Question 4

You are the financial controller of Epsilon, a listed entity. The financial statements of Epsilon for the year ended 31 March 20X7 are currently being prepared. Your managing director has sent you three questions regarding the financial statements. The questions appear in notes 1–3.

Note 1 – Farming subsidiary
I’ve recently been reviewing the financial statements of one of our subsidiaries. This subsidiary specialises in both dairy farming and beef farming. There are amounts included in both non-current and current assets:

– The non-current assets include farm machinery which has been purchased. I understand why this machinery has been included as we have spent money on it. However, the non-current assets figure also includes a figure for the dairy and beef herds. These existing herds were not purchased but are made up of animals the farming subsidiary has bred.

– The inventories include amounts for milk and beef. The milk comes from the dairy herd and the beef comes from the animals we have slaughtered.

– Is there an international financial reporting standard which deals with these issues and how does it require the subsidiary to value and account for the herds and the inventories? (8 marks)

Note 2 – Equity investments
I’ve been analysing Epsilon’s equity investments and they appear to be being treated inconsistently in the financial statements. I have noted the following:

– We have a portfolio of equity investments which we use for the short-term investment of surplus cash. When we need cash for business purposes we sell some investments from this portfolio. The portfolio is measured at its fair value each year end. Any surpluses or deficits on re-measurement to fair value are recognised in investment income as part of the profit or loss for the period.

– We have two long-term equity investments in key suppliers which we have held for some time and have no intention of selling. These investments are also measured at fair value but changes in fair value are recognised as ‘other comprehensive income’.

How can it be consistent to report changes in the fair values of our equity investments as different line items in the same financial statement? Please explain the measurement requirements of the relevant international financial reporting standard. Additionally, what difference does it make to Epsilon whether gains or losses are reported in other comprehensive income rather than as part of the profit or loss for the period? (7 marks)

Note 3 – Redundancy programmes
You will be aware that the board of directors met on 10 March 20X7 to discuss over-capacity in parts of the group. The decision was reluctantly taken to implement a programme of redundancies. The programme was to be implemented in two phases:

– Phase 1 involves 300 redundancies on 30 June 20X7. This phase of the programme was planned out in detail at the meeting on 10 March 20X7. The redundancy costs were calculated in some detail at the meeting and this first phase was made public to all affected parties on 25 March 20X7.

– Phase 2 involves 200 redundancies on 30 September 20X7. This phase of the programme was also planned out in detail at the meeting on 10 March. The redundancy costs were estimated at the meeting and this second phase was announced on 25 April 20X7.

The financial statements for the year ended 31 March 20X7 include a provision for the first phase of the redundancies but not the second phase. Both phases were agreed and the costs calculated at the same meeting. Surely both costs should be accounted for consistently? (5 marks)

Required:
Provide answers to the questions raised by your managing director. Your answers should refer to relevant provisions of International Financial Reporting Standards (IFRS® Standards).

Note: The mark allocation is shown against each of the three notes above.