ACCA FR Syllabus B. Accounting For Transactions In Financial Statements - Financial Assets - Initial Measurement - Past Papers ^{4 / 10}

Included within the financial assets of Zinet Co at 31 March 20X9 are the following two recently purchased investments in publically-traded equity shares:

Investment 1 – 10% of the issued share capital of Haruka Co. This shareholding was acquired as a long-term investment as Zinet Co wishes to participate as an active shareholder of Haruka Co.

Investment 2 – 10% of the issued share capital of Lukas Co. This shareholding was acquired for speculative purposes and Zinet Co expects to sell these shares in the near future.

Neither of these shareholdings gives Zinet Co significant influence over the investee companies.

Wherever possible, the directors of Zinet Co wish to avoid taking any fair value movements to profit or loss, so as to minimise volatility in reported earnings.

How should the fair value movements in these investments be reported in Zinet Co’s financial statements for the year ended 31 March 20X9?

A    In profit or loss for both investments
B    In other comprehensive income for both investments
C    In profit or loss for investment 1 and in other comprehensive income for investment 2
D    In other comprehensive income for investment 1 and in profit or loss for investment 2

Speculate Co is preparing its financial statements for the year ended 30 September 20X3.

The following issues are relevant:

1.     Financial assets

Shareholding A – a long-term investment in 10,000 of the equity shares of another company. These shares were acquired on 1 October 20X2 at a cost of $3·50 each. Transaction costs of 1% of the purchase price were incurred. On 30 September 20X3 the fair value of these shares is $4·50 each.

Shareholding B – a short-term speculative investment in 2,000 of the equity shares of another company. These shares were acquired on 1 December 20X2 at a cost of $2·50 each. Transaction costs of 1% of the purchase price were incurred. On 30 September 20X3 the fair value of these shares is $3·00 each.

Where possible, Speculate Co makes an irrevocable election for the fair value movements on financial assets to be reported in other comprehensive income.

2.     Taxation

The existing debit balance on the current tax account of $2·4m represents the over/under provision of the tax liability for the year ended 30 September 20X2. A provision of $28m is required for income tax for the year ended 30 September 20X3. The existing credit balance on the deferred tax account is $2·5m and the provision required at 30 September 20X3 is $4·4m.

3.     Revenue

On 1 October 20X2, Speculate Co sold one of its products for $10 million. As part of the sale agreement, Speculate Co is committed to the ongoing servicing of the product until 30 September 20X5 (i.e. three years after the sale). The sale value of this service has been included in the selling price of $10 million. The estimated cost to Speculate Co of the servicing is $600,000 per annum and Speculate Co’s gross profit margin on this type of servicing is 25%. Ignore discounting.

Which of the following meet the definition of a financial asset in accordance with IFRS 9 Financial Instruments?

A    1 and 2 only
B    1 and 4 only
C    1, 3 and 4
D    4 only

Speculate Co is preparing its financial statements for the year ended 30 September 20X3.

The following issues are relevant:

1.     Financial assets

Shareholding A – a long-term investment in 10,000 of the equity shares of another company. These shares were acquired on 1 October 20X2 at a cost of $3·50 each. Transaction costs of 1% of the purchase price were incurred. On 30 September 20X3 the fair value of these shares is $4·50 each.

Shareholding B – a short-term speculative investment in 2,000 of the equity shares of another company. These shares were acquired on 1 December 20X2 at a cost of $2·50 each. Transaction costs of 1% of the purchase price were incurred. On 30 September 20X3 the fair value of these shares is $3·00 each.

Where possible, Speculate Co makes an irrevocable election for the fair value movements on financial assets to be reported in other comprehensive income.

2.     Taxation

The existing debit balance on the current tax account of $2·4m represents the over/under provision of the tax liability for the year ended 30 September 20X2. A provision of $28m is required for income tax for the year ended 30 September 20X3. The existing credit balance on the deferred tax account is $2·5m and the provision required at 30 September 20X3 is $4·4m.

3.     Revenue

On 1 October 20X2, Speculate Co sold one of its products for $10 million. As part of the sale agreement, Speculate Co is committed to the ongoing servicing of the product until 30 September 20X5 (i.e. three years after the sale). The sale value of this service has been included in the selling price of $10 million. The estimated cost to Speculate Co of the servicing is $600,000 per annum and Speculate Co’s gross profit margin on this type of servicing is 25%. Ignore discounting.

In respect of the financial assets of Speculate Co, what amount will be included in other comprehensive income
for the year ended 30 September 20X3?

A     $9,650
B     $10,650
C     $10,000
D     $0