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Financial Reporting 2nd Edition Janice Loftus ,Ken Leo ,Sorin Daniliuc ,Belinda Luke ,Hong Nee Ang ,Karyn Byrnes - Solutions
Distinguish between an operating segment and a reportable segment.
Discuss the concerns raised about IFRS 8 (AASB 8) when it was first introduced. Compare the views of users and preparers when analysing these concerns. Do you think the concerns expressed by users will eventuate?
Explain what the ‘management approach’ used in AASB 8/IFRS 8 means.
AASB 8/IFRS 8 anticipates that some entities not within its scope might voluntarily disclose segment information. Do you think many reporting entities would voluntarily provide these disclosures? Explain your answer.
Segment disclosures are widely regarded as some of the most useful disclosures in financial statements because of the extent to which they disaggregate financial information into meaningful and often revealing groupings. Discuss this assertion by reference to the objectives of financial reporting
Accounting for cash‐settled share‐based payment transactions LO3, 8 Abernethy Ltd grants 1000 share appreciation rights (SARs) to 10 senior managers, to be taken in cash within 2 years of vesting date on condition that the managers do not leave in the next 3 years. The SARs vest at
Share‐based payment with a non‐vesting condition LO3, 4, 5 An employee is offered the opportunity to contribute 10% of their annual salary of $3000 across the next 2 years to a plan under which they receive share options. The employee’s accumulated contributions to the plan may be
Application of the intrinsic value method LO6 At the beginning of 2019, Angourie Ltd grants 2000 share options to each of its 50 most senior executives. The share options have a life of 5 years and will vest at the end of year 3 if the executives remain in service until then. The
Disclosure LO9 Bodalla Ltd operates a share option plan for its officers, employees and consultants for up to 10% of its outstanding shares. Under this plan, the exercise price of each option equals the closing market price of the shares on the day before the grant. Each option has a
Accounting for a grant with a market condition LO5, 7 At the beginning of 2019, Callala Bay Ltd grants 10 000 share options to a senior marketing executive, conditional on the executive remaining in the company’s employ until the end of 2021. The share options cannot be exercised unless
Accounting for a grant of share options where the exercise price varies LO7 At the beginning of 2019, Bargo Ltd grants 3000 employee share options with an exercise price of $45 to its newly appointed chief executive officer, conditional on the executive remaining in the company’s employ
Accounting for a grant where the number of equity instruments expected to vest varies LO7 Alstonville Ltd grants 80 share options to each of its 200 employees. Each grant is conditional on the employee working for the company for the 3 years following the grant date. On grant date, the fair
Modifications to equity‐settled share‐based payment transactions LO4, 7 At the beginning of year 1, Camden Ltd grants 50 share options to each of its 120 employees, conditional on the employee remaining in the employ of Camden Ltd over the next 2 years. The company estimates that the
Cash‐settled share‐based payment transactions LO3, 8 An entity receives inventories from a counterparty in exchange for a liability based on the price of 5000 of the entity’s own shares. At the date of receiving the inventories, the entity’s shares have a market value of $9.50 each.
Equity‐settled share‐based payment transactions LO3, 4 On 1 January 2019, Ambrose Park Ltd announces a grant of 250 share options to each of its 20 senior executives. The grant is conditional on the employee continuing to work for Ambrose Park Ltd for the next 3 years. The fair value of
Categorising LO2, 3 An entity grants 10 000 shares to a senior manager in return for services rendered. Required Should the entity recognise the cost of these services as a liability or a component of equity? Explain.
Recognition principles LO2, 3 Cabramurra Ltd, a listed company, organises major sporting events. It acquires crowd control equipment in return for a liability for an amount based on the price of 1000 of its own shares. Required Is this a share‐based payment transaction? Should Cabramurra Ltd
Scope of AASB 2/IFRS 2 LO2 Which of the following is a share‐based payment transaction within the scope of AASB 2/IFRS 2? Give reasons for your answer. (a) Goods acquired from a supplier (counterparty) by incurring a liability based on the market price of the goods (b) An invoiced amount for
INCENTIVE PLANS Visit the websites of three Australian companies and access their latest annual reports. View the remuneration report within the director’s statutory report. Compare these remuneration reports and discuss your findings, especially in relation to short‐term and/or long‐term
VESTING CONDITIONS AND SHARE OPTIONS Sebastian Ltd grants its manager a share option plan conditional on the manager contributing 10% of his fortnightly salary of $3000 for the next 2 years. The fortnightly payments will be automatically deducted from the manager’s salary and held until either:
CASE STUDY VESTING CONDITIONS On 1 January 2017, Jarrod Ltd grants 2000 share options to its 10 sales staff. At this date the fair value of the share options is $50. The vesting conditions are: • the salesperson must remain with the company for a minimum of 3 years • the gross profit margin
Explain what the ‘repricing’ of share options means.
Hedged firm commitment; hedged highly probable forecast transaction; hedged recognised liability; and borrowings and interest attributable to a qualifying asset LO3, 7, 10 Aloha Ltd is an Australian company that purchases inventories and specialised equipment from US suppliers. The
Sale of inventories with no hedge, fair value hedge and cash flow hedge LO3, 7, 10 Cool Ltd is an Australian mining company listed on the ASX. The company is an exporter of iron ore to overseas steel mills. The company’s functional currency is A$ and its financial year ends on 30 June
Purchase of inventories paid in instalments; borrowing with hedged interest commitment; purchase of inventories with hedged liability to supplier LO3, 7, 10 You are the finance director of Gripweed Ltd, an Australian company listed on the ASX. The company is an importer of goods from
Purchase of inventories paid in instalments; borrowing hedged by forward contract LO3, 6, 10 You are the finance director of the Australian listed company Fire Ltd, which has a functional currency in A$. Fire Ltd purchases goods from Hong Kong and has borrowings from a US bank. The
Forward contract with cash flow hedging LO10 On 1 January 2020, Toby Ltd, an Australian company that has A$ as its functional currency, enters into a forward exchange contract to sell €300 000 on 31 August 2020. The forward contract is designated as a hedge for a sales transaction of
Forward contract with fair value hedging LO10 On 1 March 2021, Fred Ltd, an Australian company that has A$ as its functional currency, enters into a firm commitment with a foreign supplier to buy an equipment for US$100 000. The ownership of the equipment and the consideration for the
Forward contract with fair value hedging LO10 On 1 May 2021, Edmund Ltd, an Australian company that has A$ as its functional currency, purchases inventories for US$100 000 with the invoice to be paid on 30 October 2021. On the same date as the inventories purchase, Edmund Ltd enters into a
Forward contract with no hedging LO3, 6, 10 On 1 February 2020, Robbie Ltd, an Australian company that has A$ as its functional currency, enters a forward exchange contract to buy £200 000 in 6 months’ time at 31 July 2020. The contract is entered into for speculative purposes as the
Revalued assets and inventory write-downs LO3, 6, 7 On 15 July 2019, Margot Ltd, an Australian company that has A$ as its functional currency, acquires land in Paris, France, for a cash consideration of €500 000. On 1 January 2020, Margot Ltd acquires inventories on credit for €75000.
Qualifying assets LO3, 6, 7 On 1 July 2019, Remote Ltd, an Australian company that has A$ as its functional currency, enters a loan agreement with a lender in Hong Kong to borrow HK$400 000 and uses the funds to acquire components for construction of a manufacturing plant. By 31 December
Translation of sales of inventories on credit terms LO3, 6, 7 You are the financial controller of Valley Ltd, an Australian company listed on the ASX that sells premium Australian wines into overseas markets. Valley’s sales of inventories in foreign currency during the year ended 30 June
Translation of purchases of inventories on credit terms LO3, 7 You are the financial controller of Yummy Ltd, an Australian company listed on the ASX that distributes imported food products in the local market. The functional currency of Yummy Ltd is A$. Yummy Ltd’s purchases of
Translation of purchase of plant, sale of inventories and interest free loan LO3, 6, 7 Just Ltd is an Australian company. The functional currency of Just Ltd is A$. It has reporting periods ending on 31 December and 30 June. During the year ended 30 June 2020, Just Ltd entered into various
Translation of foreign currency borrowings and interest costs LO3, 6 On 1 October 2019, the Australian company Run Down Ltd enters a loan agreement with the Bank of Scotland to borrow £2 000 000 for a period of 5 years. The interest on the borrowings is payable half-yearly in arrears at the
Translation of sale of inventories on credit terms LO3, 6, 7 Haven Ltd is an Australian company that makes and sells small electronic goods. On 1 February 2020, a customer from the United States ordered some goods from Haven Ltd at an invoice cost of US$400 000 on terms FOB destination. On 30
Translation of purchase of inventories on credit terms LO3, 6, 7 Stranded Ltd is an Australian company that purchases inventories from Hammers plc, which is an English company. The following information is relevant to a recent acquisition of inventories for £300 000 pursuant to a contract with
Translation of consulting service expense LO3, 6, 7 Orstralia Ltd is an Australian company that receives management consulting services from Spin Incorporated. On 15 June 2020, Orstralia Ltd received an invoice from Spin Incorporated amounting to US$5 million for services provided over the
Translation of various foreign currency transactions and balances LO6, 7 Know Your Product Ltd is an Australian company with a functional currency of A$. The company entered into a number of transactions denominated in US$ during the year ended 30 June 2020. The closing exchange rate is A$1.00
Translation of various foreign currency transactions and balances LO3, 6 On 1 June 2020, Laurie Ltd, an Australian company with a functional currency of A$, entered into a number of transactions in NZ$ when the exchange rate was A$1.00 = NZ$1.40. Any assets arising from the NZ$ transactions are
RECOGNITION METHODS AASB 121/IAS 21 mandates the immediate recognition method where exchange differences on monetary items are recognised in the profit or loss in the period of exchange rate movement. Other methods such as ‘defer and amortise’ or ‘recognition on realisation’ are not
RECOGNITION OF LIABILITIES You are the technical accounting consultant of a Big 4 accounting firm. One of your clients is an Australian travel company that arranges package tours to overseas destinations. The client states: ‘When we arrange accommodation in foreign hotels we recognise a liability
What is meant by foreign exchange risk? How can forward exchange contracts be used to manage foreign exchange risk?
Explain what is meant by the term ‘qualifying asset’. Describe the accounting treatment for exchange differences that relate to qualifying assets.
Explain what is meant by the term ‘exchange difference’. Distinguish between an unrealised exchange loss and a realised exchange loss. Provide an overview of the accounting requirements of AASB 121/IAS 21 in relation to foreign currency transactions and exchange differences.
Explain how the items that arise from foreign currency transactions are translated into the functional currency when initially recognised in the accounting records.
Illustrate the direct and indirect methods of quoting exchange rates.
Describe the indicators used in determining the functional currency of an entity.
Explain what is meant by the term ‘functional currency’.
Reporting LO3 Explain the difference between an integrated report and a CSR report. What are some of the benefits and limitations of each?
Sustainability index LO2 Explain the purpose of the Dow Jones Sustainability Indices.
ETS LO5 Research and prepare a report on the different approaches for accounting for carbon emissions under the EU ETS.
ETS LO5 Explain the difference between an emissions trading scheme and a carbon tax. What are some of the benefits and limitations of each?
Sustainability — developing countries LO1, 2, 5 You are the accountant of a company that is considering expanding its operations to a developing country. The CEO has asked for a report outlining what issues the company should consider from a sustainability perspective when making this
Sustainability reporting LO1, 2, 3, 4 Obtain the most recent sustainability report by Toyota Motor Corporation. Required Prepare a report that addresses the following issues. 1. Toyota’s vision and mission statement, and how these might relate to sustainability (if at all) 2. Toyota’s
Stakeholder engagement LO2 This chapter has identified a range of stakeholders that managers should consider when determining sustainability performance and reporting. Determine how managers should engage with each of these stakeholders and document what sustainability issues they would be
Impact on financial reporting LO3, 4 There are no formal accounting standards for the reporting of social and environmental activities. Evaluate what issues this presents for the preparation of financial reports.
ETHICAL INVESTMENT Refer again to the report mentioned in case study 22.4. While some investment categories have a smaller carbon footprint than others (due to a focus on different industries), it has been argued that it is not just the size of the carbon footprint that it important, but also the
ETHICAL INVESTMENT The report Carbon counts 2011: The carbon footprints of Australian superannuation investment managers examines 14 of the largest superannuation funds in Australia, accounting for $36 billion in equity holdings, and looks at the greenhouse gas emissions associated with 88 equity
STAKEHOLDERS Derby Ltd wants to focus on ‘people, profits, planet’. The board of directors has proposed linking top managers’ pay to broad measures of environmental sustainability, and worker and customer satisfaction. The board proposes that bonuses for management will be linked to targets
COSTS AND BENEFITS OF ENVIRONMENTALLY FRIENDLY BUSINESS PRACTICES The directors of Broome Ltd are concerned about the increased costs proposed by the company in adopting new, more environmentally friendly technology. Management has argued that the company was ‘always going to pay a price for
CASE STUDY SUSTAINABILITY REPORTING The manager of Exmouth Ltd is not convinced of the scientific evidence behind climate change, and does not consider it necessary to adopt changes in the company’s operations that would decrease its greenhouse gas emissions. Exmouth Ltd’s accountant, however,
Explain how emissions trading schemes are likely to affect financial reporting.
Explain what an environmental management system is and how it can be used to improve environmental performance.
Identify why you would expect the finance sector — and investment funds in particular — to have an interest in climate change. Identify how ethical investment can affect corporate decision making regarding sustainable business operations.
Identify four corporate stakeholders and explain how they affect a business’s operations.
What is the Global Reporting Initiative, and what is its purpose?
What is international integrated reporting and how does it differ from the current financial reporting system?
Explain the difference between sustainability reporting and traditional financial reporting.
Identify what information entities are likely to provide if they use sustainability reporting.
What reasons might an entity provide for adopting sustainable development?
Explain the difference between eco-justice and eco-efficiency, and outline how both might relate to business activities.
Explain the meaning of sustainability.
Identifying related party transactions LO3 Many entities have transactions with related parties which occur under normal terms and conditions. For example, banks provide a wide range of banking and other financial services and products, some of which are used by bank directors and
Exemption from disclosure for government-related entities LO5 Production Zone is a government organisation which directly controls another entity, Allsorts Ltd, and through its interest in Allsorts Ltd it indirectly controls Otis Ltd and Router Ltd. Required Determine the extent to which
Determining whether transactions are related party transactions LO2, 3, 4 Which of the following is a related party transaction and, under AASB 124/IAS 24, requires disclosure in the annual financial statements? (a) An annual cash bonus amount paid to factory workers employed by the entity
Determining whether parties are related LO2, 3 Brian holds 100% of the shares in Barlow Ltd and he is also a director of Donaldson Ltd. All of the shares in Donaldson Ltd are held by Carrington Ltd. Required Determine the related party relationships for Barlow Ltd.
Disclosure LO4 During the period ended 30 June 2020, Rebecca Johnston, an employee of Northwing Company, purchased goods from the company on normal commercial terms and conditions. Johnston receives remuneration consisting of cash and other short-term benefits amounting to $180 000. During
Recognition principles LO2, 3 Sunshine Company operates a pension scheme that offers defined benefit pensions for the benefit of the company’s employees. At the end of the reporting period, the present value of the defined benefit obligation is $105 million and the fair value of the defined
Recognition principles LO2, 3 Sonia Goodall is a newly appointed director of Proserpine Ltd, a listed company that organises major sporting events. Sonia has provided consultancy services to Proserpine Ltd for the past 10 years. In the most recent financial year these services amounted to $500
Scope of AASB 124/IAS 24 LO2, 3 Which of the following is the related party of an entity within the scope of AASB 124/IAS 24? Give reasons for your answer. (a) A person who has the authority to plan, direct and control the activities of the entity (b) The domestic partner and children of a
RELATED PARTY LOANS At the end of the 2013 financial reporting period, Westpac Banking Corporation had a number of outstanding loans it had advanced to directors. These loans included a year-end balance of over $2 million each to two key management personnel, Mr Brad Cooper and Ms Christine
RELATED PARTY DISCLOSURES Choose the most recent annual report of two Australian publicly listed companies (other than Woolworths Limited). Locate the remuneration report and the financial statement notes dealing with related party disclosures. Compare the details provided by each company. Do you
CASE STUDY EXECUTIVE REMUNERATION The following text outlines the purpose of the Australian Government Productivity Commission’s public inquiry into executive remuneration. The Productivity Commission was asked to undertake a public inquiry into the regulatory framework around remuneration of
AASB 124/IAS 24 requires the identity of key management personnel to be disclosed. Explain how an entity determines whether an employee is a member of key management personnel.
Outline the rationale for including an employer-sponsored post-employment benefit plan as a related party of the employer entity.
Explain why a parent company and its subsidiary entities are regarded as related parties.
An alternative to disclosing information about related parties is to restate related party events as though they had occurred between independent parties in arm’s length transactions. Explain why this approach has not been adopted by the standard setters.
Explain why key management personnel are regarded as related parties.
Explain how the mere existence of a related party relationship might have the potential to affect transactions with other parties.
Why do standard setters formulate rules for the disclosure of related party relationships?
Theoretical ex‐rights value, rights adjustment factor and basic earnings per share LO5 At the beginning of the current reporting period (1 January 2020 – 31 December 2020) Diamond Ltd has 60 000 ordinary shares on issue. The company announced a 1‐for‐5 rights issue on 1 January
Disclosure LO6 Lamington Ltd operates an executive performance share plan. Under this plan, the company grants rights to employees which are convertible into ordinary shares of the company. It also grants options under the plan. The options have a term of 5 years and are converted into
Determining the additional shares from potentially dilutive options LO4 Tennyson Ltd has 20 000 ordinary shares outstanding during the reporting period ended 30 June 2021. The average market price of its ordinary shares during the period was $3.75 per share. The company also has 5000
Effect of share options on diluted earnings per share LO4 Xenia Ltd determines its profit attributable to ordinary shareholders for the reporting period ended 30 June 2020 as $96 000. The company has calculated its weighted average number of ordinary shares on issue during the period as 480
to calculate the adjustment factor, and calculate adjusted basic earnings per share.
Kelso Ltd announced the rights issue at the beginning of its reporting period (1 July 2020) and the last date for exercising the rights was 1 October 2020. Kelso Ltd announced profit attributable to ordinary shareholders of $109 725 for the full reporting period. Required Use the theoretical
Rights adjustment factor and adjusted basic earnings per share LO3 Assume that in exercise
Theoretical ex‐rights value LO3 Kelso Ltd has 30 000 ordinary shares on issue. The company announced a 1‐for‐3 rights issue with an exercise price of $4 for each right. The market price of one ordinary share immediately before the exercise of the rights was $6. Required Determine the
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