5.

1
(a) Property, plant and equipment consists of tangible items which are held for use
in the production or supply of goods or services, for rental to others, or for
administrative purposes and which are expected to be used during more than
one period.

(b) An item of property, plant and equipment should be recognised as an asset when
its cost can be measured reliably and it is probable that future economic benefits
associated with the item will flow to the entity. The item should be derecognised
when it is disposed of or no future economic benefits are expected from either
its use or its disposal.

(c) The purchase price, plus import duties, delivery charges and non-refundable
purchase taxes should be included in the asset's cost. The minor spares should be
treated as inventory and the cost of maintenance should be treated as an
expense of the period covered by the contract.

5.2
(a) Under the cost model, items of property, plant and equipment are carried at cost
less any accumulated depreciation and less any accumulated impairment losses.
Under the revaluation model, an item of property, plant and equipment is
carried at a revalued amount, consisting of the item's fair value at the date of
revaluation, less any subsequent accumulated depreciation and less any
subsequent accumulated impairment losses.

(b) A revaluation increase is generally credited to a revaluation reserve and
accounted for as other comprehensive income. But a revaluation increase is
recognised as income when calculating an entity's profit or loss to the extent that
it reverses any revaluation decrease in respect of the same item that was
previously recognised as an expense.
A revaluation decrease is generally recognised as an expense when calculating
the entity's profit or loss. But a revaluation decrease is debited to the revaluation
reserve and accounted for (as a negative figure) in other comprehensive income
to the extent of any credit balance previously existing in the revaluation reserve
in respect of that same item.

(c) On 31 December 2009, a revaluation increase of 0.2m is credited to revaluation
reserve. On 31 December 2010, 0.2m is debited to the revaluation reserve and
an expense of 0.3m is recognised when calculating the company's profit or loss
for the year.
If the valuations on 31 December 2009 and 2010 are reversed, then an expense
of 0.3m is recognised when calculating profit or loss for the year to 31
December 2009. In the financial statements for the year to 31 December 2010,
income of 0.3m is recognised when calculating the company's profit and 0.2m
is credited to the revaluation reserve.


5.3
(a) Depreciation is the systematic allocation of the depreciable amount of an asset
over its useful life. Depreciable amount is the cost of the asset (or other amount
substituted for cost) less its residual value. Useful life is generally the period over
which the asset is expected to be used by the entity. Residual value is the
estimated amount that the entity would currently obtain from disposal of the
asset, after deducting the estimated costs of disposal.

(b) Depreciable amount is 49,500 and useful life is 5 years. Therefore straight-line
depreciation is 9,900 per annum. Diminishing balance depreciation is calculated
as follows:

Year Carrying amount Depreciation Carrying amount
b/f at 30% c/f

2010 59,500 17,850 41,650
2011 41,650 12,495 29,155
2012 29,155 8,746 20,409
2013 20,409 6,123 14,286
2014 14,286 4,286 10,000

49,500

The company should choose the method which most closely matches the usage
pattern of the asset concerned.

5.4
(a) Borrowing costs consist of interest and other costs incurred by an entity in
connection with the borrowing of funds. IAS23 requires that borrowing costs that
are directly attributable to the acquisition, construction or production of a
qualifying asset should be capitalised as part of the cost of that asset. Other
borrowing costs should be recognised as an expense in the period in which they
are incurred.


(b) Loans A, B and C total 23m and interest for the year totals 2.3m so the
capitalisation rate for the year is 10%. Capitalised borrowing costs are 227,500,
as follows:

1,500,000 10% 9/12 112,500
2,400,000 10% 5/12 100,000
1,800,000 10% 1/12 15,000

227,500


5.5
(a) An investment property is land or a building or a part of a building held to earn
rentals or for capital appreciation or both, rather than for use. Investment
property may be measured using either the fair value model or the cost model.
Under the fair value model, the property is measured at its fair value and any
gain or loss arising from a change in fair value is recognized as income or as an
expense when calculating the entity's profit or loss. The cost model is the same
as for property, plant and equipment.

(b) As stated above, gains arising in connection with investment property measured
at fair value are recognised as income when calculating the entity's profit or loss.
Revaluation gains arising in connection with property, plant and equipment
measured under the revaluation model are generally excluded from profit or loss
and are recognised as other comprehensive income.



5.6
This ship is a complex asset and should be treated as three separate assets. The
carrying amount of these assets at 30 September 2009 (eight years after
purchase) is as follows:
m
Ship's fabric (300m 17/25) 204
Cabins etc. (150m 4/12) 50
Propulsion system (100m 10,000/40,000) 25

279


Ship's fabric
Depreciation of 12m (300m 1/25) should be charged in the year to 30
September 2010. The repainting costs do not meet the recognition criteria for an
asset and should be treated as repairs and maintenance.

Cabins and entertainment area fittings
The upgrade (at a cost of 60m) has extended the remaining useful life of the
cabins etc. by one year and so the costs of the upgrade meet the recognition
criteria for an asset. The cost of 60m should be added to the cost of the fittings.
Any of the old fittings which have been replaced should be derecognised.
Assuming that none of the old fittings are derecognised, the revised carrying
amount is 110m and this should be depreciated over the remaining useful life of
five years.
Therefore depreciation of 22m is charged in the year to 30 September 2010.

Propulsion system
The carrying amount of the old system (25m) should be written off. This
assumes that the system has a scrap value of zero. Depreciation of the new
system for the year to 30 September 2010 is 14 million (140m 5,000/50,000).

Entries in financial statements
Expenses for the year to 30 September 2010 will include the following:
m
Depreciation of ship's fabric 12
Depreciation of cabins etc. 22
Depreciation of propulsion system 14
Loss on disposal of propulsion system 25
Repairs and maintenance 20

The statement of financial position as at 30 September 2010 will show the cruise
ship as a noncurrent asset at a carrying amount of 406m. This is calculated as
follows:
m
Ship's fabric (204m 12m) 192
Cabins etc. (110m 22m) 88
Propulsion system (140m 14m) 126

406



QUESTIONS

13.1
(a) Define the term "revenue" and explain how revenue should be measured in
accordance with the requirements of international standard IAS18.

(b) Identify the amount of revenue arising in each of the following cases:
(i) A company sells goods for 1,000 plus VAT at 17.5%, so that the customer
is charged a total of 1,175.
(ii) A company sells goods for 500 less a trade discount of 25. The customer
is offered a further cash discount of 19 if payment is made within 30 days
and does in fact pay within this period of time. The company acquired the
goods at a cost of 350.
(iii) A company issues 100,000 1 ordinary shares at par.
(iv) A manufacturing company which is moving to a new factory sells its old
factory for 450,000. The company acquired the factory 20 years
previously at a cost of 300,000.

13.2
(a) State the conditions which must be satisfied in order for the revenue relating to a
sale of goods to be recognised.

(b) Explain when revenue should be recognised in each of the following situations:
(i) A company sells goods on "sale or return" terms. The customer is entitled
to return the goods to the company (and obtain a full refund) if they
cannot be sold to a third party within three months.
(ii) A company delivers goods to an agent who undertakes to sell these goods
on behalf of the company.
(iii) A company sells goods on approval. The customer has one month in which
to decide whether or not to accept the goods.

13.3
(a) State the conditions which must be satisfied in order for the revenue relating to
the rendering of services to be recognised.
(b) Explain when revenue should be recognised in each of the following situations:
(i) A company which prepares financial statements to 31 December each year
has a contract with a customer for the provision of certain services. These
services are to be supplied evenly over the two-year period from 1 July
2009 to 30 June 2011. The agreed contract price is 45,000.
(ii) The above company has another two-year contract (again covering the
period from 1 July 2009 to 30 June 2011) for the provision of services to a
customer but these services are not to be supplied evenly over the two-
year period. The agreed contract price is 80,000. It is estimated that 10%
of the services have been rendered by the end of 2009 and that 65% of the
services have been rendered by the end of 2010.

13.4
Identify whether (and when) the "significant risks and rewards" of ownership pass from
seller to buyer in each of the following situations:

(a) A retailer has a "no questions asked" returns policy. Customers may return goods
for any reason within one month of purchase and obtain a full refund. Experience
shows that less than 1% of sales result in such returns and refunds.
(b) A company sells a machine to a customer and also undertakes to instal the
machine on the customer's premises. The installation will take approximately
three days, after which the customer will inspect the installed machine and
decide whether or not to accept it.

13.5
A company sells goods to a customer on the understanding that the customer will pay
5,000 immediately and will then pay two further instalments of 5,000 each at annual
intervals. Assuming an effective interest rate of 10% per annum, calculate the amount
of revenue which should be recognised at the date of the sale.

13.6
On 1 July 2009, Ashford Ltd sells goods worth 800,000 to Baker plc for 500,000. The
sales agreement states that Ashford Ltd is entitled to repurchase the goods on 30 June
2012 for 500,000 plus compound interest calculated at 10% per annum and it is
expected that repurchase will in fact occur.
Taking into account the substance of this transaction, how much revenue should
Ashford Ltd recognise on 1 July 2009?











ANSWERS

13.1
(a) Revenue is defined as "the gross inflow of economic benefits during the period
arising in the course of the ordinary activities of an entity when those inflows
result in increases in equity, other than increases relating to contributions from
equity participants". Revenue should be measured at the fair value of the
consideration received or receivable.

(b) (i) Revenue is 1,000. The VAT is collected on behalf of the tax authorities
and does not increase the company's equity.
(ii) Revenue is 475. Cash discounts are treated as an expense.
(iii) Revenue is nil. The 100,000 is a contribution from equity participants.
(iv) Revenue is nil. The selling of factories is not an ordinary activity for this
company. The gain on the transaction is dealt with in accordance with the
requirements of IAS16 Property, Plant and Equipment.

13.2
(a) Revenue from a sale of goods should be recognised when the seller has
transferred the significant risks and rewards of ownership of the goods to the
buyer, the seller has retained neither managerial involvement with the goods nor
control over them, the amount of revenue and any costs incurred can be
measured reliably and it is probable that the economic benefits associated with
the transaction will flow to the seller.

(b) (i) Revenue should be recognised when the goods are resold by the customer
or at the end of the three-month period if the customer chooses not to
return them.
(ii) Revenue should be recognised when the goods are sold by the agent.
(iii) Revenue should be recognised when the goods are formally accepted by
the customer or when the one-month period expires if the customer does
not reject them.

13.3
(a) Revenue from the rendering of services should be recognised when the stage of
completion of the transaction at the end of the reporting period can be
measured reliably, it is probable that the economic benefits associated with the
transaction will flow to the entity and the amount of revenue and any costs
incurred can be measured reliably.

(b) (i) Revenue of 11,250 (6/24ths of 45,000) is recognised in 2009. Revenue
recognised in 2010 and 2011 is 22,500 and 11,250 respectively.

(ii) Revenue of 8,000 (10% of 80,000) is recognised in 2009. A further 55%
of the total revenue (44,000) is recognised in 2010 and the final 28,000
is recognised in 2011.

13.4
(a) The retailer retains only an insignificant risk and all of the conditions necessary to
recognize revenue seem to be satisfied. Revenue should be recognised when a
sale is made. Sales returns should be accounted for in the usual way as they
occur. At the end of each reporting period, a provision should be made for
refunds in relation to sales made within the previous month.

(b) Revenue should not be recognised until installation is complete and the
customer has accepted the machine.

13.5
Revenue recognised at the date of the sale is 5,000 + 4,545 (5,000 1/1.1) + 4,132
(5,000 1/(1.1)2) which gives a total of 13,677. The remaining 1,323 is interest.
Assuming for the sake of simplicity that the sale occurs at the start of an accounting
year, 868 of this interest is recognized as interest income in the first year and the
remaining 455 is recognised in the second year. The calculations are as follows:
Debt Interest Received Debt
b/f at 10% c/f

Year 1 8,677 868 5,000 4,545
Year 2 4,545 455 5,000 0
The opening balance of the debt is 13,677 less the initial payment of 5,000.


13.6
In substance, this transaction is not a sale of goods but is in fact a secured loan. No
revenue should be recognised. The goods should continue to be recognised as an asset
in the statement of financial position of Ashford Ltd and the loan of 500,000 should be
accounted for as a financial liability in accordance with the requirements of IAS39.





QUESTIONS

14.1
List the four main categories of employee benefits which are identified by international
standard IAS19 and give examples of each category.

14.2
A company has 10,000 employees. Each employee is entitled to twenty days of paid
holiday per calendar year. Up to five days of this entitlement may be carried forward
and taken in the following year but cannot be carried forward any further. Employees
are not paid for any holidays which they fail to take.
As at 31 December 2009, 9,130 employees had used their full holiday entitlement for
2009. The remaining employees are carrying forward an average of three days per
employee. Based on past experience, it is expected that these employees will each use
an average of two of these three days before the end of 2010.
Each day of paid holiday costs the company an average of 150. Calculate the liability
which should appear in the company's statement of financial position at 31 December
2009 with regard to paid holiday entitlement.

14.3
(a) Distinguish between defined contribution pension plans and defined benefit
pension plans.

(b) A company's agreed contributions to a defined contribution plan for 2009 are
350,000. Of this sum, the company had paid 320,000 by the end of the year. It
is becoming clear that the pension fund assets will be insufficient to finance the
expected level of employee benefits and that the company would have to
increase its annual contributions by 50% if employee expectations were to be
met.
Calculate the expense which should be shown in the statement of
comprehensive income for the year to 31 December 2009 in relation to this plan.
Also calculate the amount of the liability which should appear in the statement of
financial position.

(c) Explain why accounting for a defined benefit plan is much more difficult than
accounting for a defined contribution plan.





ANSWERS

14.1
The four categories of employee benefits are:
(i) short-term employee benefits (e.g. wages and salaries)
(ii) post-employment benefits (e.g. pensions)
(iii) other long-term employee benefits (e.g. long-service leave)
(iv) termination benefits (e.g. redundancy pay).

14.2
The liability is 261,000 (870 2 150).

14.3
(a) Defined contribution pension plans are those where an employer pays fixed
contributions into the pension fund each year and is not obliged to make any
further contributions, even if the fund's assets are insufficient to pay adequate
benefits to employees. The risk that benefits will be less than expected falls upon
the employees, not the employer.
Defined benefit plans are those where the employer is obliged to provide an
agreed level of pensions to employees. The employer's contributions are not
limited to any fixed amount and these contributions may need to be increased if
the pension fund has insufficient assets to pay the agreed level of pensions. The
risk of having to make further contributions is borne by the employer, not the
employee.

(b) The statement of comprehensive income should show an expense of 350,000.
The statement of financial position should show an accrued expense of 30,000.
The employer has no further liability since this is a defined contribution scheme.

(c) Accounting for defined benefit plans is difficult because the expense recognised
in each accounting period should be the cost to the employer of the pensions
that will eventually be paid to employees as a result of the services that they
have provided during that period. The cost of these pensions is difficult to
determine in advance because of the unpredictability of factors such as
employee mortality rates and future returns on investments.