[Swati]

Yes..

There is no explanation with respect to it. Also, in this particular question they have not even split the borr cost.

Regards.

[Swati]

Alright Sir, thanks for the clarification.

But when i saw the Solution in the BPP Revision Kit, they have not split the borr cost. So, I thought they might have done the error there..

Also, in another similar question (past papers), I noticed that they have done the split of borr costs..

Therefore, I got confused when to split and when not to split the borr costs..??

[Swati]

Yes, thanks.
So capitalisation starts from 01 Oct 2012 (when we purchased the land for construction purposes)

But, there is one more thing which was bothering me. Do we also have to split this net borrowing costs into depreciable and non-depreciable elements?

Regards,
Swati

[Swati]

Hi Sir,

Just a small ques from Dec 2013 Paper (Dipifr).

Why are we capitalising Borrowing costs from 1 Oct 2012 till 31st May 2013 (8 months)?
If the construction is commencing from 1st Nov 2012, should not we take it for 7 months (ie. 1st Nov 2012 to 31st May 2012)?

Here is the ques:
Omega is a listed company which prepares financial statements in accordance with International Financial Reporting Standards (IFRS).
(a) On 1 October 2012, Omega purchased some land for $10 million (including legal costs of $1 million) in order to construct a new factory. Construction work commenced on 1 November 2012. Omega incurred the following costs in connection with its construction: – Preparation and levelling of the land – $300,000.
– Purchase of materials for the construction – $6·08 million in total.
– Employment costs of the construction workers – $200,000 per month.
– Overhead costs incurred directly on the construction of the factory – $100,000 per month.
– Ongoing overhead costs allocated to the construction project using Omega’s normal overhead allocation model – $50,000 per month.
– Income received during the temporary use of the factory premises as a car park during the construction period – $50,000.
– Costs of relocating employees to work at the new factory – $300,000.
– Costs of the opening ceremony on 31 July 2013 – $150,000.

The factory was completed on 31 May 2013 and production began on 1 August 2013. The overall useful life of the factory building was estimated at 40 years from the date of completion. However, it is estimated that the roof will need to be replaced 20 years after the date of completion and that the cost of replacing the roof at current prices would be 30% of the total cost of the building. At the end of the 40-year period Omega has a legally enforceable obligation to demolish the factory and restore the site to its original condition. The directors estimate that the cost of demolition in 40 years’ time (based on prices prevailing at that time) will be $20 million. An annual risk adjusted discount rate which is appropriate to this project is 8%. The present value of $1 payable in 40 years’ time at an annual discount rate of 8% is 4·6 cents. The construction of the factory was partly financed by a loan of $17·5 million taken out on 1 October 2012. The loan was at an annual rate of interest of 6%. During the period 1 October 2012 to 28 February 2013 (when the loan proceeds had been fully utilised to finance the construction), Omega received investment income of $100,000 on the temporary investment of the proceeds.

We have to compute the carrying amount of Factory in SOFP of Omega at 30 Sept 2013. (14 marks)

Thanks,
Swati

[Swati]

Yes thanks!
Understood..

[Swati]

The answer has taken $ 20 mn as the increase in the market value of the customer relations and considered it in calculation Goodwill. In the Balance Sheet, they have shown it as 16 mn (after amortising it by 4mn because the life is 5 yrs). This means that solution has taken it as an Intangible Asset.

[Swati]

Yes, I agree to you.

But i am still confused when the standard (ias 38) says:

‘Market share and Customer loyalty cannot normally be intangible assets, since an entity cannot control the actions of the customers.’

Do we still want to say that customers relations are Intangible Assets knowing that the entity Cannot control their actions?

Thanks..

[Swati]

Dear Mike,

Have a small doubt in this adjustment of ‘Intangible Assets’ (part of a Consolidation ques June 2007):

-> At 1 April 2006 Beta had a long standing portfolio of loyal customers that regularly ordered goods and services from Beta. In addition, the workforce of Beta was highly trained and the expertise of the workforce was seen by the directors as conferring significant competitive advantage to Beta. The customer relationships and the expertise of the workforce were not included in the balance sheet of Beta at 31 March 2006 because the directors did not consider that they met the recognition criteria in IAS 38 – Intangible Assets – for internally developed intangible assets. The directors of Alpha considered that the customer relationships had a market value of $20 million at
1 April 2006 and that based on the life cycle of the existing products, the existing customers would continue to order goods and services from Beta for at least five years from that date. They estimated that the fair value of the competitive advantage conferred by the workforce was $15 million at 1 April 2006 and that the average period to retirement for a typical employee was twenty years.

My doubt is: Why are we taking into account the ‘Customers relations’ and not the ‘competitive advantage of the workforce’ ? Acc. to me both should NOT be Intangible assets because as per the standard (IAS 38), we can’t control either our workforce or the customers..??

Please reply..

Thanks!

[Swati]

Alright,
Thanks a lot.

Regards..
swati

[Swati]

I am sorry, its not 90,000. Its 120,000 (360,000-240,000).
How will this amount be treated in current pd? Or it won’t be accounted for in yr ending 31 Mar 2011.

Total liability: 200,000 * 1.80 = 3,60,000
P/L (remuneration cost) = 2,00,000* 1.8 * 6/9 months = 2,40,000

[Swati]

And the amount would be ‘240000’ in the “Other components of equity”?
If yes, then, what will we do of ‘90,000’ in the current yr ending Mar 2011?

[Swati]

Dear Sir,

I have a small doubt in this pilot paper Dipifr 2010 (Ifrs 2) question:

On 1 October 2010 Omega granted 250,000 options that allowed employees to purchase shares for $10 per share. The options are to vest on 30 June 2011 provided the employees satisfy certain performance conditions in the 9-month period between 1 October 2010 and 30 June 2011. The market value of the shares on 1 October 2010 was only $10, although by 30 June 2011 the market value was expected to rise to $12.
The fair value of each share option was estimated to be $1.80 per share at 1 October 2010. This estimate had increased to $1.90 per share by 31 March 2011
On 1 October 2010 it was anticipated that all the options would vest. However employee performance in the period since 1 October 2010 has been such that it is now likely that only 200,000 of the options will vest.

I calculated correctly as follows:
Total liability: 200000 * 1.80 = 3,60,000
P/L (remuneration cost) = 2,00,000* 1.8 * 6/9 months = 2,40,000

Now,
Could you pls tell me what will be the journal entry for yr ending Mar 2011?
How much would be the amount on the credit side?
Debit: P/L 240000
Credit: increase in equity reserves?

Just a little confused as this involves 6 & 9 month thing, unlike other questions..

Thanks,

Swati.

[Swati]

Dear Sir,

Thanks a lot for your response.
I will do IFRS 2 from the course notes only & do the dipifr past exam questions on ifrs 2.
Hope it would be enough.

Thanks once again.

Regards,
Swati

[Swati]

Dear Mike Sir,

Is there a lecture on IFRS 2 (Share based payments) on the opentuition website?
I need to do it for Dipifr (Dec 2014) exam.

Regards,
Swati

[Swati]

Hi Suman,
I have purchased the BPP kit online from amazon.
No, there is no soft copy of the book. I have it for June 2014 paper but I guess thats sufficient for Dec 2014 exam as well. For any changes etc, ifrs website can be referred or there are supplements available..

Regards,
Swati.

[Swati]

Yes Sir,
I have gone through your lectures. But i think I should again go through them so have a good understanding of Leases.

May I ask you if the lease question says:
Omega intended to build a factory on this land and on 1 June 2008 borrowed $8 million at an annual interest rate of 9% to partly finance its construction.
So, while calculate the carrying amount of the factory (B/S), why do we not take $ 8 mn along with other things like Costs of construction staff, Materials..

[Swati]

Dear Sir,

A new question on lease:
On 1 April 2011, Omega began to lease a property on a 20-year lease. Omega paid a lease premium of
$3 million on 1 April 2011. The terms of the lease required Omega to make annual payments of $500,000 in arrears, the first of which was made on 31 March 2012.
On 1 April 2011 the fair values of the leasehold interests in the leased property were as follows:
– Land $3 million.
– Buildings $4·5 million.
There is no opportunity to extend the lease term beyond 31 March 2031. On 1 April 2011 the estimated useful economic life of the buildings was 20 years. The annual rate of interest implicit in finance leases can be taken to be 9·2%. The present value of 20 payments
of $1 in arrears at a discount rate of 9·2% is $9.

My doubt is on the Building depreciation. On what amount we would charge depreciation on the Building? is it $4.5 mn. If yes, then how is it been calculated? Because, when I looked at the solution, it says: The initial carrying value of the leased asset in PPE is $4·5 million ($1·8 million + $300,000 X 9).

My second doubt is: Why is it an Operating lease for Land? Whats the reason?

Thanks…

[Swati]

OK sir,
I understood it.

Basically, if we are not aware of the agreement with the lender, we can simply write in our answer that it is a liability or we will capitalise it (with the amounts). That would be sufficient for the examiner?

[Swati]

Sir,
I am sorry, I have not been able to explain my confusion.

May I ask:
1) This 10 mn loan, should we show this as a ‘non-current’ liability in Balance sheet?
2) cost of borrowing: I want to know that 8% for 6 months on $10m = $400,000, should this also be added to the loan amount of 10 mn? Or should we show this separately in B/S?
3) By ‘Both’ I meant, Loan amount (10 mn) and interest ($400000) – they both have to be shown under ‘non current’ liability in B/S?

The printed solution says:
2) Cost of borrowing: The finance costs associated with the construction must be capitalised up to the date the asset is ready for use. The appropriate amount is $400,000 ($10 million x 8% x 6/12).
3) Payment to construction team: The other overheads associated with the construction of the factory of $4·5 million ($750,000 x 6) will be included as part of the construction cost of the factory.
The solution doesn’t say anything about the 10 mn we have borrowed.

[Swati]

Thank you Sir!

Well, I have a small question on leases. Its from December 2102 paper.
There is a part in the lease question which says:
On 1 January 2012, Omega began to construct a factory and borrowed $10 million to finance the construction. The effective rate of interest on the borrowing was 8% per annum, before tax. Omega actually spent $10·6 million on the construction materials but of this amount, $800,000 was on materials that were damaged before they were used and had to be destroyed.
The factory took six months to construct and the construction team were paid at a total amount of $750,000 per month throughout the construction period. The factory was ready for use on 1 July 2012 but production did not begin until 1 September 2012.
The year ends on 30 Sept 2012.

My doubt is:
1) What do we do of this 10 mn loan that has been taken at 8 %?
2) And how do we treat the cost of borrowing (i.e. i believe 8% of 10 mn for 6 mths)? Should they both be capitalised?
3) What to do for the payment to construction team ( $750000 * 6 mths)? Do we capitalise this also? Why?

Regards,
Swati

[Swati]

Dear Sir,

From where can I practice more questions of Lease (ias 17) in order to gain confidence?

(I am preparing for Dec 2014 Dipifr Exam)

[Swati]

Hi Dean,

Many Congratulations !! 🙂

Regards,
Swati

[Swati]

Sir, just to write the inventory values more clearly:

Amount in inventory of Subsidiary at:

30/9/2006 ($’000) = 2,000 (closing)
30/9/2005 ($’000) = 1,200 (opening)

[Swati]

Dear Sir

Regarding the part (1) of my query:
Actually the inventory position was like this: (I mistakenly interchanged the figures for opening & closing Inventory.

Amount in inventory at: 30/9/2006 ($’000) 30/9/2005 ($’000)
Subsidiary: 2,000 (cl.) 1,200 (op.)
Profit is 25% mark up on Cost. Sales to Subsidiary is say, 10 mn.

Can I say that out of the 2000 worth of inventory lying in the end with Subsidiary, 800 is from the current year’s purchase of 10 mn? And hence, we will concerned about the profit element on this 800. i.e 25/125 * 800 = 160
or
(just to understand the logic, can I also say that we have to calculate the profit element from the inventory of the current period and which is still lying with the subsidiary. So from above figures,1200 was of last year, inventory worth 10,000 (10 mn given) was purchased (from Parent) and sold 9200 (b/f) worth of inventory to outside party and then finally left with 2000 (given)
Does my logic make sense?

[Swati]

Dear Sir,

While doing the Consolidation questions from BPP revision kit (Dipifr) there were few things I came across and I am not clear about their accounting treatment.

1) While calculating ‘pup’, we have to see how much is the profit element in the inventory still there with the buyer (say Subsidiary is the buyer & Parent is selling). Right. Now we are given the amount of opening (2000,000) and closing inventory (1200,000) of Subsidiary in respect of goods purchased from Parent. Profit is 25% mark up on Cost. Sales to Subsidiary is say, 10 mn. So how do we calculate the pup when opening & closing inventory is given?

2) What does it mean when ques says: the FV adjustments arising on DOA of Subsidiary will be regarded as Temporary Differences for the purposes of computing Deferred Tax. Any unrealised profit on Inter entity trading will also be regarded as Temporary Differences for this purposes. – What would be the accounting treatment & why?

Regards,
Swati

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