DipIFR Syllabus B. Elements of financial statements - Provisions - Past Papers ^{1 / 2}

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

(b) Decommissioning
On 31 March 2023, Epsilon will be legally required to decommission the machine using the original supplier. The directors of Epsilon estimate that the cost of safely decommissioning the machine on 31 March 2023 will be 3 million francs.

Note: A relevant annual rate to be used in any discounting calculations is 8% and the appropriate discount factor is 0·681. (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.

You are the financial controller of Omega, a listed entity which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS® Standards). The financial statements for the year ended 30 September 2018 are due to be published shortly. A trainee accountant who is assigned to your department is reviewing the financial statements as part of a training exercise. She has prepared a list of queries arising out of this review.

Query Three
One of the notes to the financial statements refers to a legal claim made against Omega by Customer X. This relates to losses incurred by Customer X due to Omega supplying this customer with a faulty product. Further investigation revealed that the fault was due to one of Omega’s suppliers, Supplier Y, supplying Omega with a faulty component. This component was used to manufacture the product supplied to Customer X. Therefore Omega made a legal claim against Supplier Y in respect of that faulty component. The note states that both legal claims will probably succeed. I don’t understand why Omega’s financial statements include a liability in respect of the expected settlement of Customer X’s legal claim but do not include an asset in respect of the expected settlement of Omega’s legal claim against Supplier Y. This seems inconsistent. (4 marks)

Required:
Provide answers to the queries raised by the trainee. You should justify your answers with reference to relevant IFRS Standards.

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

Delta prepares its financial statements to 30 September each year. The financial statements for the year ended 30 September 2017 are shortly to be authorised for issue. The following events are relevant to these financial statements:

(b) On 1 April 2017, Delta completed the construction of a power generating facility. The total construction cost was $20 million. The facility was capable of being used from 1 April 2017 but Delta did not bring the facility into use until 1 July 2017. The estimated useful life of the facility at 1 April 2017 was 40 years.

Under legal regulations in the jurisdiction in which Delta operates, there are no requirements to restore the land on which power generating facilities stand to its original state at the end of the useful life of the facility. However, Delta has a reputation for conducting its business in an environmentally friendly way and has previously chosen to restore similar land even in the absence of such legal requirements. The directors of Delta estimated that the cost of restoring the land in 40 years’ time (based on prices prevailing at that time) would be $10 million. A relevant annual discount rate to use in any discounting calculations is 5%. When the annual discount rate is 5%, the present value of $1 receivable in 40 years’ time is approximately 14·2 cents. (9 marks)

Required: 
Explain and show how the two events would be reported in the financial statements of Delta for the year ended 30 September 2017. When considering the reporting of events in the statement of comprehensive income, you should distinguish between events being reported in profit or loss from events being reported in other comprehensive income, where this is relevant. However, you do not need to comment on potential future reclassification issues.

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

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:

(c) On 15 May 2014, Delta was notified that a customer (Chi) was taking legal action against Delta in respect of financial losses incurred by Chi. Chi alleged that the financial losses were caused due to the supply by Delta of faulty products on 30 November 2013. Delta defended the case but considered, based on the progress of the case up to 30 September 2014, that there was a 75% probability they would have to pay damages of $20 million to the customer. The case was ultimately settled by Delta paying damages of $18 million to Chi on 15 November 2014. (3 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.