Digiwire

Question 1: Accounting of sale of three year license

Revenue Recognition: Clamusic Co shares

IFRS 15 Revenue from Contract with customer

1. Require non-cash consideration received should measured at fair value of the
consideration received.
2. If cannot reasonably estimated – consideration measured to the stand alone selling
price.
3. Non-cash consideration may vary
 If non-cash consideration vary for reason other than consideration – apply
guidance in IFRS 15 related to constraining variable consideration
 If non cash consideration vary due to form of consideration (equity) – not apply

IFRS 13 Fair Value Measurement on unlisted shares

1. Market approach
2. Income approach
3. Adjusted net asset approach

Based on the case, market approach has been used and the range of fair values is based upon
professional valuation report.
1. Range of Fair Value at date of contract is $280,000 - $350,000 (7% * $4-5million)
2. Range of Fair Value at end of reporting is $420,000 - $490,000 (7% of $6-7 m)

As fair valuation is based on similar listed company and is based upon controlling interest, a
discount on the valuation of the shares should be applied to reflect the lack of liquidity and
inability to participate in Digiwire Co’s policy. (use of mid-point)
1. At contract date - $315,000 (280,000 + 350,000)/2
2. At year end - $455,000 (420,000 + 490,000)/2

Digiwire should recognize revenue of $315,000 for the receipts of shares from Clamusic Co,
as the fair value of non cash consideration is measured at contract inception date of 1 January
2016. This revenue would not be recognized at point in time but would recognized over the
period of the licence which is three years.

Clamusic Co share valuation at 31 December 2016

The shares will be recognized at $455,000 (420,000 + 490,000)/2 at 31 December 2016. All
equity investment in scope of IFRS 9 Financial Instrument should be measured at fair value
in the statement of financial position, with value changes being recognized in profit or loss. If
an equity investment is not held for trading, an entity can make an irrevocable election at
initial recognition to measure it at fair value through other comprehensive income with only
dividend income recognized in profit or loss.

If Digiwire Co elects to present the remeasurements through other comprehensive income

(OCI), gains are never recycled through profit or loss. This means that, if the investment in
Clamusic Co is successful, when the investment is sold, there will be no profit or loss effect
since all gains will already have been recognized in OCI. Thus, at the year end, a gain of
$140,000 (445000 – 315000) will be recorded in profit or loss or OCI dependent upon any
election being made.
Question 2: Royalties
Revenue: royalties
As Digiwire Co retains an active role in the updating and maintenance of a sold license to
ensure its continuing value to the client, revenue would be recognized over the expected
length of the contract or related client relationship. An entity must be expected to undertake
activities which significantly affect the license to conclude that revenue is recognized over
the three year license based upon the license agreement. At the year end, revenue from
royalties can be calculated upon the sales for the period and it would be $50,000 (5% of 1m)

Conceptual Framework Support

The IAS has changed the definition of incomes and expenses in Conceptual Framework to
align with the revised definitions of an asset and a liability. The definition of income
encompasses increases in assets or decrease in liabilities which result in increases in equity,
other than those relating to contribution from holders of equity claims.

The conceptual framework also states that an item which meets the definition of an element
should only be recognized if it provides users of financial statements with information which
is useful. The conceptual framework defined useful information as relevant information and
faithful representation. Relevance may not always be achieved if there is uncertainty over
existence or the probability of an inflow of economic benefits is low. Faithful representation
will be affected by measurement uncertainty.
Question 3: classification of the investment which Digiwire Co has in FourDee Co
It seems that Digiwire Co and TechGame jointly control FourDee Co and it appears as though
the arrangement is a joint venture (IFRS 11 Joint Arrangement) as the parties have joint
control of the arrangement and have rights to the net assets of the arrangement. Joint control
is the contractually agreed sharing of control of an arrangement, which exists only when
decision about the relevant activities require the unanimous consent of the parties sharing
control. This is the case with FourDee Co.

A joint venturer recognizes its interest in a joint venture as an investment and accounts for
that investment using the equity method in accordance with IAS 28 Investment in Associates
and Joint Venture unless the entity is exempted.

Question 4: derecognition of asset exchanged for investment in FourFee and any resulting
gain or loss on disposal in financial statements
Digiwire Co has exchanged non-monetary asset for its investment in FourDee Co, and thus
needs to de-recognise the asset it is contributing to FourDee Co. The carrying amount of $6
million of the property is derecognized but the intellectual property of Digiwire Co has been
generated internally and does not have a carrying amount. The cryptocurrency is recorded as
an asset in the financial statements of DigiWire Co at $3 million but will be valued at $4
million, its fair value in the financial statements of FourDee Co.

Accordingly, when a joint venturer contributes a non-monetary asset to a joint venture in

exchange for an equity interest in the joint venture, the joint venturer recognizes a portion of
the gain or loss on disposal which is attributable to the other parties to the joint venture
(except when the contribution lacks commercial substance). Essentially, Digiwire Co is
required by IAS 28 to limit the profit on disposal of its non-monetary asset to 50%.
Effectively, Digiwire Co has only disposed of 50% of the asset contributed to the joint
venture. Thus the carrying amount of the joint venture in DigiWire Co’s financial statements
at 31 December 2016 will be $11.5 million ($6+3 carrying amount dereocgnised for property
and cryptocurrency.) + (4-3)/2) + (10-6)/2). A gain of $2.5 million will be recorded in profit
or loss.
1. Derecognize asset contribute to joint venture
2. Joint venture will limit the gain or loss on disposal based on proportion.
Question 5: Whether cryptocurrency classified as financial asset or intangible asset
If the cryptocurrency meets the definition of financial asset, it is possible to measure it at fair
value. However, cryptocurrency is not cash or cash equivalents as its value is exposed to
significant changes in market value and there is no contractual right to receive either cash or
cash equivalent. Thus, cryptocurrency fails the definition of financial asset.

If the cryptocurrency is to be recognised an an intangible asset, then the default position

would be measure it at cost. However, there may be an argument to say that there is an active
market for cryptocurrency in which case, it would be measured at fair value. In this case,
movement in that fair value would be recognised through other comprehensive income and
the gain would not be recycled through other comprehensive income and the gain would not
be recycled through profit or loss when the cryptocurrency is realized.

The best way to account for cryptocurrency would be fair value as that is the value at which
the entity will realise their investment or transact in exchange for goods and services.
Accounting for cryptocurrency at fair value with movements reflected in profit or loss would
provide the most useful information to investors but existing accounting requirements do not
appear to permit this.

1. Cryptocurrency not financial asset

 Not meet definition of financial asset
 Not cash or cash equivalent
 Value volatile in market
 No contractual rights to receive cash or cash equivalent
2. Cryptocurrency is intangible asset

3. Fair Value to measure cryptocurrency

 Active market available
 Movement in fair value recognized in OCI : gain will not recycled in OCI ; gain
would not recycled to P&L when it is realized.
 Fair Value = value to realized investment
 Movement in fair value recognize in profit or loss will provide useful info to
investor but existing accounting requirement not permit to do this.
Question 6: Financial Reporting Principles involved in debt factoring
IFRS 9 Financial Instrument requires Digiwire Co to consider the commercial substance
rather than the legal form of the debt factoring arrangements.

Under IFRS 9, the trade receivables should be derecognized from the financial statements of
Digiwire Co when the following condition are met:
1. When Digiwire Co has no further rights to receive cash from the factor
2. When substantially all of the risk and reward of ownership relating to the receivables
have been transferred to the factor, of if substantially all of the risk and reward have
not been transferred
3. When Digiwire Co has no further control over the trade receivables.

Agreement One
There is a sharing risk and rewards of ownership as the factoring is non-recourse except that
Digiwire Co retains an obligation to refund the factor 9% of any unrecovered debts. It can be
seen that substantially all the risk and rewards of ownership have passed to the factor. The
probability of an individual default is low given that there is low credit risk and the factor
would suffer the vast majority of the loss arising from any default. Digiwire Co also has no
further access to the rewards of ownership as the initial $32 million (80% *40million) is in
full and final settlement. Furthermore, the factor has assumed full control over the
collectability of the receivables. The trade receivables should be derecognized from the
financial statements of Digiwire Co and $8 million, being the difference between the amount
of the receivables sold and the cash received, should be charged as an irrecoverable debt
expenses against the profits of Digiwire Co.

The guarantee should be treated as separate financial liability in accordance with IFRS 9.
This would initially be measured at its fair value of $50,000.

Agreement 2
The risk and rewards of ownership do not initially pass to the factor in relation to agreement
two. The factor has full recourse to Digiwire Co for a six month period so the irrecoverable
debt risk is still with Digiwire Co. furthermore, Digiwire Co still has the right to receive
further cash payment from the factors, the amount to be received being dependent on when
and if the customer pay the factor. Digiwire Co therefore still has the risk associated with
slow or non-payment by their customers. The receivables must continue to be recognized in
the financial statements with the $0.8 million (20% * $4m) proceeds being treated as a short
term liability due to the factor. The receivables and liability balances would gradually be
reduced as the factor recovered the cash from Digiwire Co’s receivables which would be
adjusted for the imputed interest and expensed in profit or loss.

Following six month the risk and reward of ownership have passed to the factor and the
balances on loan and receivables would be offset. The remaining balance following offset
within the receivables of Digiwire Co should be expenses in profit and loss as an
irrecoverable debt.
IFRS 9: Trade receivable can derecognize
1. No further right to receive cash
2. All risk and reward of ownership transfer
3. No further control over trade receivables

Agreement 1
1. Substantially all the risk and reward passed
 Factor suffered the vast majority of loss from any default
 No further access to the reward of ownership
2. Factor has full control on collective of receivables.
3. Trade receivable should be derecognize
4. Difference between amount of receivables sold and cash received => irrecoverable
debt expenses
5. Guarantee treated as separate financial liability

Agreement 2
1. Risk and reward not pass to factor
 Right to further payment
 Risk Payment received based on customer default
 Has full recourse to entity (recognize as liability)
2. Right to receive further payment
27. Ecoma Co

Current Development in sustainability reporting show that there is a global trend towards
more extensive and more meaningful narrative reporting. The improvement in the quality and
scope of reporting are driven by both regulatory demands and market demands for
transparency. ‘sustainable investing’ describe an approach to investment where
environmental, social or governance (ESG) factors, in combination with financial
considerations, guide the selection and management of investment.

Discuss why disclosure of sustainable information has become an important and influential
consideration for investor.
There is increasing interest by investor in understanding how business are developing
environmental, social or governance. The positioning of the ESGs in relation to the overall
corporate strategies is information which investor feel is very relevant to the investment
decision which in turn will lead to capital being channeled to responsible business.

Sustainability practices will not all be equally relevant to all companies and investors’
expectations are likely to focus on companies realizing their core business activities with
financial sustainability as a prerequisite for attracting investment. Because institutional
investors have a fiduciary duty to act in the best interest of their beneficiaries, such institution
have to take into account sustainability practices. Companies utilizing more sustainable
business practices provide new investment opportunities. Investor realize that environmental
event can create cost for their portfolio in the form of insurance premiums, taxes and the
physical cost related with disaster. Social issues can lead to unrest and instability, which
carries business risks which may reduce future cash flow and financial return.

Investor screen the sustainable policies of companies and factor the information into their
valuation models. Investor may select a company for investment based on specific policy
criteria such as education and health. Investor may evaluate how successful a company has
been in a particular area such as the reduction of educational inequality. This approach can
help optimize financial returns and demonstrate their contribution to sustainability. Investor
increasingly promote sustainable economies and markets to improve their long term financial
performance. However the disclosure of information should be in line with widely accepted
recommendations such as Global Reporting Initiative and the UN Global Impact. Integrated
reporting incorporates appropriate material sustainability information equally alongside
financial information, thus providing reporting organizations with a broad perspective on
risk.

Investor often require an understanding of how the directors feel about the relevance of
sustainability to the overall corporate strategy and this will include a discussion of any risk
and opportunities identified and changes which have occurred in the business model as a
result.

Investor employ screening strategies which may involve eliminating companies which have a
specific feature such as low pay rates or eliminating them on a ranking basis. The latter may
be on the basis of companies which are contributing or not to sustainability. Investors will use
related disclosures to identify risk and opportunities on which they wish to engage with
companies. Investors will see potential business opportunities in those companies which
address the risks to people and the environment and those companies which develop new
beneficial products, services and investments which mitigate the business risk related to
sustainability. Investor are increasingly seeking investment opportunities which can make a
credible contribution to the realization of ESGs.
1. Increasing interest of investor in understand how business develop ESG.
 Capital will be attracted to responsible business.

2. Reduce risk
 Institution investor has fiduciary duty to act in best interest of their beneficiaries
so have to take sustainability into account.
 High risk of not ongoing sustainability practices which will reduce cash flow
and financial return.

3. Investor increasingly promote sustainable economies and markets to improve their

long term financial performance.
 Screen sustainable policies of companies
 Investor may select company based on specific policy such as education &
health

4. Screening strategies used by investor

 Compared the opportunities and risk of the business with other business.
Question 2: how provision associated with entity accounted.
Ecoma Co cannot make a provision of $16 million as the company cannot make a provision
for the future operating losses of $20 million nor take account of the saving of $2 million per
annum as no obligation exist.

However, the lease represent an onerous contract and an appropriate provision should be
made. IAS 37 defineds an onerous contract as a contract in which the unavoidable cost of
meeting the obligations under the contract exceed the economic benefits expected to be
received under it. There are no explicit requirement for entities to search for onerous contract
but it is implicit in the onerous contract principles that reasonable steps should be taken to
identify them. If an onerous contract is identified, a provision must be recognized for the best
suitable estimate of unavoidable cost. IAS 37 defined the unavoidable cost under a contract
as the lease net cost of exiting from the contract, which is the lower of the cost of fulfilling it
and any compensation and penalties arising from failure to fulfil it. Before a separate
provision for an onerous contract is recognized, an entity recognize any impairment loss
which has occurred on asset dedicated to that contract.

The onerous contract should be measured by determining the present value of the
unavoidable cost, net of the expected benefit under the contract. The discount rate should be
pre-tax which reflects current market assessments of the time value of money and the risk
specific to liability.

In this case, the requirements of the onerous contract must be considered along with the
prohibition in IAS 37 of providing future operating losses. It is important to distinguish
between unavoidable cost under an onerous contract, and future operating losses. Future
operating losses are not independent of the entity’s future actions and do not normally stem
from an obligation arising from past event. A provision for onerous contract is recognized if
unavoidable cost of meeting the obligations under the contract or exiting from it exceed
economic benefit expected to be received under it.

Unavoidable cost will be $1,171,429 ($600,000 + $600,000/1.05)

Expected benefit will be $552,381 (400,000 + (40% *400,000)/1.05)

A provision of $1,619,048 (1,171,429 – 552,381). In addition, a provision of $1 million can

be made for the cost of moving to the new head office if it is felt that the cost is unavoidable.
This gives total provision of $1,619,048.

1. Provision for future loss not recognize

2. Onerous Contract
 Unavoidable cost more than economic benefit s
 Best estimate of unavoidable cost. (lower of cost of fulfill or penalties)
 Measured by PV of unavoidable cost – expected benefit under the contract
Question 3: Principle of accounting of pension scheme.
IAS 19 Employee Benefit
1. Remeasured plan asset and defined benefit obligation (liability)
 Any gain or loss on remeasurement recognize in other comprehensive income.
2. Recorded in Profit or loss
 Net interest cost
 Current & past service Cost
3. Past service cost to be recognized as an expense at the earlier of following dates:
 When the plan amendment or curtailment occurs.
 When the entity recognizes related restructuring cost or termination benefit.

Question 4: Impact of adjustment on profit before tax of 25 million

A loss of $6.8 million will not be reported.

28. AVCO
Question 1: whether B shares treated as liability or equity
Cavor
IAS 32 Financial Instrument
1. Considering substance rather than legal form of instrument.

Factor that show B shares of Cavor is equity

1. Dividend are discretionary in that they need only be paid if paid on the A shares, on
which there is no obligation to pay dividend. Dividend on the B shares will be paid at
the same rate as on A shares, which will be variable.
2. Cavor has no obligation to redeem the B shares.

Lidan
IAS 32 Financial instrument to be treated as liability on settlement will provide:
1. Contractual obligation to deliver cash or own shares:
2. Cash or another financial asset
3. Its own shares whose value is determined to exceed substantially the value of the cash
or other financial asset.

IAS 32 states that when derivative contract has settlement options, all of the settlement
alternatives must result it in being classified as an equity instrument otherwise it is financial
asset or liability.

Class B shares is liability:

1. Contractual obligation is not explicit 明确
 Choice to decide how much to pay settle the redeemable shares.
2. Settlement in shares is greater than settlement in cash.
 Lidan is implicit obliged to redeem the B shares for a cash amount of $1 per
shares.
Question 2: Key classification between debt and equity under IFRS
IAS 32 requires classification to be based on principles rather than driven by perception of
users.

DEBT
1. IAS 32 Definition
 There is contractual obligation to deliver cash or another financial asset to other
entity.
 Contractual obligation include make payment of principal, interest or dividends.
2. Contractual obligation to transfer cash or cash equivalent
 Cash or another financial asset
 Its own shares whose value is determined to exceed substantially the value of the
cash or other financial asset.
3. Fixed test
 Amount of shares or cash to be receiving or delivering is variable.
4. Dividend are non-discretionary. (dividend is compulsory)
5. Redemption is at option of instrument holder.
6. Instrument has limited life.
7. Redemption is triggered by a future uncertain event which is beyond the control of
both issuer and holder of instrument.

EQUITY
1. IAS 32 define:
 Any contract that evidences a residual interest in the asset of an entity after
deducting all of its liabilities.
 It must be prove that instrument is not a financial liability before it can be
classified as equity.
2. No obligation to deliver cash or other financial asset to another entity.
 Settlement in issuer’s own shares
3. Contain contingent settlement provision in cash of variable number of shares when
the occurrence of an event which is unlikely to occur.
4. Fixed test
 Amount of shares or cash to be receiving or delivering is fixed number.
5. Dividend are discretionary.
6. Shares are non redeemable
7. No liquidation date.
Question 3: important to understand impact of investor analysis of classification of financial
instrument as debt or equity

1. Classification can have significant impact on entity’s reported earnings and gearing
ratio which affect investment decision.
 Perception of user as liability on financial instrument which is classified as equity
by entity.
 Lead to diluting existing equity interest.

2. Management have to evaluate the potential effect of the classification.

 Consideration to acquire subsidiary include financial instrument which classify as
liability.
 Liability is not payable of interest in future but can be other asset.
 When classification of liability an inception will created on investor mind which
will reduce their dividends.
Question 4: Whether cryptocurrencies should accounted as financial asset
IAS 32: Financial Asset is
1. Cash
2. Equity instrument of another entity
3. Contractual right to receive cash, equity instrument or exchange financial instrument
on favourable term.

Cryptocurrency not financial asset

1. Not meet definition of financial asset
2. Not cash or cash equivalent
3. Value volatile in market
4. No contractual rights to receive cash or cash equivalent

In absence of an IFRS standard covering investment in cryptocurrencies, director of AVCO

should use judgement to develop an appropriate accounting policy in accordance with IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors. Director should consider:
1. IFRS Accounting standard dealing with similar issues.
 Most similar standard will be IAS 38 Intangible asset.
 Meet the criteria of identifiable and non-monetary asset
 But not meet on criteria of fixed or determinable amounts.

2. Conceptual Framework
 Cryptocurrencies meet the definition of asset which present economic resource
controlled by entity as a result of past event
 Consideration should be given to the recognition criteria and to other issues such
as measurement basis to apply and how measurement uncertainty may affect that
choice given the volatility of cryptocurrencies.

3. Most recent pronouncement of other national GAAPs.

 IFRS Interpretation Committee issues an agenda decision on 2019 which what
they meant by cryptocurrency and conclude that items as intangible asset.
 Director has to consider the investment they hold meet the definition of
cryptocurrency

Director has to account for the investment in a way which provides useful information to
primary users of its financial statements. This means the information provided by the
accounting treatment should be relevant and should faithfully represent the investment.
29. Symbal Co
Question 1: Principles of good disclosure which should used to inform investor regarding the
company holding crypto asset
There is significant interest in crypto assets with implications for both new and traditional
investors. There is a growing need for clarity regarding the accounting and related disclosures
relating to these new investments. The general disclosure principles which should be used to
help investors can include that the disclosures should be entity-specific as information
tailored to an entity’s own circumstances is more useful than generic information which is
readily available outside the financial statements. Thus, detailed information concerning the
company’s holding of crypto assets and initial Coin Offering (ICO) should be disclosed. The
company’s involvement in ICO’s or other issues of crypto assets should be described as
simply and directly as possible without a loss of material information and without
unnecessarily increasing the length of financial statements. Additionally, the information
disclosed should be organized in a way which highlights important matters which includes
providing disclosure in appropriate order and emphasizing the important matters within them.
It is important that the terms of an ICO are disclosed so that investors can determine the
rights associated with it.

The information about crypto asset should be linked when relevant to other information in the
financial statements or to other part of the annual report to highlight relationship between
pieces of information and improve navigation through financial statements. Commodity
broker-traders holding crypto asset as investor at fair value less cost to sell in addition to the
general IAS 2 Inventories requirement, will need to disclose the carrying amount of such
inventories carried at fair value less cost to sell. In addition, IFRS 13 Fair Value measurement
disclosure requirement for recurring fair value measurement would also apply. The
information about crypto asset should be provided in a way which optimizes comparability
among entities and across reporting period without compromising the usefulness of the
information. Holders of Crypto asset classified as intangible asset under IAS 38 Intangible
Asset will need to disclose, by class, a reconciliation between the opening and closing
carrying amounts, whether the useful life is assessed as indefinite and the reasons supporting
the indefinite useful life assessment, and a description of individually material holding.

Finally, proper application of materiality is key to determining what information to disclose.

The judgmental nature of materiality assessments could lead to entities omitting useful
information concerning crypto assets from the financial statements. Similarly, difficulties in
exercising judgement around materiality could contribute to disclosure overload.

1. Disclosure should be entity-specific information tailored to entity circumstances is

 more useful than generic information.
2. Detailed information related to. Holding Crypto
 Described simply and directly without loss of material information
 Without uncessarily increasing the length of financial statement
3. Organize in way which highlight the important matters.
4. IAS 2 Inventories Requirement
 Disclose carry amount of crypto asset
5. IFRS 13 Fair Value
6. Information of crypto asset should disclose in a way enable comparability among
entities.
7. IAS 38 intangible asset
 Reconciliation between opening and closing
 Whether useful is assessed indefinite, and the assumption supporting the
indefinite useful life.
Question 2: Whether development and promotional cost can accounted as intangible asset
IAS 38 Intangible asset recognition criteria:
1. Probable future economic benefit inflow from the asset
 Based on reasonable and supportable assumption about conditions which will
exist over the life of asset
2. Reliably measurement

IAS 38 Intangible asset

 Entity should expenses promotional activity cost when incurred.
If not satisfy the above criteria, it will recognize as expenses.

First should evaluate whether it still capable of controlling the trading platform and
reasonably expect future economic benefit form the token holder.
 Symbal Co promise to produce gain for investor from trading the tokens and in
return company takes a percentage of profit as a fee.
 Reasonable expect future economic benefit will be expect from the holder.

Cost may recognised as intangible asset

1. Only include the cost of developing the trading platform, promotional cost will not
include.
Question 3: How presale agreement accounted and how revenue from pre-sale agreement
accounted
31 March 2017
IAS 32: Financial Instrument: Presentation at initial recognition
1. Condition to be abandoned was not within control of ICO since no guarantee will be
made on ICO will reach the minimum fundraising level.
2. It has contractual obligation to deliver cash if ICO not reached the minimum
fundraising level
The 1 million cash paid by investor to buy the token is seems as financial liability.

31 March 2017
Fund raise of 10 million allow holder to get 10% of profit made but don’t have redemption
rights or right to residual interest in the asset
1. Entity should not record any inflow as financial liability
2. Record as below

Liability of 1 million should be reversed and recorded as income.

The 10% of profit made is a contingent liability

1. It is possible obligation depend on uncertainty event which depend on whether entity
made a profit during the year.

Liability should be recognised when entity made a profit during the year,
1. Recognise a financial liability to the holders and expenses to profit or loss
2. Token lead entity have contractual obligation to deliver cash.
Question 4: Grant token to director should accounted accordance with IAS 19 Employee
Benefit but not IFRS 2 Share Based payment

Token characteristic
1. Token do not grant the director a residual interest in the net asset of Symbal Co.
2. It does not meet the definition of equity.
3. It is not fall under IFRS 2 Share Based Payment

Non cash short term employee benefit

1. Token is an exchange of employees service.
2. Measurement
 Fair value of tokens or estimated cost of good expect to deliver in future
 Amount would be $250,000 (5*$50,000)
30. Colat Co (Mar/ Jun 2021)
Question 1: why sustainability become important aspect of investor analysis of companies.
Sustainability has become an increasingly crucial aspect of investing. There is a growing
recognition that sustainability can have significant effect on company financial performance.
Investors are increasingly integrating consideration of sustainability issues and metrics into
their decision making. Investor require a better understanding of the wider social and
environmental context in which the business operates. This creates a greater trust and
credibility with investors and a reduced risk of investor using inaccurate information to make
decisions about the company.

Investor have shown an appetite for products which recognise and reflect the relationship
between their investment and social and environmental conduct. Investor need to completely
understand the nature of the companies in which they are looking to invest and need to
incorporate material sustainability factors into investment decisions. They need to understand
whether there are material risks or opportunities connected with sustainability factors which
do not appear in traditional financial reports.

Their materiality will differ from sector to sector, industry to industry. Sustainability is often
unique to the sector. This analysis can be deciding factor between otherwise identical
companies. If the company is viewed poorly based on its sustainability performance, it could
lead to a non-investment decision. The increasingly availability of data from companies
offers the opportunity for rating and ranking analysis, as well as observing trends. These
advances have led to the quantitative application of sustainability data in investment analysis
and decision making. Companies need a greater knowledge of investor needs and
perspectives to help make reporting more relevant to investors and to clearly communicate
the financial value of the company’s sustainability efforts.

Sustainability increasingly crucial aspect of investing

1. Sustainability have significant effect on financial performance.
2. Investor increasingly integrating sustainability issues into their decision.
3. Investor require better understand on social and environmental context which the
business operate.
4. Greater trust and reduce risk of using inaccurate information.
Question 2: Event that indicate impairment test ought to be conducted.

1. Decline in customer demand

 Damage in reputation resulting from the disaster
2. Share price decline
 Indicted that carry amount of net asset is higher than market capitalisation.
3. Damage to manufacturing facility
 Direct indicator
4. Replacement of local supplier to international supplier.
5. Increase in cost depend on significance and duration of the expected change.
6. Temporary disruption is NOT an indicator.
Question 3: How destruction of non current asset and decommissioning of power plant
accounted.

Destruction of non-current asset

Result in derecognition as that asset will be no future economic benefit expected either from
use or disposal. The value of $250 million would be derecognised.

Decommissioning of Power plant

IAS 37 Provision, Contingent Liabilities and Contingent Asset
 Liability is recognised as soon as the obligation arise which normally at
commencement of operations.
IAS 16 Property, Plant and equipment
 Requires initial cost of PPE to include estimate amount of cost to dismantle and
remove and restore the site which it is located.

As regard to the change in the useful life of power plant, the present value of the
decommissioning liability will increase because of the shorter period over which cash flow
are discounted. This increase is added to the carrying amount of the asset which is tested for
impairment. The remaining carrying amount is depreciated prospectively over the following
eight years.
Question 4: Cost of repairing the environmental damage and potential receipt of government
compensation accounted.
Colat Co in the past has put right minor environmental damage which it has caused but it has
never involved in a natural disaster on this scale and there is no legal obligation.

A constructive obligation for the environmental cost will only result in recognition of a
provision if there is an
1. Established pattern of past practices,
2. Published policies or a
3. Specific current statement that Colat Co will pay for the damage.
Colat Co has no indicated to other parties that it will accept certain responsibilities as a result,
it has no created a valid expectation.

IAS 37 states that a provision should be recognised only

1. When there is present obligation resulting from past event.
2. The future expected cost would not meet definition of provision as there is no legal
obligation or constructive obligation.
In case of natural disaster, Colat Co is not at fault and therefore there will be no obligation to
correct the environmental damage which may put right by the government.

IAS 20 Accounting for Government grants and Disclosure of Government Assistance

1. Government grant is recognised only when there is reasonable assurance that entity
will comply with any conditions attached to the grant and the grant will be received.
2. Grant received recognised as income in the period in which it receivables.
In case of Colat Co, it only received acknowledgement of its application for grant on 1 March
2018 and therefore, there is no reasonable assurance that the grant will be received. Further, it
is not probable that the grant will be received and it should not be disclosed in the financial
statements.
Question 5: Accounting of Hedge of Commodity price risk in aluminium
Prior to the disaster, Colat Co hedges commodity price risk in aluminium and such
transactions constituted high probable hedged transactions in cash flow hedges under IFRS 9
Financial Instrument. However, the purchase which were considered highly probable prior to
the natural disaster are now not expected to occur.

Colat Co should follow hedge accounting principles up until the date of the natural disaster
and then should cease hedge accounting. As the forecast transaction is no longer expected to
occur, Colat Co should reclassify the accumulated gains or losses on the hedging instrument
from other comprehensive income into profit or loss as a reclassification adjustment.
Question 6:Accounting of potential insurance policy proceeds.
IAS 37 not permit recognition of contingent asset.
1. Insurance recovery asset can only be recognised if it is determined that the entity has
a valid insurance policy which includes cover for the incident and a claim will be
settled by the insurer.
2. Insurance recognise when it is virtually certain

In the case, the insurance claim for the non current asset will be recognize since it is probable
that the insurance claim will be paid.
1. Entity received the insurance approval after the reporting period but before the
financial statement approved, it should disclose the potential proceed (280 million.)

No disclosure on the insurance recovery related to relocation cost, or the lost revenue as the
recovery is not virtually certain. The insurance not cover the environmental damage which is
the responsibility of government.
Handfood Co (Sep/Dec 2020)
Question 1: Discuss the nature of IFRS for SMEs Accounting Standard and the principal
difference between IFRS for SMEs Accounting Standard and full IFRS Accounting Standard.

Nature IFRS for SMEs Accounting Standard

1. Provide a framework that generated relevant, reliable and useful information and the
provision of a high quality and understandable accounting standard suitable for SMEs.
2. Simplified the section in IFRS and omitted certain standard such as earning per share
and segment reporting.
3. Certain accounting treatment are not allowable under SMEs such as non current asset
held for sale.

SMEs Standard make numerous simplification to recognition, measurement and disclosure:

1. Intangible asset must amortised over their useful life. If not determine useful life it
presumed to be 10 years.
2. The cost model (cost less any impairment loss) can be used for investment in
associates. This model may not be used for investment for which there is a published
price quotation, in which case the fair value model must be applied.

Disclosure requirement in SMEs also substantially reduced

1. Some disclosure are not considered appropriate for users’ needs and for cost-benefit
consideration.
 Disclosure in Full IFRS are more relevant to investment decision in capital
markets

Standard SMEs is modified version of full IFRS

1. Not independently developed standard.
2. It is based on recognised concepts and pervasive principles and allow easier transition
to full IFRS Accounting Standard if SME become a public listed.
Question 2: Discuss the effect that information asymmetry can have on the decision to invest
in SMEs
SMEs standard decrease information asymmetry between firm and the users because of its
recognition, measurement and disclosure requirements.

However, there are certain facts and information in companies which is not disclosed by them
to investors under any accounting standard.

Effect of information Asymmetry

1. SMEs have access to all relevant information, while investor lack much of the
relevant information.
 Lack of relevant information will have adverse effect on decision of investor.
2. Information related SME’s credit, project risk and benefit are known more by
SME than by investor.
3. Therefore, investor are in an relatively disadvantage position
 If they are financial institution, they might raise lending rates to reduce potential
risk of credit loss.
 The more incomplete and less transparent the information => the higher will be
the risk related to the investment => the higher will be the return that the investor
requires.
4. The access to investment by SMEs could be determined by the quality of financial
statements, information asymmetry and perceived risk. Quality financial statements
reduce the level of information asymmetry which reduce perceived risk.
Question 3: Discuss how integrated reporting could help SMEs better understand and better
communicate how they create value to investors.

1. Provide a roadmap to SMEs to considered multiple capital that make up its value
creation.
 A more complete corporate report which will aid in understand business.
 Build better understanding of the factors that determine their ability to create
value.
 Help assess strength and spot any weakness.
 Create a forward looking approach and sound strategic decision making.

2. Provide complete picture of intangible asset that not shown in financial statement
 (employee expertise, customer loyalty, intellectual property)
 Without having these on financial statement, stakeholders might make decision
with insufficient information.

3. Include key financial information along with non financial measures and narrative
information.
 Fulfil communication needs of financial capital and other stakeholders and
optimize reporting.
Question 3: accounting for current service cost of employee benefit

Should recognise a liability for its obligation as a result of the additional employee benefit net
of plan asset. The treatment for these payments is similar to a defined benefit pension
schemes, but the difference is that any actuarial gains or losses are recognised immediately
and not in other comprehensive income as Handfood Co does at present.

Any service cost, net interest and remeasurements should all be recognised in profit or loss.
In this case, Handfood Co is going to pay the benefit out of cash and therefore there will be
no plan asset. Handfood Co will recognise the net annual change in that liability during the
five year period as the service cost.

The company will measure the benefit liability at the present value of its obligation at the
reporting date. The amount is the estimated amount of benefit that employees have earned in
return for their service in the current and prior periods, including benefits that are not yet
vested. The benefit is based on future salaries and therefore the projected unit credit method
requires an entity to measure its defined benefit obligation on a basis that reflect estimated
future salary increases. The components of the cost of the additional benefit will be
recognised in profit or loss which include the current service cost.

Handfood Co recognise a current service cost expense of $7700 in profit or loss.

Question 5: Impact on the additional employee benefit

An increase in employee’s salaries above 3% per annum and a decrease in the probability of
employees leaving the company would have the same effect on the additional benefit
liability. The changes in the assumptions would both increase the benefit liability
(discounted) at 31 December 2013. This would in turn increase the current service cost for
the year in profit or loss as the benefit payable on 1 January 2017 will have increased as will
the number of employees to whom the benefit will be payable.

Interest, which is calculated on the opening balance of the benefit obligation, will not affected
by the changes in assumption. It will be charged to profit or loss at $385 ($7700 * 5%).
Actuarial gains or losses arise when the assumption changes. In this case because of the
changes in assumptions, an actuarial loss will arise because of the increase in benefit payable
and the obligation and this will be charged to profit or loss.
32. Skizer
Question 1: Explain criteria in Conceptual Framework for Financial Reporting for the
recognition of asset and discuss whether there are inconsistencies with the criteria in IAS 38
Intangible Asset

Conceptual Framework define asset

1. Present economic resource controlled by entity as a result of past event.
 Economic resources is a right that has the potential to produce economic benefits.
2. Allow for flexibility in how this criteria could be applied by IASB in amending or
developing IFRS Accounting Standards.

IAS 38 Intangible asset defined intangible asset

1. Definition – identifiable non monetary asset without physical substance
2. Recognize
 Probable future economic benefit are attributes to the asset will flow to entity.
(based on reasonable assumption about conditions exist over the useful life.)
 Cost of asset can measured reliably.
Difference
Probability criterion
IAS 38 – the probability of economic benefit must based on reasonable assumption which
exist over the useful life of the asset. Probability recognition criterion is always considered to
be satisfied for intangible asset which acquired separately or in business combination.

Conceptual Framework – not prescribe a probability criterion and thus does not prohibit the
recognition of asset or liabiltiies with a low probability of an inflow and outflow of economic
benefits. In terms of intangible asset, it is arguable that recognising an intangible asset with a
low probability economic benefit would not be useful to users.

Recognition criteria and definition of asset

IAS 38 – more specific
Conceptual Framework – provide info that is relevant and faithful representation.
Question 2: Stake meet the criteria of intangible asset
As per question the stake meet the criteria of intangible asset.
1. Not appropriate to derecognise the intangible asset.
 According to IAS 38, intangible asset only derecognised when no future economic
benefit are expected from use or disposal.
2. Entity could make impairment test on the stake according to IAS 36 Impairment of
asset.

Reclassification of intangible asset to research and development NOT a change in accounting

estimate.
1. IAS 8 Accounting policies, Change in accounting estiamtes states
 Change in accenting estimate is an adjustment of the carrying amount of an asset
or liability resulting from reassessing the expected future benefits and obligations
associated with that asset or liability.
2. Cost of the stakes in the development projects can be determined and will not have
been estimated.

If the recognition criteria of intangible asset were not met, Skizer should have to recognise
retrospectively a correction of an error in accordance with IAS 8.
Question 3: whether the sale of development project treated as revenue
Gain arising from derecognition of an intangible asset cannot be presented as revenue as IAS
38 explicitly forbites it. There is no indication that Skizer’s business model is to sell
development project but rather it undertakes the development of new products in conjunction
with third party entities. Skizer’s business model is to jointly develop a product then leave the
production to partners.

As Skizer has recognised an intangible asset in accordance with IAS 38 and fully impaired
the asset, it cannot argue that it has thereafter been held for sale in the ordinary course of
business. Therefore, according to IAS 38, the gain from the derecognition of the intangible
asset cannot be classified as revenue under IFRS 15 Revenue from contracts with customers
but as a profit on the sale of the intangible asset.

IAS 38: Intangible Asset

1. Gain from derecognition of intangible asset cannot be classified as revenue under
IFRS 15 Revenue from contract.
2. Must be as a profit on sale of intangible asset.
Question 4: Potential Issues which investor may have

Accounting for the different types of intangible asset acquired in a business combination
IFRS 3 Business Combination
1. Acquired intangible asset must be recognised and measured at fair value if they are
separable or arise from other contractual rights, irrespective of whether acquiree had
recognised the asset prior to business combination occurring.
2. Required all intangible asset acquired in business combination treated in line with IAS
38.
 intangible asset with finite lives to be amortised over useful life
 intangible asset with indefinite life to subject to an annual impairment review in
accordance with IAS 36.

Issues – unlikely that all intangible asset acquired in business combination will be
homogeneous and investor may feel there are different type of intangible asset
1. Example – buy patent and customer list together in business combination
 Patent only last for finite period and may be through as having an identifiable
future revenue stream. (Amortised seem logical)
 Customer List – make sense to account these asset within goodwill.
2. As such, investor may wish to reverse the amortisation charge.

IFRS Accounting standard do not permit. Different accounting treatment for this
distinction.

The choice of accounting policy of cost or revaluation model, allowed under IAS 38
Intangible Asset for intangible asset
Cost Model
1. After initial recognition intangible asset should be carried at cost less accumulated
amortisation and impairment.
Revaluation Model
1. Intangible asset carried at a revalued amount less any subsequent amortisation and
impairment loss.
2. Fair value can only determine by active market.
3. Such active market not common to intangible asset.

Issue – different value of intangible asset

Intangible asset using cost model may have less reported figure than revaluation model.
1. Different accounting treatment will lead to different figure.
2. Some intangible asset amortised over useful life while some subject to annual
impairment review.
The capitalisation of development expenditure
IAS 38
1. Research cost to be expenses and development cost to be capitalised after feasibility
of asset for use and sale has been established.
2. If cannot distinguish research cost from the project, entity should treats the
expenditure for that project as if it were incurred in the research phase only.

Issues – disclosure in the area of cost to be capitalised are not consistent.

1. Unclear from disclosure how the accounting policy in respect of R&D was applied
and how research was distinguished from development expenditure.

Issues – disclosure of relevant information is already contained within IFRS Accounting

Standards but preparers are failing to comply with these requirements or the disclosure is
insufficient.

Conclusion
Intangible asset disclosure can help analyst answer question about innovation capacity of
companies and investors can use the disclosure to identify company with intangible asset for
development and commercialisation purposes.
Question 5: Whether integrated reporting can enhance the current reporting requirements for
intangible assets.

Measuring the contribution of intangible assets to future cash flow is fundamental to

integrated reporting and will help explain the gaps between the carrying amount, intrinsic and
market equity value of an entity. As set out above, organizations are required to recognise
intangible assets acquired in a business combination. Consequently, the intangible assets are
only measured once for this purpose.

However, organizations are likely to go further in their integrated report and disclose the
change in value of an intangible asset as a result of any sustainable growth strategy or a
specific initiative. It is therefore very useful to communicate the value of intangible asset in
an integrated report. For example, entity may decide to disclose its assessment of the increase
in brand value as a result of a corporate social responsibility initiative.
33. Toobasco (Sep 2018)
Question 1: Whether Alternative Performance Measures described would achieve fair
presentation in financial statements.
(1)
APMs are not defined by IFRS Accounting Standards and therefore may not be directly
comparable with other companies’ APMs, including those in the group’s industry. Where the
same category of material items recurs each year and in similar amounts (in this example,
restructuring cost and impairment losses), the entity should consider whether such amounts
should be included as part of underlying profit.

Under IFRS Accounting Standards, items cannot be presented as extraordinary items in the
financial statements or in notes. Thus it may be confusing to users of the APMs to see this
term used. It is not appropriate to state that a charge or gain is non-recurring unless in meets
the criteria. Items such as restructuring cost or impairment losses should not be labelled as
non-recurring where it is misleading.

However, the entity can make an adjustment for a charge or gain which they believe is
appropriate but they cannot describe such adjustment inaccurately.

(2)
The deduction of capital expenditures, purchase of own shares and purchase of intangible
asset from the IAS 7 measure of cash flow from operating activities is acceptable as free cash
flow does not have a uniform definition.

As a result, a clear description and reconciliation showing how this measure is calculated
should be disclosed. Entities should also avoid misleading inferences about its usefulness.
Free cash flow does not normally represent the residual cash flow available as many entities
have mandatory debt service requirements which are not normally deducted from the
measure. It would also be misleading to show free cash flow per share in bold alongside
earnings per share as they are not comparable.
(3)
When an entity present an APM, it should present the most directly comparable measure
which has been calculated in accordance with IFRS Accounting Standards with equal or
greater prominence. The level of prominence would depend on the facts and circumstances.

In this case, the entity has omitted comparable information from an earnings release which
include APMs such as EBITDAR. Additionally, the entity has emphasised the APM measure
by describing it as ‘record performance’ without an equally prominent description of the
measure calculated in accordance with IFRS Accounting Standard. Further, the entity has
provided a discussion of the APM without similar discussion and analysis of the same
information presented form an IFRS Accounting Standard perspective.

The entity has presented EBITDR as a performance measure; such measures should be
reconciled to profit of the year as presented in the statement of comprehensive income.
Operating profit would not be considered the best starting point as EBITDAR makes
adjustment for items which are not included in operating profit such as interest and tax. The
entity has changed the way it calculates the APM because it has treated rent differently.
However, if an entity chooses to change an APM, the change and the reason for the change
should be explained and any comparatives restated. A change would be appropriately only in
exceptional circumstances where the new APM better achieves the same objectives, perhaps
if there has been a change in the strategy. The revised APM should be reliable and more
relevant.
Question 3: Reconciliation from net cash generated by operating activities

Question 4: Reconciliation from net cash generated by operating activities to operating free
cash flow.
Question 5: Explanation of the adjustment made in parts b(i) and (ii)
Purchase and sale of cars
Toobasco’s presentation of cash flow from the sale of cars as being from investing activities
is incorrect as cash flow from the sale of cars should have been presented as cash flow from