Question 1

Read the extract from the article below and answer the questions that follow:

Unwieldy Rules Useless for Investors [Extract]

Millions of dollars have been spent adopting IFRS to help investors make like-for-like comparisons between companies in global capital markets. But CFOs say they are useless and have driven financial disclosures to unmanageable levels. The criticism comes as the United States, the world's largest capital market, decides whether to retire its domestic accounting standard (US GAAP) and adopt IFRS.

"In seven years I never got one question from fund managers or investment analysts about IFRS adjustments," former AXA head of finance Geoff Roberts said. "Investors . . . rely on investor reports and management briefings to understand companies' numbers."

If analysts did delve into IFRS accounts, they would most probably misinterpret them, according to Wesfarmers finance director Terry Bowen. "Once you get into the notes you have to be technically trained. If you're not, lot of it could be misleading," Mr. Bowen said.

Commonwealth Bank chief financial officer David Craig said IFRS numbers were disregarded by investors because they could actually obscure an institution's true position.

Required:

a) Refer to the opinions in the quoted comments above and discuss the qualitative characteristics [released by the Conceptual Framework for Financial Reporting] that have not been satisfied under IFRS.(5 marks)

b) Specifically, examine the views given above on financial reporting and explain whether it will satisfy the objective of financial reporting under the Conceptual Framework for Financial Reporting.(5 marks)

Question 2

Agency theory is simply one way used to describe how people may behave in a corporate environment. By referring to this theory, rules and regulations can be constructed around this expected behavior to direct outcomes in a way that is likely to be beneficial for all concerned. Considering this ground knowledge answer the questions that follow:

Note: Parts (A) and (B) are independent questions.

Part A

Consider Devi a newly employed worker in a chocolate factory who has a performance meeting with the Floor Manager. They agree on a performance contract that sets Devi's weekly output to a minimum of 50,000 cherry-covered chocolates. Will this performance agreement between Devi and the Floor Manager give rise to agency theory? Why or why not?(3 marks)

Part B

The board of Infinity Ltd is considering business proposals from two major suppliers who are competing for work:

Prime Merchants Ltd offers the first proposal that would create significant economies of scale and Infinity Ltd will save almost $2 million every year. Further, Prime Merchants Ltd offered each of the directors of the board an "all expenses weekend away"; as well as a gift of $50,000 each if the proposal is accepted by Infinity Ltd. Galaxy Ltd offers the second proposal, it would not only save Infinity Ltd $2 million every year but it would also result in a guaranteed increase in revenue of $1 million. Besides that, there are no other significant differences between the two proposals.

i. In terms of agency theory, which proposal will the agent accept and why?(5 marks)

ii. Agency theory assumes that the agents are in a position of power since they have access to information and are in a position to make decisions. Justify how can the board of Infinity Ltd highlight this assumption.(2 marks)

Question 3

a) Normative theories tell how the world should be. However, it is known that the world is not always as it should be. Therefore, another approach to theory is to observe what happens, known to be positive theories that describe realities through empirical observations. Critically examine this logic and explain whether normative theories should be rejected because the prescriptions it provides cannot be confirmed through empirical observations?(5 marks)

b) Given below is two measurement methods:

Historical Cost Accounting

Continuously Contemporary Accounting

Choose ANY ONE measurement method from the above and provide the following:

i. Meaning

ii. Two strengths

iii. Two weaknesses(5 marks)

Question 4

HQ Ltd commences construction of an office building on 1 January 2018 for JX Ltd. The construction contract is considered to represent one performance obligation and will be the unit of account for contract accounting. It signs a fixed price contract for total revenue of $20 million. The project is expected to be completed by 31 December 2020. The expected total cost as estimated at the commencement of construction is $16 million. The expected cost to complete the construction project can change throughout the project (in this case it does). The following information relates to the project:

2018 ($000) 2019 ($000) 2020 ($000)

Costs for the year 8000 5000 4500

Costs incurred to date 6000 11500 17500

Estimated costs to complete 11500 6000 -

Progress billings during the year 8500 4500 7000

Cash collected during the year 7500 6500 6000

HQ Ltd uses cost (an input measure) as the basis for measuring progress towards satisfaction of the performance obligation. The asset under construction is deemed to be under the control of JX Ltd. Actual costs to complete the project deviate from expectations.

Required:

a) Calculate the income recognized each year using percentage completion method. (3 marks)

b) Provide the journal entries for the year 2018, assuming that stage of completion and the outcome of the construction contract can be reliably estimated. (7 marks)