AFAR
1
MIA QE/SEPT 2009
ADVANCED FINANCIAL ACCOUNTING & REPORTING
QUESTION 1
COI
60,000/ 3 x 2 x 3
COI
COI
- pre acquisation dividends
COI
Cost of control – Thyme (30%) 1st acquisition
RM’000
RM’000
120,000
Ordinary share capital
60,000
Retained profit
6,000
Goodwill
54,000
Cost of control – Thyme (30%) 2nd acquisition
RM’000
RM’000
70,000
Ordinary share capital
60,000
Retained profit
7,530
Goodwill
2,470
Cost of control – Mint (80%)
RM’000
320,000
Ordinary share capital
( 6,000)
Retained profits
ITA
Goodwill
27,280
32,000
134,720
Cost of control – Basil (1/3)
RM’000
600
Ordinary share capital
Retained profit
Goodwill
RM’000
200
33
367
COC – Ist acquisition
2nd acquisition
URP – inventory
Debenture interest
MI
To CPL
Profit and loss account – Thyme
RM’000
Bal b/d
6,000
7,530
4,000
300
14,480
8,190
COC
MI
To CPL
Profit and loss account –Mint
RM’000
33,280
Bal b/d
10,060
6,960
RM’000
120,000
RM’000
40,500
RM’000
50,300
CONFIDENTIAL
AFAR
2
Consolidated profit and loss account
RM’000
Pre acquisition dividends
6,000
Debenture interest
4,000
To CBS
172,284
MIA QE/SEPT 2009
RM’000
161,000
134
8,190
12,960
Bal b/d
Profit from JV
From Thyme
From Mint
CBS
Minority interest –Thyme (40%)
RM’000
Ordinary share capital
94,480
Retained profit
RM’000
80,000
14,480
CBS
Minority interest – Mint (20%)
RM’000
Ordinary share capital
Retained profit
48,060
ITA
RM’000
30,000
10,060
8,000
Alternative presentation (schedule format)
Analysis of equity/goodwill - Thyme
Thyme
Ist
2nd
acquisition acquisition
Share capital
60,000
60,000
200,000
Ret profit b/d
40,500
6,000
Ist acquisition
7,530
20,000
2nd acquisition
40,500-15,400 x
30%
URP
Debenture interest
MI( 40,500 - 4,000 300 x 40%)
66,000
67,530
COI
120,000
70,000
Goodwill
54,000
2,470
Analysis of equity/goodwill – Mint
Mint
Equity
Share capital
120,000
150,000
Ret profit b/d 50,300
33,280
At date of acquisition
38,700 + (11,600 x
3/12) =41,600
ITA 40,000
32,000
PrePostMI(40%)
acquisition acquisition
80,000
(6,000)
(7,530)
Preacquisition
(4,000)
( 300)
14,480
14,480
8,190
94,480
Post
acquisition
MI (20%)
30,000
(33,280)
8,000
CONFIDENTIAL
AFAR
3
MI 50,300 x 20%
COI
Goodwill
MIA QE/SEPT 2009
10,060
10,060
6,960
48,060
185,280
320,000
134,720
Consolidated retained profit
RM’000
Balance b/d
161,000
From Thyme
8,190
From Mint
6,960
From Joint Venture
134
Debenture interest
( 4,000)
----------172,284
======
Consolidated income statement of Herb group for the year ended 31 December
2008
RM’000
Revenue
85,000 + 54,000 + (40,000 x 9/12) + (15,000 134,000
x 1/3) – 40,000
COS
35,000 + 21,000 + (14,000 x 9/12) + (6,000 x ( 32,500)
1/3) – 40,000 + URP 4,000
GP
101,500
Distribution cost
8,900 + 5,400 + (4,500 x 9/12) + (3,400 x
( 18,808)
1/3)
Administrative
9,000 + 8,700 + (6,500 x 9/12) + (5,000 x
( 24,142)
expenses
1/3) – 100
Finance cost
1,000 + 500 + 4,000 + 300
( 5,800)
Profit before tax
52,750
Tax
9,900 + 3,000 + (3,400 x 9/12) + 200 x 1/3
( 15,518)
Profit after tax
37,234
Profit attributable to :
RM’000
MI : Thyme 15,400 – URP 4,000 -300 x 40%
4,440
Mint 11,600 x 9/12 x 20%
1,740
Parent + equity holders
31,054
-----------37,234
=======
Statement of changes in equity of Herbs group
Retained profit b/fwd Herbs
Thyme 25,100 – 20,000 x 30%
Profit for the year
Retained profit c/fwd
RM’000
139,700
1,530
31,054
172,284
CONFIDENTIAL
AFAR
4
MIA QE/SEPT 2009
Consolidated balance sheet of Herb group as at 31 December 2008
RM’000
Non current assets
PPE 100,000 + 210,000 + 175,000 + (23,700 x 1/3)
Investments 570,000 – 120,000 – 70,000 – 320,000 – 600
Intangible asset
Goodwill 54,000 +134,720 + 367 + 2,470
Current assets
Inventories 46,000 + 40,000 + 25,000 + 400/3 – URP 4,000
107,133
Accounts receivable 25,000 + 20,000 + 10,000 + 1,000/3 – 300
Bank 5,000 + 2,000 + 1,000 + 500/3
Cash in transit
Equity and reserves
Share capital
CPL
MI 94,480 + 48,060
Non current liabilities
Loans 50,000 + 8,000
Current liabilities
Accounts payable 30,000 + 19,000 + 7,700 + 12,500/3 – 170
Accrued interest
Tax 5,000 + 4,500 + 3,000 + 12,000/3
492,900
59,400
40,000
191,557
55,033
8,167
130
-----------954,320
=======
500,000
172,284
142,540
58,000
60,696
4,300
16,500
-----------954,320
========
Alternative solution using the equity method of consolidation for Joint Venture
Consolidated income statement of Herb group for the year ended 31 December
2008
RM’000
Revenue
85,000 + 54,000 + (40,000 x 9/12) – 40,000 129,000
COS
35,000 + 21,000 + (14,000 x 9/12) – 40,000
( 30,500)
+ URP 4,000
GP
98,500
Distribution cost
8,900 + 5,400 + (4,500 x 9/12)
( 17,675)
Administrative
9,000 + 8,700 + (6,500 x 9/12) – 100
( 22,475)
expenses
Finance cost
1,000 + 500 + 4,000 + 300
( 5,800)
Profit before tax
52,550
Share of profit of JV 400 x 1/3
134
Tax
9,900 + 3,000 + (3,400 x 9/12)
( 15,450)
Profit after tax
37,234
CONFIDENTIAL
AFAR
5
MIA QE/SEPT 2009
Consolidated balance sheet of Herb group as at 31 December 2008
RM’000
Non current assets
PPE 100,000 + 210,000 + 175,000
Investments 570,000 – 120,000 – 70,000 – 320,000 – 600
Intangible asset
Goodwill 54,000 + 134,720 + 2,470
Investment in joint venture
Current assets
Inventories 46,000 + 40,000 + 25,000– URP 4,000
Accounts receivable 25,000 + 20,000 + 10,000 – 300
Bank 5,000 + 2,000 + 1,000
Cash in transit
Equity and reserves
Share capital
CPL
MI 94,480 + 48,060
Non current liabilities
Loans 50,000 + 8,000
Current liabilities
Accounts payable 30,000 + 19,000 + 7,700– 170
Accrued interest
Tax 5,000 + 4,500 + 3,000
485,000
59,400
40,000
191,190
734
107,000
54,700
8,000
130
-----------946,154
=======
500,000
172,284
142,540
58,000
56,530
4,300
12,500
-----------946,154
========
(Total:25 marks)
QUESTION 2
Income statement for the year ended 31 March 2009
RM’000
Revenue
5,000
Cost of sales
(2,716)
-------2,284
Administrative expenses
(240)
Distribution expenses
(90)
Finance cost
(86)
Loss on investment property
(50)
---------Profit before tax
1,819
Income tax
(376)
---------Profit after tax
1,442
======
CONFIDENTIAL
AFAR
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MIA QE/SEPT 2009
Statement of changes in equity of Comel Bhd for the year ended 31 March 2009
Equity
Balance 1/4/08
RM’000
1,200
Option
Equity
Retained
component earnings
RM’000
RM’000
1,760
40
Profit for the year
Dividend paid
Balance 31/3/09
1,200
40
Total
RM’000
2,960
40
1,442
( 400)
1,442
(400)
2,802
4,042
Balance sheet of Comel Bhd as at 31 March 2009
RM’000
Non current assets
PPE (6,260 – 400)
Leased asset (320 -64)
Investment property
Current assets
Inventory
Cash
Bank
Accounts receivable
5,860
256
350
740
100
560
400
_____
8,266
=====
Equity
Ordinary shares
Equity component
1,200
40
Retained profits
2,802
Long term liabilities
Convertible loan stock
Deferred taxation
Lease creditors
Current liabilities
Accounts payable
Lease creditors
568
156
190
3,230
80
--------8,266
=====
CONFIDENTIAL
AFAR
7
Workings
1.
Cost of sales
as per TB
- finance charge
+ depreciation on
Leased asset
2. Finance costs
Interest (48 +8)
Interest on lease
MIA QE/SEPT 2009
RM’000
2,700
( 48)
64
---------2,716
======
RM’000
56
30
--------86
======
3. Convertible loan stock
Years
1
2
3
4
Cash flow
RM’000
48
48
48
648
Total value of debt component
Proceeds of the issue
Equity component
Discount
factor@10%
0.91
0.83
0.75
0.68
Present value
RM’000
43.6
39.8
36.0
440.6
560
600
40
Interest for year ended 31/3/09 : ( 10% x 560) – (8% x 600) = 8
4. Tax base RM600,000 x 26% = 156,000
deferred tax provision decrease from RM180,000 to RM156,000
(Total:25 marks)
QUESTION 3
a) At the balance sheet date, no retraining of staff has taken place. The
company has only finalized the retraining programme plan, therefore, there is
no obligation because no obligating event (retraining) has taken place. No
provision is therefore, to be recognized in the 31 March 2009 financial
statements.
(4 marks)
b) MegaPlant is of the opinion that the loss from the fire may be covered by an
insurance claim. However, the insurance company is disputing the claim.
This appears to be a contingent asset. If a contingent asset is probable, it
should be noted in the financial statements. However, if it is only possible, it
should be ignored. As this claim is at an early stage and the company has
not yet sought a legal opinion, it would be premature to consider the claim
probable. In these circumstances, the contingent asset should be ignored
and the financial statements will be unaffected.
(5 marks)
CONFIDENTIAL
AFAR
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MIA QE/SEPT 2009
c) The contamination would result in clean up costs only when the company is
required to do so under the laws of the particular country or the company has
a widely published environmental policy in which it undertakes to clean up all
contamination that it causes.
Should there be a legislation requiring a clean up, the obligating event is the
contamination of the land because of the virtual certainty of legislation
requiring cleaning up. An outflow of resources is probable in this case and
therefore, a provision is recognized for the best estimate of the costs of the
clean-up.
An entity can operate in a country where there is no environmental legislation
however, the entity has a widely published environmental legislation and the
entity has a record of honouring this published policy. In this case, the
obligating event is the contamination of the land, which gives rise to a
constructive obligation because the conduct of the entity has created a valid
expectation on the part of those affected by it that the entity will clean up the
contamination. An outflow of resources is probable in this case and therefore,
a provision is recognized for the best estimate of the costs of the clean-up.
Where there is no legislation and the company also does not have a widely
published environmental legislation, there is no legal or constructive
obligation, and thus no provision is required.
(6 marks)
d) Although the company is under no legal obligation to refund purchases by
dissatisfied customers, this refund policy would generally be made known to
its customers. The obligating event is the sale of the product, which gives
rise to a constructive obligation because the conduct of the store has created
a valid expectation on the part of its customers that the store will refund
purchases. The directors should expect that it would be probable that a
proportion of goods are returned for refund. A provision is recognized for the
best estimate of the costs of refunds.
(5 marks)
e) The contract is non-cancellable and cannot be returned or re-let to another
user. The obligating event is the signing of the lease contract, which gives
rise to a legal obligation. An outflow of resources embodying economic
benefits is probable. The entity accounts for the lease under FRS 117
Leases.
The overhaul cost will only be incurred when and if the air travel industry
improves as well as when Flightbus decides to operate the two planes again.
As such, there is no obligating event yet. No provision is to be recognised for
overhaul cost.
(5 marks)
(Total:25 marks)
QUESTION 4
A.
i.
The building has been successfully tenanted to various tenants, and it is
therefore held by Shipyard Authority to earn rentals and/or capital
CONFIDENTIAL
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MIA QE/SEPT 2009
appreciation rather than for use in the production or supply of goods or
services or for administrative purposes, or sale in the ordinary course of
business. FRS 140 therefore permits such a property interest held under an
operating lease to be classified as an investment property provided it is
accounted for as if it were a finance lease in accordance with FRS 117.
Shipyard Authority has complied with this requirement and it may, therefore,
opt to account for the warehouse as an investment property. But if it chooses
to do so, it must adopt the fair value model set out in FRS 140 for asset
recognition.
However, once Shipyard Authority decides to account for the warehouse as
an investment property, it must consistently account for its entire investment
property portfolio at fair value.
(4 marks)
ii. The first question that needs to be addressed is whether the building owned
by Company B qualifies to be classified as an investment property. 75% of the
building is held to earn rentals and the balance of 25% is held for use as a
sales and administrative office, i.e. 25% is owner-occupied. In these
circumstances, the property is an investment property only if either of the
following conditions are met:
a)
The portion tenanted could be sold separately (or leased out separately
under a finance lease), in which case Company B accounts for this
portion separately as an investment property under FRS 140 and the
owner-occupied portion as property, plant and equipment under FRS
116.
b)
If (a) is not met, but only an insignificant portion is owner-occupied, then
the building is an investment property.
If condition (a) is not met, the 25% portion which is owner-occupied cannot be
considered to be insignificant, and as a result, the building cannot be
classified as an investment property.
On the assumption that condition (a) is met and the 75% portion accounted as
an investment property, the change from the cost model to the valuation
model for the investment property is accounted for as a change in accounting
policy. Under the valuation model, or the fair value model, Company B will
measure its investment property at fair value.
The transitional provisions of FRS 140 require that the difference between the
previous carrying amount and the fair value to be adjusted against the
opening balance of retained profits. In addition, if Company B has disclosed
fair value information in its previous financial statements (determined in
accordance with FRS 140), it is encouraged to adjust the opening balance of
retained profits for the earliest period presented for which such fair value was
disclosed publicly and to restate comparative information for those periods.
The 25% continues to be accounted for under the cost basis, i.e. at cost less
accumulated depreciation and impairment losses.
(6 marks)
B.
Impairment
i.
Impairment loss
CONFIDENTIAL
AFAR
10
MIA QE/SEPT 2009
RM
Cost of factory building
Depreciable amount
Cost of factory building
Residual value (10% of cost)
RM
2,600,000
2,600,000
(260,000)
2,340,000
Annual Depreciation over useful life
Depreciation over 10 years
Carrying amount of factory building
78,000
(780,000)
1,820,000
Recoverable amount
1,500,000
Impairment loss
ii.
320,000
Fair value of the building RM2,250,000
RM
RM
Carrying amount of factory building
1,820,000
Recoverable amount higher of
Fair value
less cost to sell
2,250,000
(350,000)
1,900,000
And value-in-use
Recoverable amount
1,500,000
1,900,000
Impairment loss
C.
Nil
(6 marks)
Borrowing Costs
FRS 123 defines a qualifying asset as an asset that necessarily takes a
substantial period of time to get ready for its intended use or sale. The
construction of the ship will take approximately 3 years to complete, thus is a
qualifying asset.
Capitalisation rate
Types of financing
8% Redeemable
preference shares
10% Loan Stock
7% Term Loan
Principal
RM
Weighted
Average
(a)
Interest
Rate
(b)
(a) x (b)
60,000,000
30%
8%
2.4%
40,000,000
100,000,000
200,000,000
20%
50%
100%
10%
7%
2.0%
3.5%
7.9%
Total interest
Types of financing
8% Redeemable preference
Principal
RM
Interest
Rate
60,000,000
8%
Total
Interest
RM
4,800,000
CONFIDENTIAL
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shares
10% Loan Stock
7% Term Loan
40,000,000
100,000,000
MIA QE/SEPT 2009
10%
7%
4,000,000
7,000,000
15,800,000
RM
Interest qualifying for capitalization RM120,000,000 x
7.9%
Interest to be charged as expense
Total Interest
9,480,000
6,320,000
15,800,000
(6 marks)
D.
There must be facts and circumstances to support ComAir’s ability to
continue providing air service indefinitely between the two cities and this can
be supported by analysis of demand for air travel between the two cities as
well as cash flow supports. If based on an analysis of all the relevant factors,
there is no foreseeable limit to the period over which the asset is expected to
generate net cash inflows for ComAir, an intangible asset shall be regarded
by ComAir as having an indefinite useful life. In which case, the intangible
asset related to route authority can then be treated as intangible assets with
indefinite useful life.
No amortization is required until useful life is determined to be finite. The
asset is tested for impairment annually and when there’s an indication of
impairment.
(3 marks)
(Total: 25 marks)
CONFIDENTIAL