School/Department: SCHOOL OF ACCOUNTING

Programme: Bachelor of Commerce/ Accounting

Unit Code/Title: ACC702 – International Corporate Reporting

Year: _____________
Trimester: __________
Date of Exam: _________(not yet determined)
Time: _________
Examiner’s Name: Mr. Sanjay Sharma

Signature:……………………………………………………….

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 Section A Discussion Questions 60 marks

Answer all questions.

1. You are a graduate accountant of the ABC Company limited that is preparing its first
set of financial statements. Required: In determining the depreciation for the first year,
what sorts of information would you need? Explain your answer with reference to
IAS16.

[5 marks]

A number of judgements would be required. Firstly we would need to determine the cost,
or revalued amount of the respective assets. √
We would then need to determine any expected residual amount for the asset as at the end
of its useful life. Such information would then provide us with the ‘depreciable base’ of
the respective assets. √
We would then need to determine whether the assets would be subject to periodic
depreciation/amortisation. √
If, for example, the assets were to be accounted for by use of ‘mark-to-market’ then no
depreciation would be recognised.
If the assets were to be depreciated we would then need to determine respective useful
lives. √
The useful lives might be based upon time, or perhaps tied to other factors, such as
production output. If the asset is considered to have an indefinite life, then no
depreciation might be recognised. Rather, the asset might be subject to annual
impairment testing.
Once we have determined the depreciable base and the useful lives of the respective
assets, and we believe that the asset does not have an indefinite life, then we need to
determine the method of apportionment of the cost, or revalued amount, over the assets’
useful lives. For example, we might use the straight line method, or perhaps a declining
balance approach. √

2. Explain how a company should account for a revaluation increment and a revaluation

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 decrement on property, plant and equipment. Also discuss the accounting treatment if
such an increment or decrement is to be reversed.

[5 marks]

IAS 16 states the general policy that, whenever a non-current asset is to be revalued, the
entire class of assets to which that asset belongs must be revalued to fair value, so that all
assets of the same class are stated at amounts which are determined at the same date. √

When non-current assets of a particular class are initially revalued upwards to fair value,
the revaluation increment on each asset in that class must be credited directly to an equity
account entitled Revaluation Reserve (referred to “revaluation surplus” in IAS 16). √
Accumulated depreciation up to the date of the revaluation is usually written back
against the asset’s cost/carrying amount on the date of the revaluation. (Even though the
increment is credited to a reserve, movements in that reserve must then be disclosed in
the statement of comprehensive income for the period). √

Under the standard, downward revaluations of assets within a class of non-current assets
can occur only when those assets’ carrying amounts exceed their fair values. A
revaluation decrement represents a write-down of a class of non-current assets from
carrying amount to fair value. The standard requires a revaluation decrement to be treated
as an expense (and hence a reduction of profit) in the current period. As with revaluation
increments, any accumulated depreciation on the assets should be written off against the
assets. √
For reversal and/or offset of a revaluation increment credited to a Revaluation Reserve
(Surplus), the Revaluation Reserve created under the standard should be written down,
but only to the extent that it has been previously written up. Additional reversals are then
treated as an expense, (a decrement)
Any reversal of an initial revaluation decrement should be credited as income and added
to the entity’s profit to reverse the previously recognised expense, but only to the extent
of the previous write-down. Any amount in excess of the previous write-down should
then be credited to the Revaluation Reserve, (which is reported in the statement of
comprehensive income below the profit figure as an increase in equity from sources other
than owners). √

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3. Explain the difference between ‘research cost’ and ‘development cost’ and provide an
argument in support of the accounting requirement that research is to be written off as
incurred. Explain your answer with reference to IAS38.
[5 marks]

Research is original and planned investigation undertaken with the prospect of gaining
new scientific or technical knowledge and understanding. √
Examples of research activities:
(a) activities aimed at obtaining new knowledge;
(b) the search for, evaluation and final selection of, applications of research findings or
other knowledge;
(c) the search for alternatives for materials, devices, products, processes, systems or
services; and

Development is the application of research findings or other knowledge to a plan or design

for the production of new or substantially improved materials, devices, products, processes,
systems or services before the start of commercial production or use. √

Examples of development activities:

(a) the design, construction and testing of pre-production or pre-use prototypes and
models;
(b) the design, construction and operation of a pilot plant that is not of a scale
economically feasible for commercial production; and
(c) the design, construction and testing of a chosen alternative for new or improved
materials, devices, products, processes, systems or services

No intangible asset arising from research (or from the research phase of an internal
project) shall be recognised. Expenditure on research (or on the research phase of an
internal project) shall be recognised as an expense when it is incurred. √

In the research phase of an internal project, an entity cannot demonstrate that an

intangible asset exists that will generate probable future economic benefits. Therefore,
this expenditure is recognised as an expense when it is incurred. √

Hence, the argument is that the nexus between the expenditure and the subsequent
economic benefits is too uncertain to allow an asset to be recognised for balance sheet
purposes. Certainly, much research expenditure would not lead to future economic
benefits. √

4. Manasa Ltd has been negotiating with Tom ltd for several months, and agreements
have finally been reached for the two companies to combine. In considering the

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 Accounting for the combined entities, management realizes that, in applying IFRS 3, an
acquirer must be identified. However, there is debate amongst Accounting staff as to
which entity is the acquirer.

Required
a) Identify and explain 3 factors should Management consider in determining which entity
is the acquirer?

[3 marks]

b) Why is it necessary to identify an acquirer? In particular, what differences in

accounting would arise if Manasa Ltd or Tom Ltd were identified as an acquirer?

[3 marks]

c) Explain 4 key steps in the acquisition method.

[4 marks]

a) The acquirer is the combining entity that obtains control of the other combining
entities.

Determination of the acquirer requires judgement.

IFRS 3 provides indicators/guidelines to assist in this judgement:

- form of consideration: did one entity transfer cash or other assets for the shares of the
other? [para B14]; did one entity issue its own equity interests in exchange for another
entity’s equity interests? Was there a premium paid by one of the entities?
- subsequent management: which entity’s management subsequently controls the business
combination? What are the relative voting rights after the business combination?
- What is the composition of the senior management of the combined entity?
- large minority voting interest:The acquirer normally holds the largest minority voting
interest in the combined entity.
- predator or target: which entity initiated the combination?
- relative size of the businesses: is the fair value of one entity significantly greater than
another? Large entities normally takeover small entities;

b) Why identify an acquirer?

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 The consideration transferred is measured on the basis of the consideration given by the
acquirer, while the identifiable assets and liabilities of the acquiree are measured at
fair value. In relation to Manasa Ltd – tom Ltd, the main effect then would be:

If Manasa Ltd is the acquirer, the identifiable assets, liabilities and contingent liabilities
of Tom Ltd would be measured at fair value while Manasa Ltd assets and liabilities
remain at their original carrying amounts.
If Tom Ltd were the acquirer, it would be Manasa Ltd’s assets and liabilities that would
be at fair value.

c) Explain the key steps in the acquisition method.

 identify the acquirer

 determine the acquisition date
 recognise and measure the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquiree
 recognise and measure goodwill or a gain from a bargain purchase.

5. ‘Employee benefits typically constitute a significant component of an entity’s expenses.

Employees are paid different forms of consideration in exchange for service rendered to
an entity’

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 Required: Discuss with reference to IAS19 the definition and accounting treatment
of accumulating vs. non-accumulating annual leave and vesting vs. non-vesting sick
leave.

[5 marks]

Employee entitlement to be paid for service rendered.

Examples include sick leave and annual leave

Accumulating sick leave may be carried forward to a future period if the employee
has not taken the leave in the current period.
Non-accumulating sick leave may not be carried forward to a future period. A
liability must be recognised for accumulating sick leave when the employee renders
services that increase the entitlement.

The liability is measured as the amount that the entity expects to pay. If the leave is
non-vesting, the amount recognised is affected by the probability that the leave will
be taken.

If sick leave is vesting, the employee is entitled to cash settlement for unused leave.
If sick leave is non-vesting, the employee has no entitlement to cash settlement of unused
leave. The employer recognises a liability for accumulating sick leave, measured as
the undiscounted amount expected to be paid. The entity will have good reason to
expect that all vested accumulating sick leave will be paid. However, if sick leave is
not vesting, a liability is recognised for proportion of accumulated sick leave that the
entity expects to be taken by its employees.

6. What are possible arguments for and against the prohibition of recognition of internally
generated goodwill? Explain your answer with reference to IAS38.
[5 marks]

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 For:
It would be difficult to objectively determine the value of goodwill in the absence of a
market transaction. That is, the reliability of the recorded amount may be questionable.
Further, management may be able to employ particular assumptions in order to provide
them with their desired goodwill amount.

Against:
An obvious argument against is one of consistency. The firm can recognise and revalue
some other forms of intangible assets that were acquired at a cost. Should the fact that
something was not acquired at a cost be enough to prohibit its recognition?

Further, it does seem a bit odd, and conceptually unsound, that the entity that generates
the goodwill cannot show the asset in its balance sheet, but as soon as the entity is taken
over, the acquiring company can disclose the purchased goodwill. This would lead to
recorded assets being understated in the acquired entity.3

7. Explain how a defined contribution superannuation plan differs from a defined benefit
superannuation plan. How an entity should account for its contribution to this plan.
Explain your answer with reference to IAS19.

[5 marks]
Under a defined contribution superannuation plan the employer pays fixed contributions
into a fund. Employees’ benefits are a function of the level of contributions paid and
the return achieved by the fund on the investment of plan assets. The employer has
no obligation to make further payments if the fund is unable to pay all the benefits
accruing to members for past service.
In a defined-benefit superannuation plan, the benefits received by members on retirement
are determined by a formula reflecting their years of service and level of
remuneration, rather than the performance of the fund. The employer has an
obligation to pay further contributions if the fund is unable to pay members’ benefits.

Contributions payable to defined contribution funds are recognised as expenses in the

period that the employee renders services, unless another standard permits the cost of
employment benefits to be allocated to the carrying amount of an asset, such as
inventory. If the amount paid to the defined contribution fund by the entity during the
year is less than the amount payable in relation to services rendered by employees, a
liability for unpaid contributions must be recognised. The liability is measured at the
undiscounted amount payable unless it is due more than 12 months after the end of
the period, in which case it is discounted
8. ‘Entities are required to conduct impairment tests to ensure that disclosed assets do not
have carrying amounts in excess of their recoverable amounts’

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Required: Answer the following questions with reference to IAS36.
i. Discuss 2 external indicators and 2 internal indicators of impairment.
[5 marks]

ii. Explain how impairment loss is calculated in relation to a single asset and for
a cash-generating unit.

[5 marks]

Impairment test to determine if an entity’s assets are overstated, that is, whether the
carrying amount of the assets is greater than their recoverable amount.

some external indicators of impairment

• significant decline in market value
• significant changes in the technological, market, economic or legal environment in
which the entity operates
• increases in market interest rates
• the carrying amount of the entity’s assets exceeds the entity’s market capitalisation

some internal indicators of impairment

• evidence of obsolescence or physical damage
• assets becoming idle, plans to discontinue operations, plans to dispose of assets
• economic performance is worse than expected

impairment loss calculated in relation to a single asset accounted for?

Under cost model:

- Recognise loss immediately in profit or loss
- Write down asset – if depreciable, increase accumulated depreciation and impairment
losses account
Under revaluation model: as for a revaluation decrease under that model, the effect being
dependent on whether there have been past revaluation increments.

impairment losses accounted for in relation to cash generating units?

- Reduce the carrying amount of any goodwill allocated to the CGU
- Allocate any balance of loss to the other assets of the CGU pro rata on the basis of
their carrying amounts

9. What are the arguments for and against the use of fair value as the measurement basis
for biological assets and agricultural produce? Why do you think the IASB settled on
requiring fair value?

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 [5 marks]

The IASB decided that fair value provided more relevant information and that this
information was more comparable and understandable. It also decided that fair value
could usually be reliably determined but made an exception for cases where this was
not possible. The exception recognised that fair value may not be able to be measured
reliably where market prices are not available and alternative estimates of fair value
are determined to be clearly unreliable. However, this exception can only be applied
on initial recognition of the biological asset.

The arguments for include that: many biological assets are traded in active markets and
active markets provide relevant and reliable information; long production cycles
mean that the change in asset value is more relevant than a period-end measure of
costs incurred; valuation based on costs is arbitrary when there are joint products and
joint costs; and, different sources of animals and plants (e.g. home-grown or
purchased) should not be measured differently which would occur if the historic cost
valuation model were used rather than the fair value model.

10. State whether the following are (a) biological assets, (b) agricultural produce or (c)
products that are as a result of processing after harvest. Also State whether they
would be measured (a) at fair value or at the lower of cost and net realisable value.
i. living pigs:
ii. pork sausages:
iii. furniture:
iv. olive trees:
v. olive oil: [5 marks]

1. living pigs: (a) fair value (biological asset)

2. pork sausages: (b) LCM (other products)
3. furniture: (b) LCM (other products)
4. olive trees: (a) fair value (biological asset)
5. olive oil: (b) LCM (other products)

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Section B: Problem Solving 40 Marks

All questions are compulsory

1. Rennau Ltd has acquired a new machine, which it has had installed in its factory.
Which of the following items should be capitalised into the cost of the building?

 Labour and travel costs for managers to inspect possible new machines and for
negotiating for a new machine $5000
 Freight costs and insurance to get the new machine to the factory $7000
 Costs for renovating a section of the factory, in anticipation of the new machine’s
arrival, to ensure that all the other parts of the factory will have easy access to the
new machine $1000
 Cost of cooling equipment to assist in the efficient operation of the new machine
$3000
 Costs of repairing the factory door, which was damaged by the installation of the
new machine $2000
 Training costs of workers who will use the machine $3500

[5 marks]

(a) labour and travel costs $5000

(b) freight costs $7000
(c) costs of renovating $1000
(d) cost of cooling equipment $3000

Total 16000

Exclude:
(e) costs of repair – these are not directly attributable to bringing the asset to
its location & condition for operation. These costs should be expensed.
(f) training costs – these benefits cannot be controlled

ABC XYZ

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 Limited Limited
Cash $23,000 $12,000
Account receivables 25000 34700
Inventory 35500 27600
Freehold land 150000 100000
Buildings(net) 60000 30000
Plant and
equipment(net) 65000 46000
Goodwill 25000 2000
$383,500 $252,300
Accounts payable 56000 43500
Mortgage loan 50000 40000
Debentures 100000 50000
Share Capital -100000 shares 100000 -
-60000 shares - 60000
Other reserves 28500 26800
Retained earnings 49000 32000
$383,500 $252,300
2. ABC Company Limited is seeking to expand its share of the widgets market and as
negotiated to take-over the operations XYZ limited on 1st January 2016. The
statements of financial position of the two companies as at 31st December 2015 were
as follows:

ABC limited is to acquire all the assets except cash, of XYZ Limited. The assets of XYZ
limited are all recorded at fair value except:

Fair
value
Inventory 39000
Freehold land 130000
Buildings 40000

In exchange, ABC limited give 2 fully paid shares for every 3 shares held in by XYZ
limited. The fair value of a share in ABC limited is $3.20. Plus ABC Limited is to
provide sufficient cash to allow XYZ Ltd to repay all of its outstanding debts and

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 liquidation costs 2400. An investigation by the ABC limited reveals that 31st December
2015 the following debts were outstanding but have not been recorded.
Accounts payable 1600
Mortgage Interest 4000
Debentures interest 2500

Required: Prepare the acquisition analysis and journal entries to record the business
combination in the records of ABC Limited. Answer with reference to IFRS3.

[10 marks]

Acquisition analysis

Net fair value of assets and liabilities acquired:

Accounts receivable $34 700
Inventory 39 000
Freehold land 130 000
Buildings 40 000
Plant and equipment 46 000
$289 700

Consideration transferred

Shares: 2/3 x 60 00 x $3.20 $128 000

Cash
Accounts payable $45 100
Mortgage and interest 44 000
Debentures and premium 52 500
Liquidation expenses 2 400
144 000
Cash held (12 000) 132 000
$260 000

Gain on bargain purchase = $289 700 - $260 000

= $29 700

General Journal

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Accounts receivable Dr 34 700
Inventory Dr 39 000
Freehold land Dr 130 000
Buildings Dr 40 000
Plant and equipment Dr 46 000
Payable to XYZ Ltd Cr 132 000
Share capital Cr 128 000
Gain on bargain purchase Cr 29 700
(Acquisition of net assets of
XYZ Ltd and shares issued)

Payable to XYZ Ltd Dr 132 000

Cash Cr 132
000
(Payment of cash consideration)

Share capital Dr 1 200

Cash Cr 1 200
(Costs of issuing shares)

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3. Brilliant Ltd acquires copyrights to the original recordings of a famous singer. The
agreement with the singer allows the company to record and rerecord the singer for a
period of five years. During the initial six month period of the agreement, the singer
is very sick and consequently cannot record. The studio time that was blocked by the
company had to be paid even during the period the singer could not sing. These costs
were incurred by the company.

i. Legal cost of acquiring the copyrights

$10million
ii. Operational loss (studio time lost, etc) during start up period
$2 million
iii. Massive advertising campaign to lunch the artist
$1 million

Required: Discuss which of the above cost from (i- iii) is eligible to be recognized as an
intangible asset using IAS 38?

[5 marks]

a) Legal cost of acquiring the copyrights $10million – is an Intangible assets

b) Operational loss $2 million – Not allowed to be capitalized and not an intangible
assets
c) Massive advertising campaign to lunch the artist $1 million - Not allowed to be
capitalized and not an intangible assets

4. ABC Limited has two cash generating units. Division One and Division Two.

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At 30 June 2016, the net assets of the two divisions were as follows:

Division Division
One Two
Cash $12,000 $8,000
Inventory 30000 40000
Receivables 20000 8000
Plant 320000 0
Accumulated depreciation (plant) (120000) 0
Land 90000 150000
Buildings 110000 140000
Accumulated depreciation (Buildings) (40000) (60000)
Furniture and Fittings 0 30000
Accumulated depreciation (Furniture and
Fittings) 0 (10000)
Total assets $422,000 $306,000
Provisions 20000 40000
Borrowings 30000 66000
Total liabilities 50000 106000
Net assets $372,000 $200,000

Additional information regarding the division assets:

 The receivables of both divisions were considered to be collectable

 Division Two’s Land had a fair value lest cost to sell of $135000 at 30th June 2016.
 At 30 June 2016 ABC Limited also had the following corporate assets, with ABC’s
management decided to allocate equally to the two divisions:
- Goodwill of $14000
- a head office building with a carrying amount of $160000 (net of $50000
accumulated depreciation).

ABC Limited’s management conducted impairment testing on the company’s assets at 30

June 2016 and determined that:
Division One’s Value in use was $415000

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 Division Two’s Value in use was $310000

Required: Prepare the journal entries required at 30 th June 2016 to account for any
impairment losses. Answer with reference to IAS36.

[15 marks]
ABC LTD
Division 1:
Total assets = $422 000 + $7 000 + $80 000
= $509 000
Value in use = $415 000
Impairment loss = $94 000

Division 2:
Total assets = $306 000 + $7 000 + $80 000
= $393 000
Value in use = $310 000
Impairment loss = $83 000

ALLOCATION OF IMPAIRMENT LOSS DIVISION 1

Write-off goodwill of $7 000

Allocate $87 000 to all assets except cash, inventory and receivables.

Plant $200 000 39 545

Land 90 000 17 796
Buildings 70 000 13 841
HO Building 80 000 15 818
$440 000 $87 000

ALLOCATION OF IMPAIRMENT LOSS DIVISION 2

Write off goodwill of $7 000

Allocate $76 000 to relevant assets

Land 150 000 34 546

Buildings 80 000 18 424 61 576
Furniture 20 000 4 606 15 394
HO Building 80 000 18 424 61 576
$330 000 $76 000

However land can only be written down by $15 000, hence need to allocate $19 546 to
other assets:

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 Buildings 61 576 8 687
Furniture 15 394 2 172
HO Building 61 576 8 687
$138 546 $19 546
Journal entries are:

Impairment loss Dr 14 000

Goodwill Cr 14 000

Impairment loss Dr 42 929

Accumulated depreciation:
head office building Cr 42 929
(15 818 + 18 424 + 8 687)

Impairment loss (Division 1) Dr 71 182

Land Cr 17 796
Accumulated depreciation; plant Cr 39 545
Accumulated depreciation: buildings Cr 13 841

Impairment loss (Division 2) Dr 48 889

Land Cr 15 000
Accumulated depreciation: buildings Cr 27 111
Accumulated depreciation: furniture Cr 6 778

5. Ortrand Ltd provided employees with 4 weeks (20 days) of annual leave for each year
of service. The annual leave is accumulating and investing up to a maximum of 6

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 weeks. Thus, all employees take their annual leaves within 6 months after the
reporting period so that it does not lapse.

Ortrand Ltd pays a loading of 17.5% on annual leave; that is; employees are paid an
additional 17.5% of their regular wage while taking annual leave. Refer to the following
extract from Ortrand Ltd’s payroll records for the year ended 30 June 2016.

Employee Wage/day AL July Increase in AL Taken

2015 Days entitlement Days
Days
         
Peter $160 5 20 15
Ram $120 3 20 16
Smith $150 2 20 14
Simione $100 4 20 17

Required: Calculate the amount of annual leave that should be accrued for each
employee.
[5 marks]

Employee Wage, Change in AL 30/6/16 in AL accrual

per day AL days
entitlement
Peter $160 5+20-15 10 1 880
Ram $120 3+20-16 7 987
Smith $150 2+20-14 8 1410
Simione $100 4+20-17 7 822.5
3219.5

The End

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