Recommend answer for May 2007 Financial Reporting

Question 1 (a)

  1. Consolidation Accounts– Associate company
  1. Associate under AS28 – profits resulting from the transaction between holding and associate companies are recognized in Holding company financial statement only to the extent of “Unrelated investor’s interest” in the Associate.
  2. Since SIL is a member of the group, the elimination is still required even PHL did not take part in the transaction directly even SIL sold materials to OAL and PHL.
  1. Investment property vs. PPE – In consolidated level
  1. Under AS40, investment property is for rentals earnings or for capital appreciation and not for administrative purpose.
  2. Even the property should be classified as investment property at PHL balance sheet, it does not qualify as investment property because from the perspective of the group as a whole, the property is owner-occupied.

Question 1 (b)

CJ1 – Goodwill from purchase of investment

Purchase consideration $20 million minus Share capital and reserve and property acquired at the date of 1.4.2006

CJ2 –Additional depreciation due to fair value adjustment

Depreciation of the equipment is calculated with fair value of $2 million and amortized over the remaining useful life (i.e. 10 - 2) 8 years.

CJ3 – Reclassification of IP to PPE

Depreciation on the PPE $54,900 with the remaining useful life 40 years as the investment property should be reclassified (i.e. owner-occupier property from the perspective of a group).

CJ4 – Equity accounting of interest in OAL

Being recognition of the group’s share of post-acquisition profit in associate –(i.e. $4,800 x 30%) .

CJ5 – Elimination of unrealized profit in inventories

  1. Share of profit in associate– inventory of OAL at balance sheet date
  2. Cost of sales in associate –inventory of PHL at balance sheet date

CJ6 Minority Interest

  1. Retained profits
  2. Intra-group rental transaction.

Recommend answer for May 2007 Financial reporting

Q2 HKFRS 8 Operating segments

  1. Free choice in determining operating segment

No free choice in determining a business activities as an operating segment and subject to HKFRS 8.5 – whole operating results are regularly reviewed by the entity’s chief operating decision maker.

  1. Number of reportable segments

A reporting segment consists of an operating segment or an aggregation of two or more operating segment. The quantitative thresholds specified in HKFRS 8.13

HKFRS 8.19 states that there may be a practical limit to the number of reportable segments but no precise limit has been determined.

  1. Cope with accounting polices adopted for preparing and presenting

No requirement but HKFRS 8.25 states that the reported segment shall be measure reported to the chief operating decision maker.

  1. Restate comparative figures if the segment has been disposed

HKFRS 8.29 requires restatement of prior periods and even if the segment no longer meets HKFDS 8.13, it is also required to be reported separately in the current period.

Recommend answer for May 2007 Financial Reporting

Q3 (a) Impairment loss on loan and receivable HKAS 30.63

The amount of the loss is measured as difference between asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. (i.e. the outstanding principal and interest due as at 30 November,2006 is HK$20 million (1 + 12%) over 2.5 years minus the present value $26,550,644 / (1 +12%) over 2 years. = %5,384,634.

Q3 (b) Transfer of a financial asset meets the conditions set out in HKAS39.19

When an entity retains the contractual rights to receive the cash flows of a financial

asset (the ‘original asset’), but assumes a contractual obligation to pay those cash

flows to one or more entities (the ‘eventual recipients’), the entity treats the transaction

as a transfer of a financial asset if, and only if, all of the following three conditions are

met.

(a) The entity hasno obligation to pay amounts to the eventual recipients unless it

collects equivalent amounts from the original asset. Short-term advances by

the entity with the right of full recovery of the amount lent plus accrued

interest at market rates does not violate this condition.

(b) The entityis prohibited by the terms of the transfer contract from selling or

pledging the original asset other than as security to the eventual recipients for

the obligation to pay them cash flows.

(c) The entity has an obligation to remit any cash flows it collects on behalf of the

eventual recipients without material delay. In addition, the entity is not entitled

to reinvest such cash flows, except for investments in cash or cash equivalents

period from the collection date to the date of required remittance to the

eventual recipients, and interest earned on such investments is passed to the

eventual recipients.

Recommend answer for May 2007 Financial Reporting

Q4 Business combination with redundancy

(a) (i) Payment for redundancy of staff of HK$1,850,000

Two criteria’s:

1. HKAS 19.133 – a redundancy payment is a termination benefit which should be recognized as a liability and expenses when, and only when, an entity is demonstrated to be committed to either:

a. Before normal retirement date, the entity terminates the employment;

b. To encourage voluntary redundancy by providing termination benefits.

2. HKAS19.134 - - an entity is demonstrably committed to a termination should have a detailed formal plan without realistic possibility of withdrawal.

(ii) Payment for cancellation of options granted to managing director

a. HKFRS2.28 If the entity cancels or settles a grant of equity instruments during the vesting period, the entity shall recognize immediately the amount that otherwise would have been recognized for services received over the remainder of the vesting period.

b. Any payment made to employee on the cancellation of the grant shall be accounted for as the repurchase of an equity interest. Therefore any consideration paid for cancellation is higher than the fair value of the equity granted is recognized as an expenses and the fair value of the share option is debited to Equity.

Q 4 (b) – consolidated financial statements of Broom Ltd

a. Payment for redundancy of staff

1. Does redundancy of staff by Fortune, immediately before the business combination, a present obligation of Fortune Limited? No

2. Does it a contingent liability of Fortune Ltd immediately before the business combination? No

Therefore, the provision of HK$1.8 million should be recognized as a post acquisition expense in Broom Ltd’s consolidated income statement.

b. Payment to two directors for retrenchment

A present obligation of Fortune Ltd in the business combination – contingent liability and therefore the payment of $2,400,000 should not be recognized as a post acquisition expense in Broom Ltd’s consolidated income statement.

c. Payment for cancellation of options granted to managing director

The cancellation on 31st October of share options granted was occurred prior to the acquisition date and therefore existing liability of Fortune Ltd. Therefore, the payment should not be recognized as post acquisition expenses in Broom ‘s consolidated account.

Recommend answer for May 2007 Financial Reporting

Q5 (a) Revenue recognition

The research and development contract revenue is recognized

HKAS 18.20 – the outcome of a transaction involving rendering f services can be estimated reliably – Stage of completion of the transaction

HKAS 18.26 –the outcome of a transaction involving rendering of services cannot be estimated reliably – to the extent of the expenses recognized that are recoverable.

The non-refundable up-front payment received without any corresponding performance or delivery should be treated as an advance from WY and recognized as performance occurring over the term of the contract.

PMT may take the view that successful completion of the clinical trails and delivery of the first pilot unit are specific acts that are much more significant than any other acts.

Q5(b) – Government grant

HKAS 20 defines government grants as assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity.

HKAS 20, PMT should not recognize the grant until there is reasonable assurance that it will comply with the conditions attaching to them and the grants will be received.

Deferred income - government grant over period necessary to match the grant with related cost which it is intended to compensate.