Questions and Answers of International Financial Reporting And Analysis

Question 4 can be repeated for listed companies in several industries. Do you observe industry differences?
Look up the financial statements of two companies competing in the same industry in your country. Calculate their return on equity (ROE). First, try to explain the difference observed with the use of
It has been suggested that cash is king and that readers of a company’s accounts should pay more attention to information concerning its cash flows and balances than to its profits and other
Compare the accounting flexibility of the national GAAP in your own country with the flexibility in IAS/IFRS. Which of the two systems allows less flexibility to the preparer of the financial
If you consider companies such as McDonald’s, Kentucky Fried Chicken, Burger King, etc., what are the value drivers in their industry? What are the critical factors in their industrial environment?
The summarized statement of financial positions of three businesses in the same industry are shown below for 200X.The operating profit and sales for the three companies for the years in question
What is ‘hedge accounting’? Identify the requirements of IAS 21 in accounting for hedges.
The following statements refer to a situation where an investing entity K seeks to exert control or influence over another entity L. Assume that K is required to prepare consolidated accounts because
Using any information you can find in respect of ‘Enron’ discuss the following statement: If Enron had prepared its financial statements using IAS GAAP instead of US GAAP it would have had to
Ejoy, a public limited company, has acquired two subsidiaries. The details of the acquisitions are as follows:The draft statements of comprehensive income for the year ended 31 May 2006 are:The
Parentis, a public listed company, acquired 600m equity shares in Offspring on 1 April 2006.The purchase consideration was made up of:– a share exchange of one share in Parentis for two shares in
As well as its investment in T (see question 6) S also held 75 per cent of the shares of U. U sells goods to S. During the year ending 31 March 20X4, U sells goods to S for $100 000. The cost of the
D has owned 80 per cent of the equity shares of E since 1 January 1996. E has owned 60 per cent of the equity shares of F since 1 January 1994. The accumulated profits of F at the latest statement of
What is ‘control’ as used in relation to consolidated financial statements?
Which one of the following would be classified by WDC as a non-adjusting event according to IAS 10, Events After the Reporting Period? WDC’s year end is 30 September 20X1.(a) WDC was notified on 5
According to IFRS 8, Operating Segments, which two of the following apply to reportable segments?(a) The results of the segment must be prepared using the same accounting policies as are used for the
A quote from a colleague: ‘ I never look at the operating segment information in a set of financial statements when I am making investment decisions – it’s just lots and lots of numbers I
BJS, a listed entity, had a weighted average of 27 million ordinary shares in issue during its financial year ended 31 August 20X6. It was also financed throughout the year by an issue of 12 per cent
AGZ is a listed entity. You are a member of the team drafting its financial statements for the year ended 31 August 2008.Extracts from the draft income statement, including comparative figures, are
GA had 5 million $1 ordinary shares in issue at 1 May 20X8. On 30 September 20X8 GA issued a further 2 million $1 ordinary shares at par. Profit before tax for the year ended 30 April 20X9 was $650
AB had 10 million $0.50 ordinary shares in issue at 1 January 20X7. On 1 August 20X7 AB issued 2 million $0.5 ordinary shares at a premium of $0.30. Throughout the year AB had in issue $2 million 7
Hamlet, a publicly listed company, is preparing its financial statements to 30 September 20X4.In previous years it has chosen to write off all of its development expenditure even where management
Classify the events below as adjusting events or non-adjusting events according to IAS 10:(a) shortly after the financial reporting date a survey of an item of property, plant and equipment revealed
IAS 10 deals with the accounting treatment of events occurring after the reporting date.Required:In assessing the results of a company for the current year, explain why events occurring after the
In preparing the financial statements for the year ended 31 December 20X5 Alpha plc discovers the following, all of which are material in the context of the company’s results:• Development
As the recently qualified accountant of Aveler plc, a food retailer with financial reporting date 31 December 20X1, you notice the following items occurring before the accounts are approved by the
Norman, a public limited company, has three segments which are currently reported in its financial statements. Norman is an international hotel group which reports to management on the basis of
Calculate from the following information:(a) the basic EPS(b) the fully diluted EPS.The capital of the company is as follows:• £500 000 in 7 per cent preference shares of £1 each• £1 000 000
The following information is available in respect of Barn entity.Statement of comprehensive income for the year ended 30 September 20X7The sale proceeds from the sale of non-current assets was £72m.
Using the statement of cash flows provided in respect of the Samsung analysis, as far as the information permits, analyze the performance of the group.!
Compare and contrast the direct and indirect method of preparing a statement of cash flows and identify and comment on the reasons why the IASB prefers the direct method.
Rework a numerical exercise from Chapter 7.
The idea that a regular annual inflation rate of 35 per cent requires CPP adjustments, but a regular annual inflation rate of 25 per cent does not, is quite absurd. Discuss.
DF granted 1000 share options to each of its 300 employees on 1 January 20X0, with the condition that they continue to work for DF for 4 years from the grant date. The fair value of each option at
VB granted share options to its 500 employees on 1 August 20X6. Each employee will receive 1000 share options provided they continue to work for VB for the four years following the grant date. The
Kappa is an entity that operates in a sector where the recruitment and retention of high-quality employees is particularly important in order to achieve corporate goals. You are the financial
LEC operates a benefit pension plan for its employees. The fair value of the plan assets at 1 June 20X8 was $6 200 000. LEC made contributions of $600 000 to the plan in the year to 31 March 20X9 and
JSX, a listed entity, has a defined benefits pension scheme. The following information relates to the pension scheme for the year ended 31 October 20X8:Required:Calculate the actuarial gain and loss
The following information relates to the defined benefits pension scheme of BGA, a listed entity.The present value of the scheme obligations at 1 November 2006 was $18 360 000, while the fair value
E pays contributions into a post-employment defined benefit plan on behalf of its employees.The balance sheet of the entity at 30 April 2003 showed a net pension liability of $60 million.During the
The following statements relate to accounting for retirement benefits under the provisions of IAS 19, Employee Benefits. [The ‘net pension asset’ is the fair value of plan assets less the present
State pension plans are defined in IAS 19 as multi-employer plans. Multi-employer plans can be either of a defined benefit type or of a defined contribution type. Had you been in the position of the
Consider the assumptions ‘discount factor’ and ‘expected market return’ again. Take into account the different funding or financing systems (internal and external funding) which companies can
The actuarial assumptions ‘discount factor’ and ‘expected market return’ are different elements in the opinion of the IASB, and, as a result, the impact of both assumptions is included
For the determination and recognition of the current service cost and the defined pension liability, one particular actuarial cost method has been chosen, namely the projected unit credit method.
An entity grants 100 share appreciation rights to its 200 employees on the condition that they remain with the firm for two years. At the end of these two years, the benefits vest and the employees
At the beginning of year 1, an entity grants to 20 senior executives 1000 share options, each based on two conditions. First, the executive has to remain with the entity until the end of year 3.
Company Crux grants share options to its employees at 1.1.X1. Each employee will receive ten options if he/she stays with the company for the next three years. At grant date, the turnover percentage
IAS 19, Employee Benefits, deals, amongst other things with the treatment of post-employment benefits such as pensions and other retirement benefits.Post-employment benefits are classified as either
Company Rebo has five directors who all participate in the following share-based remuneration plan with cash alternatives. The directors have the right to choose between 600 shares or the value of
On 31 March 20X6, CH had a credit balance brought forward on its deferred tax account of$642 000. There was also a credit balance on its corporate income tax account of $31 000 representing an
HF purchased an asset on 1 April 20X7 for $220 000. HF claimed a first year tax allowance of 30 per cent and then an annual 20 per cent writing down allowance, using the reducing balance method. HF
GJ commenced business on 1 October 20X5, and on that date it acquired property, plant and equipment for $220 000. GJ used the straight line method of depreciation. The estimated useful life of the
The directors of Panel, a public limited company, are reviewing the procedures for the calculation of the deferred tax provision for their company. They are quite surprised at the impact on the
On 1 January 20X3, SPJ had an opening balance of $5000 on its tax account, which represented the balance on the account after settling its tax liability for the previous year. This balance arose from
Nette, a public limited company, manufactures mining equipment and extracts natural gas.The directors are uncertain about the role of the IASB’s Framework for the Preparation and Presentation of
(i) IAS 12, Income Tax, details the requirements relating to the accounting treatment of deferred tax.Required:Explain why it is considered necessary to provide for deferred tax and briefly outline
Critically appraise the following statement: ‘The required accounting treatment of taxation in published IAS accounts does not lead to a true and fair view as required by the Fourth Directive.’
Discounting deferred tax balances would provide useful information to users. Discuss.
Explain to a non-accountant the difference between the income statement view and the balance sheet view of deferred tax.
Explain and distinguish between:• the deferral method• the liability method.
Outline the major arguments in favour of only providing for deferred tax when it is probable that a liability will crystallize.
U manufactures refrigerators and freezers and sells them with a one-year warranty. It applies the requirements of IAS 37, Provisions, Contingent Liabilities and Contingent Assets, to its financial
NDL drilled a new oil well, which started production on 1 March 2003. The licence granting permission to drill the new oil well included a clause that requires NDL to ‘return the land to the state
Nette, a public limited company, manufactures mining equipment and extracts natural gas.The directors are uncertain about the role of the IASB’s Framework for the Preparation and Presentation of
IAS 37, Provisions, Contingent Liabilities and Contingent Assets, was issued in 1998. The Standard sets out the principles of accounting for these items and clarifies when provisions should and
(i) In relation to a failed acquisition, a firm of accountants has invoiced Gear for the sum of $300 000.Gear has paid $20 000 in full settlement of the debt and states that this was a reasonable sum
Describe the accounting arrangements in accordance with IAS 37 for provisions and contingent liabilities. Comment on whether these arrangements provide useful information to users.
IAS 37 ensures ‘consistency between entities in the recognition and measurement of provisions and contingencies and that sufficient information is disclosed about them to users so that they can
Explain the terms:– big bath accounting– profit smoothing.Give an illustration of each.
Discuss the statement that financial reports prepared under IAS 37 provide a ‘true and fair view’ to users.
Identify any other methods of accounting for provisions, contingent liabilities and contingent assets, and discuss why IAS 37 rejects these methods in favour of its recommended treatment.
Outline the recommended treatment of provisions, contingent liabilities and contingent assets in accordance with IAS 37, clearly defining and illustrating the meaning of each term.
Johan, a public limited company, operates in the telecommunications industry. The industry is capital intensive with heavy investment in licences and network infrastructure. Competition in the sector
EJ publishes trade magazines and sells them to retailers. EJ has just concluded negotiations with a large supermarket chain for the supply of a large quantity of several of its trade magazines on a
LMN trades in motor vehicles which are manufactured and supplied by their manufacturer, IJK.Trading between the two entities is subject to a contractual agreement, the principal terms of which are as
Identify when the revenue, if indeed there is any, in the following transactions should be recognized in accordance with IAS 18, Revenue.(a) Land has been sold by A entity to Connect Housing
(a) Revenue recognition is the process by which companies decide when and how much income should be included in the income statement. It is a topical area of great debate in the accounting
How does IAS 18 differ from its replacement? Has there been an improvement?
Recognition of revenue in accordance with IAS 18 is objective. Discuss.
Financial reports prepared under IAS 18 are irrelevant and unreliable. Discuss.
IAS 18 is based on substance over form. Discuss.
Financial Instrument (a)DG acquired 500 000 shares in HJ, a listed entity, for $3.50 per share on 28 May 2009. The costs associated with the purchase were $15 000 and were included in the cost of the
On 1 February 2007, the directors of AZG decided to enter into a forward foreign exchange contract to buy 6 million florins at a rate of $1 ¼ 3 florins, on 31 January 2010. AZG’s year end is 31
The directors of QRS, a listed entity, have met to discuss the business’s medium- to long-term financing requirements. Several possibilities were discussed, including the issue of more shares using
Ambush, a public limited company, is assessing the impact of implementing revised IAS 39, Financial Instruments: Recognition and Measurement. The directors realize that significant changes may occur
It is unrealistic to apply the realization concept to complex financial instruments. Discuss.
Discuss the proposal by the IASB to move to full fair value accounting for financial instruments and identify the effects this move would have on an entity’s statement of comprehensive income and
Appraise the effect of using settlement date accounting as opposed to trade date accounting for regular way contracts.
Discuss the IASB’s methodology for the recognition of gains and losses on remeasurement of financial instruments to fair value, and illustrate the effects on the statement of comprehensive income
How does the IASB determine differentiation between financial instruments and other assets and liabilities?
HS, a contractor, signed a two-year fixed price contract on 31 March 20X8 for $300 000 to build a bridge. Total costs were originally estimated at $240 000. At 31 March 20X9, HS extracted the
Gear Software, a public limited company, develops and sells computer games software. The revenue of Gear Software for the year ended 31 May 2003 is $5 million, the statement of financial position
The inventory of Base at 30 September 200X was valued at cost E28.5 million. This included E4.5 million of slow-moving stock that Base had been trying to sell to another retailer. The best price Base
Using any information you wish from Exercise 1, illustrate and discuss the effects on the statement of comprehensive income and statement of financial position from using the different cost
Forte commences business on 1 January buying and selling pianos. He sells two standard types, upright and grand, and his transactions for the year are given in the table below.You observe that the
The following figures have been extracted from the accounting records of Lavalamp on 30 September 20X3:(i) Lavalamp has spent $6 million (included in the cost of sales) during the year developing and
The need to account for lease transactions in a useful way proves that the principle of substance over form is essential. Discuss.
Explain the theoretical distinction between finance leases and operating leases.
(a) IAS 36, Impairment of Assets, was issued in June 1998 and subsequently amended in March 2004. Its main objective is to prescribe the procedures that should ensure that an entity’s assets are

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