Fiji National University

College of Business, Hospitality and Tourism

Studies
School of Accounting
ACC702 International Corporate Reporting
Trimester III, 2016
Group Assignment
Weighting: 10% of total assessment for this
unit.

Group Members:

Question 1
ABC Asset Inc. owns a freely transferable taxi operator's license, which it acquired
on January 1,20X5, at an initial cost of $10,000. The useful life of the license is five
years (based on the date it is valid for). The entity uses the straight-line method to
amortize the intangible. Such licenses are frequently traded either between existing
operators or with aspiring operators. At the balance sheet date, on December 31,
20X6, due to a government-permitted increase in fixed taxi fares, the traded values
of such a license was $12,000. The accumulated amortization on December 31,
20X6, amounted to $4,000.
Required: What journal entries are required at December 31, 20X6, to reflect the
increase/decrease in carrying value (cost or revalued amount less accumulated
depreciation) on the revaluation of the operating license based on the traded values
of similar license? Also, what would be the resultant carrying value of the intangible
asset after the revaluation?
Solution:
The journal entries to be recorded in the books of the account are:
1. Dr Intangible asset-accumulated amortization $4,000
Cr Intangible asset-cost $4,000
(Being elimination of accumulated depreciation against the cost of the asset)
2. Dr Intangible assetcost $6,000
Cr Revaluation reserve $6,000
(Being uplift of net book value to revalued amount)
The net result is that the asset has a revised carrying amount of $12,000 ($10,000
$4,000 + $6,000).

Question 2
XYZ Limited has recently obtained some patents considered useful in its
manufacture of mens shoes. The patents consist of:
Patent XC456, acquired from a leather manufacturing firm for $425000.
Patent CU254, obtained as part of a bundle of assets acquired from the
conglomerate U- Beauty Fashions.

XYZ Ltd is also in the process of preparing an application for a patent for a new
process of softening leather. It has spent a number of years refining this process.
The accountant for XYZ Ltd is unsure how to account for patents under IFRSs. He
has asked you to prepare a detailed report for him on the principles of how to
account for patent, using the examples above to illustrate the appropriate
accountant procedures.
Required: Prepare a report for XYZ Ltd.s accountant.

Patent is an intangible asset which is separable from the entity, capable of being
transferred and arises from contractual and other legal rights.
Many factors are considered in determining the useful life of an intangible asset,
including: (a) the expected usage of the asset by the entity and whether the asset
could be managed efficiently by another management team ; (b) typical product
life cycles for the asset and public information; (c) technical, technological,
commercial or other types of obsolescence; (d) the stability of the industry in
which the asset operates and changes in the market demand for the products or
services output from the asset; (e) expected actions by competitors or potential
competitors; (f) the level of maintenance expenditure required to obtain the
expected future economic benefits from the asset; (g) the period of control over
the asset and legal or similar limits on the use of the asset, such as the expiry dates
of related leases; and (h) whether the useful life of the asset is dependent on the
useful life of other assets of the entity.
Recognition & initial measurement
Once it has been determined that an item meets the definition of an intangible it
must then meet the following recognition criteria before it can be recognized as an
asset. It is probable that future economic benefits attributable to the asset will
flow to the entity The cost of the asset can be measured reliably. Intangibles that
fail the recognition criteria must be expensed. Intangibles are required to be
initially measured at cost (purchase price + directly attributable costs)

Question 3.
Provide an argument in support of the accounting requirement that research is to be
written off as incurred. Do you think this requirement is overly conservative?
Research as per the AASB 138, refers to an original and planned investigation
undertaken with the prospect of gaining new scientific or technical knowledge and
understanding. While development expenditure may be capitalized to the extent
that certain conditions are met, paragraph 54 of AASB 138 stated that no intangible

assets shall be recognized as the result of research or from the research phase of an
internal project. This is due to the fact that in the research phase of an internal
project, an entity cannot be able to demonstrate that an intangible asset exists that
will generate probable future economic benefits and is therefore, recognized as
expense when incurred. However, it should also be noted that the transition of
research towards the subsequent stage (development) minimizes this uncertainty to
levels that are acceptable for the purpose of asset recognition. In other words,
research is to be written off as incurred because it is hard to tell if the research will
actually result in real profits. If research was capitalized then companies would have
to book massive, unpredictable write downs whenever they found out that a
research project didn't pay off. It's better not to give investors false hope - that's
why we have the accounting principle of conservatism.

Question 4.
On 1st June 2016, Big Ltd acquired the following assets and liabilities of Small Ltd:
Land
Plant ($400,000)
Inventory
cash
Accounts payable
Loans

Carrying amount $
310,000
280,000
80,000
15,000
(20,000)
(80,000)

Fair Value $
340,000
295,000
85,000
15,000
(20,000)
(80,000)

In exchange for these assets and liabilities, Big Ltd issued 100000 shares that have
been issued for $1.20 per shares but at 1 June 2016 had a fair value of $6.10 per
share.
Required:
I.

Prepare the acquisition analysis

Land
Plant
Inventory
Cash
Total Assets
Accounts Payable

340,000
295000
85000
15000
735,000
20000

II.

Loans
FVNIA

80000
635,000

Consideration transferred
(100000 shares @ 6.10 per
share)
Gain on bargain purchase

610,000

Prepare the journal entries in the records of Big Ltd to account for the
acquisition of the assets and liabilities of Small Ltd.
Total Assets
Total Liabilities
Share Capital
Gain on Bargain
Purchase

III.

25,000

DR
735,000

CR
100,000
610,000
25,0000

Prepare the journal entries assuming that the fair value of the shares was
$7.50 per share.
Land
Plant
Inventory
Cash
Total Assets
Accounts Payable
Loans
FVNIA

340,000
295000
85000
15000
735,000
20000
80000
635,000

Consideration transferred
(100000 shares @ 7.50
per share)
Goodwill

750,000

Total Assets
Goodwill
Total Liabilities
Share Capital

-115,000
DR
735,000
115,000

CR
100,000
750,000

Question 5.
Silver Ltd has acquired a major manufacturing division from Fern Ltd. The
accountant, Ms. Anna, has shown the board of directors of Silver Ltd the financial
information regarding the acquisition. Ms. Anna calculated a residual amount of
$45000 to be reported as goodwill in the accounts. The directors are not sure
whether they want to record goodwill on Silver Ltds statement of financial position.
Some directors are not sure what goodwill is or why the company has bought it.
Other directors even query whether goodwill is an asset, with some being
concerned with future effects on the statement of profit or loss and other
comprehensive income.
Required: Prepare a report for Ms. Anna to present to the directors to help them
understand the nature of goodwill and how to account for it.

If the consideration transferred is more than the fair value of Net identifiable assets,
than a goodwill is recorded. There are two types of Goodwill, the Internal and the
External\acquired goodwill. Internal Goodwill are unrecorded assets which are
produced internally and not covered by international standards. External goodwill is
recognized usually through business combination and is measured as a residual
under paragraph 32, IAS 38. It is subject to annual impairment test allocated to a
cash generating unit and has to be written off first for impairment loss.
Question 6.
An entity operates an oil platform in the sea. The entity has provided the amount of
$10 million for the financial costs of the restoration of the seabed, which is the
present value of such costs. The entity has received an offer to buy the oil platform
for $16 million, and the disposal costs would be $2 million. The value-in-use of the
oil platform is approximately $24 million before the restoration costs. The carrying
value of the oil platform is $20 million.
Required: Is the value of the oil platform impaired?
The fair value less cost to sell of the oil platform is $14 million, being $16 million
offered minus the disposal costs. The value-in-use of the platform will be $24 million
minus $10 million, which is $14 million. The carrying amount of the platform is $20
million minus $10 million, which is $10 million.
Therefore, the recoverable amount of the cash-generating unit exceeds its carrying
amount, and it is not impaired.
Question 7.

An entity has an oil platform in the sea. The entity has to decommission the
platform at the end of its useful life, and a provision was set up at the
commencement of production. The carrying value of the provision is $8 million. The
entity has received an offer of $20 million (selling costs $1 million) for the rights to
the oil platform, which reflects the fact that the owners have to decommission it at
the end of its useful life. The value-in-use of the oil platform is $26 million ignoring
the decommissioning costs. The current carrying value of the oil platform is $28
million.
Required: Determine whether the value of the oil platform is impaired?
Determine whether the value of the oil platform is impaired?
Recoverable amount

Equal to the higher of

FV less cost of disposal
(20m 1m = 19m)

Value in use
($26m)

Recoverable amount ($26m) is less than the carrying amount ($28m) impairment loss has incurred
Question 8

an

An entity has two cash-generating units, X and Y. There is no goodwill within the
units' carrying values. The carrying values are X $10 million and Y $15 million. The
entity has an office building that has not been included in the above values and can
be allocated to the units on the basis of their carrying values. The office building has
a carrying value of $5 million. The recoverable amounts are based on value-in-use
of $9 million for X and $19 million for Y.
Required: Determine whether the carrying values of X and Y are impaired?
Carrying amount
Office
Building
x=
(10/25*5) Y= (15/25*5)
Total carrying amount
Recoverable
amount
(VIU)
Impairment Loss

X
$10m
2

Y
$15m
3

$12m
$9m

$18m
$19m

$3m

$-1m

Impairment Loss $3m DR

Acc.Loss on cash generating unit X $3m CR

For unit Y, no further action is required since recoverable amount is more than the
carrying amount.
Question 9
Some employers will pay out employees for any unused sick leave entitlements if
they leave the organization, whereas in other organizations employees forfeit this
entitlement when they leave.
Required: Explain how these different types of sick leave entitlements are treated
for accounting purpose.

Accumulating Vs Non accumulating benefits Accumulating benefits for

unused leave can be carried forward to future periods.
Vesting Vs Non Vesting Benefits Vesting benefits are those where an
employer has an obligation to make a payment to an employee for the sick
leave even if the employee leaves the company.

Accounting treatment for different types of benefits is as follows

Non Accumulating no liability recorded

Accumulating and vesting liability recorded at each reporting date

Accumulating but non-vesting liability only recognized for the portion that is
expected to result in additional payment to employees .

Question 10
IAS 19 Employee Benefits was issued in February 1998. Amongst other things, the
standard deals with the treatment of post-employment benefits such as pensions
and other retirement benefits. Post-employment benefits are classified as either
defined contribution or defined benefit plans.
Required: Describe the relevant features and required accounting treatment of
defined contribution and defined benefit plans under IAS 19.
Defined contribution Post Employment plans

Benefits paid on retirement are determined with reference to accumulated

contributions and earnings thereon.

Recorded as expense in the period that the employee renders the service
Liability is limited to any contribution outstanding or payable at year end.
Risk in relation to investment returns lies with employee
Example in Fiji Fiji National Provident Fund

Defined benefit Post employment plan

Benefits paid on retirement is based on a formula incorporating factors such

as years of service and final average salary.
In substance the employer underwrites the risk associated with the fund.
Actuarial assessments use to determine the estimate of the defined benefit
obligation.

IAS 19 requires employers to recognize an obligation for the accrued benefits owing
to the employees. This obligation is reduced by the assets held in the plan. When
plan assets > plan obligation, the company will recognize the asset. Net
capitalization method and partial method are two method used to account for
defined benefits plans. Partial Capitalization method is adopted by IAS 19 and allows
for full recognition in the period in which actuarial gains are incurred in the current
year profit and loss and in other comprehensive income.
Question 11
The board of directors of ABC Ltd met in June 2016 and decided to close down a
branch of the companys operations when the lease expired in the following
February. The chief financial officer advised that termination benefits of $2.0 million
are likely to be paid. Should the company recognize a liability for termination
benefits in its financial statements for the year ended June 2016? Justify your
judgment with reference to the requirements of IAS 19.
Paragraph 7 of IAS 19 refers to termination benefits as employee benefits that are
payable as a result either;
a)

An entitys decision to terminate an employees employment before the

normal retirement date or
b) An employees decision to accept voluntary redundancy in exchange for
those benefits.
Paragraph 133 of IAS 19 requires an entity to recognize an expense and a liability
for termination benefits when, and only when, the entity is demonstrably committed
to either;
a) Terminate the employment of an employee or group of employees before the
normal retirement date; or
b) Provide termination benefits as a result of an offer made in order to
encourage voluntary redundancy

Yes, ABC Ltd should recognize the termination benefit as a liability since it meets
the criteria under IAS 19.
Question 12
What are the arguments for and against the use of fair value as the measurement
basis for biological assets and agricultural produce? Why do you think the IASB
settled on requiring fair value?
Arguments for:
I.
The value accretion of agricultural assets is unique
II.
Fair value measurement provides relevant, reliable, comparable and
understandable measurement of future economic benefits.
-

Consider a plantation forest with a 30 year harvesting cycle; fair value

measurement reflects the biological growth using current fair values

III.

Historical cost cannot accurately portray the value of an accreting asset.

- Consider the plantation forest; no income would be reported until harvest
and sale (30 years)
- What is the cost of a fifth generation calf?
Arguments Against:
Fair value is a rational and unbiased estimate of the potential market price of a
good, service, or asset and therefore provides users with more relevant information.
However, it has drawbacks.

If the good, service, or the asset does not have an active market, then the
fair value will involve estimations which would be less reliable.
Also fair value may fluctuate materially even in short term, in such cases fair
value at the balance sheet date would be useless for an investor.