[trainee1]

Dear tutor,
Thanks for your answer.
Yes, I do 100% agree with you. But all my problem is that the answer of ACCA says something different.

I copy and paste the ACCA answer for you ( it relates to DipIFR exam, June 2020, question 2, note 2, purchase of machine ):

The cumulative gains will have been accumulated in a cash flow hedge reserve and the inclusion of these gains in property, plant and equipment will be achieved by a direct transfer out of this reserve. This transfer will not affect other comprehensive income.

my question is that why it says the transfer will NOT affect other comprehensive income? Why we should not report the number in OCI?!!!! I am confused.

Thanks a million.

[trainee1]

Hello sir and thank you for your answer.

Unfortunately it is yet not clear for me 🙁

in the past papers there are two questions regarding cashflow hedge.

One of them is about buying an inventory (June 2011 Q2 part a) In that example, when we wanted to transfer the cashflow reserve to inventory value (resulting to increase the value of the inventory), the transfer was through OCI. so here we had reclassification to PL.

But in another example (June 2020, question 2, part b) which was about buying a PPE, when we wanted to transfer the cashflow reserve to inventory value (resulting to decrease the value of the PPE), the transfer was NOT through OCI. it was directly through reserve. so no reclassification.

My question is why our approach is NOT the same in the both cases. in both cases the transfer would adjust the value of the asset (inventory or PPE) and as the result on both case our PL would be affected ( inventory through COGS and PPE through depreciation). However in the case of inventory, we are reclassifying, but for PPE the reclassification through PL never occurs.

[trainee1]

Hello dear tutor,

Hope you are fine.

Why in this example the gain was transferred DIRECTLY from RESERVE to PPE?
Why we didn’t reclassified it through P&L as stated in the opentuition notes?

I mean:
Dr OCI
Cr PPE

instead of:
Dr Reserve
Cr PPE

Thank you for your help

[trainee1]

Sorry, I wrongly wrote “wrong”!!! 🙁
My question is why that sentence is correct?! Because as I know we can sing forward contract with long periods too. Why currency swaps cover longer period?

[trainee1]

Dear John,

Hope you are fine. I am fine with the calculation of this question. I just have a question about calculation of cost of equity.
As far as I understood, anyway that we use for calculation of cost of equity should give the same result. By using the CAPM model, the cost of equity = 12%, but if we use the regular method (dividend/ex div price) it becomes = 90/610 = 14.75%.
Why this method does not give the same result as CAPM?

Thanks

[trainee1]

Thank you very much for your answer.

But unfortunately I just checked a question from ACCA and its answer confused me! They have deducted the deferred tax from the seller!! 🙁

I mean according to ACCA, the PUP is recognised net of deferred tax. So say PUP is 1000 and tax rate is 10% , then they have deducted 900 from the SELLER. so it means they are adding the deferred tax to the seller too and this is really confusing for me! Why? I can’t understand at all 🙁

[trainee1]

Sorry, there was a typing mistake in the above post. we have to recognise $100 as deferred tax asset …

[trainee1]

Honestly, I also did some search on the internet about the first questions ( why borrow at the same rate).

What I understood was that it seems they use something called “arbitrage process” for the proof of their theory and we assume that for example we sell 10% of an geared company, then borrow some money (which I really don’t get why we have to suppose we borrow some money) and then we use total money we have to buy shares of an ungeared company. and at the end it was shown that we are making profit after these transaction, so this could lead to adjust the price of two firms after a while and making their value equal! Full of ambiguity 🙁

[trainee1]

Sorry, there were some typing mistakes in the above post. So I just amend it:

So far I though there are two propositions:
1– M&M proposition without tax
2- M&M proposition with tax
But I feel i am wrong! I mean it seems there are FOUR propositions! Is it correct to say in fact there are 2 main theories, and each has 2 proposition. I mean:

1 – M&M first theory (without tax)
1-1: Proposition 1: Cheaper debt is exactly offset by increase in cost of equity.
1-2: Proposition 2: WACC = Ve*Ke/(Ve+Vd) + Vd*Kd/(Ve+Vd)

2 – M&M second theory (with tax)
2-1: Proposition 1: The company should borrow as much as possible ( because of tax shield)
2-2: Proposition 2: WACC = Ve*Ke/(Ve+Vd) + Vd*Kd*(1-t)/(Ve+Vd)

[trainee1]

Ohhh, Hello again !!!

I also found the answer to the second question! https://opentuition.com/topic/fubuki/ :))

They both have already been answered by you. Thank you!!!!

[trainee1]

Hello again!

I found the answer to my first question at https://opentuition.com/topic/fubuki-co/ 🙂
So would you please just answer the second question?

[trainee1]

Hello Dear Moffat,

The data of the question (Fubuki December 2010 , Q2) are as follows:

Cost of equity=14%
Tax rate=28%,
Ve=37.95
Vd= 37.952
Rf 4.5%
Risk Premium=4.0%

My solution:

1- Find Beta equity of Haizum:
14%=4.5% + Be * 4%, So Be=2.22

2- Ungeared B equity to find B asset:
Ba = 37.95*2.22/(37.95+37.952) = 1.11

3- Use CAPM:
Cost of equity = 4.5% + 1.11* 4% = 8.94%

I have two issues regarding this question:
1 – Why my solution is not the same as the answer of ACCA. they calculated cost of equity as 10%.

2- Why we assume that the project if fully financed through equity? In the paragraph above the last paragraph it says that Fubuko intends to raise finance through debt. So why we are just calculating the cost of equity at all!

Your help is much appreciated.
Thanks

[trainee1]

Sir, would you please solve and find Ke(u) with the CAPM approach for this question?

[trainee1]

Thank you very much

[trainee1]

Hello dear tutor

Hope you are doing well

My question is about indirect labour (Grade B employees)
if Grade B labour worked 45 hours of overtime with the direct request of customer, how should we account for overtime premium(ie 45*6*0.5=135) and basic(ie 45*6=270)?
Is it direct cost or indirect cost?

In my opinion (according to Ch 7 of OT notes) all related costs of indirect labours must be treated as indirect costs.

Also for me this sentence “None of grade B’s pay is a direct cost because the question says they are indirect labour” means that all related costs of indirect employees are indirect because they are INDIRECT labour and so in my example it is NOT relevant whether their overtime is with direct request of customer or not.

Please let me know if I am wrong.

Thank you in advance

[trainee1]

Dear tutor,

Thank you for your lectures. Just a short question, In sale and leaseback when we have to recognise a prepayment (because the proceeds is less than the fair value of the asset), then we have to amortise it over the lease term on the straight line basis ? yes?

I mean for example we have to recognise a prepayment = 10M and the lease period is for 10 years. So we should amortise it over 10 years, releasing 1M to P&L each year? Am I correct?

Also is there any rule here about the amortisation useful life? I mean we have to amortise over the lease period or shorter of lease period and useful life of the asset? or can we use reducing balance method instead of straight line method?

Thank you for your help in advance

[trainee1]

Dear John,
would you please explain why real interest rate should be the same in both country? I am happy with the calculations and the calculation also proves this fact that real interest rate are the same in both country. But I can not get the logic behind it! Does it really mean that real interest rate in all countries of the world are the same as each other?!!!

(I also watched you lectures but yet did not understand it yet)

thank you

[trainee1]

Dear John,
Thank you for your reply.

Honestly, I already have watched your nice lectures ( and thank you very much for preparing them)

But I still have not understand a point. Maybe my question was not clear. Could you please let me to explain my question with an examle:

Suppose we have a company with the following structure:
Equity: $100 m with cost of 20%
Debt: $200 m with cost of 10%

So the overall WACC of the company is: 100*20% + 200*10% ÷ 300 = 13%.

Now let suppose a company want to invest $50 m in a new project which is more risky (all the new finance is through equity). So after calculation we undestand the cost of equity is 25% as it is more risky than the current activity of the business. ( i have no problem to calculate this 25%. No problem with ungearing, gearing and using CAPM model and … all of these things are clear for me)

But now my question is why we use 25% for the project appraisal?
I was expecting to use the overall WACC again. I mean the strucute of the company now :

Equity: $100 m with cost of 20%
Equity: $50 m with cost of 25%
Debt: $200 m with cost of 10%

So the overall WACC of the company is: 100*20% + 50×25% + 200*10% ÷ 350 = 15%.

Why we dont use the OVERALL WACC which is 15% instead of 25%. Yes I know 25% is the cost of capital for the new project but the overall effect of this project is that the cost of capital of the entity becomes 15%. So why not using 15%??

Hope my question is clear.
Thank you in advance

[trainee1]

Dear Moffat,

I have no problem regarding the calculation of the above question. But I am confused with the wording of the question. the question is asking what is the DIRECT labour cost?
As far as I know the money which is paid for the idle time is an INDIRECT labour cost.

In fact I think :
Total labour cost = 10,500
Direct labour cost = 6 hrs * $7 * 200 = 8400
Indirect labour cost = 10,500 – 8,400 = 2,100

I mean if the question were asking about the TOTAL labour cost, then the answer was 10,500 but here it is clearly asks for the DIRECT labour cost)

Would you please help me on this matter.
Thanks

[trainee1]

Hello again.

It seems that both methods have the same effect on SOPL
Net method =20000

Gross Up method=5000+15000(Dep. =90000/6)=20000

i forgot to take in o accounts the effect of Depreciation in the second method.

Thank you for your time and sorry for my mistake.

[trainee1]

Hello

Thank you for your reply

[trainee1]

Hello

Thank you for your reply.
I will transfer the question to FR forum.
Thanks.

[trainee1]

Thank you.
Sorry but I think I am a little confused yet 🙁

I read your reply few times. What I get from your reply is:
4700/0.92 is in fact the trend , removing ONLY the seasonal variation.
and
the 4300 (the underlying trend) is the trend , removing ALL variations not just seasonal variation

Is it correct?

Thank you

[trainee1]

Hello again
I hope that you are well.
I am studying FR right now.

Thank you

[trainee1]

Hello Sir.
Thank you for your reply and I am sorry for my bad question.

in your simple example if that reversed amount(100) was previously debited to SOPL only then for reversal i agree with your entries.

But what if part of that reversed amount(100) was previously debited to R.R (eg 70)-because the entity has revaluation reserves- and the remainning was debited to SOPL(30)-which is lower than the difference between 75 and 110(ie 35).
what is the amount to be Credited in SOPL and R.R in this case(which one is correct)?
1-D;PPE 100
C:SOPL 30
C:R.R 70

or
2-D:PPE 100
C:SOPL 35
C:R.R 65

thank you for your time

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