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Under IFRS 9, the basis for classifying and measuring financial assets is the business model for
managing the financial asset and the contractual cash flow characteristics of the financial asset. 1
Where the business model for managing the financial asset is to hold the financial asset to collect
the contractual cash flows and where the contractual terms of the financial asset give rise on
specified dates to cash flows which are solely payments of principal and interest on the principal
amount outstanding, then the financial asset is measured at amortised cost. ½+½+½
Where the business model for managing the financial asset is to both hold the financial asset to
collect the contractual cash flows and to sell the financial asset and where the contractual terms of
the financial asset give rise on specified dates to cash flows which are solely payments of principal
and interest on the principal amount outstanding, then the financial asset is measured at fair value
through other comprehensive income. ½ + ½ + ½
If a financial asset is not measured at amortised cost or fair value through other comprehensive
income, then it is measured at fair value through profit or loss (the default category).
An entity can make an optional irrevocable election on initial recognition that particular investments
in equity instruments which would otherwise be measured at fair value through profit or loss be
measured at fair value through other comprehensive income. This election is only possible if the
equity investment is not ‘held for trading’. ½+½+½
Notwithstanding the above, an entity may, at initial recognition, irrevocably designate a financial
asset as measured at fair value through profit or loss if to do so would eliminate or reduce a
measurement or recognition inconsistency which would otherwise arise from measuring assets or
liabilities or recognising gains or losses on them on different bases (an ‘accounting mismatch’). ½ +
½+½
Required:
Explain and show how the three events should be reported in
the financial statements of Epsilon for the year ended 31 March
2018. In part (b) you should assume that Epsilon only
measures financial assets at fair value through profit or loss
when required to do so by IFRS 9.
(i) Since the business model is to collect the contractual cash flows and the cash flows consist solely
of the repayment of principal and interest, this asset is measured at amortised cost. 1
(explanation)
The initial carrying amount of the financial asset will be $30·25 million ($30 million fair value +
$250,000 transaction costs). 1
The finance income recorded under investment income category in the statement of profit or loss
for the year ended 31 March 2018 will be $3·025 million ($30·25 million x 10%). 1
The carrying amount of the financial asset in the statement of financial position at 31 March 2018
will be $31·775 million ($30·25 million + $3·025 million – $1·5 million). 1
(ii) Since this is an equity investment which Epsilon has no intention of selling, Epsilon can measure
the investment at fair value through other comprehensive income (provided irrevocable election on
initial recognition has been made). 1
Since the financial asset is measured at fair value through other comprehensive income, the
transaction cost (agent’s commission) is included in the initial fair value of shares (500,000 x $2 +
$100,000). 2
The carrying amount of the financial asset in the statement of financial position at 31 March 2018
will be $1·125 million based on fair value of shares at the year end (500,000 x $2·25). 1
The difference (fair value gain) of $25,000 ($1·125 million – $1·1 million) will be recognised in other
comprehensive income. 1
Dividend income of $150,000 (500,000 x 30 cents) will be recognised as other income in the
statement of profit or loss. 1
(iii) The call option cannot be measured at amortised cost or fair value through other comprehensive
income, so it must be measured at fair value through profit or loss. 1
The initial carrying value of the call option will be $125,000 (100,000 x $1·25). 1
At the year end, the call option will be re-measured to its fair value of $160,000 (100,000 x $1·60).
1
The fair value gain of $35,000 ($160,000 – $125,000) will be recognised in the statement of profit or
loss.
Query One
I’m confused about our treatment of equity investments in listed
entities that we don’t control. There seem to be two different
treatments in our financial statements. One of the notes to the
financial statements says that the equity investments we hold to
temporarily invest surplus cash balances are measured at fair value
and that changes in fair value are recognised in profit or loss.
Another note says that the equity investment we hold in a key
supplier is measured at fair value and that changes in fair value are
recognised in other comprehensive income (OCI). Earnings per
share (EPS) is a key performance indicator for Omega, so please
explain how it can be justified to use two different treatments for
equity investments made by the same entity. Please also explain
what the impact on EPS might be if a gain or loss is reported in OCI
rather than profit or loss. (6 marks)
Required:
Provide answers to the queries raised by the managing
director. You should justify your answers with reference to
relevant International Financial Reporting Standards.
Query One
The accounting treatment of equity investments which we do not control or significantly influence is
dealt with in IFRS 9 – Financial Instruments. ½
Under IFRS 9, equity investments are financial assets which fail the ‘contractual cash flow test’.
Equity investments must be measured at fair value. ½+½
Under IFRS 9, gains or losses on the remeasurement of financial assets measured at fair value are
normally taken to profit or loss. ½
In the case of equity investments not held for trading, it is possible to make an irrevocable election
at initial recognition to recognise gains or losses on the remeasurement to fair value in other
comprehensive income. ½+ ½+ ½
The IASB Conceptual Framework for Financial Reporting makes no clear conceptual distinction
between gains and losses reported in profit or loss and gains and losses reported in other
comprehensive income. ½
The distinction between profit or loss and other comprehensive income does have some practical
relevance, however. ½
The distinction is particularly important for listed entities. Such entities are required to report their
earnings per share under IAS 33 – Earnings per Share. Gains and losses reported in profit or loss
affect earnings per share whereas gains or losses reported in other comprehensive income do not.
(a) The classification and measurement of financial assets is largely based on:
The business model for managing the asset – specifically whether or not the objective is to hold the
financial asset in order to collect the contractual cash flows. 1
Whether or not the contractual cash flows are solely payments of principal and interest on the
principal amount outstanding. 1
Where the business model for managing the asset is to hold the financial asset in order to collect the
contractual cash flows and the contractual cash flows are solely payments of principal and interest
on the principal amount outstanding, then the financial asset is normally measured at amortised
cost. 1
Where the business model for managing the asset is to both hold the financial asset in order to
collect the contractual cash flows and to sell the financial asset and the contractual cash flows are
solely payments of principal and interest on the principal amount outstanding, then the financial
asset is normally measured at fair value through other comprehensive income. Interest income on
such assets is recognised in the same way as if the asset were measured at amortised cost. 1+
1
In other circumstances, financial assets are normally measured at fair value through profit or loss.
1
Notwithstanding the above, where equity investments are not held for trading, an entity may make
an irrevocable election to measure such investments at fair value through other comprehensive
income. 1
Finally an entity may, at initial recognition, irrevocably designate a financial asset as measured at fair
value through profit or loss if to do so eliminates or significantly reduces an accounting mismatch.
Given the fact that Kappa normally requires a return of 10% per annum on business loans of this
type, the loan asset should be initially recognised at $661,157 ($800,000/(1·10)2). 1
An amount of $138,843 ($800,000 – $661,157) would be charged to profit or loss at 1 October 2015.
1
Because of the business model and the contractual cash flows, this loan asset will subsequently be
measured at amortised cost. 1
Therefore $66,116 ($661,157 x 10%) will be recognised as finance income in the year ended 30
September 2016. The closing loan asset $727,273 will be ($661,157 + $66,116). This will be shown as
a current asset since repayment is due on 30 September 2017.
Required:
Explain and show how the above transactions would be
reported in the financial statements of Kappa for the year
ended 30 September 2016.
(iii) The equity investment would be initially recognised at its cost of purchase – $12 million. 1
The contractual cash flows relating to an equity investment are not solely payments of principal and
interest on the principal amount outstanding. Therefore the asset would normally be measured at
fair value through profit or loss. This would result in a gain on remeasurement to fair value of $1
million ($13 million – $12 million) being recognised in profit or loss. 1
Since the equity investment is being held for the long term, rather than as part of a trading portfolio,
it is possible to make an irrevocable election on 1 October 2015 to classify the asset as fair value
through other comprehensive income. In such circumstances, the remeasurement gain of $1 million
would be recognised in other comprehensive income rather than profit or loss.
You are the financial controller of Omega, a listed company which
prepares consolidated financial statements in accordance with
International Financial Reporting Standards (IFRS). Your managing
director, who is not an accountant, has recently attended a seminar
and has raised two questions for you concerning issues discussed
at the seminar:
(b) Another delegate was discussing the fact that the entity of which
she is a director is relocating its head office staff to a more suitable
site and intends to sell its existing head office building. Apparently
the existing building was advertised for sale on 1 July 2015 and the
entity anticipates selling it by 31 December 2015. The year end of
the entity is 30 September 2015. The delegate stated that in certain
circumstances buildings which are intended to be sold are treated
differently from other buildings in the financial statements. Please
outline under what circumstances buildings which are being sold
are treated differently and also what that different treatment is. (10
marks)
Required:
Provide answers to the questions raised by the managing
director.
Query Three
‘I was confused when I looked at the statement of financial position
and saw that the assets and liabilities were divided up into three
sections and not two. The current and non-current sections I
understand but I don’t understand the ‘non-current assets held for
sale’ and ‘liabilities directly associated with non-current assets held
for sale’ sections. Please explain the meaning and accounting
treatment of a non-current asset held for sale. Please also explain
how there can be liabilities directly associated with non-current
assets held for sale.’ (4 marks)
Required:
Provide answers to the three queries raised by the managing
director. Your answers should refer to relevant provisions of
International Financial Reporting Standards
Query Three
A non-current asset is classified as held for sale when its carrying amount will be recovered
principally through a sale transaction, rather than through continuing use. 1
Such assets are measured at the lower of their carrying amount and fair value less costs to sell. Any
write downs arising out of this process are treated as impairment losses. ½+½+½
The ‘held for sale’ definition can apply to groups of assets as well as single assets where the group of
assets is to be sold as a single unit. It is in situations such as this that liabilities associated with such
groups of assets are separately identified. ½+½+½
Goodwill
Property, plant and equipment
Patents and trademarks
Inventories
Trade receivables
Delta offered the business for sale at a price of $46·5 million, which
was considered to be reasonably achievable. Delta estimated that
the direct costs of selling the business would be $500,000. These
estimates have not changed since 1 June 2013 and Delta estimates
that the business will be sold by 31 March 2014 at the latest.
The business would be regarded as held for sale from 1 June 2013. The held for sale criteria apply
because the business is being actively marketed at a reasonable price and the sale is expected to be
completed within one year of the date of classification. 1
Given this classification, IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations –
requires that the assets be separately classified under current assets in the statement of financial
position. No further depreciation would be charged on these assets. 1
The assets will be measured at the lower of their current carrying amounts at the date of
classification and their fair value less costs to sell. In this case, the total carrying amount after re-
measurement will be $46 million ($46·5 million – $0·5 million). 1
The impairment loss of $17 million ($63 million – $46 million) will first be allocated to goodwill
taking its carrying amount to nil. 1
None of the remaining impairment loss will be allocated to inventories or trade receivables since
their recoverable amounts are at least equal to their existing carrying amounts. 1
The remaining impairment loss of $7 million ($17 million – $10 million) will be allocated to the
property, plant and equipment and the patents on a pro-rata basis. 1
The closing carrying amounts of the property, plant and equipment and the patents will be $15
million and $6 million respectively. 1