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FAR811S-ADVANCED FINANCIAL ACCOUNTING AND REPORTING-2ND OPP-JULY 2022 |
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nAmlBIA UnlVERSITY
0 F SCIEn CE An D TECHn OLOGY
FACULTY OF COMMERCE, HUMAN SCIENCESAND EDUCATION
DEPARTMENT OF ACCOUNTING, ECONOMICS AND FINANCE
QUALIFICATION : BACHELOR OF ACCOUNTING HONOURS
QUALIFICATION CODE: 08 BOAH
COURSE CODE: FAR811S
LEVEL: 8
COURSE NAME: ADVANCEDFINANCIALACCOUNTING
AND REPORTING
SESSION: July/August 2022
PAPER: THEORYAND CALCULATIONS
DURATION: 3 hours
MARKS: 100
EXAMINER(S}
FINAL ASSESSMENT- 2nd Opportunity
D W Kamotho
MODERATOR: Dr E Mashiri
INSTRUCTIONS
1. Answer ALL questions in blue or black ink only.
2. Write clearly and neatly.
3. Start each question on a new page and number the answers clearly.
4. No programmable calculators are allowed.
5. Questions relating to the paper may be raised in the initial 30
minutes after the start of the paper. Thereafter, candidates must use
their initiative to deal with any perceived error or ambiguities & any
assumption made by the candidate should be clearly stated.
6. Any resemblance to any people, places, organisations or anything is
purely coincidental.
THIS QUESTION PAPER CONSISTS OF 6 PAGES (Including the front page)
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QUESTION 1
(15 marks}
Softa Ltd developed a unique soft drink. It is very healthy and yet tastes like the top-selling
unhealthy brands. Unfortunately, the product does not sell very well. Softa Ltd has identified
the following reasons for this:
• The product is not being correctly marked.
• The marketing problem is attributed to the fact that the product does not have a
trademark.
Softa Ltd therefore set about developing a trademark for this product. All indications are that
it will be called Softa Cola.
In developing the trademark, Softa Ltd incurred the following expenses up to 30 June 2021:
Design of logo
Legal fees for registration
Advertising campaign to promote the trademark
N$
950 000
400 000
800 000
Total
2 150 000
From budgets prepared and experiences so far it seems that Softa Ltd will enjoy benefits from
the trademark for the next 10 years. Softa Ltd is already experiencing an upswing in the
demand for its product.
REQUIRED:
Explain with reasons, how Softa Ltd should treat the cost of developing the trademark in the
financial statements for the year ended 30 June 2021 in terms of the requirements of the
conceptual framework for financial reporting 2018. Discussall the possible alternatives.
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QUESTION 2
(30 marks)
This question has two parts
Part A
The difference between debt and equity in an entity's statement of financial position is not
easily distinguishable for preparers of financial statements. Some financial instruments may
have both features, which can lead to inconsistency of reporting. The International
Accounting Standards Board (IASB) has agreed that greater clarity may be required in its
definitions of assets and liabilities for debt instruments. It is thought that defining the nature
of liabilities would help the IASB'sthinking on the difference between financial instruments
classified as equity and liabilities.
REQUIRED:
(i) Discussthe key classification differences between debt and equity under International
Financial Reporting Standards.
Note. Examples should be given to illustrate your answer. (12 marks)
(ii) Explain why it is important for entities to understand the impact of the classification of a
financial instrument as debt or equity in the financial statements. (6 marks)
Part B
The directors of Avis, a public limited company, are reviewing the financial statements of two
entities which are acquisition targets, Olynpia and Rocky.They have asked for clarification on
the treatment of the following financial instruments within the financial statements of the
entities.
Olynpia has two classes of shares: A and B shares. A shares are Olynpia's ordinary shares and
are correctly classed as equity. B shares are not mandatorily redeemable shares but contain
a call option allowing Olynpia to repurchase them. Dividends are payable on the B shares if,
and only if, dividends have been paid on the A ordinary shares. The terms of the B shares are
such that dividends are payable at a rate equal to that of the A ordinary shares. Additionally,
Olynpia has also issued share options which give the counterparty rights to buy a fixed
number of its B shares for a fixed amount of $10 million. The contract can be settled only by
the issuance of shares for cash by Olynpia.
Rockyhas in issuetwo classesof shares: A shares and Bshares. A shares are correctly classified
as equity. Two million B shares of nominal value of $1 each are in issue. The B shares are
redeemable in two years' time. Rocky has a choice as to the method of redemption of the B
shares. It may either redeem the B shares for cash at their nominal value or it may issue one
million A shares in settlement. A shares are currently valued at $10 per share. The lowest
price for Rocky's A shares since its formation has been $5 per share.
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REQUIRED:
Discusswhether the above arrangements regarding the B shares of each of Olynpia and Rocky
should be treated as liabilities or equity in the financial statements of the respective issuing
companies.
(12 marks)
(Total= 30 marks)
QUESTION 3
This question has two separate parts
(30 Marks)
Part 1
Sugar Co leased a machine from Spice Co. The terms of the lease are as follows:
Inception of lease
Lease term
Present value of future lease payments
Useful life of asset
1 January 2021
4 years at $78,864 per annum payable in
arrears
$250,000
4 years
REQUIRED:
(a) Calculate the interest rate implicit in the lease, using the table below. (4 marks)
This table shows the cumulative present value of $1 per annum, receivable or payable at the
end of each year for n years.
Years
(n)
1
2
3
4
5
6%
0.943
1.833
2.673
3.465
4.212
Interest rates
8%
0.926
1.783
2.577
3.312
3.993
10%
0.909
1.736
2.487
3.170
3.791
(b) Explain, with suitable workings and extracts from the financial statements, how Sugar
Co should account for the lease for the year ended 31 December 2021. Notes to the
accounts are not required.
(12 marks)
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Part 2
Khomasad is a public limited company and would like advice in relation to the following
transactions.
(a) Khomasad owned a building on which it raised finance. Khomasad sold the building for
N$6 million, its fair value, to a finance company on 1 June 2021 when the carrying amount
was N$3.6 million. The same building was leased back from the finance company for a period
of 20 years. The remaining useful life of the building is 25 years. The lease rentals for the
period are N$441,000 payable annually in arrears. The interest rate implicit in the lease is 7%.
The present value of the lease payments is N$5 million. The transaction constitutes a sale in
accordance with IFRS15 Revenuefrom Contracts with Customers.
REQUIRED:
Advise Khomasad how to account for the above transaction for the year ended 31 May 2022.
(14 marks)
Question 4
(25 Marks)
International Financial Reporting Standards (IFRS) support the use of fair values when
reporting the values of assets wherever practical. This involves periodic remeasurements of
assets and the consequent recognition of gains and losses in the financial statements. There
are several methods of recognising gains and losses on remeasurement of assets required by
IFRS.
Willy adopts the revaluation model of IAS 16 Property, Plant & Equipment, and the fair value
model of IAS40 Investment Property. Willy chooses to recognise any fair value gains or losses
arising on its equity investments in 'other comprehensive income' as permitted by IFRS9
Financial Instruments. The following two matters have arisen
(i) Willy owns a piece of property it purchased on 1 April 2018 for N$3.5 million. The land
component of the property was estimated to be N$1 million at the date of purchase.
The useful economic life of the building on this land was estimated to be 25 years on
1 April 2018. The property was used as the corporate headquarters for two years from
that date. On 1 April 2020, the company moved its headquarters to another building
and leased the entire property for five years to an unrelated tenant on an arm's length
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basis in order to benefit from the rental income and future capital appreciation. The
fair value of the property on 1 April 2020 was N$4.1 million (land component N$1.9
million), and on 31 March 2021, N$4.8 million (land component N$2.1 million). The
estimate of useful economic life remained unchanged throughout the period. Land
and buildings are considered to be two separate assets by the directors of Willy.
(ii) Willy holds a portfolio of equity investments the value of which was correctly
recorded at N$12 million on 1 April 2020. During the year ended 31 March 2021, the
company received dividends of N$0.75 million. Further equity investments were
purchased at a cost of N$1.6 million. Shares were disposed of during the year for
proceeds of N$1.1 million. These shares had cost N$0.4 million a number of years
earlier but had been valued at N$0.9 million on 1 April 2020. The fair value of the
financial assets held on 31 March 2021 was N$14 million.
REQUIRED:
(a) Advise how IFRSrequire gains or losseson remeasurement to be dealt with in the financial
statements in the case of each of the following assets. The calculation of such gains or losses
is not necessary, merely their accounting treatment. Your answer should indicate clearly
where in the performance statement each component of gain or loss should appear.
(i) Property, plant & equipment held under the revaluation model of IAS 16.
(4 marks)
(ii) Investment property held under the fair value model of IAS40.
(2 marks)
(iii) Financial assets held at fair value under IFRS9.
(4 marks)
(b) In each of the matters (i) and (ii) above, briefly outline the appropriate accounting
treatment and show the journal entries in the financial statements of Willy Ltd (Willy) for year
ended 31 March 2021, resulting from recording the events described. Any entry affecting the
performance statement must be clearly classified as either 'profit or loss' or 'other
comprehensive income'.
(15 marks)
END OF QUESTION PAPER
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