Question Tag: Non-current Assets

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CR – May 2015 – L3 – Q7 – Impairment of Assets (IAS 36)

Evaluate the accounting treatment for non-current assets held for sale, impairments, and intangible assets for Ondo Telecoms Limited under IFRS.

Question

ONDO TELECOMS LIMITED

Ondo Telecoms Limited is one of the biggest telecoms companies in Abuja. One month after the year-end, the Chief Finance Officer (CFO), while reviewing the company’s activities came up with the following issues for the year ended 30 September, 2014:

(a) The Board of Directors is not impressed with the performance of the Home Broadband operating segment which posted a loss of N1.7 billion in 2014 financial year following another loss of N0.8 billion in the 2013 financial year.

(b) The carrying amount of the assets in the segment is N4.3 billion as at 30 September, 2014 and N4.5 billion as at 30 September, 2013. Professional valuers were engaged and they came up with a fair value of N4.2 billion as at 30 September, 2013.

(c) The Board of Directors made the final decision in June 2014 to sell off the assets in this segment and concentrate on other business lines. Since the beginning of September, four serious bidders have been negotiating with Ondo. The board anticipates the sale to be concluded by the end of May 2015 with the transaction cost of N0.3 million.

(d) On 1 November 2013, Ondo Telecoms Limited acquired a block of flats with an estimated useful life of 50 years at a total cost of N225 million. The blocks of flats are to be rented out to its employees and engineers at market prices. The decision to acquire the block of flats was made by the board due to the need to have the engineers close to the head office to attend to technical issues immediately they arise.

(e) Professional valuers were engaged to value the flats as at 30 September, 2014 and a fair value of N232 million was determined.

(f) International Telecom Limited, which acquired Edo Communications Limited during the year, has just published its results. Edo Communications Limited was a direct competitor to Ondo Telecoms Limited and does similar business. The CFO noted that International Telecom Ltd. shows an asset of N110 million arising from Edo Communication Limited customer lists’. This made the CFO realize how valuable the customer details are and has engaged a professional valuer who valued them at N98 million.

(g) Over the years, Ondo Telecoms Limited’s main business has been the provision of mobile and fixed landlines services as well as broadband services. In July 2013, Ondo Telecoms Limited bid for the award of a subscription television license from the government.

(h) Ondo Telecoms Limited won the bid and paid N560 million for a five-year license beginning 1 October 2013. The license is transferred and at the time of winning the bid, the fair value of the license was estimated at N580 million. Due to the slow uptake of the television business, the license was revalued at N420 million as at 30 September, 2014 by a professional valuer.

Required:
Advise, with suitable computations, how the above transactions should be accounted for in the financial statements of Ondo Telecoms Limited under IFRS for the year ended 30 September, 2014.

Answer

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Tags: Held for Sale, IFRS Compliance, Impairment testing, Intangible Assets, Non-current Assets
Level: Level 3

Topic: Impairment of Assets (IAS 36)

CR – Nov 2016 – L3 – SC – Q6 – Events After the Reporting Period (IAS 10)

Assess the treatment of transactions involving a property sale in accordance with IFRS 5 and evaluate the impact of events on reported gains under IAS 10.

Question

straight-line basis at the rate of 7.5%. An impairment loss of N350,000 was recognized at the end of May 31, 2013, financial year when accumulated depreciation was N1 million. Consequently, the property was valued at its estimated value in use. The company planned to move to new premises before the property was classified as held for sale on October 1, 2013. By this time, the fair value less costs to sell was N2.4 million.

Maranathan Plc published interim financial statements on December 1, 2013, by which time the property market had improved, and the fair value less costs to sell was reassessed at N2.52 million. At the year-end, on May 31, 2014, it had improved further, so that the fair value less costs to sell was N2.95 million. The property was disposed of eventually on June 5, 2014, for N3 million.

Required:
a. Assess the above transactions based on the requirements of IFRS 5, Non-current Assets Held for Sale and Discontinued Operations. (5 Marks)
b. Evaluate the impact of the events occurring on the property over time and on the reported gain in accordance with IAS 10, Events After the Reporting Period. (10 Marks)

Answer

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Tags: Discontinued Operations, Events After Reporting, Held for Sale, IAS 10, IFRS 5, Non-current Assets
Level: Level 3

Topic: Events After the Reporting Period (IAS 10)
Series: NOV 2016

CR – May 2023 – L3 – Q4b – Events After the Reporting Period (IAS 10)

Advise on the correct accounting treatment and disclosures for Resource LTD’s sale.

Question

At August 31, 2016, Evolve LTD controlled a wholly owned subsidiary, Resource LTD, whose only assets were land and buildings, measured in accordance with International Financial Reporting Standards.

On August 1, 2016, Evolve LTD published a statement stating that a binding offer for the sale of Resource LTD had been made and accepted, and at that date, the sale was expected to be completed by August 31, 2016. The non-current assets of Resource LTD were measured at the lower of their carrying amount or fair value less costs to sell at August 31, 2016, based on the selling price in the binding offer. This measurement was in accordance with IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations.

However, Evolve LTD did not classify the non-current assets of Resource LTD as held for sale in the financial statements at August 31, 2016, because there were uncertainties regarding the negotiations with the buyer and a risk that the agreement would not be finalized. There was no disclosure of these uncertainties, and the original agreement was finalized on September 20, 2016.

Required:
Advise Evolve LTD on how the above transactions should be correctly dealt with in its financial statements with reference to relevant International Financial Reporting Standards. (10 Marks)

Answer

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Tags: Disclosure Requirements, Events After Reporting Period, Held for Sale, IFRS 5, Non-current Assets
Level: Level 3

Topic: Events After the Reporting Period (IAS 10)

AAA – Nov 2012 – L3 – AII – Q15 – Regulatory Framework and Professional Standards

Identifies a major deficiency of local standards compared to IFRS in the presentation of non-current assets.

Question

One of the major deficiencies of our Local Standards over IFRS’s presentation of Non-current Assets is that our Local Standards do not recognise ……………. process.

Answer

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Tags: Accounting Standards, IFRS, Local Standards, Non-current Assets, Regulatory Differences
Level: Level 3

Topic: Regulatory Framework and Professional Standards
Series: NOV 2012

CR – Nov 2016 – L3 – Q6 – Events After the Reporting Period (IAS 10)

Discuss IFRS 5 requirements for non-current assets held for sale and evaluate event impacts per IAS 10.

Question

Maranathan Plc acquired a property for N4 million with annual depreciation on a straight-line basis at 7.5%. An impairment loss of N350,000 was recognized as of May 31, 2013, with accumulated depreciation at N1 million. The property was classified as held for sale on October 1, 2013, with fair value less costs to sell of N2.4 million. In December 2013, interim financials reported an improved fair value less costs to sell of N2.52 million. By May 31, 2014, fair value increased to N2.95 million, and the property was eventually sold on June 5, 2014, for N3 million.

Required:

a. Assess these transactions per IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. (5 Marks)
b. Evaluate the impact of events on the property over time and on reported gain per IAS 10 Events After the Reporting Period. (10 Marks)

Answer

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Tags: Depreciation, Disposal Gain, Held for Sale, Impairment Loss, Non-current Assets
Level: Level 3

Topic: Events After the Reporting Period (IAS 10)

FM – Nov 2020 – L3 – Q5 – Financial Strategy Formulation

Examines financial proposals affecting Yinko plc's capital structure, including debt-financed share buyback, asset expansion, and asset sale with debt reduction.

Question

Yinko plc operates in the hospitality and leisure industry. The board of directors met recently to discuss several financial proposals:

Proposal 1: Increase the company’s debt by borrowing an additional N100 million and use the funds raised to buy back its shares.
Proposal 2: Increase the company’s debt by borrowing an additional N100 million to invest in expanding available rooms in one of its hotels.
Proposal 3: Sell excess non-current assets in another hotel with a net book value of ₦100 million for N135 million. The funds from the sale will be used to reduce the company’s debt.

Yinko plc Financial Information:

	Amount (N Million)
Non-current assets	1,410
Current assets	330
Total assets	1,740
Equity and liabilities
Share capital (40 kobo per share par value)	240
Retained earnings	615
Total equity	855
Non-current liabilities	700
Current liabilities	185
Total liabilities	885
Total liabilities and capital	1,740

Additional Information:

Yinko’s forecasted after-tax profit for the coming year, without implementing the proposals, is N130 million.
Current share price: N3.20 per share.
Non-current liabilities include a 6% medium-term loan redeemable in seven years. Any increase in borrowing raises the coupon rate by 25 basis points on the total amount borrowed, while a reduction lowers it by 15 basis points.
Effective tax rate: 20%
Expected after-tax return on investment: 15% for new or reduced investments.

Required:

a. Estimate the impact of each proposal on the forecast statement of financial position, earnings per share, and financial gearing (Total Debt/Total Assets) of Yinko Plc. Show all calculations. (16 Marks)

b. Discuss your results. (4 Marks)

Answer

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Tags: Asset sale, debt level, EPS, Financial Gearing, Financial restructuring, Non-current Assets, share buyback
Level: Level 3

Topic: Financial strategy formulation

AAA – May 2018 – L3 – SA – Q1 – Audit of Complex Entities

Evaluate materiality reassessment, audit findings, and joint audit implications for Honey Group’s financial statements.

Question

You are a manager in Puposola & Company (Chartered Accountants) responsible for the audit of the Honey Group (the Group), a quoted company. The Group’s main activity is steel manufacturing and it comprises of a parent company and three subsidiaries. Your firm currently audits all components of the Group. You are working on the audit of the Group’s financial statements for the year ended June 30, 2017. This morning, the audit engagement partner left a note for you.

“Hello

I have gone through the draft consolidated financial statements and accompanying notes which summarise the key audit findings and some background information.

Although, at the planning stage, materiality was initially determined to be N900,000, and was calculated based on the assumption that Honey Group is a high-risk client due to its listing status. However, due to a number of issues that arose during the audit, there is a need to revise the materiality level for the financial statements as a whole. The revised level of materiality should now be N700,000.

Thank you.”

The Group’s draft consolidated financial statements, with notes referenced to key audit findings, are shown below:

Draft Consolidated Statement of Comprehensive Income

Note	June 30, 2017 Draft (N’000)	June 30, 2016 Actual (N’000)
Revenue	98,795	103,100
Cost of sales	(75,250)	(74,560)
Gross profit	23,545	28,540
Operating expenses	(14,900)	(17,500)
Operating profit	8,645	11,040
Share of profit of associate	1,010	900
Finance costs	(380)	(340)
Profit before tax	9,275	11,600
Taxation	(3,200)	(3,500)
Profit for the year	6,075	8,100
Other comprehensive income for the year, net of tax:
Gain on property revaluation	800	—–
Actuarial losses on defined benefit plan	(1,100)	(200)
Other comprehensive loss	(300)	(200)
Total comprehensive income for the year	5,775	7,900

Notes: Key Audit Findings on Statement of Comprehensive Income

Revenue has been stable for all components of the Group with the exception of one subsidiary, Copesink Company, which witnessed a 25% decrease in revenue.
Operating expenses for the year to June 2017 is shown net of profit on a property disposal of N2 million. Our evidence includes agreeing the cash receipts to the bank statement and sale documentation, and we have confirmed that the property has been removed from the non-current asset register. The audit junior noted when reviewing the sale document that there is an option to repurchase the property in five years’ time, but did not discuss the matter with management.
The property revaluation relates to the Group’s head office. The audit team has not obtained evidence on the revaluation, as the gain was immaterial based on the initial calculation of materiality.
The actuarial loss is attributed to an unexpected stock market crash. The Group’s pension plan is managed by Axial Company, a firm of independent fund managers who maintain the necessary accounting records relating to the plan. Axial Company has supplied written representation as to the value of the defined benefit plan’s assets and liabilities at June 30, 2017. No other audit work has been performed other than to agree the amount reported in the financial statements to supporting documentation supplied by Axial Company.

Draft Consolidated Statement of Financial Position

Note	June 30, 2017 Draft (N’000)	June 30, 2016 Actual (N’000)
ASSETS
Non-current assets
Property, plant and equipment	81,800	76,300
Goodwill	5,350	5,350
Investment in associate	4,230	4,230
Non-current assets held for sale	7,800	–
Total non-current assets	99,180	85,880
Current assets
Inventory	8,600	8,000
Receivables	8,540	7,800
Cash and cash equivalents	2,100	2,420
Total current assets	19,240	18,220
Total assets	118,420	104,100
EQUITY AND LIABILITIES
Equity
Share capital	12,500	12,500
Revaluation reserve	3,300	2,500
Retained earnings	33,600	29,400
Non-controlling interest	4,350	4,000
Total equity	53,750	48,400
Non-current liabilities
Defined benefit pension plan	10,820	9,250
Long-term borrowings	43,000	35,000
Deferred tax	1,950	1,350
Total non-current liabilities	55,770	45,600
Current liabilities
Trade and other payables	6,200	7,300
Provisions	2,700	2,800
Total current liabilities	8,900	10,100
Total liabilities	64,670	55,700
Total equity and liabilities	118,420	104,100

Notes: Key Audit Findings on Statement of Financial Position

The goodwill relates to each of the subsidiaries in the Group. Management has confirmed in writing that goodwill is stated correctly, and our other audit procedure was to arithmetically check the impairment review conducted by management.
The associate is a 30% holding in Jamil Company, purchased to provide investment income. The audit team has not obtained evidence regarding the associate as there is no movement in the amount recognised in the statement of financial position.
The non-current assets held for sale relate to a trading division of one of the subsidiaries, which represents one third of that subsidiary’s net assets. The sale of the division was announced in May 2017, and is expected to be complete by December 31, 2017. Audit evidence obtained includes a review of the sales agreement and confirmation from the buyer obtained in July 2017, that the sale will take place.
Two of the Group’s subsidiaries are partly owned by shareholders external to the Group.
A loan of N8 million was obtained in October 2016 at an interest rate of 2%, payable annually in arrears. The terms of the loan have been confirmed from the loan agreement provided by the bank. There was no repayment of the loan in the books as at prior year end.

Required:

a. Explain why auditors may need to reassess materiality as the audit progresses. (4 Marks)

b. Assess the implications of the key audit findings for the completion of the audit.

Note: Your assessment must consider whether the key audit findings indicate a risk of material misstatement. Where the key audit findings refer to audit evidence, you must also consider the adequacy of the audit evidence obtained, but you do not need to recommend further specific procedures. (18 Marks)

c. Discuss TWO advantages and TWO disadvantages of a joint audit being performed on the financial statements. (8 Marks)

(Total 30 Marks)

Answer

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Tags: Audit evidence, consolidated financial statements, Defined Benefit Plan, Goodwill, Joint Audit, Key Audit Findings, Materiality, Non-current Assets, Revaluation Reserve, Subsidiary Revenue
Level: Level 3

Topic: Audit of Complex Entities
Series: MAY 2018

CR – May 2018 – L3 – SB – Q3b – Impairment of Assets (IAS 36)

valuate discontinuation conditions and prepare profit or loss statement for Bamgbose Plc with comparative figures.

Question

Bamgbose Plc. is a long-established travel agent, operating through a network of retail outlets and online store. In recent years, the business has seen its revenue from the online store grow strongly, and that of retail outlets decline significantly. On July 1, 2017, the board decided to close the retail network at the financial year end of December 31, 2017, and put the buildings up for sale on that date. The directors are seeking advice regarding the treatment of the buildings in the statement of financial position as well as the treatment of the trading results of the retail division for the year. The following figures are available at December 31, 2017:

Carrying amount of buildings: ₦30.0 million
Fair value less costs to sell of buildings: ₦25.8 million
Other expected costs of closure: ₦5.85 million

Required:

(i) Outline the conditions which must be met in order to present the results of an operation as “discontinued” and the accounting treatment that applies when such a classification is deemed appropriate. (5 Marks)

(ii) Draft the statement of profit or loss for Bamgbose Plc. for year ended December 31, 2017, together with the comparative figures for 2016, taking the above information into account. (8 Marks)

Answer

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Tags: Accounting Treatment, Closure Costs, Discontinued Operations, Held for Sale, IFRS 5, Non-current Assets, Profit or Loss Statement, Revenue
Level: Level 3

Topic: Impairment of Assets (IAS 36)
Series: MAY 2018

CR – May 2018 – L3 – SB – Q3a – Impairment of Assets (IAS 36)

Outline conditions for classifying assets as held for sale and their accounting treatment under IFRS 5.

Question

(a) “IFRS 5 Non-current Asset held for Sale and Discontinued Operations” sets out the principles governing the measurement and presentation of non-current assets that are expected to be realized through sale rather than through continuing use. The standard also deals with reporting the results of operations that qualify as discontinued.

Required:

Discuss the conditions which must be met for a non-current asset to be classified as being “held for sale” and explain the accounting treatment that applies when such a classification is deemed appropriate. (7 Marks)

Answer

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Tags: Accounting Treatment, Classification Conditions, Discontinued Operations, Held for Sale, IFRS 5, Non-current Assets
Level: Level 3

Topic: Impairment of Assets (IAS 36)
Series: MAY 2018

CR – Nov 2022 – L3 – Q7 – Impairment of Assets (IAS 36)

: Evaluate the treatment of a property held for sale and assess impairment adjustments per IFRS 5.

Question

Kukundawa Plc acquired a property for N8 million on which annual depreciation is charged on a straight-line basis at the rate of 7.5%. An impairment loss of N700,000 was recognized at the end of the May 31, 2018 financial year when accumulated depreciation was N2 million. Consequently, the property was valued at its estimated value in use. The company planned to move to new premises before the property was reclassified as held for sale on October 1, 2018. By this time, the fair value less costs to sell was N4.8 million. Kukundawa Plc published interim financial statements on December 1, 2018, by which time the property market value had improved, and the fair value less costs to sell was reassessed at N5.04 million. At the year end, on May 31, 2019, it had improved further, so that the fair value less costs to sell was N5.9 million. The property was disposed of eventually on June 5, 2019, for N6 million.

Required:
a. Assess the above transactions based on the requirements of IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations. (5 Marks)
b. Evaluate the impact of the events occurring on the property over time and on the financial statements up to the date of disposal. (10 Marks)
(Total 15 Marks)

Answer

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Tags: Financial Position, IFRS 5, Impairment, Non-current Assets
Level: Level 3

Topic: Impairment of Assets (IAS 36)
Series: NOV 2022

FA – MAY 2015 – L1 – SA – Q20 – Financial Statements Preparation

Identify the asset that is classified as non-current in financial statements.

Question

Which of the following assets can be classified as non-current in the financial statements of an entity?
A. A tax refund due next year
B. A motor vehicle held for resale
C. A computer acquired for office use
D. Cleaning products used to clean the office
E. Closing inventories

Answer

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Tags: Financial Statements, Non-current Assets
Level: Level 1

Topic: Financial Statements Preparation, Preparation of Financial Statements
Series: MAY 2015

FA – May 2024 – L1 – SA – Q5 – Depreciation Methods and Accounting for Disposals

Calculates gain or loss on the disposal of a motor car.

Question

What is the gain or loss on disposal of the old car if the company received a part-exchange allowance of ₦20,000 against an old car, which originally cost ₦70,000 and had accumulated depreciation of ₦45,000?

A. ₦5,000
B. ₦(5,000)
C. ₦7,000
D. ₦(7,000)
E. ₦10,000

Answer

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Tags: Asset Disposal, Gain or Loss Calculation, Non-current Assets
Level: Level 1

Topic: Depreciation Methods and Accounting for Disposals
Series: MAY 2024

FA – May 2024 – L1 – SA – Q4 – Accounting for Property, Plant, and Equipment (IAS 16)

Calculates the carrying amount of motor vehicles.

Question

A company has several motor cars that are accounted for as non-current assets. As at April 1, Year 2, the cost of the cars was ₦300,000, and the accumulated depreciation was ₦160,000. What is the carrying amount of the motor cars as at April 1, Year 2?

Answer

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Tags: Carrying Amount, Depreciation, Non-current Assets
Level: Level 1

Topic: Accounting for Property, Plant, and Equipment (PPE) IAS 16
Series: MAY 2024

FA – MAY 2015 – L1 – SA – Q11 – Correction of Errors

Identify which financial statement effect is not caused by an undetected error in non-current assets.

Question

The effect of the error on the financial statements, if not detected, would include the following EXCEPT:
A. The purchases in the financial statements will be overstated.
B. The inventory of the outfit will be understated.
C. The profit of the outfit will be understated.
D. The non-current assets account will be understated.
E. The inventory will be overstated.

Answer

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Tags: Error Correction, Financial Statements, Non-current Assets
Level: Level 1

Topic: Correction of errors
Series: MAY 2015

FR – Nov 2016 – L2 – Q2e – Preparation of Financial Statements

Discuss how a plant classified as held for sale should be accounted for under IFRS 5.

Question

Sofoline Ltd has a plant which cost GH¢40,000 and was purchased on 1 January 2013 with a useful life of 10 years. The plant was being used as part of its business operating capacity. On 30 June 2015, Sofoline Ltd made a decision to classify the plant as held for sale and an agent was appointed for the sale of the plant, which started being advertised at a selling price of GH¢29,000, which was considered to be its fair value. The selling expenses are estimated to be GH¢1,500. The asset has not yet been sold by the year-end of 31 December 2015, and it has a fair value less cost to sell of GH¢24,000 on this date.

Required:
Discuss how this will be accounted for in the financial statements of Sofoline Ltd for the year ended 31 December 2015 in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

Answer

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Tags: Fair Value, Financial Statements, Held for Sale, IFRS 5, Impairment, Non-current Assets
Level: Level 2

Topic: Preparation of Financial Statements
Series: NOV 2016

FR – May 2018 – L2 – Q2e – Financial Reporting Standards and Their Applications

Identify the criteria to be met for an asset to be classified as held for sale in accordance with IFRS 5.

Question

In accordance with IFRS 5: Non-Current Assets Held for Sale and Discontinued Operations, a non-current asset (disposal group) is classified as “held for sale” if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. However, to qualify to be classified as held for sale, a detailed criteria must be met.

Required:
Identify any TWO criteria to be met before an asset can be classified as held for sale. (2 marks)

Answer

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Tags: Discontinued Operations, Held for Sale, IFRS 5, Non-current Assets
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2018

PT – Nov 2021 – L2 – Q4a – Corporate Tax Liabilities

Calculate the capital allowance claimable for NASA Ltd for the years 2017-2020 based on its non-current assets.

Question

NASA Ltd commenced business on 1 October 2017, preparing accounts to 31 December each year. Accordingly, the company has the following extracts from its financial records on non-current assets:

Year 2017

Purchased Office furniture and fittings costing GH¢40,000.
Purchased office Air conditioners at the cost of GH¢20,000.
The company bought a land costing GH¢55,000.
Bought office building at the cost of GH¢700,000.
Purchased a computer at the cost of GH¢1,500.
Purchased office Photocopier at the cost of GH¢2,500.

Year 2018

Purchased a Television Set for the office at the cost of GH¢3,500.
Bought a 4×4 Vehicle (7-passenger-seater) for an amount of GH¢200,000.
Purchased a File Cabinet for GH¢2,000.

Year 2019

Exchanged the vehicle bought in 2018 for four plots of land valued at GH¢200,000.
Paid for a Trade Mark costing GH¢15,000, which was licensed for ten years.
Purchased a business that resulted in Goodwill of GH¢100,000. The company decided to amortize the goodwill over 20 years.

Year 2020

Bought a home-used motor vehicle at the cost of GH¢70,000.
Purchased office computers for GH¢5,000.
Purchased Trucks and Trailers for GH¢50,000.
Sold some of the office furniture for GH¢3,000.

Required:
Calculate the amount of capital allowance claimable for 2017, 2018, 2019, and 2020 years of assessment. (16 marks)

Answer

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Tags: Capital Allowance, Corporate Tax, Depreciation, Non-current Assets, Tax computation
Level: Level 2

Topic: Corporate Tax Liabilities
Series: NOV 2021

CR – May 2018 – L3 – Q2d – IFRS 5: Non-current Assets Held for Sale and Discontinued Operations

Explain whether certain scenarios meet the criteria for classification as discontinued operations under IFRS 5.

Question

Explain with justification, whether each of the following could most likely be classified as a discontinued operation under IFRS 5: Non-current Assets Held for Sale and Discontinued Operations in this year’s financial statements:
i) A reportable operating segment that met the definition of held for sale after the year-end but before the financial statements were authorised for issue. (1 mark)
ii) A reportable operating segment that was closed down during the financial year. The assets of the segment were broken up and used in other divisions of the company. (2 marks)
iii) A division of a business, classified as held for sale, that was correctly treated as a discontinued operation in last year’s financial statements, but which has not been sold by this year-end due to the sale being referred to the National Insurance Commission, which regulates the insurance industry. The commission is not expected to report its findings until 6 months after this year-end. (2 marks)

Answer

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Tags: Discontinued Operations, Held for Sale, IFRS 5, Non-current Assets, Operating segments
Level: Level 3

Topic: IFRS 5: Non-current assets held for sale and discontinued operations
Series: MAY 2018

AT – Nov 2018 – L3 – Q3a – Permanent establishment, International taxation

Tax policy implications on the establishment of a permanent entity, finance lease acquisitions, and dividend policies by a foreign company.

Question

The management of Smith Plc, a UK-based company, is considering the possibility of launching its presence in Ghana and it is not sure of the tax implication of the following under the tax laws of Ghana:

i) It is considering making its presence through incorporation in Ghana or creating an external company that is a Permanent Establishment (Branch) instead.
ii) It intends to acquire all its non-current assets through finance lease as against buying the assets outright when it makes its presence in Ghana.
iii) It intends to bring some staff from the United Kingdom to work in Ghana who will be paid half salary in Ghana and the other half paid directly to their accounts in the United Kingdom as against paying their full salary in Ghana.
iv) Management intends to acquire shares in many companies in Ghana as part of efforts to create value for shareholders through dividend receipts as against granting loans to interested companies in Ghana if it is unable to make its presence in Ghana.

Required:
Evaluate the above policy interventions and advise on the tax implication of each to enable the management of Smith Plc to make a decision.

Answer

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Tags: Dividends, Finance lease, Incorporation, Non-current Assets, Permanent Establishment, Tax implications
Level: Level 3

Topic: International taxation, Permanent establishment
Series: NOV 2018

CR – Aug 2022 – L3 – Q2 – IFRS 5: Non-current assets held for sale and discontinued operations | IAS 38: Intangible assets

This question focuses on the accounting treatment of non-current assets held for sale, leasebacks, franchise costs, and intangible asset amortization.

Question

Unity Link Ltd (ULL) has enjoyed a significant market share in the southern part of Ghana over the years. However, ULL has suffered liquidity challenges due to the effects of the pandemic lockdown and its subsequent restrictions. ULL’s main source of income, dealings in luxury goods, has reduced significantly because customers have shifted their demand to necessities of life.

The following transactions were undertaken by ULL:

a) ULL has entered into a contract to sell one of their gold refinery equipment on 31 January 2023 and immediately lease it back. The Finance Director, in consultation with the Finance Manager, has decided to classify this transaction as a non-current asset “held for sale” in its financial statements for the year ended 31 December 2022 as he rates this transaction as highly probable. The market value for the gold refinery equipment has not changed in many years and is unlikely to change in the foreseeable future. The contract states that the gold refinery equipment should be disposed of at its fair value of GH¢6 million and for ULL to lease it back over a period of 10 years. It is estimated that GH¢400,000 is needed to refurbish the gold refinery equipment and there is no legal requirement to do so. ULL has in error treated this amount as a reduction of the asset’s carrying amount at 31 December 2022, and the corresponding debit has been made to profit or loss. The gold refinery equipment is depreciated at 5% per annum using the reducing balance method, and at 31 December 2022, the carrying amount after depreciation and deduction of the proposed cost of refurbishment is GH¢3.6 million. (7 marks)

b) ULL has established a chain of business franchise. This franchise was obtained from a foreign company. In this arrangement, dealers in luxury items, especially refined gold, obtain a franchise under a brand name “Lockhert” from ULL to sell its own refined gold. The budgeted costs of obtaining a franchise from a foreign company are based on the estimated revenues from the franchise given out to local companies. These costs of obtaining a franchise are then capitalised as an intangible asset and called “Franchise cost.” The Finance Director is convinced that the franchise is consumed as Franchisees produce their own refined gold. ULL currently amortises the franchise based on estimated future revenues from the franchise. For example, the franchise is estimated to generate GH¢1.6 million of revenue in total, and GH¢800,000 of that revenue will be generated in year one. The intangible asset will be amortised by 50% in year one. However, industry practice is to amortise the capitalised cost less its recoverable amount over its remaining useful life. (6 marks)

c) ULL’s franchise registration fee, which is separate from the franchise fee, is treated as an intangible asset and is initially recognised at the fair value of the consideration paid for the registration. Subsequent franchise fees, which are paid yearly, are subject to negotiation. The franchise contract has embedded contingent performance conditions where a franchisee may be paid a bonus based on an increase in sales. This bonus is an additional contract cost. ULL has reasoned that the only way to determine the value-in-use of the cost of the franchise is when a new customer takes over from an existing one who is prepared to sell his franchise. This treatment is what prevails in the industry. (7 marks)

Required:

In accordance with International Financial Reporting Standards, discuss the appropriate accounting treatment of the above transactions in the financial statements of ULL.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Franchise, Impairment, Intangible Assets, Leaseback, Non-current Assets
Level: Level 3

Topic: IAS 38: Intangible assets, IFRS 5: Non-current assets held for sale and discontinued operations
Series: AUG 2022

Question Tag: Non-current Assets

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