ACCOUNTING FOR SUBSI

CJEs for year ended 31/12/x6 CJE1: Elimination of Investment in Y

DR Share Cap DR Beg RE DR GW 100K 50K 52K CR Investment in Y CR NCI (B/S)

May need to adjust following before current period:

CJE2a: Tax effect on CJE2 (CR DTA) CJE3: Allocate NCI share in adjusted beg RE DR Beg RE CR NCI (B/S) Change in RE since acquisition 20K
Less: unrealised profit on sale of PPE Add: overstated tax exp Add: realisation of profit through reversal of depreciation Less: tax expense on reversal of dep Adjusted current PAT NCI share @ 10%

CJE: Prior periods cumulative impairment of in-process R&D up till 1/1/x6

DR Beg RE 100K CR Cumulative impairment 20K CR Beg RE If contingent liability crystallises in current period: DR Contingent Liability 50K CR Provision Expense 100K

- Current over depreciation on transferred fixed asset - Realisation of unrealised profit in beg inventory (upstream) - Unrealised profit in ending inventory (downstream) Adj current profit before tax Ps share @ 40% Tax expense of A Add/less: - Less: tax due to additional depreciation on undervalued fixed assets at acquisition - More: tax due to reversal of current over depreciation on transferred fixed asset - More: tax due to realisation of unrealised profit in beg inventory (upstream) - Less: tax due to elimination of unrealised profit in ending inventor (downstream) Adj tax expense of A Ps share @ 40%

10K

30K (45K) 182.5K 73K 40K (2.5K)

Tax effect
160K 42K DR DTL

XXX
. . . . . .

EIR (5%) Amortization of bond discount (interest rev)* Unamortized bond discount Carrying value of bond

478,353 78,353 354,595 Initial purchase px (9,567,052) + 78,353 = 9,645,405 0 when bond matures 10,000,000 (face value of bond purchase)

CJE2: Prior periods sale of undervalued inventory

DR Beg RE CR Inventory 100K 100K 20K CR Beg RE 20K

50K

CJE2a: Tax effect of CJE2

DR DTL

Tax effect
DR Tax expense CR DTL 10K 10K

CJE3: Elimination of unrealised profit in Beg RE

DR Beg RE 48K CR Inventory %unsold x unrealised profit 48K 9.6K CR Beg RE 9.6K

CJE3a: Tax effect of CJE3

DR DTA

Measurement of NCI (a) At FV determined on basis of market prices for shares not held by acquirer, or valuation method (for non-listed) - Full GW recognised (b) At NCIs proportionate share of FV of acquirees INA = NCI ownership % x FV of INA of subsi - Partial GW (parents share) Measurement of Goodwill Gain from bargain purchase - Charge immediately to conso I/S as a gain attributable to acquirer. Amount deducted from beg bal of conso RE a/c CR Gain from bargain purchase

CJE4: Reverse current years over years over depreciation due to unrealised profit included in PPE DR Acc Dep (P) 5K CR Dep Exp (P) 5K CJE4a: Tax effect on CJE4 DR Tax expense (P) 1K CR DTA (Gp) 1K CJE5: Allocate NCI share in adjusted current profit DR NCI share of profit 80,400 CR NCI (B/S) Reported current profit after tax Add: realisation of profit through reversal of depreciation Less: tax expense on reversal of dep Adjusted current PAT NCI share @ 10% 800K 5K (1K) 804K 80,400

Computation for share of tax:

3. Find FV adj in functional currency to be recognised in EQUITY

FV of AFS at 31/12/x2 using spot exchange rate Amortized cost FV adj (to equity) 16,698,060 Carrying amount in FC x spot exchange rate = 16,397,188 297,872

10K

4. Find exchange difference on bond

Amortised cost @ 31/12/x2 Carrying value at 31/12/x1 Amortised discount during 20x2 Exchange loss on bond Add: exchange loss on interest received Exchange loss for 20x2 16,397,188 (17,220,693) (137,118) (960,623) (20,000) (980,623) 400K x change in ER using avg ER 78,353 x average exchange rate

80,400

6K

CJE4: Allocate NCI share in adj Beg RE

DR NCI (B/S) CR Beg RE Computation: Beg RE @ 1/1/x6 Beg RE @ acquisition Change in post-acq RE Less: prior periods undervalued inv Add: related tax effect Less: unrealised profit Add: related tax effect Adj. change in post-acq RE NCIs share @ 10% 800K (700K) 100K (100K) 20K (48K) 9.6K (18.4K) (1.84K) 1,840 1,840

(9K)

CJE5: Elimination of dividends

DR Div income from Y 108K DR NCI (B/S) 12K CR Div declared 90% x total declared 120K

Deferred tax implications For identifiable asset: FV > BV CR DTL (tax rate x FV adj) For identifiable liability: FV > BV DR DTA - Recognised DTL (or DTA) will be reduced as related FV adj is amortized over time Intragroup Transactions NCI IS ONLY AFFECTED BY UPSTREAM SALE/ TRANSFER Upstream sale of PPE

Sale made at loss: unrealised loss will not be eliminated (if it is

because of impairment loss) - If its not because of impairment, must record loss (will create a DTL

36.5K 14.6K

ACCOUNTING FOR ASSOCIATE

EQUITY METHOD OF ACCOUNTING
Must calculate implicit GW

Analytical check on ending NCI for 31/12/x3 Based on EAs, balance of Investment a/c at 31/12/x3 = 615,680 Applying analytical check at 31/12/x3:
Unadjusted book value of A at 31/12/x3 Add/Less: - Less: outstanding unrealised profit from transfer of fixed asset - related tax effect - Less: outstanding unrealised profit in ending inventory (upstream) - related tax effect - Less: outstanding unrealised profit in ending inventory (downstream) - related tax effect Adjusted book value of A - Add: unamortized FV adjustment - related tax effect Adjusted FV of INA of A Ps share @ 40% Add: unimpaired implicit GW Investment in A at 31/12/x3 440K (25K) 5K (6K)

DR Cash 680,000 DR Exchange loss 980,623 CR Interest Rev CR Equity Cr Bond

(400K x 1.7) 478,353 x 1.75 297,872 Change in FV

CJE6: Adj. for realisation of unrealised profit in current year from upstream sale
DR Inventory 36K CR COGS % sold x unrealised profit 36K

EAs on 31/12/x3 EA1: to bring beg Inv and beg RE to equity accounted numbers
DR Beg RE (P) 2,720 CR Investment in A Co 180K (120K) 60K (12.5K) 2.5K (40K) 8K 5K 2,720

IMPAIRMENT OF FINANCIAL ASSETS For HTM, L&R (carried at amortised cost)

CJE7: Adj for realisation of unrealised profit in current year from downstream sale
DR Sales DR Inventory 100K 4K CR COGS % unsold x unrealised loss 104K 800 CR DTL 800

CJE7a: Tax effect of CJE7

DR Tax Expense

1/1/x0: P bought @ 400K, dep over 10 years (40K/yr) 1/1/x2: P sold to S @ 360K, dep over 8 years (45K/yr) - Re-enactment at point of sale 1/1/x2 In conso fs No sale With Sale Adj needed Cost of Asset 400K 360K +40K Acc Dep 80K 0 +80K Profit on sale 0 40K -40K CJEs on 31/12/x2 CJE1: Re-enactment at POS Reinstate to original cost, acc dep, and reverse profit on sale DR Equipment (S) 40K DR Profit on sale (P) 40K CR Acc Dep (S) 80K CJE1a: Tax effect of CJE1 (DR DTA) CJE2: Reverse current years over depreciation due to unrealised profit included in equipment DR Acc Dep 5K CR Dep Exp (S) 5K

CJE8: Elimination of interco loans & balances

DR Interco Payable (P) 40K CR Interco Receivable (Y) 40K

Beg RE @ 1/1/x3 RE @ acquisition Post-acq after tax profits before adj Add/less: - Additional depreciation on undervalue fixed asset at acquisition - Related tax effect - Unrealised profit on upstream tsf of fixed asset - Related tax effect - Past over-depreciation on transferred fixed asset - Related tax effect - Unrealised profit in beg inventory (upstream) - Related tax effect Adj post-acq after tax profit Ps share @ 40%

Subsequent Measurement
1.2K (45K) 9K 379.2K 25K (5K) 399.2K 159,680 456K 615,680

Using Amortised Cost method

Amount of loss measured as the difference between assets carrying amount and the PV of estimated future CF discounted using original effective interest rate - Interest income thereafter is recognised using rate of interest used to discount the future CF for impairment 1) At date of restructuring: - If interest was due on 31/12/x2, and restructure on 1/1/x3, must reverse DR Interest Income 64K CR Interest Receivable 64K - Recognise impairment loss (carrying amount less PV of all future payments using original effect i/r) DR Impairment Loss 326,749 CR Note Receivable 326,749 2) Must draw table to calculate interest income thereafter, using original interest rate as effective rate Year 31/12/x3 31/12/x4 Beg Bal PV of future payments 486,111 473,251 5% coupon rate 25K 25K 8% effective rate 37,860 38,889 Amortised cost 486,111 500K (End Bal)

CJE9: Elimination of I/S effect of loans & balances

DR Interest Income (Y) 1.5K CR Interest Expense (P) DR Interest Payable (Y) 1.5K CR Interest Receivable (P) 1.5K 1.5K

- Use

or

CJE2a: Tax effect on CJE2 (CR DTA) CJE3: Allocate NCI share in adjusted current profit DR NCI share of profit 47,200 CR NCI (B/S) Reported current profit after tax Less: unrealised profit on sale of PPE Add: overstated tax exp Add: realisation of profit through reversal of depreciation Less: tax expense on reversal of dep Adjusted current PAT NCI share @ 10% 500K (40K) 8K 5K (1K) 472K 47,200

(1K) (36K) 7.2K (6.8K) (2,720)

FINANCIAL INSTRUMENTS
Classes Financial Assets 1. Receivables 2. Cash Classification FVTPL AFS Measurement FV thru P/L FV thru FV Reserve Amortised Cost (using EIR) Amortised Cost (using EIR) FV thru P/L Amortised Cost

Journal entries:

At 31/12/20x3
DR Cash DR Debtor 25K 12,860 CR Interest Income 37,860

CJE10: Allocation of NCI share in adj current profit of Y

DR NCI Share of profits CR NCI (B/S) Computation: Current after-tax profit of Y Add: realised profit from prior periods upstream sale Less: related tax effect Adj. current after-tax profit NCIs share @ 10% 98.88K 98.88K 960K 36K (7.2K) 988.8K 98.88K

47,200

EA2: to reclassify dividend income

DR Dividend Income (P) 40K CR Investment in A Co 40K

3. Invt in equity HTM invt < 20% 4. Invt in debt L&R invt (eg. Borrowing) Financial Liabilities 1. Payables FVTPL 2. Borrowings Other Liabilities

(from years x5 to x7 same j/es)

3) Derecognise note when matured

DR Cash DR Debtor 25K 13,889 CR Interest Income 500K CR Note 500K 38,889

EA3: to recognise share of current profit and tax expense

DR Investment in A Co 58.4K DR Share of tax of A Co 14.6K CR Share of profit before tax 73K

DR Cash

Based on CJEs NCI (B/S) = 225,040 Applying analytical check Book value of Y @ 31/12/x6 Less: unrealised profit included therein Add: related tax effect Adj BV NCIs share @ 10% Add: NCI share of GW Total NCI @ period end

2,140K (12K) 2.4K 2,130.4K 213.04K 12K 225,040

CJEs on 31/12/x4 CJE1: Re-enactment at POS Reinstate to original cost, acc dep, and reverse profit on sale DR Equipment (S) 40K DR Beg RE 40K CR Acc Dep (S) 80K CJE1a: Tax effect of CJE1 (DR DTA) CJE2: Reverse prior years over depreciation due to unrealised profit included in equipment DR Acc Dep 5K CR Beg RE 5K

Computation for share of profit:

Unadjusted current profit before tax of A Add/less: - Additional depreciation on undervalue fixed asset at acquisition 200K (12.5K)

Method for accounting regular way purchases/ sales: 1. Trade date accounting - Date that entity commits itself to purchase/ sell 2. Settlement date accounting - Date that an asset is delivered to or by an entity

ACCOUNTING FOR FOREX GAIN/LOSS ON AFS Non-monetary items (shares) Gain/loss recognised directly in equity Monetary items (debt instruments; bonds)

For financial assets carried at COST

1. Find carrying amount of bond in functional currency using spot exchange rate at date of purchase (x1) DR Bond (AFS) 17,220,693 CR Cash 17,220,693 2. Prepare schedule of amortization of bond in FC Year 31/12/x2 For years until bond matures Coupon payment 400K

Impairment loss = difference between carrying amount and the PV of est future CF discounted at current market rate of return for similar financial assets - Such losses shall not be reversed! For AFS - Decline in FV of AFS recognised directly in equity - When impaired, cumulative loss shall be removed from equity and recognised in P/L even tho asset has not be derecognised Amount removed = acquisition cost (net of principal repayments and amortization) less impairment loss previously recognised in P/L - Impairment losses recognised in P/L for equity instruments

classified as AFS cannot be reversed!

- On vesting date

- FO dependent/ independent on parent for financing

DR Liability CR Cash (iv) Check

FV Hedge

- Must account for FV of hedged item & FV of hedging instrument Both goes into P/L

Assets: inventory stock

- Impairment losses recognised in P/L for debt instruments classified as AFS cannot be reversed!

ACCOUNTING FOR COMPOUND INSTRUMENTS Liability & equity component accounted for separately Liability component determined first: FV future CFs using Residual assigned to equity

01/10/08: no entries as FV of forward contract = 0 31/12/08 - Record change in FV of forward contract

DR Derivative Asset 100K CR P/L- gain in forward contract 10,000 x (150-140) 100K 10,000 x (160-150) 100K

Depending on accounting policy, gain in equity at time of purchase of machine will either be Released as machine is depreciated, or Dr Hedging Reserve CR P/L- amortization of reserve Dr Depreciation expense CR Acc. depreciation

Once vested, no further accounting action allowed!

Intrinsic value method (i) For each reporting period up to vesting date

(B) SAR vests after period of service (i) Recognised services received and liability when service rendered during service period, record liability as

Deducted from initial carrying amount of machine

prevailing market i/r for similar debt without equity component

Dr Hedging Reserve CR Machinery

- Record change in FV of inventory

DR P/L- loss on inventory CR Inventory 100K

Liability (variable interest rate)

31/12/09 - Record change in value of forward contract: no j/e - Record change in FV of inventory
DR P/L- loss on inventory CR Inventory DR Cash CR Derivative Asset 100K 100K 100K 10,000 x (150-140) 100K

- Record settlement of forward contract - Prepare schedule for amortization of bond to recognise interest expense 01/04/09
DR Cash 1,420K CR Sales 1,420K DR COGS 800K (find inventory using T bal) CR Inventory 800K

(1) First interest payment Dr Interest Exp CR Cash Dr Swap Asset FV of IRS CR Hedging Reserve (2) 2nd interest payment Dr Interest Exp CR Cash Dr Swap Asset Change in FV of IRS CR Hedging Reserve Dr Cash Diff. bet what he pays and receives CR Interest Exp

(ii) For each reporting period, from the vesting date to final settlement date

(iii) At final settlement (expiry date)

SHARE-BASED PAYMENT TRANSACTIONS

Recognition

FOREX ACCOUNTING
FRS21.21: foreign currency transaction initially recorded in functional currency, using actual rate between functional $ and foreign $ - For group of similar transactions over given period, use average rate - Before vesting date, use IV - After vesting date, use change in IV - Assume by the end of Yr 10, 2K options lapsed Actual total exp = 1672K ($55 x 2k) = X Need to reverse in Yr 10, amount = 1658K X Modifications - Change in exercise price, performance conditions If modification decreases FV of equity instruments already granted, no action needed If increases FV of equity instruments already granted continue to account for original grant determine aggregate incremental FV at date of modification aggregate incremental FV is to be recognised for services received - modification during vesting period: recognise over period from date of change to vesting date - modification after vesting period: recognise immediately or over additional vesting period if imposed

Liabilities: fixed interest rate liability (use of swap) (1) Record issuance of bond
DR Cash (1) Converts at maturity - Derecognise liability component & recognise it as equity - Original equity component remains there forever - Total of Amortization of bond discount column is deducted from RE Dr P/L Finance cost 175,046 CR Unamortised discount on bond 55,046 CR Cash 120K DR Convertible Bond 2mil CR Capital 2mil (2) Converts before maturity 100mil CR Bond Payable 100mil

(2) At interest payment date Measure FV of bond: discount future payments to PV using new i/r if changed (96,196K) Measure FV of IRS using new i/r if changed (3,804K) - Record payment of fixed interest on bond (for previous period) - Record change in FV of
3,804K

Reporting at subsequent B/S dates FRS21.23: At each balance sheet date

Monetary items Translated to functional currency using closing rate Non-monetary items Historical Fair value cost Translated using Translated exchange rates using at date when the exchange fair value was rate at the determined date of the transaction (historical rate) follow treatment of gain/loss on the non-monetary item measured at FV in the foreign currency

ESBP
Object of measuremt EMPLOYEE ESBP FV of equity instruments granted at grant date SUPPLIER ESBP FV of goods/ services

DR Bond Payable 3,804K CR Hedging revaluation gain

- Record settlement of net interest accruals on IRS for first 6 months (difference between fixed and floating rate)
DR Cash 150K CR Interest Expense 150K

Measuremt date

- Record change in FV of IRS after settlement of interest

DR Hedging revaluation loss 3,804K CR IRS revaluation liability 3,804K T bal 3,437K Market price $20mil $21mil $21.5mil

Grant date. But if grant date is dependent on SH, use SH approval date

(3) Termination of hedge

DR IRS Revaluation liability CR Cash 3,437K

HEDGING
Types of Risks (1) Price, (2) I/R, (3) FX, (4) Credit, (5) Liquidity Risk Hedged Items 1. Assets FVH, FVH: (P/L) CFH - FV of H Item - FV of H 2. Liabilities FVH, instrument CFH CFH: (equity) 3. Unrecognised FC FVH, - FV of H CFH instrument 4. HPFT CFH Hedging Reserve 5. NIFO HNIFO FV of H instrument exchange translation reserve (equity) Hedging Instruments 1. Options 3. Futures Call: buy/ Put: sell Buy: long position/ Sell: shor 2. Forwards 4. Swaps - Interest rate swap Hedge accounting Hedge Effectiveness: Prospective testing by comparison of past changes, showing high statistical correlation Retrospective testing: within 80-125 - Using dollar offset system

Firm commitment
Year 31/07/x6 31/12/x6 31/12/x7 Machine 10mil 10mil 10mil Forward Contract $20mil $20mil $20mil

31/07/x6: no entries as FV of forward contract = 0 31/12/x6

DR Forward Asset 1mil CR P/L- gain on forward contract DR P/L- loss on firm commitment 1mil CR Firm commitment 1mil 1mil

31/12/x7
Dr Bank 1.5mil 1mil 0.5mil 0.5mil 21.5mil 1.5mil CR Forward Asset CR P/L- gain on forward contract Dr P/L- loss on firm commitment 0.5mil CR Firm commitment Dr Machinery 21.5mil CR Cash Dr Firm commitment 1.5mil CR Machinery

*once FV (per unit) obtained, not revised subsequently USE FV If equity of instruments granted Market exist: use mkt price, but may need to adjust for T&Cs Market does not exist: valuation technique Unreliable: use IV method (A) Vests immediately DR Equity compensation exp Total FV of instruments CR Equity compensation reserve - Subsequently even if vested instruments are forfeited or lapsed, no reversal allowed! - Reserve a/c remains there indefinitely unless transferred to Share Cap or RE a/c (B) Dont vest immediately (i) FIXED VESTING PERIOD Record equity compensation expense over this fixed period (ii) VARIABLE VESTING PERIOD Non-market performance condition Record expense over expected vesting period est. at grant date Subsequently revised along the way Market performance condition Record expense over expected vesting period est. at grant date NOT revised thereafter Method of measuremt - For each reporting period within vesting period, reporting periods equity compensation must be determined

Date that you obtain the goods, or counter-party renders services

Result of remeasurement unrealised exchange gain/loss recognised in P/L Unrealised exchange differences arise only when there are exposures to exchange rate items either through Future settlement in foreign currency (monetary items) Measurement of FV in foreign currency (non-monetary) Assets: foreign $ appreciates relative to functional $ (gain) Liabilities: foreign $ appreciates relative to functional $ (loss) It is the foreign currency changes that causes the gain/loss

Set exchange rate to- functional $ : foreign $

Share Appreciation Rights (SAR): employee will only exercise if share px @ exercise > stipulated px, company will pay difference in CASH (A) SAR vests immediately, presumption that service has been rendered (i) Recognise immediately services received and liability DR Expense Total FV CR Liability Total FV (ii) At each subsequent reporting date until expiry, re-measure FV of liability for SAR which are not exercised

CSBP

Settlement date If settlement date exchange difference is different from rate last used in books, exchange difference realised taken to P/L FRS21.25: for non-monetary items (inventories/PPE) measured in foreign currency
Inventories/ PPE Cost/ Carrying amount NRV/ Recoverable Amount Translated at historical rate Translated at exchange rate at date value was determined

CF Hedge - Only FV the instrument. Effective portion goes into equity. Ineffective portion goes into P/L Firm commitment 31/07/x6: no entries as FV of forward contract = 0 31/12/x6 31/12/x7

DR Liability Total FV CR Expense Total FV (iii) At each exercise date, record expense and notional increase in liability by FV of the exercised SAR # equity instruments expected to vest revised based on expected attainment of vesting conditions provided they are non-market vesting conditions (service/performance). Revisions NOT allowed with respect to market vesting conditions and non-vesting conditions

Translation of financial statements Re-measurement/ temporal method: translating from foreign currency to functional currency Closing rate method: translation from functional currency to presentation currency Whether FO should have same functional currency as reporting entity depends on secondary indicators: - Extension of parent/ significant degree of autonomy - Transactions with parent high/ low proportion of FOs activities - CF from activities of FO directly/ little effect of CF of parent

- Hedged effectiveness: less than 100% offset Ineffective portion recognised in P/L Effective portion recognised directly in equity

DR Expense CR Liability