Subject (SQ): FINANCIAL REPORTING

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  • 10 Marks

FR – L2 – Q38 – Financial Reporting Standards and Their Applications

Define non-current assets held for sale and discontinued operations, and explain the usefulness of discontinued operations information.

(a) State the definition of both non-current assets held for sale and discontinued operations and explain the usefulness of information for discontinued operations.

Adenta Holdings is in the process of preparing its financial statements for the year ended 31 October 20X4. The company’s main activity is in the travel industry mainly selling package holidays (flights and accommodation) to the general public through the Internet and retail travel agencies. During the current year the number of holidays sold by travel agencies declined dramatically and the directors decided at a board meeting on 15 October 20X4 to cease marketing holidays through its chain of travel agents and sell off the related high-street premises. Immediately after the meeting the travel agencies’ staff and suppliers were notified of the situation and an announcement was made in the press. The directors wish to show the travel agencies’ results as a discontinued operation in the financial statements to 31 October 20X4. Due to the declining business of the travel agents, on 1 August 20X4 (three months before the year-end) Adenta Holdings expanded its Internet operations to offer car hire facilities to purchasers of its Internet holidays.

The following are Adenta Holdings’s summarised statement of profit or loss results – years ended 31 October:

20X4 Total 20X4 Travel Agencies 20X3 Total 20X3 Travel Agencies
Revenue 39,000 14,000 40,000 18,000
Cost of sales (36,000) (16,500) (32,000) (15,000)
Gross profit/(loss) 3,000 (2,500) 8,000 3,000
Operating expenses (2,600) (1,500) (2,000) (1,500)
Profit/(loss) for period 400 (4,000) 6,000 1,500

Required:

(b) Discuss whether the directors’ wish to show the travel agencies’ results as a discontinued operation is justifiable.

(c) Assuming the closure of the travel agencies is a discontinued operation, prepare the (summarised) statement of profit or loss of Adenta Holdings for the year ended 31 October 20X4 together with its comparatives.

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  • 15 Marks

FR – L2 – Q37 – Financial Reporting Standards and Their Applications

Redraft Saul Plc's financial statements for Year 1 to comply with IFRS 5, reflecting Division A's closure as a discontinued operation.

Kofi Plc operates its business through a number of divisions. It has a year end of 31 December. Set out below are extracts from the draft financial statements of Kofi Plc for the year ended 31 December Year 1.

Statement of profit or loss for the year ended 31 December Year 1

GH₵000
Revenue 3,900
Cost of sales (2,500)
Gross profit 1,400
Distribution costs (300)
Administrative expenses (800)
Profit before tax 300
Income tax expense (90)
Profit for the period 210

Statement of financial position at 31 December Year 1

Assets GH₵000 GH₵000
Non-current assets
Property, plant and equipment 1,900
Intangible assets 40
1,940
Current assets
Inventories 350
Trade and other receivables 190
Cash 90
630
Total assets 2,570
Equity and liabilities GH₵000 GH₵000
Equity
Share capital 600
Retained earnings 1,700
2,300
Current liabilities
Trade and other payables 195
Current tax payable 75
270
Total equity and liabilities 2,570

On 30 November Year 1 Kofi Plc made the decision to close Division B, which is located in a different part of the country and covers a separate major line of business. This decision was immediately announced to the press and to the workforce and, by the end of Year 1, a buyer had been found.

The directors of Kofi Plc have calculated the following:

  • 15% of the entity’s income and expenses for the year was attributable to Division B.
  • No tax is attributable to Division B.
  • Property, plant and equipment of GH₵510,000 and payables of GH₵10,000 in the above statement of financial position relate to Division B. The fair value minus costs to sell of the property, plant and equipment is GH₵450,000.

Required
Redraft the above financial statements to meet the provisions of IFRS 5: Non-current assets held for sale and discontinued operations. Work to the nearest GH₵000.

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  • 15 Marks

FR – L2 – Q36 – Impairment of Assets

Calculate and explain the accounting for an impaired plant in Ashanti-Co Group's financial statements for the year ended 30 September 20X4.

Ashanti-Co Group
The assistant financial controller of the Ashanti-Co Group, a public listed company, has identified the matters below which she believes may indicate an impairment to one or more assets:
(a) Ashanti-Co owns and operates an item of plant that cost GH¢640,000 and had accumulated depreciation of GH¢400,000 at 1 October 20X3. It is being depreciated at 12½% on cost. On 1 April 20X4 (exactly half way through the year) the plant was damaged when a factory vehicle collided into it. Due to the unavailability of replacement parts, it is not possible to repair the plant, but it still operates, albeit at a reduced capacity. Also it is expected that as a result of the damage the remaining life of the plant from the date of the damage will be only two years. Based on its reduced capacity, the estimated present value of the plant in use is GH¢150,000. The plant has a current disposal value of GH¢20,000 (which will be nil in two years’ time), but Ashanti-Co has been offered a trade-in value of GH¢180,000 against a replacement machine which has a cost of GH¢1 million (there would be no disposal costs for the replaced plant). Ashanti-Co is reluctant to replace the plant as it is worried about the long-term demand for the product produced by the plant. The trade-in value is only available if the plant is replaced.

Required
(a). Prepare extracts from the statement of financial position and statement of profit or loss of Ashanti-Co in respect of the plant for the year ended 30 September 20X4. Your answer should explain how you arrived at your figures.

(b). On 1 April 20X3 Ashanti-Co acquired 100% of the share capital of Asamankese Limited, whose only activity is the extraction and sale of spa water.
Asamankese Limited had been profitable since its acquisition, but bad publicity resulting from several consumers becoming ill due to a contamination of the spa water supply in April 20X4 has led to unexpected losses in the last six months. The carrying amounts of Asamankese Limited’s assets at 30 September 20X4 are:

GH¢’000
Brand (Vita-Cola – see below) 7,000
Land containing spa 12,000
Purifying and bottling plant 8,000
Inventories 5,000
32,000

The source of the contamination was found and it has now ceased.
The company originally sold the bottled water under the brand name of ‘Vita-Cola’, but because of the contamination it has re-branded its bottled water as ‘PureSpring’. After a large advertising campaign, sales are now starting to recover and are approaching previous levels. The carrying amount of the brand in the statement of financial position is the depreciated amount of the original brand name of ‘Vita-Cola’.
The directors have acknowledged that GH¢1.5 million will have to be spent in the first three months of the next accounting period to upgrade the purifying and bottling plant.
Inventories contain some old ‘Vita-Cola’ bottled water at a cost of GH¢2 million; the remaining inventories are labelled with the new brand ‘PureSpring’. Samples of all the bottled water have been tested by the health authority and have been passed as fit to sell. The old bottled water will have to be relabelled at a cost of GH¢250,000, but is then expected to be sold at the normal selling price of (normal) cost plus 50%.
Based on the estimated future cash flows, the directors have estimated that the value in use of Asamankese Limited at 30 September 20X4, calculated according to the guidance in IAS 36, is GH¢20 million. There is no reliable estimate of the fair value less costs to sell of Asamankese Limited.

Required
Calculate the amounts at which the assets of Asamankese Limited should appear in the consolidated statement of financial position of Ashanti-Co at 30 September 20X4. Your answer should explain how you arrived at your figures.

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  • 10 Marks

FR – L2 – Q35 – Financial Reporting Standards and Their Applications

Explain accounting treatment for revalued properties of Peak Limited, including depreciation and impairment for the year ended 31 March 20X4.

Peak Limited conducts its activities from two properties, a main office in the centre and a property in the rural area where staff training is conducted. Both properties were acquired on 1 April 20X1 and had estimated lives of 25 years with no residual value. The company has a policy of carrying its land and buildings at current values. However, until recently property prices had changed for some years. On 1 October 20X3 the properties were revalued by a firm of surveyors. Details of this and the original costs are:

Land Main office Training premises
Cost 1 April 20X1 500 300
Valuation 1 October 20X3 700 350
Buildings Main office Training premises
Cost 1 April 20X1 1,200 900
Valuation 1 October 20X3 1,350 600

Required
Show the effect of the above transactions on the statement of profit or loss and statement of financial position of Peak Limited for the year ended 31 March 20X4.

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  • 12 Marks

FR – L2 – Q34 – Impairment of Assets

Calculate the impact of impairment, revaluation, and sale of three machines on profit or loss, OCI, and revaluation reserve for Chantelle (Ghana) Ltd in Year 7.

The following is relevant to three tangible non-current assets held by Chantelle (Ghana) Ltd.

Machine 1 was purchased on 1 January Year 1 for GH¢420,000. It had an estimated residual value of GH¢50,000 and a useful life of ten years and was being depreciated on a straight-line basis. On 1 January Year 6 Chantelle (Ghana) Ltd revalued this machine to GH¢275,000 and reassessed its total useful life as fifteen years. On 1 January Year 7 an impairment review showed machine 1’s recoverable amount to be GH¢100,000 and its remaining useful life to be five years.

Machine 2 was purchased on 1 January Year 1 for GH¢500,000. It had an estimated residual value of GH¢60,000 and a useful life of ten years and was being depreciated on a straight-line basis. On 1 January Year 7 this machine was classified as held for sale, at which time its fair value was estimated at GH¢200,000 and costs to sell at GH¢5,000. On 31 March Year 7 the machine was sold for GH¢210,000.

Machine 3 was purchased on 1 January Year 1 for GH¢600,000. In Year 1 depreciation of GH¢30,000 was charged. On 1 January Year 2 this machine was revalued to GH¢800,000 and its remaining useful life assessed as eight years. On 1 January Year 7 this machine was classified as held for sale, at which time, its fair value was estimated at GH¢550,000 and costs to sell at GH¢5,000. On 31 March Year 7 the machine was sold for GH¢550,000.

Tax is at the rate of 30%.

Required
For each machine show the effect of the above on profit or loss, other comprehensive income and revaluation reserve of Chantelle (Ghana) Ltd in Year 7. You should also show the brought forward balance on the revaluation reserve (at 1 January Year 7) in respect of machines 1 and 3.

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  • 16 Marks

FR – L2 – Q33 – Intangible Assets

Explain accounting treatment for R&D, patent, brand, and process in Medina Traders Ltd's 20X4 financial statements per IFRS.

33 AKYEM TRADERS LIMITED

(a) Following are the criteria that should be used while recognizing intangible assets from research and development work.

(i) No intangible asset arising from research shall be recognised.

(ii) An intangible arising from development shall be recognised if, and only if, an entity can demonstrate all of the following:

  • the technical feasibility of completing the intangible asset so that it will be available for use or sale.
  • its intention to complete the intangible asset and use or sell it.
  • its ability to use or sell the intangible asset.
  • how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.
  • the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.
  • its ability to measure reliably the expenditure attributable to the intangible asset during its development.

(b) (i) Since the product met all the criteria for the development of the product, it should be recognised as an intangible in the statement of financial position (SOFP) of the company. However, RI should capitalise only the development work (i.e. GH¢9 million) as intangible asset. IAS-38 does not allow capitalization of cost relating to the research work, training of staff and cost of trial run.

Since the product has a useful life of 7 years, the amortization expense amounting to GH¢0.32 million (GH¢9 million × 3/12 ÷ 7 years) should be recorded in the statement of profit or loss.

(ii) This purchasing of right to manufacture should be recognised as an intangible in the SOFP because:

  • it is for an established product which would generate future economic benefits.
  • cost of the patent can be measured reliably.

Since there is a finite life, the patent must be amortised over its useful life. The useful life will be shorter of its actual life (i.e. 10 years) and its legal life (i.e. 5 years). The amortization to be recorded in SOCI is GH¢2.83 million (GH¢17 million × 10/12 ÷ 5).

(iii) The acquired brand should be recognised as an intangible in the SOFP because acquisition price is a reliable measure of its value. The amortization to be recorded in SOCI is GH¢0.12 million (GH¢2 million ÷ 10 years × 7/12).

(iv) The carrying amount of the intangible asset should be increased to GH¢10 million in the SOFP. Since there is an indefinite useful life of the intangible assets, it should not be amortised. Instead, RI should test the intangible asset for impairment by comparing its recoverable amount with its carrying amount.

Required

In the light of International Financial Reporting Standards, explain how each of the above transactions should be accounted for in the financial statements of Akyem Traders Limited for the year ended 31 December 20X4

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  • 15 Marks

FR – L2 – Q32 – Intangible Assets

Explain accounting treatment for intangible asset transactions of Tobi Plc for 20X4 per IFRS.

Tobi Plc entered into the following transactions during the year ended 31 December 20X4. The directors of Tobi Plc wish to capitalise all assets where possible.

(1) On 1 January Tobi Plc acquired the net assets of Gidi for GH¢105,000. The assets acquired had the following book and fair values:

Book value Fair value
Goodwill – 5,000
Patents 5,000 5,000
Non-current assets 50,000 50,000
Other sundry net assets 40,000 40,000

The recoverable amount of the goodwill at 31 December 20X4 was estimated at GH¢2,000.

(2) On 1 April Tobi Plc purchased a patent for GH¢20,000. The patent has a remaining useful life of eight years.

(3) On 1 April Tobi Plc purchased a brand for GH¢50,000. The brand has a remaining useful life of five years.

(4) During the year Tobi Plc incurred expenditure of GH¢30,000 developing a new brand.

(5) During the year Tobi Plc incurred expenditure of GH¢40,000 developing customer lists.

Required
Show how the above transactions would appear in the financial statements (including notes to the financial statements) of Tobi Plc as of 31 December 20X4.

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  • 15 Marks

FR – L2 – Q31 – Intangible Assets

Prepare extracts of financial position and intangible assets note for Cape Coast Pharmaceutical, correcting erroneous write-offs per IAS 38.

Cape Coast Pharmaceutical Limited (CCPL), a listed company, purchased a brand on January 1, 20W9 at a cost of GH¢382 million. It has incurred a substantial amount on further development of the brand in subsequent years.
It is the policy of CCPL to amortise the development expenditures which meet the recognition criteria as given in IAS-38 Intangible Assets, over a period of ten years. The amortisation commences when the development expenditures first meet the recognition criteria. However, it was discovered during the year 20X4 that the development expenditure incurred after acquisition had erroneously been written-off to the statement of profit or loss, details of which, are as follows:

Year ended GH¢m
December 31, 20X1 24
December 31, 20X2 54
December 31, 20X3 38
December 31, 20X4 43

The draft financial statements (before correction of error) show that retained earnings as at December 31, 20X4 was GH¢1,950 million (20X3: GH¢1,785 million).
Required
In accordance with the requirements of International Financial Reporting Standards, prepare relevant extracts of the Statement of Financial Position along with the note on intangible assets after incorporating the required corrections. (Ignore tax)

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  • 15 Marks

FR – L2 – Q30 – Intangible Assets

Show how R&D projects are accounted for in Henry Ltd's financial statements for 20X4, including capitalisation and amortisation.

During 20X4 Kofi Ltd has the following research and development projects in progress.

Project A was completed at the end of 20X3. Development expenditure brought forward at the beginning of 20X4 was GH₵412,500 on this project. Savings in production costs arising from this project are first expected to arise in 20X4. In 20X4 savings are expected to be GH₵100,000, followed by savings of GH₵300,000 in 20X5 and GH₵200,000 in 20X6.

Project B commenced on 1 April 20X4. Costs incurred during the year were GH₵56,000. In addition to these costs a machine was purchased on 1 April 20X4 for GH₵30,000 for use on the project. This machine has a useful life of five years. At the end of 20X4 there were still some uncertainties surrounding the completion of the project.

Project C had been started in 20X3. In 20X3 the costs relating to this project of GH₵36,700 had been written off, as at the end of 20X3 there were still some uncertainties surrounding the completion of the project. Those uncertainties have now been resolved and a further GH₵45,000 costs incurred during the year.

Required

Show how the above would appear in the financial statements (including notes to the financial statements) of Kofi Ltd as of 31 December 20X4.

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  • 15 Marks

FR – L2 – Q29 – Government Grants

Show how Karla Ltd's three grants are reflected in financial statements for year ended 30 June Year 2, with options per IAS 20.

During the year ended 30 June Year 2, Karla Ltd received three grants, the details of which are set out below.
(1) On 1 September, a grant of GH₵40,000 from local government. This grant was in respect of training costs of GH₵70,000 which Karla Ltd had incurred.
(2) On 1 November Karla Ltd bought a machine for GH₵350,000. A grant of GH₵100,000 was received from central government in respect of this purchase. The machine, which has a residual value of GH₵50,000, is depreciated on a straight-line basis over its useful life of five years.
(3) On 1 June, a grant of GH₵100,000 from local government. This grant was in respect of relocation costs that Karla Ltd had incurred moving part of its business from outside the local area. The grant is repayable in full unless Karla Ltd recruits ten employees locally by the end of Year 2. Karla Ltd is finding it difficult to recruit as the local skill base does not match the needs of this part of the business.

Required
Show how the above transactions should be reflected in the financial statements of Karla Ltd for the year ended 30 June Year 2. Where any accounting standards allow a choice you should show all possible options.

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