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I thought debt has something to do with payments on specified dates 🙁
With both B type of shares there was no compulsory payments on specified dates.for 1st company (something like cavon) it was said that A shares are ordinary shares. Payment of dividends is not mandatory. However, dividend can only be paid to B shares after payment to A shares
To me it looks like A shares were not ordinary shares and they were preference dividend. However, B shares are only paid after A shares are paid dividend which gives an indication that these are ordinary shares and so are equity.
For second scenario Lidan it was said that these include redemption option and the settlement can be made in cash or issue of A shares.
So it looks like these were convertible bonds, as it includes the redemption option in both (equity and cash). so it is part equity and part debt. That’s what I guessed in the exam. Hope it was correct. Best of luck everyone.
Hi. Just confirming… in question 1 who owned the subsidiary called option? Was it Merchant or the subsidiary?
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The group was made up of a parent and two 60% subsidiaries both controlled by the parent. Parent still controlled subsidiary one after the 8% sale as this was only a transfer of equity between owners and didn’t effect the I.S. At all. Parent controlled subsidiary two for 6 months and for the other 6 months it would be treated as an associate as parent had sold 40% and equity accounting is used.
I thought it was very hard overt all
Q1. relatively ok but allot was going on for such a short period of time.
I was not sure on sbp i calculated 6 employees as only one director was expected to leave,
Loss on inter-company sale- i added back to cost of sales, not sure how to adjust the $8m the ye figure
Q2 was challenging, i thought
a) i thought it was consolidated with information, i thought investment property then i could not finish. that was the last one i was writing on
b) was not intangibles, it was not purchased, the contract was only for 3 years, the intangible recognised only if purchased?
c) i thought it was confusing. leasing with other capitalisation cost of new build, I’m not sure
d) i thought was asset held for sale, fair value with measurement, it was very litle time to read and think.
Q4
a) was very confusing,
all based on technical articles debt equity swap,
was it financials instruments, current development
b) was about a and b shares, b shares was option for cash settlement ????it was there obligation??
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I think they wanted us to discuss the positives and negatives of FV
Below is how I tackled it. wanted to discuss different levels of valuations but decided against it as time was lited.
Examples of positives
1) using observable inputs esp. for level 1 inputs, The price is the one quoted on the market without adjustments. It is therefore more reliable than other measures (NRV or VIU).2) Aids comparability as the assets and liabilities are traded on the stock market and therefore all entities on the same stock market will have the same value for the identical assets or liabilities.
Negatives
1) Because it flactuates with the market, it gives different valuations of the same asset/liability at each measurement date making profits/earnings volatile.2) Creates artifical profits and losses which may never be realised, especially if an asset or liability is held for a longer period. It’s ok for Held for sale or for trade as the sale transaction would be eminent. But for long term assets, IAS16 cost or VIU could be a better determinant of value.
3) it is not applicable to all assets. For instance Inventory is held at NRV or cost. Plus those unique equipments specific tailored to an entity, FV is not the best value as level 1 and 2 observable inputs may not be available. Therefore VIU is more appropriate valuation than FV.
4) Some times company’s transactions are not reflected in the price of it’s shares at closure of business for the day. Therefore, on that particular day for example the advantages of a merger had not been analysed by the stock market before closure of business.
5) Share price may be affectd if there is a CSR scandal even if the underlying financial performance of the entity is not affected. For example, Marks and Spenser share price was affected when Sir Stewart Rose was appointed both as chairman of board and chief executive. Reduction in the Fair value of the share in this case had nothing to do with financial performance but rather not separating the two positions.- Topics: 0
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Qt 1 A) Goodwill impairment reversed till original goodwill level. 2m Adj required.
Option sale gain of 24 million if I remember.
Employee compensation 7.5 M in P/L 2 M in OCI
Share based compensation 1.86 M in previous Year 2.345 M in current year. Current year Expense 0.5M
Finance costs of 3M reclassed from P/L to OCI as it is effective portion of hedge
Associate income of 1.5M (20% of 7.5M)
PPE 4.56M revaluation. 1.96M OCI and 2.6M P/LB)I approached in a very weird manner.
PT1 Inventories-Lower of Cost or NRV but no room for upward increase. Hence Understate FV during rapidly rising prices.PT2 PPE Cost model followed by many companies. Drastically understates fair value of Land.
Pt3 IFRS 3 allows correction of some problems by allowing recognition of Intangibles and Fair value adjustments
PT4 Does not allow recognition of Internally generated Goodwill. Research costs expensed understate value of Knowledge based industry companies.
C) I discussed the dilemma faced by the Financial Controller. I was not sure whether they asked Finance Director or Controller. Thanks for ur responses on that.
Job loss/lower share based compensation/ little bit about finance lease vs Op lease. The land portion should be fairly easy ascertain. Must make sure statements are true to substance over form. Inform CEO/CFO/Board of directors/Auditors if no resolution.3A) Minco Revenue criteria. All contradicted by recognizing. Recognize only sale of land..which will be eliminated on consolidation.
b) Tennis player:. If contract enforceable $20,000 Prepaid Intangible asset. $6,667 expensed each year. If not enforceable expense full amount. $50,000 expensed each year.
May make provision for bonus if Minco contracts most of the top players and very likely it has to pay out some money each year.
c) Repair and maintenance. Provision or Contingent Liability for internal repairs.
Floor expansion. Leasehold improvements. Amortize over 6 years.
General repairs. Nothing to be done if no significant damage
Roof repair. Confirm with Landlord get estimate and book provision right away.
d) PPE. W/down to 2.4M 0.12 M loss. Revalue to 2.52M only not beyond. Disclose sale in notes as it happened after period.4A) Difference between debt and equity. Contractual payments interest and principal. Call-ability.
B) Changing the two effects financial ratios/perceived riskiness/ability to get funds/Supplier line of credit
c) 1) Equity as no contractual payments. Stopping Dividends of Class A stops payments on Class B. Not callable by owners of Class B.
2) Equity again. NO fixed payments. Can be redeemed by company at their option within 2 years. Even then has to pay in either cash or shares.Please comment whether any of this matches your answers.
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My thoughts exactly. See my answer description.
For Lidan, I accounted the norminal value of $1 as a debt, as you have a choice to redeem at norminal or for the share’s. Thus as the shares has always been above $5, the option to choose the share will be likely, therefore I choose to write that the difference will be treated as an option to convert to equity
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@benjamin…but they do not have to be redeemed. It is at the company’s option to redeem.
If you do one mistake in almost every calculation in Q1 and Q2 but then write good theory in Q3… do you have a chance to pass?
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Thank God for the exam….hopefully to earn the full mark
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I have attempted
I came to same conclusion as Benjamin for Qu 4 – Lidan have the choice between redeeming the shares or not – but their options were issuing shares at $10 or cash at $1 – no brainer therefore ‘probable’ future outflow..
i thought reversal of goodwill impairment was not allowed, or the subsequent increase?
I think i got 15m goodwill initially, then it is impaired by 20%, so goodwill at 1 may 2013 is $12m.
Then, it said it was reversed, which would now become $2m ABOVE the ORIGINAL goodwill, so i take it now as $17m, and it seems that there’s a reversal of $5m. So i took out the $5m from the “other income” as it was said that the gain on reversal was included in other income.
I attempted Q4 as i’m having a serious headache after answering Q1 n Q2. My plan was answering Q3, but seems like the last 45minutes, i really can’t think anymore, so i attempted Q4 part a and b. I stated about IAS32 definition of liability and equity and the implication if it has been misclassified (sounds a bit to F9 but really can’t think anything else). I almost given up hope during the exam, the headache was seriously killing me.
50 marks is all i’m hoping for. It’s a blessing if more, and please God-forbid if it is less.
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The Compulsory bit was very Time Consuming and confusing.
I managed to do the adjustments but couldn’t transfer to complete my Trading or Profit account.
The Section B was cool for me.
On the whole i think i run out of time a little
PLEASE HELP !!!
If you do one mistake in almost every calculation in Q1 and Q2 but then write good theory in Q3… do you have a chance to pass?
Q4 of the exam was based on this article
@ James good to see u have the same answer as mine.
I had a goodwill of 12. Goodwill was impaired in prior year by 20%. Reversal of goodwill is disallowed under FRS 36
https://www.iasplus.com/en/standards/ias/ias36 states “Reversal of an impairment loss for goodwill is prohibited. [IAS 36.124]”
Therefore there is no adjustment for the current year and goodwill is 12
That’s my answer for goodwill
Honestly i felt that the paper was quite manageable. It is very similar to the Ashanti question in Jul 2010. It had disposal in it as well. the 8% disposal was a transaction between equity holders and should be accounted for in OCI, and the disposal (control lost) would be accounted for in the P/L
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