DipIFR Syllabus B. Elements of financial statements - Initial Recognition of PPE - Past Papers ^{1 / 15}

Epsilon is an entity which prepares financial statements to 30 September each year.

(a) Purchase of machine
On 1 April 2018, Epsilon accepted delivery of a large and complex machine from an overseas supplier. The agreed purchase price for the machine was 20 million francs – the functional currency of the supplier. Under the terms of the agreement with the supplier 12·6 million francs was payable on 31 July 2018, with the balance of 7·4 million francs being payable on 30 November 2018. The payment due on 31 July 2018 was made in accordance with the terms of the agreement. Epsilon does not use hedge accounting.

On 1 April 2018, Epsilon incurred direct costs of $250,000 in installing the machine at its premises. Although the machine was ready for use from 1 April 2018, Epsilon did not bring the machine into use until 30 April 2018. During April 2018 Epsilon incurred costs of $200,000 in training relevant staff to use the machine.

The directors of Epsilon estimate that the machine is capable of being usefully employed in the business until 31 March 2023, and that it will have no residual value at that date. (8 marks)

Required:
Explain and show with appropriate calculations how the above events would be reported in the financial statements of Epsilon for the year ended 30 September 2018. Marks will be awarded for BOTH figures AND explanations.

Relevant exchange rates (francs to $1) are as follows:
– 1 April 2018 – 10 francs to $1.
– 30 April 2018 – 9·5 francs to $1.
– 31 July 2018 – 9 francs to $1.
– 30 September 2018 – 8 francs to $1.
– Average rate for the period from 1 April 2018 to 30 September 2018 – 9·2 francs to $1.

You are the financial controller of Omega, a listed entity which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). The chief executive officer (CEO) of Omega has reviewed the draft consolidated financial statements of the Omega group and of a number of the key subsidiary companies for the year ended 31 March 2018. None of the subsidiaries are listed entities but all prepare their financial statements in accordance with IFRS. The CEO has sent you an email with the following queries:

Query Two
When reading the accounting policies note in the consolidated financial statements I notice that we measure all of our freehold properties using a fair value model but that we measure our plant and equipment using a cost model. I further notice that both of these asset types are shown in the ‘property, plant and equipment’ figure which is a single component of non-current assets in the consolidated statement of financial position. It makes no sense to me that assets which are shown as property, plant and equipment are measured inconsistently. If it’s OK to measure different parts of property, plant and equipment using two different measurement models, why not use the fair value model for the more readily accessible properties and use the cost model for the properties in remote locations to save on time and cost? (6 marks)

Required:
Provide answers to the three queries raised by the chief executive officer. Your answers should refer to relevant provisions of International Financial Reporting Standards.

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

Non-current assets are often a highly significant component of the total assets of an entity. Therefore, a number of different International Financial Reporting Standards have been published which regulate their definition, recognition, measurement and disclosure. IAS 1 Presentation of Financial Statements distinguishes between current and non-current assets. IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets specifically regulate the recognition, measurement and disclosure of tangible and intangible assets respectively.

Required:
Explain how:
(ii) IAS 16 defines property, plant and equipment and IAS 38 defines intangible assets. (4 marks)

A deferred tax liability is the amount of income tax payable in respect of taxable temporary differences. A deferred tax asset is the amount of income tax recoverable in future periods in respect of deductible temporary differences.

A temporary difference is the difference between the carrying amount of an asset or liability in the statement of financial position and its tax base.

Required:
(ii) Define the tax base of a liability as outlined in IAS 12. Use your definition to compute the tax base of the following liabilities:

– $40,000 is included in accrued liabilities. A tax deduction relating to this liability will be given when the liability is settled. (4 marks)

Delta is an entity which prepares financial statements to 30 September each year. Each year the financial statements are authorised for issue on 30 November. During the year ended 30 September 2014, the following transactions occurred:

(b) On 1 October 2013, Delta completed the construction of a factory at a total construction cost of $40 million. The factory was constructed on land which was being leased on an operating lease until 30 September 2053. Annual lease rentals were $800,000, payable on 30 September in arrears. The expected useful economic life of the factory at 1 October 2013 was 40 years. Under the terms of the leasing agreement, Delta is required to dismantle the factory on 30 September 2053 and return the land to its original state. The latest estimated cost of this process, at 30 September 2053 prices, is $55 million. An appropriate discount rate to use in any relevant calculations is 5% per annum. At this discount rate, the present value of $1 receivable in 40 years is 14·2 cents. (8 marks)

Required: 
Explain and show (where possible by quantifying amounts) how the three events would be accounted for in the financial statements of Delta for the year ended 30 September 2014.

Note: The mark allocation is shown against each of the three events above. You should assume that all transactions described here are material.