Whilst acknowledging the importance of high quality corporate reporting, the recommendations to improve it are sometimes questioned on the basis that the marketplace for capital can determine the nature and quality of corporate reporting. It could be argued that additional accounting and disclosure standards would only distort a market mechanism that already works well and would add costs to the reporting mechanism, with no apparent benefit.

It could be said that accounting standards create costly, inefficient, and unnecessary regulation.

It could be argued that increased disclosure reduces risks and offers a degree of protection to users. However, increased disclosure has several costs to the preparer of financial statements.

Required

(a) Explain why accounting standards are needed to help the market mechanism work effectively for the benefit of preparers and users of corporate reports. (15 marks)

(b) Discuss the relative costs to the preparer and benefits to the users of financial statements of increased disclosure of information in financial statements. (20 marks)

Total 35 marks

Question 2

Required:

(a) How does IAS 37 define a contingent liability? (5 marks)

(b) How should contingent liabilities be treated in the Financial Statements? (5 marks)

After a wedding in 20X8 ten people died, possibly as a result of food poisoning from products sold by Callow Co. Legal proceedings are started seeking damages from Callow but it disputes liability. Up to the date of approval of the financial statements for the year to 31 December

20X8, Callow's lawyers advise that it is probable that it will not be found liable. However, when Callow prepares the financial statements for the year to 31 December 20X9 its lawyers advise that, owing to developments in the case, it is probable that it will be found liable.

Required:

(c) What is the required accounting treatment? (15 marks; equal marks for each case)

• At 31 December 20X8?
• At 31 December 20X9?

Total 25 marks

Question 3

Crinckle Co bought an asset for $10,000 at the beginning of 20X6. It had a useful life of five years. On 1 January 20X8 the asset was revalued to $12,000. The expected useful life has remained unchanged (ie three years remain).

Required:

(a) Account for the revaluation and state the treatment for depreciation from 20X8 onwards (10 marks)

(b) What are the purposes of providing for depreciation? (10 marks)

Total 20 marks

Question 4

At 1 January 20X2 the fair value of the assets of a defined benefit plan were valued at

$1,100,000 and the present value of the defined benefit obligation was $1,250,000. On 31

December 20X2, the plan received contributions from the employer of $490,000 and paid out benefits of $190,000.

The current service cost for the year was $360,000 and a discount rate of 6% is to be applied to the net liability/ (asset).

After these transactions, the fair value of the plan's assets at 31 December 20X2 was $1.5m.

The present value of the defined benefit obligation was $1,553,600.

Required

Calculate the gains or losses on re-measurement through Other Comprehensive Income

(OCI) and the return on plan assets and illustrate how this pension plan will be treated in the statement of profit or loss and other comprehensive income and statement of financial position for the year ended 31 December 20X2.

Total 20 Marks

Answer rating: 100% (QA)

Here are the answers to the questions Question 1 a Accounting standards are needed to ensure quality and comparability of corporate reporting They pro... View the full answer