Vintage is a public company that prepares financial statements inaccordance with IFRS Standards. Its reporting date is
Question:
Vintage is a public company that prepares financial statements inaccordance with IFRS Standards. Its reporting date is 31 March 20X3.
Vintage entered into a contract with a customer to supply electrical
equipment. Vintage has developed the equipment in close
collaboration with the customer but has contracted with a supplier for
its manufacture, in which the supplier will deliver the equipment to the
customer.
Vintage agrees to pay the supplier directly and invoices the customer
with the agreed selling price at cost plus 25%. It is also agreed that any
equipment defects are the responsibility of Vintage.
The directors of Vintage are not sure of how to account for this
transaction, either as a whole transaction as a principal or just a
commission as if an agent.
Impairment
Vintage also acquired a Cash-Generating Unit (CGU) years ago. At 31
March 20X3, the directors of Vintage were worried that the value of
the CGU had declined because of a reduction in sales due to new
competitors entering the market and other key market indicators. At
31 March 20X3, the carrying amounts of the assets in the CGU before
any impairment testing were:
m
Goodwill 3
Property, plant and equipment 10
Intangible assets 18
Cash 1
----
32
----
The total fair value of the CGU's assets at 31 March 20X3 was 27
million and costs to sell were 400,000.
The CGU's cash flow forecasts for the next five years are as follows:
Year ended Pre-tax cash flow
m
31 March 20X4 8
31 March 20X5 7
31 March 20X6 5
31 March 20X7 3
31 March 20X8 13
The pre-tax discount rate for the CGU is
8%.
The directors of Vintage require your group's advice about accounting
for the impairment of the CGU.
Decision to sell
During the reporting period, Vintage made the decision to sell some
assets, previously classified as property, plant and equipment. These
assets were not sold prior to the reporting date. Vintage also disposed
of a component of its business. The directors were required to apply
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
This IFRS Standard specifies the accounting treatment of assets held
for sale and the disclosure and presentation of discontinued
operations.
Lease
While filing invoices, the company's accountant found a lease
agreement that allows it to use a specialised machine for two years.
The lease commenced on 31 December 20X1. Vintage must make
annual payments of 2 million. The first payment commences on 31
December 20X2. The interest rate implicit in the lease is 6%. No
accounting entries have been posted. The accountant queried this
accounting treatment, but the finance director became angry and
threatened the accountant with disciplinary action on the grounds that
she was not a 'team player'.
Required:
1) With regards to the impairment of the CGU, how should Vintage do the accounting for the impairment?
2) Show the accounting entries and discuss the accounting treatment that Vintage should
adopt to address the lease and any relevant ethical issues
arising.
Intermediate Accounting
ISBN: 978-0071339476
Volume 1, 6th Edition
Authors: Beechy Thomas, Conrod Joan, Farrell Elizabeth, McLeod Dick I