Ribby Group – June 2008

“1. item iii, the c.v. of the foreign building in 08 is cost:40 dinars/10 ex. rate in 07 – drpn:40 dinars/20 yrs =$3.8, BUT according to 08 rate- 12, I translated 38 dinars to 3.17, then I use 3.17 to compare with recoverable value $3 coming from 36 dinars at 12, SO my impairment loss is 0.17. OR I just get 2 dinar of difference from 38 and 36, then translated @12, the impairment loss is still 0.17. Why wrong?”

You obviously agree that the carrying value at the date of the impairment review is $38m dinars (= $3.8m before the impairment review) and that the revalued amount should be $36m dinars (= $3m after the impairment review)

When the asset was purchased a year ago, the accounting for it would have translated at the historic rate of 10 and depreciation would be based on that figure giving the carrying value of $3.8. Then we review and the $ value at the year end has fallen to $3 ($36m dinars / closing rate)

I know FOR SURE that you can see where the figures are coming from but I cannot think of the words necessary to clear up your confusion

“2. how to understand answer paper working vii for intra-group sales, I really don’t understand Cr. CL 6m. Can you give more double entry for both H and R respectively for this adjustment.”

This activity is known as window-dressing – an activity entered into specifically to distort the view shown by the financial statements and as such, AS A BARE MINIMUM, the details of the intra-group inventory sale transaction should be fully disclosed.

But we need to go further than this in this situation. The question tells us that the directors plan to do it again in the interim financial statements if the subsidiary is not sold by that date. Included within the Framework is the requirement of “fair representation” and clearly these financial statements, if left uncorrected, will not be fairly representing the state of affairs and the results of Hall

In order to satisfy that criteria, the financial statements should be adjusted by the reversal of this manipulative transaction which is distorting the view of the statements.

Incidentally, as a P7 point, if the directors refuse to amend, the auditor would most likely issue an adverse opinion on the basis that the financial statements do not show a true and fair view because this manipulation has changed the view of the financial statements in a pervasive way

Translate opening value at opening rate and closing value at closing rate

The opening value at opening rate will have depreciation at the same opening rate

So 40 – 2 = 38 translates to 3.8

Closing (after impairment) 36 translates to 3

Forex .8

Good to know that F3 is still useful in the higher reaches of P2 🙂