DipIFR Syllabus B. Elements of financial statements - Financial Instruments - Introduction - Past Papers ^{1 / 12}

Delta is an entity which prepares financial statements to 31 March each year. The functional currency of Delta is the dollar ($). The following events have occurred which are relevant to the year ended 31 March 2018:

Event (a)
On 1 January 2018, Delta entered into a contract with a foreign supplier. The terms of the contract were that the supplier would construct a large machine for Delta’s use and deliver the machine on 30 June 2018. The total construction price of 20 million groats (the currency of the supplier) is due for payment on 31 July 2018.

On 1 January 2018, Delta entered into an agreement for the forward purchase of 20 million groats. The settlement date for this forward purchase of foreign currency was 31 July 2018. Delta intends to use this forward purchase as a hedge of the expected cash outflow flows arising under the construction contract on 31 July 2018.

Delta wishes to use hedge accounting for this arrangement if this is possible under International Financial Reporting Standards. Delta has prepared all relevant documentation which is necessary to enable hedge accounting to be used if the qualifying conditions are met.

Data relevant to the construction contract and to the forward purchase of currency is as follows:

– Increase in expected cash flows arising under the construction contract between 1 January 2018 and 31 March 2018 = $2,600,000.
– Positive fair value of forward currency purchase contract at 31 March 2018 = $2,700,000. (9 marks)

Required:
Explain and show how the two events would be reported in the financial statements of Delta for the year ended 31 March 2018.

Note: The mark allocation is shown against each of the two events above.

You are the financial controller of Omega, a listed entity which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). The managing director, who is not an accountant, has recently attended a business seminar at which financial reporting issues were discussed. Following the seminar, she reviewed the financial statements of Omega for the year ended 31 March 2016. Based on this review she has prepared a series of queries relating to those statements:

Query Two
‘Another issue discussed at the seminar was financial reporting by farming entities. The issue of ‘biological assets’ was
mentioned. I don’t really understand what these are or how they’re recognised and measured in the financial
statements. Please explain this to me.’ (5 marks)

Required:
Provide answers to the three questions raised by the managing director. 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.