(b) Discuss the nature of the following issues in developing IFRSs for SMEs.
(i) The purpose of the standards and the type of entity to whom they should apply. (7 marks)
(b) Discuss the nature of the following issues in developing IFRSs for SMEs.
(i) The purpose of the standards and the type of entity to whom they should apply. (7 marks)
5 Ambush, a public limited company, is assessing the impact of implementing the revised IAS39 ‘Financial Instruments:
Recognition and Measurement’. The directors realise that significant changes may occur in their accounting treatment
of financial instruments and they understand that on initial recognition any financial asset or liability can be
designated as one to be measured at fair value through profit or loss (the fair value option). However, there are certain
issues that they wish to have explained and these are set out below.
Required:
(a) Outline in a report to the directors of Ambush the following information:
(i) how financial assets and liabilities are measured and classified, briefly setting out the accounting
method used for each category. (Hedging relationships can be ignored.) (10 marks)
(ii) How existing standards could be modified to meet the needs of SMEs. (6 marks
(ii) why the ‘fair value option’ was initially introduced and why it has caused such concern. (5 marks)
5 Jones and Cousin, a public quoted company, operate in twenty seven different countries and earn revenue and incur
costs in several currencies. The group develops, manufactures and markets products in the medical sector. The growth
of the group has been achieved by investment and acquisition. It is organised into three global business units which
manage their sales in international markets, and take full responsibility for strategy and business performance. Only
five per cent of the business is in the country of incorporation. Competition in the sector is quite fierce.
The group competes across a wide range of geographic and product markets and encourages its subsidiaries to
enhance local communities by reinvestment of profits in local educational projects. The group’s share of revenue in a
market sector is often determined by government policy. The markets contain a number of different competitors
including specialised and large international corporations. At present the group is awaiting regulatory approval for a
range of new products to grow its market share. The group lodges its patents for products and enters into legal
proceedings where necessary to protect patents. The products are sourced from a wide range of suppliers, who, once
approved both from a qualitative and ethical perspective, are generally given a long term contract for the supply of
goods. Obsolete products are disposed of with concern for the environment and the health of its customers, with
reusable materials normally being used. The industry is highly regulated in terms of medical and environmental laws
and regulations. The products normally carry a low health risk.
The Group has developed a set of corporate and social responsibility principles during the period which is the
responsibility of the Board of Directors. The Managing Director manages the risks arising from corporate and social
responsibility issues. The group wishes to retain and attract employees and follows policies which ensure equal
opportunity for all the employees. Employees are informed of management policies, and regularly receive in-house
training.
The Group enters into contracts for fixed rate currency swaps and uses floating to fixed rate interest rate swaps. The
cash flow effects of these swaps match the cash flows on the underlying financial instruments. All financial
instruments are accounted for as cash flow hedges. A significant amount of trading activity is denominated in the
Dinar and the Euro. The dollar is its functional currency.
Required:
(a) Describe the principles behind the Management Commentary discussing whether the commentary should be
mandatory or whether directors should be free to use their judgement as to what should be included in such
a commentary. (13 marks)
(b) Draft a report suitable for inclusion in a Management Commentary for Jones and Cousin which deals with:
(i) the key risks and relationships of the business (9 marks)
(b) Ambush loaned $200,000 to Bromwich on 1 December 2003. The effective and stated interest rate for this
loan was 8 per cent. Interest is payable by Bromwich at the end of each year and the loan is repayable on
30 November 2007. At 30 November 2005, the directors of Ambush have heard that Bromwich is in financial
difficulties and is undergoing a financial reorganisation. The directors feel that it is likely that they will only
receive $100,000 on 30 November 2007 and no future interest payment. Interest for the year ended
30 November 2005 had been received. The financial year end of Ambush is 30 November 2005.
Required:
(i) Outline the requirements of IAS 39 as regards the impairment of financial assets. (6 marks)
(iii) How items not dealt with by an IFRS for SMEs should be treated. (5 marks)
3 (a) Leigh, a public limited company, purchased the whole of the share capital of Hash, a limited company, on 1 June
2006. The whole of the share capital of Hash was formerly owned by the five directors of Hash and under the
terms of the purchase agreement, the five directors were to receive a total of three million ordinary shares of $1
of Leigh on 1 June 2006 (market value $6 million) and a further 5,000 shares per director on 31 May 2007,
if they were still employed by Leigh on that date. All of the directors were still employed by Leigh at 31 May
2007.
Leigh granted and issued fully paid shares to its own employees on 31 May 2007. Normally share options issued
to employees would vest over a three year period, but these shares were given as a bonus because of the
company’s exceptional performance over the period. The shares in Leigh had a market value of $3 million
(one million ordinary shares of $1 at $3 per share) on 31 May 2007 and an average fair value of
$2·5 million (one million ordinary shares of $1 at $2·50 per share) for the year ended 31 May 2007. It is
expected that Leigh’s share price will rise to $6 per share over the next three years. (10 marks)
Required:
Discuss with suitable computations how the above share based transactions should be accounted for in the
financial statements of Leigh for the year ended 31 May 2007.
(ii) Explain the accounting treatment under IAS39 of the loan to Bromwich in the financial statements of
Ambush for the year ended 30 November 2005. (4 marks)
2 Tyre, a public limited company, operates in the vehicle retailing sector. The company is currently preparing its financial
statements for the year ended 31 May 2006 and has asked for advice on how to deal with the following items:
(i) Tyre requires customers to pay a deposit of 20% of the purchase price when placing an order for a vehicle. If the
customer cancels the order, the deposit is not refundable and Tyre retains it. If the order cannot be fulfilled by
Tyre, the company repays the full amount of the deposit to the customer. The balance of the purchase price
becomes payable on the delivery of the vehicle when the title to the goods passes. Tyre proposes to recognise
the revenue from the deposits immediately and the balance of the purchase price when the goods are delivered
to the customer. The cost of sales for the vehicle is recognised when the balance of the purchase price is paid.
Additionally, Tyre had sold a fleet of cars to Hub and gave Hub a discount of 30% of the retail price on the
transaction. The discount given is normal for this type of transaction. Tyre has given Hub a buyback option which
entitles Hub to require Tyre to repurchase the vehicles after three years for 40% of the purchase price. The normal
economic life of the vehicles is five years and the buyback option is expected to be exercised. (8 marks)
Required:
Advise the directors of Tyre on how to treat the above items in the financial statements for the year ended
31 May 2006.
(The mark allocation is shown against each of the above items)