The equity interest in Caller held by Trailer has been revalued at 31 May 2013 from $280 million to $310 million and theprofit will have been recognised in profit or loss and hence in retained earnings. This needs to be reversed on consolidation($30m). The gain of $20 million recognised before Trailer took control of Park remains as it is treated as part of theconsideration at the date that Trailer takes control of Park and is measured at fair value as at that date.Working 3
Impairment of goodwillPark
$m
Goodwill
Unrecognised non-controlling interest (40%/60% of $80m)Identifiable net assets Net assets
FV adjustment –land
$m8053·3
2,22035––––––
高ac顿ca财.g经aoACduCAn. cnTotal
Recoverable amount
Impairment
Lessnotional goodwill on NCIImpairment loss to be allocatedAllocated toGoodwillPPETotal
80167––––––––247––––––––
Working 4Retained earnings
$m
Trailer:
Balance at 31 May 2013
Reversal of gain on revaluation of investmentImpairment loss (W3)Interest charge (W8)Interest credit (W8)
Reversal of revaluation loss (W9)Provision for restructuring (W11)Pension plan (W12)
Post-acquisition reserves:Park (60% of (930 – 650))
Caller (56% of (350 – 240))Working 5
Other components of equity
Balance at 31 May 2013 – TrailerRevaluation gain (W9)
Pension plan remeasurements (W12)Park post acquisition (60% of 80 – 55)Caller (56% x (95 – 70))
$m12521(4·9)1514––––––170·1––––––
2,255––––––––2,388·3(2,088)––––––––300·3(53·3)––––––––247––––––––
Total goodwill is therefore only that of Caller, i.e. $398m. The impairment loss relating to the PPE is split between NCI($66·8m) and retained earnings ($100·2m). As the goodwill relating to the NCI is not recognised, no impairment of goodwillis allocated to the NCI. Thus retained earnings are charged with ($80m + $100·2m), i.e. $180·2m. It is assumed that therecoverable amount includes the investment in Caller.
1,240(30)(180·2)(3·99)2·7611·58(14)(1·1)16861·6–––––––––1,254·65–––––––––
12
Working 6Current liabilities
$m
Balance at 31 May 2013TrailerParkCaller
Provision for restructuring (W11)
1158719614––––412––––
Working 7
Non-controlling interest
Park (W1)Caller (W2)
Post-acquisition retained earnings – Park (40% of 930 – 650)Post-acquisition retained earnings – Caller (44% of 350 – 240)OCE –post acquisition – Park (40% of 80 – 55)OCE –post acquisition – Caller (44% of 95 – 70)Lessimpairment in Park (W3)
LessNCI share of Park’s investment in Caller (40% of $1,270m)
$m78050611248·41011(66·8)(508)––––––2·6––––––
高ac顿ca财.g经aoACduCAn. cnWorking 8
Financial assets –advanceAdvance201320142015
$m –cash flows
50(1·5)(1·5)(51·5)
Discount factor
0·940·0·84
Dr Financial assetsCr Cash
Dr Profit or loss
$46·01m$50m$3·99m
The accounting entries should be for the year ended 31 May 2013:Financial assets
Amortised costat 1 June 2012
$m46·01
Interestcredit$m2·76
Cashpaid$m(1·5)
The correcting entries should therefore be:Dr Retained earningsCr Financial assetDr Financial assetCr Retained earnings
$3·99m$3·99m$2·76m$2·76m
The discounted interest rate should be recognised as a reduction in the fair value of the asset when measured for the firsttime. The treatment reflects the economic substance of the transaction, i.e. Trailer is locking itself into an arrangement whereit will incur an effective loss on interest receivable over the life of the instrument. This loss will be anticipated by calculatingthe present value of all future cash receipts using the prevailing market interest rate for a similar instrument. This will resultin a lower figure for fair value than the amount advanced, the difference being required to be debited to profit or loss.
Present value(1·41)(1·34)(43·26)–––––46·01–––––
The initial fair value of the loan is calculated by scheduling the cash flows due to take place over the life of the loan (afterthe advance has been made) and discounting them to present value using the unsubsidised rate of interest. The making ofthe loan would be accounted for by:
Amortised costat 31 May 2013
$m47·27
13
Financial assetsTrailerParkCallerInterest chargeInterest credit
$m32021141–––––––(3·99)2·76–––––––
$m
482
Balance at 31 May 2013Working 9
Property, plant and equipment
(1·23)–––––––480·77–––––––
高ac顿ca财.g经aoACduCAn. cnTrailerParkCaller
Increase in value of land – Park (W1)Increase in value of land – Caller (W2)Impairment (W3)
Increase in value of officesThe entries will be:
Dr Property, plant and equipmentCr Profit or loss
Cr Revaluation reserve
$32·58m$11·58m$21m
Working 10
Non-current liabilitiesTrailerParkCaller
Defined benefit liability (W12)
$m9857651506––––––1,906––––––
Working 11
Provision for restructuring
$m1,4401,1001,300––––––
$m
3,8403540(167)32·58–––––––––3,780·58–––––––––
In 2012, Trailer would have charged $3m for depreciation ($90m divided by 30). Trailer would then have accounted for theremaining $12m of the $15m fall in value as a revaluation loss and charged this to profit or loss.
In 2013, Trailer should charge depreciation of $2·58m ($75m divided by 29 years –the remaining useful life), reducing thecarrying amount of the asset to $72·42m. In order to bring the asset up to its current value of $105m at the end of the year,a revaluation gain of $32·58m needs to be recognised.
The credit to profit or loss is made up of a reversal of $12m impairment loss charged in 2012, less $0·42m for thedepreciation that would have been charged if the asset had not been devalued ($12m divided by 29). This leaves $21m ofthe upward valuation to be credited to the revaluation reserve.
Only those costs that result directly from and are necessarily entailed by the restructuring may be included, such as employeeredundancy costs or lease termination costs. Expenses that relate to ongoing activities, such as relocation and retraining areexcluded. With regard to the service reduction, a provision should be recognised for the redundancy and lease terminationcosts of $14 million. The sites and details of the redundancy costs have been identified.
In contrast, Trailer should not recognise a provision for the finance and IT department’s re-organisation. The re-organisationis not due to start for two years. External parties are unlikely to have a valid expectation that management is committed tothe re-organisation as the time frame allows significant opportunities for management to change the details of the plan oreven to decide not to proceed with it. Additionally, the degree of identification of the staff to lose their jobs is not sufficientlydetailed to support the recognising of a redundancy provision.
14
Working 12Pension plan
Fair value at 1 June 2012
Return on plan assets (5% of $28m)Contributions for periodBenefits paid
Expected fair value at 31 May 2013Actual fair value
Remeasurements –gain recognised in OCIObligation at 1 June 2012Interest cost (5% of $30m)Current service costBenefits paid
$m281·42(3)–––––28·429–––––0·6–––––301·51(3)–––––29·535–––––5·5–––––$m20·1(2)14·9––––6––––
(b)
高ac顿ca财.g经aoACduCAn. cnExpected obligation
Obligation at 31 May 2013
Remeasurements –loss recognised in OCI
The liability recognised in the financial statements will be ($35 –$29m), i.e. $6 million.Net obligation at 1 June 2012 ($30m –$28m)Net interest cost ($1·5m –$1·4m)Contributions
Current service cost
Remeasurement loss ($5·5m –$0·6m)Net obligation at 31 May 2013 ($35m –$29m)Working 13Current assetsTrailerParkCaller
$m5681150––––––1,726––––––
Park
$m
Fair value of consideration for 60% interestFair value of NCI
Fair value of identifiable net assets acquired:Share capital
Retained earningsOCE
FV adjustment – land
$m1,250800
1,2106505535––––––
Goodwill
(1,950)––––––100––––––
The current service cost and net interest cost will be charged to profit or loss ($1·1m) and the remeasurements to OCI($4·9m). There will be no adjustment for the contributions, which have already been taken into account. Therefore theobligation will be credited with $6m.
15
Caller
$m
Purchase consideration – TrailerPark – 60% of $1,270mFair value of NCI
Lessfair value of identifiable net assets:Share capital
Retained earningsOCE
FV adjustment – land
$m280762530
8002407040––––
Goodwill
Impairment of goodwill
(1,150)––––––422––––––
(c)
高ac顿ca财.g经aoACduCAn. cn$m
Goodwill
Identifiable net assets Net assets
FV adjustment –land
$m100
2,22035––––––
Total
Recoverable amountImpairment
2,255––––––2,355(2,088)––––––267––––––100167––––––267––––––
Allocated toGoodwill
PPE (split $66·8m NCI/$100·2m retained earnings)Total
Park
Under the previous method used by Trailer, NCI was recognised at their share of net assets and did not include any goodwill.The full goodwill method means that non-controlling interest and goodwill are both increased by the goodwill that relates tothe non-controlling interest.
It can be seen that goodwill is effectively adjusted for the change in the value of the non-controlling interest which representsthe goodwill attributable to the NCI. In the case of Park, goodwill has increased from $80m to $100m, and the figure usedfor NCI under the proportionate method of $780m has moved to the fair value of $800m at 1 June 2012, that is an increaseof $20m. In the case of Caller, goodwill has increased by $24m from $398m to $422m and the figure used for NCI (beforeadjustments) under the proportionate method of $506m has moved to its fair value of $530m at 1 June 2012, that is a riseof $24 million. The choice of method of accounting for NCI only makes a difference in an acquisition where less than 100%of the acquired business is purchased. The full goodwill method increases reported net assets, which means that anyimpairment of goodwill will be greater. Thus in the case of Park, the impairment of goodwill will be $100m but this will becharged $60m to retained earnings and $40 million to NCI. PPE will be charged with $167m under either method. Bothamounts are charged to retained earnings and NCI in the proportion 60/40, that is based upon the profit or loss allocation.Although measuring non-controlling interest at fair value may prove difficult, goodwill impairment testing is easier under fullgoodwill, as there is no need to gross up goodwill for partially owned subsidiaries.
There are several reasons why an accountant should study ethics. The moral beliefs that an individual holds may not besufficient because often these are simple beliefs about complex issues. The study of ethics can sort out these complex issuesby teaching the principles that are operating in these cases. Often there may be ethical principles which conflict and it maybe difficult to decide on a course of action. The study of ethics can help by developing ethical reasoning in accountants byproviding insight into how to deal with conflicting principles and why a certain course of action is desirable. Individuals mayhold inadequate beliefs or hold on to inadequate ethical values. For example, it may be thought that it is acceptable to holdshares in client companies for business reasons, which, of course, is contrary to ethical guidance. Additionally, compliancewith GAAP could be thought to be sufficient to meet the duty of an accountant. However, it can be argued that an accountanthas an ethical obligation to encourage a more realistic financial picture by applying ethical judgement to the provisions ofGAAP.
Another important reason to study ethics is to understand the nature of one’s own opinion and ethical values. Ethicalprinciples should be compatible with other values in life. For example, one’s reaction to the following circumstances: thechoice between keeping your job and violating professional and ethical responsibilities, the resolution of conflicts of interestif they involve family.
Finally, a good reason for studying ethics is to identify the basic ethical principles that should be applied. This will involve notonly code-based decisions but also the application of principles that should enable the determination of what should be done
16
in a given situation. The ethical guidance gives a checklist to be applied so that the outcome can be determined. Ethical issuesare becoming more and more complex and it is critical to have knowledge of the underlying structure of ethical reasoning.Professional ethics is an inherent part of the profession. ACCA’s Code of Ethics and Conductrequires its members to adhereto a set of fundamental principles in the course of their professional duty, such as confidentiality, objectivity, professionalbehaviour, integrity and professional competence and due care. The main aim of professional ethics is to serve as a moralguideline for professional accountants. By referring back to the set of ethical guidelines, the accountant is able to decide onthe most appropriate course of action, which will be in line with the professional body’s stance on ethics. The presence of acode of ethics is a form of declaration by the professional body to the public that it is committed to ensuring the highest levelof professionalism amongst its members.
Although the takeover does not benefit the company, its executives or society as a whole, the action is deceptive, unethicaland hence unfair. It violates the relationship of trust, which the company has with society and the professional code of ethics.There are nothing but good reasons against the false disclosure of profits.
2
(a)
IFRS 8 Operating Segmentsstates that reportable segments are those operating segments or aggregations of operatingsegments for which segment information must be separately reported. Aggregation of one or more operating segments into asingle reportable segment is permitted (but not required) where certain conditions are met, the principal condition being thatthe operating segments should have similar economic characteristics. The segments must be similar in each of the followingrespects:–––––
the nature of the products and servicesthe nature of the production processesthe type or class of customer
the methods used to distribute their products or provide their servicesthe nature of the regulatory environment.
(b)
高ac顿ca财.g经aoACduCAn. cn––
The calculation of the revenue’s fair value is as follows: ––
Segments 1 and 2 have different customers. In view of the fact that the segments have different customers, the two segmentsdo not satisfy one of the aggregation criteria above. The decision to award or withdraw a local train contract rests with thetransport authority and not with the end customer, the passenger. In contrast, the decision to withdraw from a route in theinter-city train market would normally rest with Verge but would be largely influenced by the passengers’ actions that wouldlead to the route becoming economically unviable.
In the local train market, contracts are awarded following a competitive tender process, and, consequently, there is noexposure to passenger revenue risk. The ticket prices paid by passengers are set by a transport authority and not Verge. Bycontrast, in the inter-city train market, ticket prices are set by Verge and its revenues are, therefore, the fares paid by thepassengers travelling on the trains. In this set of circumstances, the company is exposed to passenger revenue risk. This riskwould affect the two segments in different ways but generally through the action of the operating segment’s customer.Therefore the economic characteristics of the two segments are different and should be reported as separate segments.
Revenue should be measured at the fair value of the consideration received or receivable under IAS 18 Revenue. Where theinflow of cash or cash equivalents is deferred, the fair value of the consideration receivable is less than the nominal amountof cash and cash equivalents to be received, and discounting is appropriate. This would occur in this instance as, effectively,Verge is providing interest-free credit to the buyer. Interest must be imputed based on market rates, which in this case is 6%.Recognition, as defined in the IASB Framework, means incorporating an item that meets the definition of revenue in thestatement of profit or loss when it meets the following criteria:
it is probable that any future economic benefit associated with the item of revenue will flow to the entity, andthe amount of revenue can be measured with reliability.
Thus Verge must recognise revenue as work is performed throughout the contract life. Discounting the revenue to reflect thedelay in receipt of cash from the customer ensures that the revenue is reported at its fair value. The difference between thediscounted revenue and the payment received should be recognised as interest income.
In the year ended 31 March 2012, Verge should have recorded revenue of $1·8 million/1·06/1·06, i.e. $1·6 million plus $1 million, i.e. $2·6 million. In the year ended 31 March 2013, revenue should be recorded of $1·2 million/1·06, i.e. $1·13 million. In addition, there will be an interest income of $1·6 million x 6%, i.e. $96,000 recorded in the year to 31 March 2013 which is the unwinding of the discount on the recognised revenue for the year ended 31 March 2012.Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periodsarising from a failure to use, or misuse of, reliable information that:
was available when financial statements for those periods were authorised for issue; and
could reasonably be expected to have been obtained and taken into account in the preparation and presentation of thosefinancial statements.
Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights ormisinterpretations of facts and fraud. The fact that Verge only included $1 million of the revenue in the financial statementsfor the year ended 31 March 2012 is a prior period error.
Verge should correct the prior period errors retrospectively in the financial statements for the year ended 31 March 2013 byrestating the comparative amounts for the prior period presented in which the error occurred.
17
(c)Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, an entity must recognise a provision if, and only if:–––
a present obligation (legal or constructive) has arisen as a result of a past event (the obligating event), payment is probable (‘more likely than not’), and the amount can be estimated reliably.
An obligating event is an event that creates a legal or constructive obligation and, therefore, results in an entity having norealistic alternative but to settle the obligation. The obligating event took place in the year to 31 March 2012. A provisionshould be made on the date of the obligating event, which is the date on which the event takes place that results in an entityhaving no realistic alternative to settling the legal or constructive obligation. Even in the absence of legal proceedings, Vergeshould prudently recognise an obligation to pay damages, but it is reasonable at 31 March 2012 to assess the need for aprovision to be immaterial as no legal proceedings have been started and the damage to the building seemed superficial.Provisions should represent the best estimate at the financial statement date of the expenditure required to settle the presentobligation and this measurement should take into account the risks and uncertainties of circumstances relevant to theobligation.
In the year to 31 March 2013, as a result of the legal arguments supporting the action, Verge will have to reassess its estimateof the likely damages and a provision is needed, based on the advice that it has regarding the likely settlement. Provisionsshould be reviewed at each year end for material changes to the best estimate.Dr Profit or loss
Cr Provision for damages
$800,000$800,000
(d)
高ac顿ca财.g经aoACduCAn. cnDr Trade receivablesCr Profit or loss
$200,000$200,000
Dr Property, plant and equipmentCr Profit or loss
Cr Cash/trade payable
$2·5m$1·5m$1m
Depreciation of the building should also be charged for the period according to Verge’s accounting policy.A grant relating to assets (capital based grant) may be presented in one of two ways:––
either as deferred income, or
by deducting the grant from the asset’s carrying amount. Dr Cash
Cr Profit or loss
Cr Deferred income or PPE (depending on accounting policy)
$250,000$100,000$150,000
The potential for reimbursements (e.g. insurance payments) to cover some of the expenditure required to settle a provisioncan be recognised, but only if receipt is virtually certain if the entity settles the obligation. IAS 37 requires that thereimbursement be treated as a separate asset. The amount recognised for the reimbursement cannot exceed the amount ofthe provision. IAS 37 permits the expense relating to a provision to be presented net of the amount. The company seemsconfident that it will satisfy the terms of the insurance policy and should accrue for the reimbursement:
The court case was found against Verge but as this was after the authorisation of the financial statements, there is noadjustment of the provision at 31 March 2013. It is not an adjusting event.
In accordance with IAS 1 Presentation of Financial Statements, all items of income and expense recognised in a period shouldbe included in profit or loss for the period unless a standard or interpretation requires or permits otherwise.
IAS 16 Property, Plant and Equipmentstates that the recognition criteria for PPE are based on the probability that futurebenefits will flow to the entity from the asset and that cost can be measured reliably. The above normally occurs when therisks and rewards of the asset have passed to the entity. Normally the risks and rewards are assumed to transfer when anunconditional and irrevocable contract is put in place.
Therefore at 31 March 2012, the building would not be recognised as the ‘contract’ is not unconditional and possession ofthe building has not been taken by Verge.
Once the conditions of the donated asset have been met in February 2013, the income of $1·5 million is recognised in thestatement of profit or loss and other comprehensive income. The following transactions need to be made to recognise theasset in the entity’s statement of financial position as of 31 March 2013.
IAS 20 Accounting for Government Grants and Disclosure of Government Assistancestates that a government grant isrecognised only when there is reasonable assurance that (a) the entity will comply with any conditions attached to the grantand (b) the grant will be received. Thus in this case the grant will be recognised.
The grant is recognised as income over the period necessary to match it with the related costs, for which it is intended tocompensate, on a systematic basis. A grant receivable as compensation for costs already incurred or for immediate financialsupport, with no future related costs, should be recognised as income in the period in which it is receivable.
The grant of $250,000 relates to capital expenditure and revenue. It seems appropriate to account for the grant on the basisof matching the grant to the expenditure. Therefore $100,000 (20 x $5,000) should be taken to income and the remainder($150,000) should be recognised as a capital based grant. The double entry would be:
18
3(a)
The lease of the land is subject to the general lease classification criteria of IAS 17 Leasesand the fact that land normallyhas an indefinite economic life is an important consideration. Thus, if the lease of land transfers substantially all the risks andrewards incidental to ownership to the lessee, then the lease is a finance lease, otherwise it is an operating lease. A lease ofland with a long term may be classified as a finance lease even if the title does not pass to the lessee. Situations set out inIAS 17 that would normally lead to a lease being classified as a finance lease include the following:(1)the lease transfers ownership of the asset to the lessee by the end of the lease term;
(2)the lease term is for the major part of the economic life of the asset, even if title is not transferred;
(3)at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of
the fair value of the leased asset;(4)the lessee has the ability to continue to lease for a secondary period at a rent that is substantially lower than market
rent.A contingent rent is an amount that is paid as part of the lease payments but is not fixed or agreed in advance at the inceptionof the lease, rather the amount to be paid is dependent on some future event. However, it is not an interest payment, as it isnot connected with the passage of time, therefore time value of money is not an issue. Under IAS 17, contingent rents areexcluded from minimum lease payments and are accounted as expense/income in the period in which they areincurred/earned. Contingent rents may indicate that a lease is an operating lease if the nature of the contingency providesevidence that the lessor has not transferred substantially all of the risks and rewards of ownership of the land. However, otherfactors have to be taken into account besides the contingent rental.
The presence of an option to extend the lease at substantially less than a market rent or purchase it at a discount of 90% onthe market value implies that the lessor expects to achieve its return on investment mainly through the lease payments andtherefore is content to continue the lease for a secondary period at an immaterial rental or sell it at a substantial discount tothe market value. This is an indicator of a finance lease. It is reasonable to assume that the lessee will extend the lease orpurchase the land in these circumstances. However, an option to extend it at a market rental without the purchase provisionmay indicate that the lessor has not achieved its return on investment through the lease rentals and therefore is relying on asubsequent lease or sale to do so. This is an indicator of an operating lease as there will be no compelling commercial reasonwhy the lessee should extend the agreement. In this case, the lease term is not for the major part of the economic life of theasset as the asset is land. However, it would appear that the minimum lease payments would equate to the fair value of theasset, given the fact that the lease premium is 70% of the current fair value and the rent is 4% of the fair value for 30 years.Additionally, if land values rise, then there is a revision of the rental every five years to ensure that the lessor achieves thereturn on the investment. As a result of the above, it would appear that the lease is a finance lease. The upfront premiumplus the present value of the annual payments at the commencement of the lease would be capitalised as property, plant andequipment and the annual lease payments would be shown as a liability. The interest expense would be recognised over thelease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
(b)
高ac顿ca财.g经aoACduCAn. cn(3)Level 3 inputs are unobservable inputs that are usually determined based on management’s assumptions.
Additionally, Janne plans to use the land in its business but may hold the land for capital gain. Thus the lease may meet thedefinition of an investment property if it is to be held for capital gain. In the latter case, IAS 40 Investment Propertyshouldbe used to account for the land with the lessee’s chosen model used to account for it.
If a lease contains a clean break clause, where the lessee is free to walk away from the lease agreement after a certain timewithout penalty, then the lease term for accounting purposes will normally be the period between the commencement of thelease and the earliest point at which the break option is exercisable by the lessee. If a lease contains an early terminationclause that requires the lessee to make a termination payment to compensate the lessor such that the recovery of the lessor’sremaining investment in the lease is assured, then the termination clause would normally be disregarded in determining thelease term. However, the suggestions made by Maret do add substance to the conclusion that the lease is a finance lease,as the early termination clause requires a payment which recovers the lessor’s investment and it would appear that Maret ishappy to allow the termination of the agreement after 25 years which would imply that the lessor’s return would have beenachieved after that period of time.
Fair value, in IAS 40 Investment Property, is the price that would be received to sell an asset or paid to transfer a liability inan orderly transaction between market participants at the measurement date. Fair value should reflect market conditions atthe end of the reporting period. However, IFRS 13 Fair Value Measurementacts as a common framework on how to measurethe fair value when its determination is required or permitted by another IFRS. The framework defines fair value and providesa single source of guidance for measuring fair value. IFRS 13 defines the fair value of an asset as an ‘exit price’, which is theprice that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participantsat the measurement date. Fair value is a market-based measurement, not an entity-specific measurement, and fair valuereflects current market conditions.
In IFRS 13, fair value measurements are categorised into a three-level hierarchy based on the type of inputs and are not basedon a valuation method. The new hierarchy is defined as follows:
(1)Level 1 inputs are unadjusted quoted prices in active markets for items identical to the asset being measured.(2)Level 2 inputs are inputs other than quoted prices in active markets included within Level 1 that are directly or indirectly
observable.
19
Due to the nature of investment property, which is often unique and not traded on a regular basis, and the subsequent lackof observable input data for identical assets, fair value measurements are likely to be categorised as Level 2 or Level 3valuations. Level 2 inputs are likely to be sale prices per square metre for similar properties in the same location, observablemarket rents and property yields from the latest transactions. Level 3 inputs may be yields based on management estimates,cash flow forecasts using the entity’s own data, and assumptions about the future development of certain parameters suchas rental income that are not derived from the market. Management should maximise the use of relevant observable inputsand minimise the use of unobservable inputs. The use of unobservable inputs is a complex and judgemental area where IFRS 13 provides certain guidance. According to IFRS 13, there are generally three approaches that can be used to derivefair value: the market approach, the income approach and the cost approach. To measure fair value, management should usevaluation techniques consistent with one or more of these approaches. A market or income approach will therefore usuallybe more appropriate in these circumstances. A valuation based on new-build value less obsolescence takes no account ofthis consideration. A valuation based on ‘new-build value less obsolescence’ does not reflect the level 2 inputs which areavailable, such as sale prices and market rent.
Similarly, the new-build value less obsolescence does not reflect any discounted cash flows based on reliable estimates offuture cash flows, or recent prices of similar properties on less active markets and does not take account of any incomemeasures. As level 2 data is available, the entity should use this data in valuing the industrial property.
Under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, a disposal group is classified as held for salewhere its carrying amount will be recovered principally through sale rather than continuing use. The sale should be expectedto be complete within one year from the date of classification. A disposal group can, exceptionally, be classified as held forsale/discontinued after a period of 12 months if it meets certain criteria. These are: that during the initial one-year period,circumstances arose that were previously considered unlikely and, as a result, a disposal group previously classified as heldfor sale is not sold by the end of that period. Also during the initial one-year period, the entity took action necessary to respondto the change in circumstances such that the non-current asset (or disposal group) is being actively marketed at a price thatis reasonable, given the change in circumstances, and the criteria for classification as held for sale are met.
The draft agreements with investment bankers appear not to be sufficiently detailed to prove that the subsidiary met thecriteria at the point of classification as required by IFRS 5. This requires the disposal group to be available for immediate salein its present condition subject only to terms that are usual and customary for sales of such disposal groups. Also, Janne hadmade certain organisational changes during the year to 31 May 2013, which resulted in additional activities being transferredto the subsidiary. This confirms that the subsidiary was not available for sale in its present condition as at the point ofclassification. Also, the shareholders’ authorisation to sell the subsidiary was only granted for one year and there is noindication that this was extended by the subsequent shareholders’ meeting in 2013. The subsidiary should have been treatedas a continuing operation in the financial statements for both years ended 31 May 2012 and 31 May 2013.
(c)
4(a)
高ac顿ca财.g经aoACduCAn. cn(i)
Excessive disclosure can obscure relevant information and make it harder for users to find the key points about theperformance of the business and its prospects for long-term success. It is important that financial statements arerelevant, reliable and can be understood. Additionally, it is important for the efficient operation of the capital marketsthat annual reports do not contain unnecessary information. However, it is equally important that useful information ispresented in a coherent way so that users can find what they are looking for and gain an understanding of the company’sbusiness and the opportunities, risks and constraints that it faces. A company, however, must treat all of its shareholdersequally in the provision of information. It is for each shareholder to decide whether they wish to make use of thatinformation. It is not for a company to pre-empt a shareholder’s rights in this regard by withholding the information.A significant cause of excessive disclosure in annual reports is the vast array of requirements imposed by laws,regulations and financial reporting standards. Regulators and standard setters have a key role to play in cutting clutter,both by cutting the requirements that they themselves already impose and by guarding against the imposition ofunnecessary new disclosures. A listed company may have to comply with listing rules, company law, internationalfinancial reporting standards, the corporate governance codes and, if it has an overseas listing, any local requirements,such as those of the SEC in the US. Thus a major source of excessive disclosure is the fact that different parties requirediffering disclosures for the same matter. For example, an international bank in the UK may have to disclose credit riskunder IFRS 7 Financial Instruments: Disclosures, the Companies Acts and the Disclosure and Transparency Rules, theSEC rules and Industry Guide 3 as well as the requirements of Basel II Pillar 3. A problem is that different regulatorshave different audiences in mind for the requirements they impose on annual reports. Regulators attempt to reach widerranges of actual or potential users and this can lead to a loss of focus and structure in reports.
Shareholders are increasingly unhappy with the substantial increase in the length of reports that has occurred in recentyears. This, often, has not resulted in better information but more confusion as to the reason for the disclosure. A reviewof companies’ published accounts will show that large sections such as ‘Statement of Directors Responsibilities’ and‘Audit Committee report’ can be almost identical.
Preparers now have to consider many other stakeholders including employees, unions, environmentalists, suppliers,customers, etc. The disclosures required to meet the needs of this wider audience have contributed to the increasedvolume of disclosure. The growth of previous initiatives on going concern, sustainability, risk, the business model andothers that have been identified by regulators as ‘key’ has also expanded the annual report size.
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A problem that seems to exist is that disclosures are being made because a disclosure checklist suggests it may needto be made, without assessing whether the disclosure is necessary in a company’s particular circumstances. It isinherent in these checklists that they include all possible disclosures that could be material.
The length of the annual report is not necessarily the problem but the way in which it is organised. The inclusion of‘immaterial’ disclosures will usually make this problem worse but, in a well organised annual report, users will often beable to bypass much of the information they consider unimportant especially if the report is online. It is not the lengthof the accounting policies disclosure that is itself problematic, but the fact that new or amended policies can be obscuredin a long note running over several pages. A further problem is that accounting policy disclosure is often ‘boilerplate’,providing little specific detail of how companies apply their general policies to particular transactions. Many disclosurerequirements have been introduced in new or revised international accounting standards over the last ten years withoutany review of their overall impact on the length or usefulness of the resulting financial statements.(ii)
There are behavioural barriers to reducing disclosure. It may be that the threat of criticism or litigation could be aconsiderable limitation on the ability to cut disclosure. The threat of future litigation may outweigh any benefits to beobtained from eliminating ‘catch-all’ disclosures. Preparers of annual reports are likely to err on the side of caution andinclude more detailed disclosures than are strictly necessary to avoid challenge from auditors and regulators. Removingdisclosures is perceived as creating a risk of adverse comment and regulatory challenge. Disclosure is the safest optionand is therefore often the default position. Preparers and auditors may be reluctant to change from the current positionunless the risk of regulatory challenge is reduced. The prospect of internal firm review and/or external review can induceauditors to take a ‘tick-box’ compliance approach to avoid challenge and adverse publicity. Companies have a tendencyto repeat disclosures because they were there last year. Preparers wish to present balanced and sufficiently informativedisclosures and may be unwilling to change.
A reassessment of the whole model will take time and may necessitate changes to law and other requirements. TheIASB has recently issued a request for views regarding its forward agenda in which it acknowledges that stakeholdershave said that disclosure requirements are too voluminous and not always focused in the right areas. The drive by theIASB has very much been to increase the use of disclosure to address comparability between companies and, in theshort to medium term, a reduction in the volume of accounting disclosures does not look feasible although this is anarea to be considered by the IASB for its post-2012 agenda.
Lizzer’s perception of who could reasonably be considered to be among the users of its financial statements is toonarrow, being limited to the company’s shareholders rather than including debt-holders; and the risk disclosures requiredby IFRS 7 should be enhanced to include those relating to the debt-holders, by individual series of debt wherepracticable, so as to ensure that significant differences between the various series of debt are not obscured. IAS 1 statesthat the objective of financial statements is to provide information about the financial position, financial performance andcash flows of an entity that is useful to a wide range of users in making economic decisions. The standard also statesthat omissions or misstatements of items are material if they could, individually or collectively, influence the economicdecisions that users make on the basis of the financial statements.
The objective of IFRS 7 is to require entities to provide disclosures in their financial statements that enable users toevaluate the significance of financial instruments for the entity’s financial position and performance. IFRS 7 states that,amongst other matters, for each type of risk arising from financial instruments, an entity shall disclose: (a)(b)
the exposures to risk and how they arise;
its objectives, policies and processes for managing the risk and the methods used to measure the risk.
(b)
高ac顿ca财.g经aoACduCAn. cn(i)
Thus the risks attached to the debt should be disclosed. (ii)
Lizzer should have disclosed additional information about the covenants relating to each loan or group of loans, includingthe amount of headroom, as deemed appropriate under IFRS 7. The subsequent breach of the covenants represented amaterial event after the reporting period and should have given rise to relevant disclosures required by IAS 10 EventsAfter the Reporting Periodin relation to material non-adjusting events after the reporting period.
According to IFRS 7, an entity should disclose information that enables users of its financial statements to evaluate thenature and extent of risks arising from financial instruments to which the entity is exposed at the end of the reportingperiod. Disclosure of information about covenants is necessary to a greater extent in situations where the entity is closeto breaching its covenants, and in situations where uncertainty is expressed in relation to the going concern assumption.Given the fact that, at 31 January 2013, there was a considerable risk of breach of covenants in the near future, Lizzershould have given additional information relating to the conditions attached to its loans, including details on how closethe entity was to breaching the covenants.
A breach of covenants after the date of the financial statements, but before the financial statements were authorised forissue, constitutes a material non-adjusting event after the end of the reporting period which requires further disclosurein accordance with IAS 10. Additionally, there appears to be an apparent inconsistency between the informationprovided in the directors’ and auditors’ reports and that which is included in the financial statements. If balances areaffected in the SOFP, then there would need to be some adjustment.
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Professional Level – Essentials Module, Paper P2 (INT)Corporate Reporting (International)
June 2013 Marking SchemeMarks5651 63315–––35–––4
1(a)
Property, plant and equipment Goodwill
Financial assets
Current assets/total non-current liabilities Retained earnings
Other components of equity Non-controlling interest Current liabilities Pension plan
(b)
(c)
2(a)
(b)(c)
(d)
Professional marks
3(a)
(b)(c)
Professional marks
4(a)
(b)
Professional marks
高ac顿ca财.g经aoACduCAn. cnSubjective assessment of discussionUp to 2 marks per elementCalculations
5–––9–––
Subjective assessment –1 mark per point
6–––50–––5
Segment explanation up toIAS 18 explanation and calculation
66
IAS 37 explanation and calculationIAS 1/16/20 explanation and calculation
6 2–––25–––12
Leases explanation up to
Investment properties explanation IFRS 5 explanation
562–––25–––968
Subjective disclosure
barriersSubjective
2–––25–––
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