Question 1: Discuss the ‘primary users’ of general-purpose financial reports?
Answer
These reports are prepared to show all types of financial information that is needed by various stakeholders to make decisions. The cash flow statement of the business’s retained earnings statement, income statement, and balance sheet are key statements that are included in a set of general-purpose financial statements.
There are different types of primary users of these financial reports of business because the information needs of each user are different. The major and common concern of all primary users is to determine the financial performance of the business and take decisions accordingly. Some of the primary users are internal stakeholders, and some of these are known as external stakeholders.
The key primary users are given below:
Investors or shareholders: These are the individuals who invest risk capital in a business. This increases their concern to know how much return they can expect by investing. They want financial information to decide for further investment.
Lenders: These are usually financial institutions such as banks that provide credit to a business. They are concerned about the creditworthiness of the business. Based on looking at general-purpose financial reports, they decide whether or not loans are offered to the business.
Other creditors: They may include the suppliers who sell goods or services to businesses on credit. They want financial information to decide the provision of goods on credit.
Question 2: Looking at different literature, discuss if there is a unique definition for social responsibility reporting and if social responsibility has a connection with accountability and accounting?
Answer
All businesses have certain impacts at the social, environmental, and economic levels due to the business activities. A report that is issued by a business about these social impacts is defined as social responsibility reporting. CSR report is the common name used for social responsibility reporting. A CSR report is based on communicating the actions and commitments of business from an environmental and social perspective. By doing so, key stakeholders become aware of how the company is integrating the principles of sustainable development into the operations.
Social responsibility reporting has the following internal organizational benefits:
Social responsibility reporting enables businesses to identify and estimate the level of impact that could be created by the operational activities. The operations and activities could have an impact on the economy, society, and environment. These reports are issued to ensure social responsibility of protecting the social rights of people and the environment. Companies could also reduce operational costs and improve operations based on the use of data presented in the sustainability report.
Social responsibility reporting has the following external organizational benefits:
Companies can increase their engagement with external stakeholders by preparing and considering CSR reports. Companies can gain positive and sound financial performance by providing financial information regarding short-term, medium-term, and long-term projects.
CSR reports help the key stakeholders or interested parties to assess the commitment of an organization to the protection of the environment from actions that could be impactful for the environment. These reports are helpful for the parties concerned to evaluate the key targets of the company.
In the context of consideration of the relationship that exists between accounting, accountability, and social responsibility, it could be seen that there is no direct relationship between them. The key reason is that accounting and accountability are mandatory aspects, but social responsibility shows how companies are taking care of environmental and social needs.
Question 3: Discuss the inclusion of the expenses incurred in the initial evaluation and exploration stage of a project involved with oil extraction into asset or inventory. Further, when should the organization recognize the expenses related to restoration/rehabilitation at the cessation and conclusion of the mining activities?
Answer
Definition:
An organization can start searching for mineral resources such as natural gas, oils, minerals, and other non-regenerative kinds of resources by obtaining a license or right of exploration. The costs associated with the process of exploring these mineral and natural resources is known as exploration cost. The right to explore or extract natural or mineral resources could be obtained based on the determination of commercial viability and technical feasibility.
Accounting for expenditures associated with evaluation and exploration:
A company involved in the exploration of mineral resources must recognize the relative expenditures by developing an accounting policy according to the rules of IFRS 6.
It might be possible that the company has deferred its expenditure of exploration and evaluation as an asset in the past, even in situations of highly uncertain outcomes. It could be also possible that some entities have expensed the expenditures of exploration and evaluation until the establishment of commercial viability and technical feasibility for extraction of mineral resources.
According to rules of IFRS 6, the recognition of cost is carried out by including the following components in cost:
- Getting a right of exploration
- The cost associated with exploratory drilling
- The cost associated with sampling and Trenching
- The expense occurred to conduct a study of geology and topography
- The expense incurred for creating commercial viability and technical feasibility of mineral extraction.
Rehabilitation and restoration-based Expenses:
It is a must for the company to recognize the rehabilitation and restoration-based expenses at the time of cessation and at the time when mining activities are concluded. This is the basic requirement of IAS-37. The recognition after mining activities is based on the creation of obligation at the time construction is started.
The creation of obligation could be either based on regulatory requirements or based on third parties’ valid expectations that have been created by the organization.
The initial estimate of costs associated with the item’s dismantling and removal and restoration of the site into asset’s cost is also included in IAS 16 Property, Plant, and Equipment states.
Question 4: Ginger Ltd is marketing a ‘surfing bundle’ in which, for $2200, it provides customers with a surfboard (which retails separately for $1700), a wetsuit (which retails separately for $500), and five lessons (which retail separately for $400). You are required to determine:
a) Whether separate performance obligations exist, and to explain why you made this Judgment.
b) How much of the transaction price to allocate to each performance obligation?
Ans: a)
The promises were included in the contract with a customer, and these promises are based on transferring of goods and services that are distinct. So, yes, a separate performance obligation exists.
If both of the following aspects are met, then goods and services included in a contract would be distinct.
- Good or service gives benefit to the customers either on its own or together with other readily available resources
- The promise of transferring goods or services that has been made by the entity could be identifiable as separate from other contract-based promises.
Ans: b)
The table given below indicates the transaction price that must be allocated to each performance obligation.
| Surfing bundle Price | $2,200 | |
| Description | Stand-alone Price | Price Allocated |
| Surfboard | $1,700 | $1,438.46 |
| Wetsuit | $500 | $423.08 |
| Five lessons | $400 | $338.46 |
| Total: | $2,600 | $2,200.00 |
Question 5: An asset having a cost of $200 000 and accumulated depreciation of $40 000 is revalued to $240 000 at the beginning of the year. Depreciation for the year is based on the revalued amount and the remaining useful life of eight years. Shareholders’ equity, before adjusting for the above revaluation and subsequent depreciation is as follows:
| Share capital | 600 000 |
| Revaluation surplus | 90 000 |
| Capital profits reserve | 170 000 |
| Retained earnings | 140 000 |
| Total | 1 000 000 |
Required:
Prepare journal entries to reflect the revaluation of the asset and the subsequent depreciation of the revalued asset. Which of the equity accounts would be affected directly or indirectly by the revaluation?
Answer
| Particulars | Debit | Credit | |
| 1 | Accumulated depreciation | $40,000 | |
| Asset | $40,000 | ||
| (Charging Accumulated depreciation) | |||
| 2 | Asset | $80,000 | |
| Revaluation surplus | $80,000 | ||
| (Revaluation of Asset) | |||
| 240,000-160,000= 80,000 | |||
| 3 | Depreciation | $30,000 | |
| Accumulated depreciation | $30,000 | ||
| (Depreciation for the year) | |||
| 240000/8 = 30,000 |
Revaluation’s effect on equity accounts
A revaluation surplus would be increased to the amount of $80,000 and based on consideration of excess depreciation charged, this revaluation surplus would be transferred to retained earnings.
Question 6: ABC Ltd acquires 100 percent of RedCarpet Ltd on 1 July 2021.
ABC Ltd pays the shareholders ofRedCarpet Ltd the following consideration:
| Cash | 35 000 |
| Plant and equipment | fair value $125 000; carrying amount in the books of ABC
Ltd $85 000 |
| Land fair value |
$150 000; carrying amount in the books of ABC Ltd $100 000 |
There are also legal fees of $95 000 involved in acquiring RedCarpet Ltd.
On 1 July 2021 RedCarpet Ltd’s statement of financial position shows total assets of $300 000 and
liabilities of $150 000. The fair value of the assets is $400 000.
Required:
- a) Has any goodwill been acquired and, if so, how much?
- b) And discuss the potential for including associated legal fees into the cost of acquiring
RedCarpet using appropriate accounting standards.
| Answer (a)
Date of Acquisition: |
1-Jul-21 | |
| Cash | $ 35,000 | A |
| PPE (Fair value) | $ 125,000 | B |
| Land (Fair value) | $ 150,000 | C |
| Consideration given | $ 310,000 | D=A+B+C |
| Fair value of net assets: | $ 250,000 | E |
| Goodwill acquired | $ 60,000 | D-E |
| Legal fees | $ 95,000 |
Answer (b)
According to the rules presented by Business Combination (IFRS 3), it is not just that all the costs associated with acquisition, even costs that are directly related such as valuation, accounting, legal fees, could not necessarily the part of costs of acquisition and these must be recorded as an expense.
