- 10 Marks
FR – L2 – Q14 – Financial Reporting Standards and Their Applications
Question
The following transactions took place at Accra Healthcare Manufacturing Limited in the year ended 31 March 20X9.
(1) On 1 January Accra Healthcare Manufacturing Limited sold goods to a bank for GH₵18m cash and agreed to repurchase the personally identifiable information repurchase the goods for GH₵20m cash on 31 December 20X9.
(2) On 31 March Accra Healthcare Manufacturing Limited consigned several motorised mobility aids to independent medical salespeople for sale to third parties. The sales price to the dealer is Accra Healthcare Manufacturing Limited’s list price at the date of sale to third parties. If a mobility aid is unsold after six months, the medical rep has a right to return it to Accra Healthcare Manufacturing Limited.
Required
Discuss how the above transactions should be accounted for in the financial statements of Accra Healthcare Manufacturing Limited for the year ended 31 March 20X9.
Answer
(1) Repurchase agreement
A repurchase agreement is a contract in which an entity sells an asset and also promises or has the option to repurchase the asset.
Accra Healthcare Manufacturing Limited has promised to repurchase the asset. The bank has not obtained control of the asset, so there is no sale. This is a financing transaction.
The substance of the arrangement is that Accra Healthcare Manufacturing Limited has obtained a loan secured on the inventories. The difference between the sale price of GH₵18m and the repurchase price of GH₵20m represents the interest on the loan.
Accra Healthcare Manufacturing Limited should account for the transaction as follows:
1st January
Dr Cash GH₵18m
Cr Loan from bank GH₵18m
Being: The recognition of a bank loan
31st March
Dr Loan from bank (3/12 × (GH₵20m – GH₵18m)) GH₵0.5m
Cr Statement of profit or loss GH₵0.5m
Being: The recognition of interest on the bank loan for the 3 months up to the year-end
31st December
Dr Loan from bank (9/12 × (GH₵20m – GH₵18m)) GH₵1.5m
Cr Statement of profit or loss GH₵1.5m
Being: The recognition of interest on the bank loan for the 9 months ending 31 December 20X9
Dr Loan from bank GH₵20m
Cr Cash GH₵20m
Being: The repayment of the bank loan
(2) Consignment arrangement
Whether Accra Healthcare Manufacturing Limited should continue to hold the inventories in its statement of financial position on 31 March 20X9 depends on whether the medical salespeople have obtained control of the assets.
If the dealers have not obtained control of the motorised mobility aids, they are said to be held on consignment. Revenue is not recognised on inventory held on consignment.
Indicators that the arrangement is a consignment arrangement include:
- The items are still controlled by Accra Healthcare Manufacturing Limited until a specified event occurs (sale of the aid to a customer or 6 months).
- Accra Healthcare Manufacturing Limited continues to set the price for the aids even though they are held by the medical salespeople.
- The salespeople do not have an unconditional obligation to pay for the product.
So the mobility aids should remain in inventories in Accra Healthcare Manufacturing Limited’s statement of financial position on 31 March 20X9.
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