SBR Question (Please help me with this question)

QUESTION 1 (50 MARKS)
Tasty Co is a public limited company which produces beverages. It prepares its financial
statements in accordance with International Financial Reporting Standards. The following exhibits
relate to Tasty Co.
EXHIBIT 1
Tasty has entered into an agreement with a separate entity, Dulce, under which Tasty will acquire
a licence to use Dulce’s technology to manufacture pasteurised dairy beverages. The technology
has a fair value of $8 million. Tasty cannot use the technology to manufacture any other drinks.
Tasty has not concluded the amount of economic benefits that are likely to flow from the dairy
beverages, but will use Dulce’s technology for a period of 3 years. Tasty will have to keep updating
the technology in accordance with Dulce’s requirements which is expected to cost $50 000 over
the period of three years. The agreement stipulates that Tasty will make a non-refundable
payment of $ 8 million to Dulce to acquire the licence to use Dulce’s technology immediately.
Once the legal aspects have been completed, Tasty will be able to start manufacturing.
EXHIBIT 2
A new accountant has recently joined Tasty. The accountant noticed that the provisions balance
for the 2023 financial year-end is substantially higher than that of 2022. After enquiring, it has
come to the accountant’s attention that the increase is due to suspected legal requirements, to
come into effect in 2024, to train staff in the consumer industry. The training is expected to
commence once the requirements are enacted at an amount of $4 million.
Furthermore, the board of directors have discussed a potential restructure of Tasty. The
restructuring plans included an analysis of long term cost savings but, should the restructure go
ahead, there will be substantial short term costs as well. These include, professional fees,
penalties for cancelling leases and also redundancy costs for some employees. Even though
Tasty might not restructure their business, further plans will need to be made to ensure Tasty
remains a going concern. For this reason, the finance director has included a restructuring
provision, arguing that this is prudent. A final decision and announcements to staff and lessors
are likely to be made prior to authorisation of the financial statements which is expected to be in
March 2024.
When the new accountant probed further into the recording of provisions, he was abruptly
dismissed. The director threatened that should the accountant question his decisions, he could
be dismissed from his position.
The directors of Tasty receive bonus’s on an annual basis based on actual profits exceeding
projected profits. In the past few years, the entity has exceeded projected profits, however, in the
years to come this may not be the case due to the going concern issues the entity is facing.
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EXHIBIT 3
Mrs Dewet is the wife of the financial director of Tasty, Mr Dewet. She is not an employee of Tasty
and she does not know about the proposed restructure. However, Mrs Dewet recently acquired
5% of the equity shares of Tasty.
EXHIBIT 4
Delish is a subsidiary of Tasty. The subsidiary has been in a loss making position and has unused
trading losses amounting to $125 000 as at the 2022 financial year-end. 20 % of these losses
have accumulated in 2020, 40% in 2021 and the remaining 40% in 2022. The entity has a turnaround plan that is being implemented and according to forecasts, profits are expected to be
$40 000 at the 31 December 2023 year-end. The forecast show that profits will grow by 20% each
year for the next four years. A trainee accountant had been asked to complete the forecasts and
to use his discretion with regards to pertinent estimates. The trainee is optimistic by nature and
does not take much interest in current events and economic conditions. The markets are currently
performing at its lowest level in a decades and have thus had the lowest reported profits for the
first quarter in 2023. Delish operates in a tax jurisdiction which allows for trading losses to be only
carried forward for a maximum of two years.
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REQUIRED:
a. Discuss how the agreement with Dulce should be dealt with in the financial statements of
Tasty under IFRS standards. (10)
b.
(i) Discuss the accounting implications of Tasty’s provisions. Your discussion should
include the implications should the announcement be made to staff and lessors.
(12)
(ii) Discuss the ethical implications of the treatment of the provisions by the financial
director of Tasty. (10)
c. Discuss, briefly, whether Mrs Dewet’s acquisition of the equity shares in in Tasty Co should
be disclosed as a related party transaction. (5)
d. Explain whether a deferred tax asset can be recognised in the financial statements of
Delish, in the year 2023. (8)
e.
In the revised 2018 Conceptual Framework for Financial Reporting (the Conceptual
Framework), the accounting model is built on the definitions and principles for the
recognition of assets and liabilities.
The 2010 Conceptual Framework specified three recognition criteria which apply to all
assets and liabilities:
1. The item meets the definition of an asset or a liability;
2. It is probable that any future economic benefit associated with the asset or liability
will flow to or from the entity; and
3. The asset or liability has a cost or value which can be measured reliably.
However, these definitions were not always consistently applied by the standard setters,
the result is that many existing IFRS Standards are inconsistent with the 2010 Conceptual
Framework.
Discuss and contrast the criteria for the recognition of assets and liabilities as set out in
the 2018 Conceptual Framework and its predecessor, the 2010 Conceptual Framework
(given above). (5)