(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) 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)
(ii) The property of the former administrative centre of Tyre is owned by the company. Tyre had decided in the year
that the property was surplus to requirements and demolished the building on 10 June 2006. After demolition,
the company will have to carry out remedial environmental work, which is a legal requirement resulting from the
demolition. It was intended that the land would be sold after the remedial work had been carried out. However,
land prices are currently increasing in value and, therefore, the company has decided that it will not sell the land
immediately. Tyres uses the ‘cost model’ in IAS16 ‘Property, plant and equipment’ and has owned the property
for many years. (7 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)
(b) On 31 May 2007, Leigh purchased property, plant and equipment for $4 million. The supplier has agreed to
accept payment for the property, plant and equipment either in cash or in shares. The supplier can either choose
1·5 million shares of the company to be issued in six months time or to receive a cash payment in three months
time equivalent to the market value of 1·3 million shares. It is estimated that the share price will be $3·50 in
three months time and $4 in six months time.
Additionally, at 31 May 2007, one of the directors recently appointed to the board has been granted the right to
choose either 50,000 shares of Leigh or receive a cash payment equal to the current value of 40,000 shares at
the settlement date. This right has been granted because of the performance of the director during the year and
is unconditional at 31 May 2007. The settlement date is 1 July 2008 and the company estimates the fair value
of the share alternative is $2·50 per share at 31 May 2007. The share price of Leigh at 31 May 2007 is $3 per
share, and if the director chooses the share alternative, they must be kept for a period of four years. (9 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.
(b) Explain the matters you should consider before accepting an engagement to conduct a due diligence review
of MCM. (10 marks)
(ii) the strategy of the business regarding its treasury policies. (3 marks)
(Marks will be awarded in part (b) for the identification and discussion of relevant points and for the style. of the
report.)
(c) Discuss the ways in which budgets and the budgeting process can be used to motivate managers to
endeavour to meet the objectives of the company. Your answer should refer to:
(i) setting targets for financial performance;
(ii) participation in the budget-setting process. (12 marks)