8567

Submitted By : Sundas Saif

Roll number : 0000256156

Programe : M.com
Semester : 5th Spring 2024

Course Name : Financial Reporting-I

ASSIGNMENT No. 2
Q. 1
Compare and contrast the recognition of property, plant,
and equipment using the cost model and fair value model
outlined in IAS 16. How do these models impact financial
reporting, and what factors influence the choice between
them? Illustrate your answer with relevant examples.

International Accounting Standard (IAS) 16 outlines the

recognition and measurement of property, plant, and
equipment (PPE). Under this standard, entities can choose
between two models for subsequent measurement: the cost
model and the fair value model. Each model has distinct
implications for financial reporting and decision-making. Here’s
a comparison and contrast of the two models:
Cost Model
Definition: The cost model states that an asset is recorded at
its cost less any accumulated depreciation and any
accumulated impairment losses.
Key Features:
1. Initial Recognition: Assets are recognized at their historical
cost, including all expenditures directly attributable to bringing
the asset to its intended use.
2. Subsequent Measurement: The carrying amount of the asset
is reduced over time through systematic depreciation.
3. Impairment: If an asset’s recoverable amount falls below its
carrying amount, an impairment loss is recognized.
Financial Reporting Impact:
• Stability and Predictability: Financial statements under the cost
model are generally more stable, as they are less influenced by
market fluctuations.

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• Depreciation: The impact of depreciation can smooth earnings
over time, which may appeal to investors seeking consistent
performance indicators.
• Historical Costs: The information provided reflects historical
costs, which might be less relevant for users looking for
current asset values.
Example: A company purchases machinery for $100,000,
incurs $5,000 in installation costs, and depreciates it over ten
years using straight-line depreciation. After five years, the
carrying amount would be $50,000 (cost - accumulated
depreciation).
Fair Value Model
Definition: Under the fair value model, an asset is measured at
its fair value at each reporting date, with changes in fair value
recognized in the financial statements.
Key Features:
1. Initial Recognition: Similar to the cost model, assets are
recognized at cost.
2. Subsequent Measurement: The asset is revalued to its fair
value at each reporting date. Changes in fair value are
recognized in other comprehensive income or profit or loss,
depending on how the entity opts to account for those
changes.
3. No Depreciation: Instead of systematic depreciation, the fair
value model focuses on periodic revaluation.
Financial Reporting Impact:
• Relevance and Timeliness: The fair value model provides more
relevant and timely information about the asset’s current
market value.

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• Volatility: Financial statements can exhibit greater volatility due
to fluctuations in asset values, which might concern investors
looking for stability.
• Market Sensitivity: Results are sensitive to market conditions
and economic factors, making financial statements potentially
less predictable.
Example: If the same machinery purchased for $100,000 has a
fair value of $80,000 after five years, the company would
revalue the asset to reflect its fair value in the balance sheet.
Factors Influencing the Choice Between Models
1. Nature of the Asset:
o Assets that have a more stable market and less subject
to obsolescence may be better suited for the cost
model. Conversely, assets that frequently change in
value, such as investment properties, may warrant the
fair value model.
2. Market Activity:
o Companies in active markets with available pricing
information may find the fair value model more
appropriate, as it reflects current market conditions.
3. Management Strategy:
o Management’s approach to using assets and their intent
regarding asset sale or investment can influence model
choice.
4. Regulatory Environment:
o Local regulations and compliance requirements may also
dictate the accounting practices that a company adopts.
5. Stakeholder Needs:

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 o The preferences of investors, creditors, and other
stakeholders regarding information relevancy can sway
the decision towards one model over the other.

Both the cost and fair value models have their respective
advantages and disadvantages, influencing financial reporting
significantly. The cost model offers stability and predictability,
making it easier for stakeholders to assess performance over
time. On the other hand, the fair value model provides a more
current view of asset value, enhancing relevance but
introducing volatility. The choice between these models
depends on various factors, including asset nature, market
conditions, management strategy, and stakeholder needs.
Understanding these differences can help businesses make
informed decisions that align with their financial reporting
objectives.

Q. 2 Examine the recognition criteria for revenue in each

category (sale of goods, rendering of services, and interest,
royalties, and dividends) according to IAS 18. How does the
standard guide entities in determining when to recognize
revenue in each scenario? Utilize practical examples for
clarity

International Accounting Standard (IAS) 18, which has now

been replaced by IFRS 15, outlines the recognition criteria for

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 revenue across three primary categories: sale of goods,
rendering of services, and interest, royalties, and dividends.
The recognition of revenue is fundamental for accurate
financial reporting, as it affects the measurement of
performance and financial position. Here’s an examination of
the recognition criteria for each category under IAS 18.
1. Sale of Goods
Recognition Criteria: Revenue from the sale of goods is
recognized when:
• The risks and rewards of ownership have been transferred to
the buyer.
• The seller no longer has managerial involvement or control over
the goods.
• The revenue can be measured reliably.
• It is probable that the economic benefits associated with the
transaction will flow to the seller.
Practical Example: A retailer sells a product for $1,000. The
transaction occurs on December 15, and the product is
delivered to the customer on December 20. The retailer
recognizes the revenue on December 20, when the product is
delivered and the risks and rewards of ownership transfer to
the buyer. At this point, the retailer can measure the revenue
reliably, and it is probable that they will receive payment.
2. Rendering of Services
Recognition Criteria: Revenue from the rendering of services is
recognized when:
• The outcome of the transaction can be estimated reliably.
• It is probable that the economic benefits associated with the
transaction will flow to the seller.

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• The stage of completion of the transaction can be measured
reliably.
Practical Example: A consulting firm provides services under a
contract that spans three months for a fee of $30,000. At the
end of the first month, the firm has completed 50% of the
work. The firm would recognize $15,000 (50% of the total fee)
as revenue at the end of the first month. This recognition is
based on the reliable estimation of the work completed and
the expectation of receiving the economic benefits.
3. Interest, Royalties, and Dividends
Recognition Criteria: Revenue from interest, royalties, and
dividends is recognized when:
• It is probable that the economic benefits will flow to the entity.
• The amount of revenue can be measured reliably.
Practical Examples:
• Interest: A company has a loan of $100,000 with an interest rate
of 5%. Interest revenue is recognized as it accrues, typically on
an annual basis. At the end of the year, the company
recognizes $5,000 (5% of $100,000) as interest revenue.
• Royalties: A company licenses its technology for a royalty fee of
10% on sales. If the licensee sells $50,000 worth of products
using that technology, the company recognizes $5,000 (10% of
$50,000) as royalty revenue when the sales occur and are
reported.
• Dividends: A company holds shares in another company and
expects to receive dividends. Revenue from dividends is
recognized when the shareholder’s right to receive payment is
established, which is typically on the declaration date. If a
company declares a dividend of $1 per share and the entity

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 holds 1,000 shares, it recognizes $1,000 as dividend revenue
on the declaration date.
IAS 18 provides clear criteria for recognizing revenue in
different scenarios, emphasizing the transfer of risks and
rewards, the ability to measure revenue reliably, and the
probability of economic benefits flowing to the entity. These
principles help ensure that revenue is recognized in a manner
that reflects the economic reality of transactions, thus
enhancing the reliability and relevance of financial statements.
Understanding these criteria allows entities to report revenue
accurately and comply with accounting standards effectively.
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Q. 3
What do you know about adjusting and non-adjusting events?
Explain with some examples with reference to IAS 10.
Further, you are required to explain whether the matters are
adjusting or non-adjusting events.
a. Trade debts as at June 30, 2020 included a debt of Rs.
100,000 recoverable from M&P, who as declared
insolvent on August 10, 2020.
b. Dock Ltd. Being sued for Rs. 6 million for reliance on
report issued in January 2020 to a T.U Company. Based
on these reports, T.U Co invested in a venture that is
now in liquidation. Dock’s handling of the whole affair
has been terrible and this news came before Dock’s
management issued its financial statements for the year
ended 31st December 2019.

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 c. Alisia ltd. Has disposed of its pen business. The major
subsidiary was disposed for Rs. 100 million, just a month
after the December year-end. The authorization for
issuance of the 2020 financial statement is expected next
week.
d. Bend Co. had imported a production plant before year-
end. After the reporting period when time had come to
pay the price there had occurred a great rise in foreign
exchange rate. The financial statements are yet to be
authorized.
e. The professional valuation of a property one month after
the reporting period is Rs. 500,000 below the current
book value. The diminution in value is considered to be
permanent. The purpose of the valuation is to show
assets using revaluation model of IAS-16.

IAS 10, "Events After the Reporting Period," distinguishes between

adjusting events and non-adjusting events that occur after the
reporting period but before the financial statements are
authorized for issue. Understanding these categories is essential
for accurate financial reporting.
Definitions
1. Adjusting Events:
o These are events that provide evidence of conditions that
existed at the end of the reporting period. If an adjusting
event occurs, the entity must adjust the amounts
recognized in the financial statements.
2. Non-Adjusting Events:
o These are events that are indicative of conditions that
arose after the reporting period. Such events do not

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 require adjustments to the financial statements but may
need disclosure.
Examples and Analysis
Let’s analyze each provided scenario to determine whether it
constitutes an adjusting or non-adjusting event:
a. Trade debts as of June 30, 2020, included a debt of Rs. 100,000
recoverable from M&P, who declared insolvency on August
10, 2020.
• Analysis: This is an adjusting event. The insolvency of M&P
provides evidence of a condition (i.e., the inability to recover
the debt) that existed at the reporting date (June 30, 2020).
Therefore, the financial statements should be adjusted to reflect
the loss on the trade debt.
b. Dock Ltd. is being sued for Rs. 6 million for reliance on a
report issued in January 2020 to a T.U Company. The news
about the lawsuit came before Dock’s management issued its
financial statements for the year ended December 31, 2019.
• Analysis: This is an adjusting event. The lawsuit relates to
events that occurred prior to the reporting date, indicating a
potential liability for Dock Ltd. The financial statements should
be adjusted to reflect the provision for the lawsuit if the loss is
probable and can be estimated reliably.
c. Alisia Ltd. has disposed of its pen business. The major
subsidiary was disposed of for Rs. 100 million, just a month
after the December year-end. The authorization for issuance
of the 2020 financial statements is expected next week.
• Analysis: This is a non-adjusting event. The disposal of the
business occurred after the reporting period and does not
provide evidence of conditions that existed at the reporting date.
However, it should be disclosed in the financial statements, as it
is a significant event.
d. Bend Co. had imported a production plant before year-end.
After the reporting period, when the time had come to pay
the price, there was a great rise in the foreign exchange rate.
The financial statements are yet to be authorized.

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 • Analysis: This is a non-adjusting event. The rise in the foreign
exchange rate occurred after the reporting period and does not
indicate a condition that existed at the reporting date. It may
require disclosure if it is significant, but it does not require
adjustment in the financial statements.
e. The professional valuation of a property one month after the
reporting period is Rs. 500,000 below the current book value.
The diminution in value is considered to be permanent. The
purpose of the valuation is to show assets using the
revaluation model of IAS 16.
• Analysis: This is a non-adjusting event. The decline in value is
indicative of conditions that arose after the reporting period and
does not reflect a condition that existed at the reporting date.
However, it should be disclosed in the financial statements if
the decline is significant.
Conclusion
In summary, adjusting events require adjustments to the financial
statements to reflect new information about conditions that
existed at the reporting date, while non-adjusting events do not
affect the financial statements but may require disclosure.
Understanding these concepts is vital for compliance with IAS 10
and for providing stakeholders with accurate and relevant
financial information.

Q. 4 (20)
The balance sheet of a company at year end December 2021
reflects following status:
Rs.000
Plant under installation 2,000
Other assets 8,000
10,000
Loan
Bank loan 18% 2,000
Bank loan 20% 2,500

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 Bank loan 22% 1,500
6,000
Shareholders’ equity 4,000
10,000
All Loans were brought forward from the year 2020. Expenditure
incurred on Plant under installation:
May 1 20211,000
July 1 2021700
November 1 2021 300
2,000
Required: (1) Capitalization rate and total borrowing Cost
(2) Cost of qualifying asset

To calculate the capitalization rate, total borrowing cost, and the cost of the
qualifying asset for the plant under installation, we need to follow these steps:

1. Capitalization Rate and Total Borrowing Cost

Step 1: Calculate Total Borrowing Cost

The total borrowing cost includes interest from all loans. We'll calculate the
interest for each loan based on the amounts and interest rates provided.

Loan Breakdown:

Loan Type Amount (Rs.000) Interest Rate Interest for 2021 (Rs.000)
Bank loan 18% 2,000 18% 2,000 × 18% = 360
Bank loan 20% 2,500 20% 2,500 × 20% = 500
Bank loan 22% 1,500 22% 1,500 × 22% = 330
Total 6,000 1,190

Total Borrowing Cost = Rs. 1,190,000

Step 2: Calculate Capitalization Rate

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The capitalization rate is calculated using the total borrowing cost divided by the
total amount of loans.

Capitalization Rate=Total Borrowing CostTotal Loan Amount=1,1906,000\text{C

apitalization Rate} = \frac{\text{Total Borrowing Cost}}{\text{Total Loan
Amount}} =
\frac{1,190}{6,000}Capitalization Rate=Total Loan AmountTotal Borrowing Cos
t=6,0001,190 Capitalization Rate=0.1983 or 19.83%\text{Capitalization Rate} =
0.1983 \text{ or } 19.83\%Capitalization Rate=0.1983 or 19.83%

2. Cost of Qualifying Asset

Step 1: Calculate the weighted average of the borrowings

Since the loans have different rates, we need to find a weighted average for the
capitalization:

Weighted Average Interest Rate=(2,000×0.18)+(2,500×0.20)+(1,500×0.22)6,000\

text{Weighted Average Interest Rate} = \frac{(2,000 \times 0.18) + (2,500 \times
0.20) + (1,500 \times
0.22)}{6,000}Weighted Average Interest Rate=6,000(2,000×0.18)+(2,500×0.20)
+(1,500×0.22)

Calculating each component:

• For 18% loan: 2,000×0.18=3602,000 \times 0.18 = 3602,000×0.18=360

• For 20% loan: 2,500×0.20=5002,500 \times 0.20 = 5002,500×0.20=500
• For 22% loan: 1,500×0.22=3301,500 \times 0.22 = 3301,500×0.22=330

Weighted Average Interest Rate=360+500+3306,000=1,1906,000=0.1983 or 19.8

3%\text{Weighted Average Interest Rate} = \frac{360 + 500 + 330}{6,000} =
\frac{1,190}{6,000} = 0.1983 \text{ or }
19.83\%Weighted Average Interest Rate=6,000360+500+330=6,0001,190
=0.1983 or 19.83%

Step 2: Calculate the Cost of Qualifying Asset

Next, we will allocate the borrowing costs to the qualifying asset (the plant under
installation) based on the period it was incurred. The asset is in installation for the
following periods:

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 1. From May 1 to December 31 (8 months) for Rs. 1,000
2. From July 1 to December 31 (6 months) for Rs. 700
3. From November 1 to December 31 (2 months) for Rs. 300

Cost Calculation:

1. For May 1 expenditure (Rs. 1,000 for 8 months):

Interest=1,000×19.83%×812=1,000×0.1983×812≈132.2\text{Interest} =
1,000 \times 19.83\% \times \frac{8}{12} = 1,000 \times 0.1983 \times
\frac{8}{12} \approx 132.2Interest=1,000×19.83%×128
=1,000×0.1983×128≈132.2

2. For July 1 expenditure (Rs. 700 for 6 months):

Interest=700×19.83%×612=700×0.1983×612≈69.4\text{Interest} = 700
\times 19.83\% \times \frac{6}{12} = 700 \times 0.1983 \times
\frac{6}{12} \approx 69.4Interest=700×19.83%×126=700×0.1983×126
≈69.4

3. For November 1 expenditure (Rs. 300 for 2 months):

Interest=300×19.83%×212=300×0.1983×212≈9.9\text{Interest} = 300
\times 19.83\% \times \frac{2}{12} = 300 \times 0.1983 \times
\frac{2}{12} \approx 9.9Interest=300×19.83%×122=300×0.1983×122
≈9.9

Total Cost of Qualifying Asset:

Total Interest≈132.2+69.4+9.9≈211.5\text{Total Interest} \approx 132.2 + 69.4 +

9.9 \approx 211.5Total Interest≈132.2+69.4+9.9≈211.5

Summary of Results

1. Capitalization Rate: 19.83%

2. Total Borrowing Cost: Rs. 1,190,000
3. Cost of Qualifying Asset: Rs. 211,500

These calculations provide the necessary financial information for proper

reporting of the qualifying asset in accordance with relevant accounting standards.

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Q5
A company has purchased a large item of plant. The following costs
were incurred.
List price of the Rs. Cost of site Rs.
machine 1,000,000 preparation 200,000
Trade discount 50,000 Architect’s fees 15,000
given
Delivery cost 100,000 Administration 150,000
expense
Installation cost 125,000 Redeployment Cost 35,000
Local government officials have granted the company a license to
operate the asset on condition that the company will remove the
asset and return the site to its former condition at the end of the
asset’s life. The company has recognized a liability of Rs. 350,000 in
respect of the expected clearance cost. You are required to
calculate the cost of plant, prepare necessary journal entries and
relevant ledger accounts throughout the useful life of machine that
is expected 4 years with zero residual value.

To calculate the total cost of the plant and prepare the necessary
journal entries and ledger accounts, we will follow these steps:

Step 1: Calculate the Total Cost of the Plant

The total cost of the plant includes all costs directly attributable to
bringing the asset to the location and condition necessary for it to be
capable of operating as intended. According to IAS 16, these costs
can include the purchase price, delivery, installation, and preparation
costs, but not general administrative expenses.

Breakdown of Costs:
1. List Price of the Machine: Rs. 1,000,000
2. Less: Trade Discount: Rs. 50,000

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Net Cost of Machine: Rs. 1,000,000 - Rs. 50,000 = Rs. 950,000
3. Cost of Site Preparation: Rs. 200,000
4. Delivery Cost: Rs. 100,000
5. Installation Cost: Rs. 125,000
6. Architect’s Fees: Rs. 15,000
7. Redeployment Cost: Rs. 35,000
8. Liability for Clearance Cost: Rs. 350,000
(This represents a future obligation related to the asset and should
be included in the cost of the asset).

Total Cost Calculation:

Total Cost of the Plant=Net Cost of Machine+Cost of Site Preparation
+Delivery Cost+Installation Cost+Architect’s Fees+Redeployment Cost
+Liability for Clearance Cost\{Total Cost of the Plant}

{Net Cost of Machine} + {Cost of Site Preparation} +{Delivery Cost} +

{Installation Cost} +{Architect’s Fees} +{Redeployment Cost} +
{Liability for Clearance Cost}

Total Cost of the Plant=Net Cost of Machine+Cost of Site Preparation

+Delivery Cost+Installation Cost+Architect’s Fees+Redeployment Cost
+Liability for Clearance Cost

Total Cost of the Plant=950,000+200,000+100,000+125,000+15,000+

35,000+350,000=1,775,000
Total Cost of the Plant = 950,000 + 200,000 + 100,000 + 125,000 +
15,000 + 35,000 + 350,000 = 1,775,000

Total Cost of the Plant=950,000+200,000+100,000+125,000+15,000+

35,000+350,0
1,775,000

Step 2: Prepare Journal Entries

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 1. Initial Recognition of the Asset:
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Date Account Titles Dr (Rs.) Cr (Rs.)
01-Jan-202X Plant (Asset) 1,775,000
Accounts Payable / Cash 1,775,000
(To record the purchase and installation of plant)
2. Recognition of Clearance Cost Liability:
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Date Account Titles Dr (Rs.) Cr (Rs.)
01-Jan-202X Plant (Asset) 350,000
Provision for Clearance Costs 350,000

(To recognize the liability for future clearance costs)

Step 3: Depreciation Expense Calculation

Given that the machine has a useful life of 4 years and a residual
value of zero, the annual depreciation expense can be calculated
using the straight-line method:
Depreciation Expense=Total Cost of the PlantUseful Life
=1,775,0004=443,750
{Depreciation Expense} ={Total Cost of the Plant}{Useful Life} =
{1,775,000}{4}

Depreciation Expense=Useful LifeTotal Cost of the Plant=41,775,000

=443,750
Step 4: Prepare Journal Entries for Depreciation
1. Annual Depreciation Journal Entry:
Each year for four years:
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Date Account Titles Dr (Rs.) Cr (Rs.)

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31-Dec-202X Depreciation Expense 443,750
Accumulated Depreciation 443,750
(To record annual depreciation for the plant)

Step 5: Ledger Accounts

Here is how the accounts would look over the useful life of the
machine.
Plant Account
Date Description Dr (Rs.) Cr (Rs.) Balance (Rs.)
01-Jan-202X Initial Recognition 1,775,000 1,775,000
Total 1,775,000 1,775,000
Provision for Clearance Costs
Date Description Dr (Rs.) Cr (Rs.) Balance (Rs.)
01-Jan-202X Initial Recognition 350,000 350,000
Total 350,000 350,000
Accumulated Depreciation
Date Description Dr (Rs.) Cr (Rs.) Balance (Rs.)
31-Dec-202X Annual Depreciation 443,750 443,750
31-Dec-202Y Annual Depreciation 443,750 887,500
31-Dec-202Z Annual Depreciation 443,750 1,331,250
31-Dec-202Z+1 Annual Depreciation 443,750 1,775,000
Total 1,775,000 1,775,000
Summary
• Total Cost of the Plant: Rs. 1,775,000
• Annual Depreciation Expense: Rs. 443,750
• Journal Entries: Recorded for the acquisition and depreciation.
• Ledger Accounts: Maintained for the plant, provision for
clearance costs, and accumulated depreciation.

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These steps provide a comprehensive view of how to recognize and
account for the costs associated with the purchase of a plant asset in
accordance with accounting principles.
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