BIBM702 Advanced Financial Accounting - Financial Reporting

QUESTION ONE                 Lease Accounting                                                              [22 MARKS]

Part A                                                                                                                                    (6 marks)

Your manager comes to you and states

“What’s this new lease standard IFRS 16 about, I hear it will make our performance metrics much worse?” I also hear that the economic and financial markets effects of the COVID-19 pandemic may impact a company’s lease accounting in several ways.

Your manager requests that you respond by email and you cover the following points.

• A brief critique of the former lease standard NZIAS-17
• The main issues and changes in the new lease standard IFRS16
• A response to your manager on the comment above i.e. the impacts on financial metrics (ratios) the new standard is likely to create
• An explanation of three key lease accounting impacts due to the economic and financial markets effects of the COVID-19 pandemic.

Required:

In a series of bullet points, respond to the manager on the issues raised.

Part B                                                                                                                                    (16 Marks)

Tōtara Ltd enters into a non-cancellable five-year lease agreement with Super Engines Ltd on 1 July 2020. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $711,911.

The machinery is expected to have an economic life of six years, after which time it will have an expected residual value of $115,500. There is a bargain purchase option that Tōtara Ltd will be able to exercise at the end of the fifth year for $154,000.

There are to be five annual payments of $192,500, the first being made on 30 June 2021. Included within the $192,500 lease payments is an amount of $19,250 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis.

 

Required:  Show all workings

1. Determine the rate of interest implicit in the lease and calculate the present value of the lease payments. (3 marks)
2. Prepare the journal entries in the books of Tōtara Ltd for the years ending 30 June 2021 and 30 June 2022. (7 marks)
3. Prepare the portion of the statement of financial position for the year ending 30 June 2022 relating to the lease asset and lease liability. (6 marks)

QUESTION TWO                 Accounting for Taxation                                                  14 MARKS

At 30 June 2020, Kakariki Ltd had the following temporary differences:

The following information is available for the following year, the year ending 30 June 2021:

Statement of profit or loss and other comprehensive income for Kakariki Ltd for the year ending 30 June 2021.

QUESTION Two cont’d

Kakariki Ltd depreciates computers over five years in its accounting records but over three years for tax purposes. The straight-line method is used. During the year, Kakariki Ltd wrote off bad debts amounting to $7,000. Warranty costs of $35,000 were paid during the year. No amounts were paid for long-service leave during the year. The following information is extracted from the statement of financial position at 30 June 2021:

Required:

1. Calculate the amount of each of Kakariki Ltd.’s temporary differences, if any, at 30 June 2020, and state whether it is deductible or taxable. Show workings (6 marks)
2. What is the balance of the deferred tax liability and deferred tax asset, if any, as at 30 June 2020?    (2 marks)
3. Is it possible that the recognition of deferred tax assets associated with unused tax losses could be used as a means of ‘earnings management’? Explain your answer.   (2 marks)
4. Calculate Kakariki Ltd.’s taxable profit for the year ending 30 June 2021. Show workings   (4 marks)

QUESTION THREE                         Foreign Exchange Accounting                          19 MARKS

Fantail Ltd purchases inventory from Goldfinch Ltd, a listed British company. Relevant events and the spot rates at each date are shown as follows:

Required: 

1. Prepare appropriate journal entries for each relevant event. (8.5 marks)
2. Assume that, instead of inventory, the purchase is plant and equipment, which is installed ready for use on 15 July 2022 when the rate is NZD 1.00 = GBP 0.42. Prepare appropriate journal entries for each relevant event. (8.5 marks)
3. Concerned about the risks associated with fluctuations in exchange rates, the organisation is considering entering a foreign currency swap. Explain how this would be done by Fantail Ltd. (2 marks)

QUESTION FOUR               Financial Reporting- accounting for intangibles      30 MARKS

                                                    and accounting for financial instruments                                       

You are the accountant for Best Invest Ltd (a New Zealand listed company). The directors of Best Invest Ltd have several accounting issues that require clarification. They come to you for explanation on the accounting issues related to the following matters.

• We acquired a patented technology (an intangible asset) with a value of $50,000 in a business combination. Explain the difference in how you measure intangible assets that are individually acquired compared to with those that are acquired as part of a business combination?                                                                                                             (4 marks)
• How should the fair value of this patented technology be measured, considering that we are planning to discontinue its active use? (5 marks)
• What is the difference between research activities and development activities, and which of the following costs would be included as part of (i) research costs or (ii) development costs for a project to improve the production process of our chocolate factory?            (11 marks)

1. Depreciation of administrative equipment during the research phase of the project.
2. Salaries of administrative staff during the development phase of the project.
3. Salaries of staff working half-time on the research project and half-time on other work.
4. Depreciation of laboratory equipment used to undertake development of the new production process.
5. Consulting fees paid to outside consultants used in the research phase and development phase of the project.
6. Raw materials used in the research phase and development phase of the project.

• On 1 June 2020 our company invested in five hundred 7 per cent, ten-year Teleco bonds with a face value of $100 each. The bonds were issued at face value. On 30 June 2020 the Teleco bonds, which are traded in an active market, had a market value of $105.        (10 marks)

1. Can our company classify the Teleco bonds as being measured at amortised cost?
2. If measured at amortised cost, what is the amount at which the bonds should be reported in the statement of financial position at 30 June 2020?

Required: 

Provide the appropriate explanation and/or calculation for each situation above. Ensure you provide reference to appropriate accounting standards.

QUESTION FIVE                 Accounting Theories                                                        15 MARKS

Part A                                                                                                                                    (5 marks)

Watch the following YouTube video titled “Sen. Elizabeth Warren: GOP tax plan is giveaway to giant corporations, not middle class”, PBS NewsHour Nov 3, 2017.

Click here or copy and paste the link below into a browser to watch the assigned video, and then answer the questions that follows.

https://www.youtube.com/watch?v=ZvR9lLSLjTg

Required:

1. Pursuant to Capture Theory, why would the American Government respond to the demands of the giant corporations?                                                                                                 (2 marks)
2. From a Capture Theory perspective, who benefits from government regulations? (1 mark)
3. Would it be possible to ‘prove’ that the American Government has been ‘captured’ by the ‘giant corporations’, and if so, what evidence would provide such proof? (2 marks)

Part B                                                                                                                                    (10 marks)

“While recognition of the elements of financial reporting require that they should be measurable with reasonable accuracy (as well as being ‘probable’), conceptual frameworks have tended to provide very limited prescription in relation to measurement issues.” (Deegan & Samkin, 2013, p. 63) 

Required: 

Critique the above statement. Ensure you explain what is meant by measurement, identify the three component parts of measurement, and discuss the issues of measurement in financial reporting.