the year end of 31 May 2016. The direct costs were $20 million in February 2016 and then $50 million in each month until the year end. Emcee has not taken out any specific borrowings to finance the construction of the stadium, but it has incurred finance costs on its general borrowings during the period, which could have been avoided if the stadium had not been constructed. Emcee has calculated that the weighted average cost of borrowings for the period 1 February–31 May 2016 on an annualised basis amounted to 9% per annum. Emcee needs advice on how to treat the borrowing costs in its financial statements for the year ending 31 May 2016. (6 marks)
(b) Emcee purchases and sells players’ registrations on a regular basis. Emcee must purchase registrations for that player to play for the club. Player registrations are contractual obligations between the player and Emcee. The costs of acquiring player registrations include transfer fees, league levy fees, and player agents’ fees incurred by the club. Often players’ former clubs are paid amounts which are contingent upon the performance of the player whilst they play for Emcee. For example, if a contracted basketball player scores an average of more than 20 points per game in a season, then an additional $5 million may become payable to his former club. Also, players’ contracts can be extended and this incurs additional costs for Emcee.
At the end of every season, which also is the financial year end of Emcee, the club reviews its playing staff and makes decisions as to whether they wish to sell any players’ registrations. These registrations are actively marketed by circulating other clubs with a list of players’ registrations and their estimated selling price. Players’ registrations are also sold during the season, often with performance conditions attached. Occasionally, it becomes clear that a player will not play for the club again because of, for example, a player sustaining a career threatening injury or being permanently removed from the playing squad for another reason. The playing registrations of certain players were sold after the year end, for total proceeds, net of associated costs, of $25 million. These registrations had a net book value of $7 million.
Emcee would like to know the financial reporting treatment of the acquisition, extension, review and sale of players’ registrations in the circumstances outlined above. (10 marks)
(c) Emcee uses the revaluation model to measure its stadiums. The directors have been offered $100 million from an airline for the property naming rights of all the stadiums for three years. There are two directors who are on the management boards of Emcee and the airline. Additionally, there are regulations in place by both the football and basketball leagues which regulate the financing of the clubs. These regulations prevent capital contributions from a related party which ‘increases equity without repayment in return’. The aim of these regulations is to promote sustainable business models. Sanctions imposed by the regulator include fines and withholding of prize monies. Emcee wishes to know how to take account of the naming rights in the valuation of the stadium and the potential implications of the financial regulations imposed by the leagues. (7 marks)
Required:
Discuss how the above events would be shown in the financial statements of Emcee under International Financial Reporting Standards.
Note: The split of the mark allocation is shown against each of the three issues above.
Professional marks will be awarded in question 3 for clarity and quality of presentation. (2 marks)
Analysis of recently published data, detailing the frequency and impact of earthquakes around the world, suggest that the likelihood of a strong earthquake occurring in the area where WSK has its only manufacturing and chemical storage facility is high. This very serious claim was made by the operations director at a recent board meeting following consultation with the senior scientific team. It has always been recognised that the WSK factory was situated in an area where earthquakes could occur, but the area had not experienced any major tremors for several years.
The possibility of an earthquake which could destroy the WSK factory and then cause a major environmental incident was of grave concern to the board, who decided that it needed to be fully evaluated and then effectively managed. The board asked the scientific team to calculate the probability of a toxic chemical emission being caused by an earthquake together with the consequential effects on the local environment and population, many of whom depended on WSK for employment and commercial activity. However, the scientific team were unable to provide any objective analysis to support their initial claim, they merely offered their best guess of what they perceived the risk to be.
The board concluded that this was inadequate, so they tasked the internal audit team to conduct an environmental audit, and to determine WSK’s environmental footprint.
Required:
(a) Evaluate the difficulties of risk perception, and describe the problems with the perception of risk shown by the scientific team at WSK. (8 marks)
(b) Explain the stages and benefits to WSK of conducting an environmental audit, and assess the importance of then reporting good quality information to the board. (10 marks)
(c) Explain the term environmental footprint, and assess how the activities of WSK contribute to its footprint. (7 marks)
Section B – TWO questions ONLY to be attempted
(a) Mehran, a public limited company, has just acquired a company, which comprises a farming and mining business. Mehran wishes advice on how to fair value some of the assets acquired.
One such asset is a piece of land, which is currently used for farming. The fair value of the land if used for farming is $5 million. If the land is used for farming purposes, a tax credit currently arises annually, which is based upon the lower of 15% of the fair market value of land or $500,000 at the current tax rate. The current tax rate in the jurisdiction is 20%.
Mehran has determined that market participants would consider that the land could have an alternative use for residential purposes. The fair value of the land for residential purposes before associated costs is thought to be $7·4 million. In order to transform. the land from farming to residential use, there would be legal costs of $200,000, a viability analysis cost of $300,000 and costs of demolition of the farm buildings of $100,000. Additionally, permission for residential use has not been formally given by the legal authority and because of this, market participants have indicated that the fair value of the land, after the above costs, would be discounted by 20% because of the risk of not obtaining planning permission.
In addition, Mehran has acquired the brand name associated with the produce from the farm. Mehran has decided to discontinue the brand on the assumption that it will gain increased revenues from its own brands. Mehran has determined that if it ceases to use the brand, then the indirect benefits will be $20 million. If it continues to use the brand, then the direct benefit will be $17 million. (8 marks)
(b) Mehran wishes to fair value the inventory of the entity acquired. There are three different markets for the produce, which are mainly vegetables. The first is the local domestic market where Mehran can sell direct to retailers of the produce. The second domestic market is one where Mehran sells directly to manufacturers of canned vegetables. There are no restrictions on the sale of produce in either of the domestic markets other than the demand of the retailers and manufacturers. The final market is the export market but the government limits the amount of produce which can be exported. Mehran needs a licence from the government to export its produce. Farmers tend to sell all of the produce that they can in the export market and, when they do not have any further authorisation to export, they sell the remaining produce in the two domestic markets.
It is difficult to obtain information on the volume of trade in the domestic market where the produce is sold locally direct to retailers but Mehran feels that the market is at least as large as the domestic market – direct to manufacturers. The volumes of sales quoted below have been taken from trade journals.
(9 marks)
(c) Mehran owns a non-controlling equity interest in Erham, a private company, and wishes to fair value it as at its financial year end of 31 March 2016. Mehran acquired the ordinary share interest in Erham on 1 April 2014. During the current financial year, Erham has issued further equity capital through the issue of preferred shares to a venture capital fund.
As a result of the preferred share issue, the venture capital fund now holds a controlling interest in Erham. The terms of the preferred shares, including the voting rights, are similar to those of the ordinary shares, except that the preferred shares have a cumulative fixed dividend entitlement for a period of four years and the preferred shares rank ahead of the ordinary shares upon the liquidation of Erham. The transaction price for the preferred shares was $15 per share.
Mehran wishes to know the factors which should be taken into account in measuring the fair value of their holding in the ordinary shares of Erham at 31 March 2016 using a market-based approach. (6 marks)
Required:
Discuss the way in which Mehran should fair value the above assets with reference to the principles of IFRS 13 Fair Value Measurement.
Note: The mark allocation is shown against each of the three issues above.
Professional marks will be awarded in question 2 for clarity and quality of presentation. (2 marks)
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