IMPAIRMENT OF ASSETS (IAS 36)
QUESTION 1
A company runs a unit that suffers a drastic drop in income due to the failure of its technology
on 1 January,2000.The following carrying values were recorded in the books immediately prior
to their impairment:
GHC
Goodwill
100,000
Technology
25,000
Brands
50,000
Land
250,000
Buildings
150,000
Other net assets
200,000
The recoverable value of the unit is estimated at GHC 425,000.The technology is
worthless,following its complete failure.
The other net assets include inventory,receivables and payables and it is considered that the
book values of other net assets is a reasonable representation of its net realizable value.
Show how the impairment of the CGU will be treated in the books.
QUESTION 2
There was an explosion in a factory.The carrying amounts of its assets were as follows:
GHC’000
Goodwill
100
Patents
200
Machines
300
Computers
500
Buildings
1,500
2,600
The factory operates as a cash generating unit.An impairment review reveals a net selling price
of GHC 1.2m for the factory and value in use of GHC 1.95m.Half of the machines have been
blown to pieces but the other half can be sold for at least their book value.The patents have been
superseded and are now considered worthless.
Show the effect of the explosion on the asset values.
Question 3
Stev acquired a plant which cost of GH¢3,000,000 as at 1 January 2011. The machine is not
producing as it was originally planned. Consequently, Stev has to reduce production by 40%.
Cash flow forecast for six years included in the budget submitted for management approval in
January 2012 shows the following as at 31st December:
Year
Cash flows (GH¢)
2012
600,000
2013
700,000
2014
660,000
2015
500,000
2016
450,000
1
2017
800,000
The cash flow forecast for 2017 Includes expected proceeds from disposal of the plant. The cash
flow projections also ignore the effects general upwards movement in prices.
It is estimated if the plant is sold on 1st January 2013, it would realize proceeds of
GH¢1,500,000 and pay sales commission of 2.5% on proceeds. Stev Ltd depreciates all
Machinery at 15% per annum. The cost of capital for Stev is 20% (ignoring inflationary effect)
Required:
Calculate the recoverable amount of the plant at 1st January 2013 and impairment loss (if any)
Question 4
A cash generating unit comprising a factory, plant and equipment etc and assorted purchased
goodwill becomes impaired because the product it makes is overtaken by a technologically more
advanced model produced by a competitor. The recoverable amount of the cash generating unit
falls to GH¢60m, resulting in an impairment of GH¢80m, allocate as follows:
Carrying amount carrying amount
Before impairment
after impairment
GH¢m
GH¢m
Goodwill
40
_
Patent (with no market value)
20
Tangible non-current assets (market value GH¢60m)80
60
Total
140
60
After three years, the entity makes a technological breakthrough of its own, and the recoverable
amount of the cash generating unit increases to GH¢90m. The carrying amount of the tangible
non-current assets had the impairment not occurred would have been GH¢70m.
Required
Calculate the reversal of the impairment loss.
Question 5
AT Group Ltd has an item of earth moving plant, which is rented out to companies on short-term
contracts. Its carrying value, based on depreciated historical cost is GH¢400,000. The estimated
selling price of this asset is only GH¢250,000, with associated selling expenses of GH¢5,000. A
recent review of its value in use based on its forecast future cash flows was estimated at
GH¢500,000. Since this review was undertaken, there has been a dramatic increase in interest
rates that has significantly increased the cost of capital used by AT Group Ltd to discount the
future cash flows of the plant.
Question 6
Afoko Ltd acquired a car taxi business on 1 January 2015 for GH¢230,000. The value of the
assets of the business at that date based on net selling price were as follows:
GH¢000
120
30
10
50
(20)
190
On 1 February 2015, the taxi business had three (3) of its vehicles stolen. The net selling values of these
vehicles was GH¢30,000 and because of non-disclosure of certain risk to the insurance company, the
business was uninsured. As a result of this event, Afoko Ltd wishes to recognise an impairment loss of
Vehicles
Intangible assets
Trade receivables
Cash
Trade payables
2
GH¢45,000 inclusive of the loss of the stolen vehicles due to the decline in value of the stolen income
generating unit, that is the taxi business. On 1 March 2015, a rival taxi company commenced business in
the same area. It is anticipated that the business revenue of Afoko Ltd would be reduced by 25% leading
to a decline in the present value in use of the business which is calculated at GH¢150,000. The net selling
value of the taxi license has fallen to GH¢25,000 as a result of the rival taxi operator. The net selling
values of the other assets have remained the same as at 1 January 2015.
Required: Recommend how Afoko Ltd should account for the above transaction in its financial
statements in accordance with IAS 36 Impairment of Assets.
RELATED PARTY TRANSACTIONS (IAS 24)
QUESTION 1
Mane is an entity specializing in importing a wide range of non-food items and selling them to
retailers. Aqeel is Mane’s CEO and founder and owns 40% of Mane’s equity shares:
i) Mane’s largest customer, Zico accounts for 35% of Mane’s revenue. Zico has just completed
negotiations with Mane for a special 5% discount on all sales.
ii) During the accounting period, Aqeel purchased a property from Mane for GH¢500,000. Mane
had previously declared the property surplus to its requirements and had valued it at
GH¢750,000.
iii) Aqeel’s son, Sherif is a director in a financial institution, Cheap Capital. During the
accounting period, Cheap Capital advanced GH¢2 million to Mane as an unsecured loan at a
favourable rate of interest.
Required:
Explain, with reasons, the extent to which each of the above transactions should be classified and
disclosed in accordance with IAS 24 Related Party Disclosures in Mane’s financial statements
for the period.
(4 marks)
Solution:
According to IAS 24 Related Party Disclosures,a customer with whom an entity transacts a
significant volume of business is not a related party merely by virtue of the resulting economic
dependence.
(I)
Zico is not a related party and the negotiated discount does not need to be disclosed.
A party is related to an entity if it has an interest in the entity that gives it significant influence
over the entity. The party is related to an entity if they are a member of the key management
personnel of the entity. As founder member and major shareholder holding 40% of the equity,
(II) Aqeel is able to exert significant influence and is a related party of Mane. Aqeel is also a
related party as he is Mane’s president. He is a member of the key management personnel of
Mane. The sale of the property for GHȻ500,000 will need to be disclosed, along with its
valuation as a related party transaction.
(II) Providers of finance are not related parties simply because of their normal dealings with the
entity. However, if a party is a close member of the family of any individual categorized as a
related party, they are also a related party. As Sherif is Aqeel’s son and Aqeel is a related party,
Sherif is also a related party. The loan from Cheap Capital will need to be disclosed along with
the details of Sherif and his involvement in the arrangements.
3
QUESTION 2
Engina, a foreign company has approached a partner in your firm to assist in obtaining local
stock exchange listing (or stock market registration) for the company. Engina is registered in a
country where transactions between related parties are considered to be normal but where such
transactions are not disclosed.
The directors of Engina are reluctant to disclose the nature of their related party transactions as
they feel that although they are a normal feature of business in their part of the world, it could
cause significant problems politically and culturally to disclose such transactions.
The partner in your firm has requested a list of all transactions with parties connected with the
company and the directors of Engina have produced the following summary:
(a) Every month, Engina sells GHC50,000 of goods per month to Mr Satay, the financial
director. The financial director has set up a small retailing business for his son and the goods are
purchased at cost price for him. The annual turnover of Engina is GHC300 million. Additionally,
Mr Satay has purchased his company car from the company for GHC45,000 (market value
GHC80,000). The director, Mr Satay, earns a salary of GHC500,000 a year, and has a personal
fortune of many millions of Cedis.
(b) A hotel property had been sold to a brother of Mr Soy, the Managing Director of Engina, for
GHC4 million (net of selling cost of GHC0.2 million). The market value of the property was
GHC4.3 million but prices have been falling rapidly. The carrying value of the hotel was GHC5
million and its value in use was GHC3.6 million. There was an over-supply of hotel
accommodation due to government subsidies in an attempt to encourage hotel development and
the tourist industry.
(c) Mr Satay owns several companies and the structure of the group is outlined below. Engina
earns 60% of its profits from transactions with Car and 40% of its profits from transactions with
Wheel. All of the above companies are incorporated in the same country.
Required
Write a report to the directors of Engina setting out the reasons why it is important to disclose
related party transactions and the nature of any disclosure required for the above transactions
under IAS 24 Related Party Disclosures.
Solution:
Engina
Report to: The Board of Directors of Engina
4
From: XXXXXXXX
Date: Subject: Related party transactions
Related party transactions
This report addresses the disclosure requirements of IAS 24 Related Party Disclosures with
regard to Engina. IAS 24 requires that all entities, listed or otherwise, provide disclosure of such
transactions as they may affect the assessments made by users of an entity’s operations, risks and
opportunities.
It is understood that Engina is reluctant to disclose related party transactions because they are
believed to be both politically and culturally sensitive, however the following advice must be
followed in order to secure a listing/stock exchange registration.
IAS 24: Scope and purpose
IAS 24 does not provide any exclusion from its scope, and so disclosure must be made. Related
party transactions are a normal feature of business, but an entity’s ability to succeed in business
is often affected by the strength of its relationship with other entities and individuals. The results
of the entity may be affected if these relationships were to be terminated. For example, the ability
of an entity to trade in a particular country may only be possible because of the presence of its
subsidiary in that local market. Similarly, prices and terms of trade may be preferential because
of the strength of the relationship. Therefore IAS 24 requires knowledge of these transactions to
be provided to the reader of the financial statements.
The results of an entity may be affected even if the related party transactions do not occur. A
parent may cease trading with a business partner upon acquisition of a subsidiary that can supply
similar products.
Disclosure must be given irrespective of whether the transactions took place at an arm’s length
value, as such transactions may still be lost if the relationship is terminated. Hence the
knowledge of such transactions provides valuable information to investors and regulators.
•
•
•
•
Disclosure requirements
IAS 24 requires that, at a minimum, the following disclosures must be given: „
The amount of the transaction „
The amount of any outstanding balance and the terms, conditions and guarantees attached „
Allowance for any irrecoverable debts or amounts written off in the period „
Disclosure that transactions were at an arm’s length value can only be given if this information
can be substantiated.
Disclosures relevant to Engina
The following outlines the related party disclosure requirements for the three transactions you
have specifically requested comment on. It is your responsibility to bring any further related
party transactions to our attention in order that they can also be incorporated into your financial
statement disclosures.
(a) Sale of goods to directors
The sale of goods and a company car to Mr Satay both constitute related party transactions, due
to Mr Satay’s position as a director of Engina. IAS 24 requires disclosure of all related party
5
transactions with key management personnel. However, accounting standards only apply to
material transactions. An item is considered material where knowledge of that transaction might
influence the decisions of a user of the financial statements. Materiality is not just a matter of
size, as small transactions with a director may still be of relevance to an investor if the
transaction is material to the director, despite not being material to the entity.
In the situation described, the transactions amount to GHC600,000 of sales and the sale of a
company car for GHC45,000 (market value GHC80,000). In terms of value these transactions
appear not to be material to Engina and neither do they appear to be material in value to Mr
Satay. However, given the sensitive nature of transactions with directors, and especially senior
directors like Mr Satay, the transactions should be disclosed in the financial statements in
accordance with good corporate governance practice. Significant contracts with directors, such
as these with Mr Satay, may also require disclosure by the local Stock Exchange.
(b) Hotel property
The sale of the hotel to the brother of Mr Soy, constitutes a related party transaction because of
Mr Soy’s status as Managing Director. The property seems to have been sold at below market
price and IAS 24 requires disclosure of any information surrounding a transaction which will
allow the reader to understand its impact on the financial statements.
The hotel had a carrying value of GHC5m, but given the fall in market values it should have
been written down to its recoverable amount in accordance with IAS 36 Impairment.
Recoverable amount is measured at the higher of value in use (GHC3.6m) and fair value minus
costs of sale (GHC4.3 - 0.2m). Hence the property should have been recorded in the statement of
financial position at GHC4.1m. As the property was sold at GHC100,000 less than this impaired
value, disclosure of this fact should be made, together with any other information relevant to the
reader, such as the reason for the sale in light of the expected decline in prices in the future.
(c) Mr Satay
Mr Satay has investments in 100% of the equity of Car and 80% of the equity of Wheel. In turn,
Wheel owns 100% of Engina. Engina and Wheel are related because of their parent-subsidiary
relationship. In addition, because all three entities are under the common control of Mr Satay,
IAS 24 also considers Engina and Car to be related. Therefore, the transactions between Engina
and both Wheel and Car are related party transactions.
The transactions will need to be disclosed in the individual financial statements of all three
entities. In the group accounts, all intra-group transactions are cancelled on consolidation, and so
disclosure need not be made at this level.
Further disclosure requirements of director’s interests in the equity of Engina may be necessary
under local Companies Code requirements and Stock Exchange rules.
QUESTION 3
Related party relationships are a common feature of commercial life. The objective of IAS 24:
Related Party Disclosures is to ensure that financial statements contain the necessary disclosures
to make users aware of the possibility that financial statements may have been affected by the
existence of related parties.
Required:Explain TWO importance of disclosing related party relationships and transactions in
financial statements.
(4 marks)
6
Solution:
IMPORTANCE OF RELATED PARTY DISCLOSURES
•Investors invest in a business on the assumption that it aims to maximize its own profits for the
benefit of its own shareholders. This means that all transactions have been negotiated at arm's
length between willing and informed parties. The existence of related parties may encourage
directors to make decisions for the benefit of another entity at the expense of their own
shareholders. This can be done actively by selling goods and services cheaply to related parties,
or by buying in goods and services at an above market price. It can also happen when directors
chose not to compete with a related party, or offer guarantees or collateral for other party's loans.
•Disclosure is particularly important when a business is being sold. It may receive a lot of
custom, supplies, services or general help and advice from family or group companies. When the
company is sold these benefits may be withdrawn.
•Related party transactions are not illegal, nor are they necessarily a bad thing. However
shareholders and potential investors need to be informed of material related party transactions in
order to make informed investment and stewardship decisions.
Question 4
Bongo Designs is the parent company of a small group. Its shares are stock market quoted, with
many shareholders. Only one shareholder, Akwasi Boakye has a holding over 5%. Akwasi
Boakye holds 20% of the shares and was the founder of the company. He still retains a seat on
the board which is made up of four executive directors (including himself) and two nonexecutive directors.
Akwasi Boakye's domestic live-in partner of ten years, Abena Lamptey, recently set up a
company, Gushegu Ltd, in the textile industry with a friend, Akosua Pokuaa. Abena Lamptey
and Akosua Pokuaa each own 50% of the shares of Gushegu Ltd, and decisions are made jointly
under a contract that both parties signed.
Bongo Designs has two subsidiaries, Zabzugu Fabrics which is 100% owned and Binduri
Textiles which is 60% owned. The other 40% of Binduri Textiles is owned by a single
shareholder, Innovative Sissala, which has two seats on Binduri Textiles’s five-member board.
Yaw Abdulai is the Finance Director of Zabzugu Fabrics. He is also the person responsible for
finance at the group level, but is not a member of the group’s board.
Required: In accordance with IAS 24: Related Party Disclosures, identify the related parties of
Bongo Designs in the above scenario, explaining why each is a related party.
(5 marks)
SOLU
Related Parties of Bongo Design
Akwasi Boakye is a related party as he both has significant influence over entity and is a
member of key management.
Abena Lamptey is treated as a close family member of Akwasi Boakye, and is therefore a
related party.
The company Abena Lamptey has invested in is jointly controlled. It is considered a related
party as there is joint control by a close family of key management of Bongo Designs.
Both Zabzugu Fabrics and Binduri Textiles are related parties as they are members of the
same group as Bongo Designs.
Yaw Abdulai is a related party because he is a member of key management personnel at a
group level.
(Innovative Sissala is not a related party of the group as it does not have significant influence
at a group level).
7
IFRS 5
QUESTION 1
On 1st January,2009 Messi and Ronaldo Ltd purchased a machine for GHC20,000.It has an
expected useful life of 10 years and a nil residual value. The company uses the straight line
method of depreciation.
On 31st December,2010 the company decides to sell the machine, Its current market value is
GHC15,000 and the company is confident they will find a buyer very quickly due to the short
supply in the market for this type of machinery .It will cost the company GHC500 to dismantle
the machine .
Required:
At what value should the machine be in Messi and Ronaldo Ltd’s financial statement?
Solution:
GHS
Carrying Value(8/10 x 20,000)
16,000
Fair Value less Cost to Sell(15,000-500)
14,500
Impairment Loss
1,500
The Asset will be classified as held for sale at GHC14,500(lower)in the Statement of Financial
position as part of Current assets and an impairment loss of GHC1,500 charged to the Income
Statement.
QUESTION 2
Pinch plc owns a building which it has used for many years as a factory. On 1 January 2012 the
building had a carrying value of GHC15m with an estimated useful economic life of 15 years.
Pinch uses the cost model under IAS 16 to account for buildings. On 1 April 2012 Pinch plc
commenced operations in a new building, and the old one was placed on the market as it was no
longer being used. The estimated proceeds of sale were GHC13 million, less selling costs of
GHC0.2 million. It was seen as highly probable at that date that the building would sell at that
price. By year end, 31 December 2012, the building remained unsold, so Pinch plc reduced the
asking price to GHC11m. The estimate of selling costs remained the same. The directors of
Pinch plc believed at that date it was highly probable the sale would occur within 12 months at
the lower price.
Required:
Explain how the old building should be treated in the books of Pinch plc for year ended 31
December 2012.
Solution
The building qualifies for transfer to “held for sale” on 1 April 2012 as the two conditions were
met at that date:
1. It was available for immediate sale in its present condition at the date classification to “held
for sale” is made; and
2. The sale was considered highly probable.
The carrying value on 1 April 2012 was GHC15 million less 3 month’s depreciation (15m * 1/15
* 3/12) of GHC0.25 million. Therefore the carrying value was GHC14.75 million. Always
assume depreciation is calculated on a time-apportioned basis unless otherwise instructed.
The “fair value less costs to sell” on 1 April 2012 was GHC12.8 million (13m – 0.2m). Therefore
the initial value to be assigned to the non-current asset held for sale is GHC12.8 million (lower
of
(1) carrying value at date of transfer and
8
(2) “fair value less costs to sell”). The loss in value of GHC1.95 million (14.75m – 12.8m) is
taken to profit or loss for the year.
No depreciation is charged from 1 April 2012.
At 31 December 2012, the next reporting date, the asset has not been sold. The applicability of
the conditions is reviewed, and the fair value less costs to sell is also reviewed. Based on the
failure to sell the asset, the price was reduced. The conditions are still met in that:
1. It is still available for immediate sale in its present condition; and
2. The sale is still considered highly probable.
Therefore the classification continues to be “held for sale”, but the asset’s carrying amount is
reduced to the revised “fair value less costs to sell” of GHC10.8 million (11m – 0.2m). The
further reduction in value of GHC2 million (12.8m – 10.8m) is taken to profit or loss for year
ended 31 December 2012.
QUESTION 3
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 that have started advertising the plant 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.
(5 marks)
ICAG NOV,2016
Solution:
As the plant appears to have met the criteria to be classified as held for sale on 30 June 2015, it
will be classified as held for sale on 30 June 2015at lower of:
*Carrying value on the date of classification
*Its fair value less cost to sell on the same date
Working (31/12/2015)
GHS
Cost
40,000
Less Accumulated Dep. (GHS40,000/10 years) × 2
(8,000)
Carrying value at 1.1.2015
32,000
Less Current Yr. Dep. (6 months) (GHS4,000 × 6/12)
(2,000)
Carrying value at 30.6.2015
30,000
Impairment loss at 30.6.2015
(2,500)
Fair value less cost to sell at 30.6.2015 (GHS29,000 - GHS1,500)
27,500
Further impairment loss at 31.12.2015
(3,500)
Fair value less cost to sell at 31.12.2015
24,000
If fair value less cost to sell is lower than the carrying value of asset on the date of classification
the difference will be impairment loss.The asset classified as held for sale is not depreciated after
being classified as held for sale.The asset will be presented separately from other assets, as a
separate line item in the statement of financial position under current assets at GHS24,000.
9
QUESTION 4
IFRS 5: Non-current Assets Held for Sale and Discontinued Operations sets out the principles
governing the measurement and presentation of non-current assets that are expected to be
realised through sale rather than through continuing use. The standard also deals with reporting
the results of operations that qualify as discontinued operations.
Required: Identify TWO (2) conditions which must be present in order to present the results of
an operation as “discontinued” and the accounting treatment that applies when such a
classification is deemed appropriate.
SOLU
A discontinued operation is a component of an entity that either has been disposed of, or is
classified as held for sale, and
represents a separate major line of business or geographical area of operations,
is part of a single co-ordinated plan to dispose of a separate major line of business or
geographical area of operations or
is a subsidiary acquired exclusively with a view to resale.
Accounting Treatment
Discontinued operations are presented separately at the end of profit or loss by including the
profit after tax generated by discontinued operations. This figure should include the post-tax gain
or loss on disposal of the assets of the operation or the gain or loss on remeasurement following
transfer to “held for sale”.
A component of an entity comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest of the entity. In
other words, a component of an entity will have been a cash generating unit or a group of cashgenerating units while being held for use.
An entity shall not classify as held for sale a non-current asset (or disposal group) that is to be
abandoned. This is because its carrying amount will be recovered principally through continuing
use.
Question 5
Asawasi Ltd made a decision to sell a business unit on 15 June 2017, and the criteria to classify
the unit as held for sale were met on 1 July 2017. Asawasi Ltd’s accounting year end is 31
December. At 1 July 2017, the carrying amount of the assets and liabilities of the business unit
(before any 2017 depreciation or revaluation adjustments) was as follows:
GH¢ million
Land and buildings
120
Equipment
50
Trade receivables
30
Inventories
20
Trade payables
(26)
Additional Information:
i) The land and buildings are held under the revaluation model of IAS 16: Property, Plant and
Equipment and were last revalued on 31 December 2016 to GH¢120 million. Their market
valuation on 1 July 2017 was GH¢124 million and selling costs were estimated at GH¢2.5
million at that date. Residual value was, and continues to be, expected to be higher than cost.
ii) The equipment is held under the cost model of IAS 16. The equipment was purchased on 1
July 2015 for GH¢80 million and is being depreciated straight line over a four-year period to a
10
zero residual value. Its sale value at 1 July 2017 was GH¢55 million. Selling costs are
insignificant.
iii) The trade receivables are recorded at invoiced value, reduced by any allowances for credit
losses recognised at 31 December 2016. No adjustment to these allowances was necessary at 1
July 2017. The receivables, if factored, would realise approximately GH¢26 million, net of
transaction costs at 1 July 2017.
iv) The inventories are merchandise purchased for resale and are held at cost. Their market value
at 1 July 2017 was GH¢28 million. Associated selling costs would amount to GH¢1.4 million.
v) It was anticipated at 1 July 2017 that the business unit will be sold for GH¢200 million, net of
selling costs, to a rival company in a single transaction.
Required: In respect of Asawasi Ltd’s year ended 31 December 2017, show, and briefly explain,
the amount recognised as Non-Current Assets Held for Sale under IFRS 5 at 1 July 2017 and the
impairment charge (if any) for the business unit.
SOLU
Non-Current Assets Held for Sale (IFRS 5) Carrying amount at 1 July 2017, after applying IAS
16:
GH¢ million
Land and buildings
124
Equipment (50 – (80/4 years x 6/12))
40
Trade receivables
30
Inventories
20
Trade payables
(26)
188
Any test for impairment will be based on the disposal group as a whole. As a disposal group, fair
value less costs to sell (GH¢200 million) is higher than carrying amount (GH¢188 million) there
is no impairment charge.
The amount recognised as non-current assets held for sale is therefore:
GH¢ million
Land and buildings
124
Equipment
40
164
Trade receivables and inventories are outside the scope of IFRS 5.
REVENUE FROM CONTRACTS WITH CUSTOMERS (IFRS 15)
QUESTION 1
Neymar enters into a 12 –month telecom plan with the local mobile operator Kasapa Plc.The
terms of the plan are as follows:
- Neymar’s monthly fixed fee is GHC100.
- Neymar recieves a free handset at the inception of the plan.
Kasapa Plc sells the same handset for GHC300 and the same monthly prepayment plans without
handset for GHC80/month.
Required:
How should Kasapa Plc recognise the revenues from this plan in line with IFRS 15-Revenue
from Contracts with Customers ?
11
Solution:
Step 1: Contrcat Indentification
Neymar
1.Receives a free handset
2.Monthly payment of GHC100
Step 2: Obligation Identification
Kasapa Plc
1.Deliver the free handset
2. Provide the network service to Neymar
Step 3: Price for the transaction
Fee (GHC100 x 12)
= GHC1,200
Free handset
= GHC 0
Total
= GHC1,200
Step 4 : Allocation of transaction price over the performance obligations.
Stand-alone selling price
%
GHC
Handset
300
300/1,260
23.8
Service (GHC80 x 12)
960
960/1,260
76.2
1,260
100
Step 5: Recognise Revenue
1.When the handset is delivered to the customer
Dr.
Contract Asset
GHC286
Cr.
Revenue
GHC286
2.Recognise Service Income
Dr.
Receivables
GHC100
Cr.
Contract Asset (286/12)
GHC24
Cr.
Revenue (914/12)
GHC76
When Cash is received
Dr.
Cash
GHC100
Cr.
Receivables
GHC100
Actual
GHC
286
914
1,200
QUESTION 2
Carsoon constructs retail vehicle outlets and enters into contracts with customers to construct
buildings on their land. The contracts have standard terms, which include penalties payable by
Carsoon if the contract is delayed, or payable by the customer, if Carsoon cannot gain access to
the construction site.
Due to poor weather, one of the projects was delayed. As a result, Carsoon faced additional costs
and contractual penalties. As Carsoon could not gain access to the construction site, the directors
decided to make a counter-claim against the customer for the penalties and additional costs
which Carsoon faced. Carsoon felt that because claims had been made against the customer, the
additional costs and penalties should not be included in contract costs but shown as a contingent
liability. Carsoon has assessed the legal basis of the claim and feels it has enforceable rights.
In the year ended 28 February 2017, Carsoon incurred general and administrative costs of
GHC10 million, and costs relating to wasted materials of GHC5 million. Additionally, during
the year, Carsoon agreed to construct a storage facility on the same customer’s land for GHC7
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million at a cost of GHC5 million. The parties agreed to modify the contract to include the
construction of the storage facility, which was completed during the current financial year. All of
the additional costs relating to the above were capitalised as assets in the financial statements.
The directors of Carsoon wish to know how to account for the penalties, counter claim and
additional costs in accordance with IFRS 15 Revenue from Contracts with Customers.
(7 marks)
Solution:
IFRS 15 Revenue from Contracts with Customers specifies how to account for costs incurred in
fulfilling a contract which are not in the scope of another standard. Costs to fulfil a contract
which is accounted for under IFRS 15 are divided into those which give rise to an asset and those
which are expensed as incurred. Entities will recognise an asset when costs incurred to fulfil a
contract meet certain criteria, one of which is that the costs are expected to be recovered.
For costs to meet the ‘expected to be recovered’ criterion, they need to be either explicitly
reimbursable under the contract or reflected through the pricing of the contract and recoverable
through the margin.
The penalty and additional costs attributable to the contract should be considered when they
occur and Carsoon should have included them in the total costs of the contract in the period in
which they had been notified.
As regards the counter claim for compensation, Carsoon accounts for the claim as a contract
modification in accordance with IFRS 15. The modification does not result in any additional
goods and services being provided to the customer. In addition,all of the remaining goods and
services after the modification are not distinct and form part of a single performance obligation.
Consequently, Carsoon should account for the modification by updating the transaction price and
the measure of progress towards complete satisfaction of the performance obligation.
A contract modification may exist even though the parties to the contract have a dispute about
the scope or price (or both) of the modification or the parties have approved a change in the
scope of the contract but have not yet determined the corresponding change in price. In
determining whether the rights and obligations which are created or changed by a modification
are enforceable, an entity should consider all relevant facts and circumstances including the
terms of the contract and other evidence. On the basis of information available, it is possible to
feel that the counter claim had not reached an advanced stage, so that claims submitted to the
client could not be included in total revenues.
When the contract is modified for the construction of the storage facility, an additional GHC7
million is added to the consideration which Carsoon will receive. The additional GHC7 million
reflects the stand-alone selling price of the contract modification. The construction of the
separate storage facility is a distinct performance obligation; the contract modification for the
additional storage facility would be, in effect, a new contract which does not affect the
accounting for the existing contract. Therefore the contract is a performance obligation which
has been satisfied as assets are only recognised in relation to satisfying future performance
obligations. General and administrative costs cannot be capitalised unless these costs are
specifically chargeable to the customer under the contract. Similarly, wasted material costs are
expensed where they are not chargeable to the customer. Therefore a total expense of GHC15
million will be charged to profit or loss and not shown as assets.
QUESTION 3
Ejura Ltd (Ejura) is a manufacturing and retail company which prepares financial statements in
accordance with International Financial Reporting Standards (IFRS) up to 31 December each
year.
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In order to generate or improve sales on one of its older products,Ejura offered a promotion
named ‘something for free’.The promotion included free maintenance services for the first two
years.On 1 October 2019,under the promotional offer,Ejura sold goods to a supermarket chain
for GHC4.4million.A two-year maintenance contract would normally be sold for
GHC0.5million,and the list price of the product would normally be GHC5 million.The
transaction has been included in revenue at GHC4.4million.
Required:
In accordance with IFRS 15:Revenue from Contracts with Customers,justify the appropriate
accounting treatment for the above transaction in the financial statements of Ejura for the year
ended 31 December 2019.
(7 marks)
QUESTION 4
IFRS 15: Revenue from Contracts with Customers specifies how and when an IFRS reporter will
recognise revenue as well as requiring such entities to provide users of financial statements with
more informative, relevant disclosures. The standard provides a single, principles based five-step
model to be applied to all contracts with customers. Mankranso Ltd, a hotel had the following
transactions during the year:
i) On 31 March 2019, Mankranso Ltd signed a contract to supply 50,000 units of food packs at
an agreed price of GH¢10 per unit. On the same day, 30,000 units were delivered at that date,
with the remainder delivered on 1 June 2019. It was agreed that the customer would have
extended credit terms of 12 months from the date of delivery. Mankranso Ltd’s cost of capital is
10%.
(3 marks)
ii) During the year ended 31 March 2019, Mankranso Ltd received payment in advance for the
supply of 2,000 hotel room-nights to customers at GH¢100 per room per night. Only 400 of these
had been occupied by 31 March 2019. The amounts paid by the customers are non-refundable
unless the company fails to provide the agreed accommodation.
(3 marks) Assume
Mankranso Ltd has decided to adopt IFRS 15 for year ended 31 March 2019.
Required: In each scenario above, calculate the amount of revenue to be recognised in the
financial statements of Mankranso Ltd for year ended 31 March 2019. Justify the correct
accounting treatment for each transaction.
SOLUTION
(i) The contract to supply is not sufficient to recognise revenue. It is necessary that control of the
goods have actually transferred to the customer. This is the case for 30,000 units. The deferred
payment does not prevent revenue from being recognised, but the consideration needs to be
measured at the fair value, on the transaction date, of the amount receivable. The fair value needs
to reflect a discount allowing for the time value of money, as a result of the extended credit
period. The discount rate will be 10%, Mankranso’s cost of capital. Hence revenue will be
recognised as follows: 30,000 units * GH¢10 * 1/1.10 = GH¢272,727.
The discount will be recognised as finance income as time passes, on a timeapportioned basis.
As the sale took place on 31 March 2019, no time has yet passed to trigger the recognition of
finance income. Journal:
GH¢
GH¢
Dr trade receivables
272,727
Cr Revenue
272,727
(recognition of revenue and trade receivables at fair value of consideration receivable)
(ii) Again, the same principles apply. Revenue is recognised when control of the goods or
services are transferred to the customer.
Here, cash was received in advance. Nevertheless, revenue is only recognised when the service is
delivered to the customer. Any excess cash retained is recognised as deferred income, a liability.
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If the cash is non-refundable, this does not change the timing of recognition of revenue.
However, if the customer’s right to the service expires, and the customer has no right to a refund,
the revenue should then be recognised.
Total cash received in year ended 31 March 2019: 2000 * GH¢100 = GH¢200,000 Total room
nights provided 400 Revenue recognised = 400 * GH¢100 = GH¢40,000
Deferred revenue = 200,000 – 40,000 = 160,000
Journal:
GH¢ 000
GH¢ 000
Dr Cash
200
Cr Revenue
40
Cr Deferred revenue
160
(recognition of revenue, deferred revenue and cash received)
QUESTION 5
Marshall Ltd (Marshall) is a manufacturing company that prepares Financial Statements in
compliance with IFRSs and has a reporting date to 31 December. During the year to 31
December 2020, Marshall entered into a contract with a customer to manufacture and sell some
goods such that the goods will be delivered (control of the goods vests with the customer) in two
years. The contract has two payment options:
i)
The customer can pay GH¢500,000 when the contract is signed or
ii)
GH¢650,000 in two years when the customer gains control of the goods. Marshall's
incremental borrowing rate is 10%. The customer paid GH¢500,000 on 1 January 2020,
when the contract was signed. Marshall intends to recognise revenue on this contract in
the financial statements.
Required:
In accordance with IFRS 15: Revenue from Contract with Customers, explain (with supporting
calculations) how Marshall should account for the above transactions for years 2020 and 2021.
SOLUTION
IFRS 15 requires revenue to be recognised as each performance obligation is satisfied. An entity
satisfies a performance obligation by transferring control of a promised good or service to the
customer, which could occur over time or at a point in time.
In this contract, Marshall undertakes to transfer control of the goods in two years. Hence,
performance obligation has not been satisfied, and revenue cannot be recognised.
The customer has made an advance payment of GH¢500,000 for goods to be delivered in 2
years.
This represents a liability (revenue received in advance) and has a significant financing
component.
For the year to 31 December 2020, Marshall would recognise a finance cost of GH¢50,000
(500,000 x 10%) and a liability in the statement of financial position of GH¢550,000
(GH¢500,000 + GH¢50,000).
For the year to 31 December 2021, Marshall would recognise a finance cost of GH¢55,000
(550,000 x 10%) and a liability in the statement of financial position of GH¢605,000
(GH¢550,000 + GH¢55,000).
IFRS 2
Illustration 1a: Award with only service conditions
An entity grants 100 share options to each of its 500 employees. Each grant is conditional upon
the employee working for the entity over the next three years. The entity estimates that the fair
value of each share option is GH¢15. The entity estimates that 20% of the employees will leave
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during the three-year period and, therefore, forfeit their rights to the share options. Application of
the requirements:
Illustration 2: Award with market conditions
An entity grants 10,000 share options to a director on the condition that the director remaines in
employment for three years and the market price of the related shares increased from GH¢50 at
the beginning of year 1 to above GH¢65 at the end of year 3. The entity determines the fair value
at grant that takes into account the possibility that the share price will exceed GH¢65 at the end
of year 3 (and therefore become exercisable) and the possibility that the share price will not
exceed GH¢65 at the end of three years (and hence the options will be forfeited). It estimates the
fair value of the share options with this market condition to be GH¢24 per option.
The possibility that the share price target might not be achieved is already taken into account
when estimating the fair value of the options at grant date. Therefore, if the entity expects the
director to complete the three-year service period and the director does so, the entity recognises
the following amounts in years 1, 2 and 3:
Illustration 3
on 1 January 2014 an entity grants 100 share options to each of its 500 employees. Each grant is
conditional upon the employee working for the entity until 31 December 2016. At the grant date
the fair value of each share option is GH¢15.
during 2014 20 employees leave and the entity estimates that a total of 20% of the 500
employees will leave during the three- year period. During 2015, a further 20 employees leave
and the entity now estimates that only a total of 15% of its 500 employees will leave during the
three-year period. During 2016, a further 10 employees leave.
Required :
Calculate the remuneration expense that will be recognised in respect of the share-based payment
transaction for each of the three years ended 31 December 2016.
Solutions
Yr
Calculation
Expense for period Cumulative expense
GH¢
GH¢
2014 (100 x 500 x 80% x 15 x 1/3years)
200,000
200,000
2015 (100 x 500 x 85% x 15 x 2/3years) - 200,000
225,000
425,000
2016 (45000 x 15) - 425,000
250,000
675,000
The Financial statements will include the following amounts:
Income Statement
Staff Costs
Statement of Financial Position
included with equity
2014
GH¢
20,000
2015
GH¢
225,000
2016
GH¢
250,000
2014
GH¢
200,000
2015
GH¢
425,000
2016
GH¢
675,000
Illustration 4
On the 1 January 2014, 400 staff receive 100 share options each. They must work for the
company for the next three years and the options become exercisable on 31 December 2016. The
fair value at the time of granting is GH¢20 per option.
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In the year ending 31 December 2014, 10 staff leave and it is thought that during the three-year
vesting period, the total amount leaving will be 15%.
In 2015, a further 15 leave but the estimate of total leaving is now reduced to 10%. In the final
year 12 staff leave.
Required:
Show how this will impact on the financial statements of the years 2014, 2015 and 2016.
Illustration 5
Adu has set up an employee option scheme to motivate its sales team often key sales people.
Each sales persons was offered 1 million options, conditional upon the employee remaining with
the entity during the vesting period of 5years. The fair value of each option at the grant date was
GH¢20.
At the of year one, two sales people were expected to leave over the vesting period.
one of these two people left in year two, however the other recommitted to the entity and
therefore, at the end of year two, the entity expected the remaining nine sales people to remain
with the entity for the rest of the vesting period.
Required:
Calculate the charge to Adu statement of profit and loss for the year two in respect of the share
options and prepare the journal entry to record this.
Illustration 6
JP granted share options to its 300 employees on 1 January 2013. Each employee will receive
1,000share options provided they continue to work for JP for 3 years from the grant date. The
fair value of each option at the grant date was GH¢1.22
The actual and expected staff movement over the 3years to 31 December 2015 is provided
below:
In 2013 25 employees left and another 40 were expected to leave over the next two years.
In 2014 a further 15 employees left and another 20 were expected to leave the following year/
Required:
Calculate the charge to JP statement of profit and loss for the year ended 31 December 2013 in
respect of the share options and prepare the journal entry to record this.
Answer
2013
(300 - 25 - 40 ) x 1,000 x GH¢1.22 = GH¢286,700 over 3years GH¢95,567 charge for 2013
2014
(300 - 25 - 20 ) x 1,000 x GH¢1.22 = GH¢292,800 x 2/3 = GH¢195,200 recognizable to date
Less amount recognised in 2013 = GH¢195,200 - 95,567 = GH¢99,633 charge for 2014
charge for 2014 of GH¢99,633 will be recorded as
Dr P&L - staff costs
GH¢99,633
Cr Other reserves (equity)
GH¢99,633
Being the charge for share-based payment for the year ended 31 December 2014
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Cash-settled awards
Illustration 1: Award that is cash-settled
An entity grants 100 cash-settled awards to each of its 500 employees on the condition that the
employees remain in its employment for the next three years. Cash is payable at the end of three
years based on the share price of the entity’s shares on such date.
During year 1, 35 employees leave. The entity estimates that 60 additional employees will leave
during years 2 and 3 (i.e., the award will vest for 405 employees). The share price at year-end is
GH¢14.40.
During year 2, 40 employees leave and the entity estimates that 25 additional employees will
leave during year 3 (i.e., the award will vest for 400 employees). The share price at year-end is
GH¢15.50.
During year 3, 22 employees leave, so that the award vests for 403 employees. The share price at
year-end is GH¢18.20.
Illustration 2
On 1 January 2011 an entity grants 100 cast share appreciation rights (SAR) to each of its 300
employees, on condition that they continue to work for the entity until 31December 2013.
During 2011 20 employees leave. The entity estimates that a further 40 will leave during 2012
and 2013.
During 2012 10 employees leave. The entity estimates that a further 20 will leave during 20 2013
During 2013 10 employees leave.
the fair value of one SAR at each year end are shown below.
Fair value
GH¢
2011
10.00
2012
12.00
2013
15.00
Required:
Calculate the amount to be recognised as an expenses for each of the three years ended 31
December 2013 and the liability to be recognised in the statement of financial position at 31
December for each of the three years.
Illustration 3
On 1 January 2011 kindly sets up a cash based payment to each of its 100 employees, on
condition that they continue to work for the entity until 31 December 2013. Each employee has
been allocated 100 shares and will receive a payment in cash if the share price exceeds GH¢10
on 31 December 2013. of the amount by which it exceeds GH¢10.
During 2011, 5 employees leave. The entity estimates that a further 15 will leave during 2013.
During 2012, 10 employees leave. The entity estimates that a further 12 will leave during 2013.
During 2013, 18 employees leave.
The share prices at the reporting date in each year are shown below
Fair value
GH¢
2011
11.00
18
2012
2013
12.00
14.00
Required
Calculate the amount to be recognised as an expense for the two years ended 31 December 2013
and the liability to be recognised in the statement of financial position at 31 December for both
years.
Illustration 4
Power grants 100 share appreciation rights (SARs) to its 500 employees on 1 January 2013 on
the condition that the employees stay with the entity for the next two years. The SARs must be
exercised at the start of 2015.
During 2013 `15 staff leave and another 20 are expected to leave in 2014.
During 2014 25 staff leave
The fair value of the SAR is GH¢10 at 31 December 2013 and GH¢13 at 31 December 2014.
Required:
calculate the amount to be recognised as an expense for the two years ended 31 December 2013
and 2014 and the liability to be recognised in the statement of financial position at 31 December
for both years.
Illustration 5
Abi's granted 1,000 share appreciation rights (SARs) to its 300 employees on 1 January 2009. To
be eligible, employees must remain employed for 3years from the date of issue and the rights
must be exercised in January 2012, with settlement due in cash.
In the year to 31 December 2009, 32 staff left and a further 35 were expected to leave over the
following two years.
In the year to 31December 2010, 28 staff left and a further 10 were expected to leave in the
following year.
No actual figures are available as yet for 2011.
The fair value of each SAR was GH¢8 at 31 December 2009 and GH¢12 at 31 December 2010.
Required:
prepare the accounting entry to record the expense associated with the SARs for the year to 31
December 2010 in accordance with IFRS 2 Share - based payments
Answer
2009
Eligible employees (300 - 32 - 35 ) =233
Equivalent cost of SARs = 233 employees x 1000 rights x FV GH¢8 = GH¢1,864,000
Allocate over 3 years vesting period GH¢1,864,000/3= GH¢621,333 equivalent charge to the
statement of profit and loss in the first year.
2010
Eligible employees (300 - 32 - 28 - 10 ) = 230
Equivalent cost of SARs = 230 employees x 1000 rights x FV GH¢12 = GH¢2,760,000
Cumulative amount to be recognised as a liability = GH¢2,760,000 x 2/3 years = GH¢1,840,000
less amount previously recognised = GH¢1,840,000 - GH¢621,333 = GH¢1,218,667
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The expense will be recorded as:
Dr P&L - staff cost
GH¢1,218,667
Cr Liability
GH¢1,218,667
. Disclosures
Among other things, IFRS 2 requires entities to disclose the following:
• The type and scope of agreements existing during the reporting period
• Descriptions of each type of arrangement, including general terms and conditions of the
arrangement (e.g., settlement methods, vesting conditions)
• The number and weighted-average exercise price of share options (outstanding at the beginning
of the reporting period and at the end of the reporting period, granted, vested, exercised, expired
and forfeited during the period)
• The average share price of exercised options
• The range of exercise prices and weighted average remaining contractual life of options
outstanding at the end of the reporting period
• The valuation method used to estimate the fair value of the awards (model and input values,
etc.)
• The impact on the income statement (i.e., total expense) and the financial position (e.g.,
carrying amount of liabilities) of share-based payment awards
Illustration 5
On 1 October 2016, HO made an award of 4,000 share options to each of its seven directors. The
condition attached to the award was that the directors must remain employed by HO for three
years. The fair value of each option at the grant date was GH¢100 and the fair value of each
option at 30 September 2018 was GH¢110. At 30 September 2017, it was estimated that three
directors would leave before the end of three years. Due to an economic downturn, the estimate
of directors who were going to leave was revised to one director at 30 September 2018. The
expense for the year as regards the share options had not been included in profit or loss for the
current year and no director had left by 30 September 2018.
Required
Calculate the amount to be recognised as an expense for 30 September 2018
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