AFAB243

FINANCIAL ACCOUNTING & REPORTING 3

SEMESTER 2, 2017/2018
TUTORIAL TOPIC 8: DEFERRED TAXES AND FINANCIAL ASSETS &
LIABILITIES: AN EVALUATION

QUESTION 1
On 1 January 20X1, KP Setia Bhd issued 100,000 units of convertible unsecured loan stocks
(CULS) at the nominal value of RM1 each. The CULS carry a coupon interest rate of 3% per
annum and interest is payable on 31 December each year. The CULS could be converted into
ordinary shares at RM2 conversion by the maturity date would be redeemed at their nominal value
of RM1 each.
As at the date of the issue of the CULs and based on KP Setia’s current bond rating, the prevailing
market interest rate for similar risk class bond was 10% per annum.

KP Setia Bhd splits up the components of this compound instrument by using the DCF model to
vale the liability components with the equity component arrived at as the residual amount. It uses
the amortised cost model to account and adjust the carrying amount of the liability component for
the accretion in the bond value. Amortisation of bond discount is not an allowable expense for
income tax purposes. Income tax rate is 25%.

Required:

Compute the temporary differences associated with the liability component and the resulting
deferred tax liability for each of the five-year period. Also show the deferred tax expense or income
that is associated with the subsequent changes in the carrying amount of the liability component

1
QUESTION 2

On 1 January 20X1, Handy Bhd Issued 350 million units of Irredeemable Unsecured Loan Stocks
(ICULs) to the investing public. The terms of the issue were as follows:

Issue Price RM1.00 per RM1.00 nominal value of ICULs

Coupon rate The ICULs carry a coupon rate of 2% per annum. Such coupon rate shall
be payable in arrears annually during its tenure one (1) day before the
anniversary of the date of issuance up to its full conversion.
Conversion Rights The ICULS may be converted at the option of the holders into ordinary
shares of Handy Bhd at the conversion price at any time after its issuance
up to maturity date. On maturity date, all outstanding ICULs shall be
automatically converted into ordinary shares at the conversion price.
Conversion price RM1.00 nominal value of ICULS can be converted into one (1) new
ordinary share in Handy Bhd
Redemption Not Redeemable
Tenure Three (3) years
Maturity date 1 January 20x4

The Bonds and similar debt instruments of Handy Bhd were rate at “AAB”. On 1 January 20x1, it
effective market interest rate was 7% per annum.
Assume an income tax rate of 28%.

Required:

Explain How Handy should account for the issuance of the ICULs in its financial statements. Your
explanation should include the accounting treatment in each of the following situations.
(a) On issue date
(b) The RCULs remained outstanding throughout the three-year tenure and were automatically
converted into ordinary shares on maturity date.