Mix IAS and IFRS Practice Questions

ROONEY 

(a) Rooney has recently finished building a new item of plant for its own use. The item is a press for use in the manufacture of industrial diamonds. Rooney commenced construction of the asset on 1st April 2013 and completed it on 1st April 2015.

  1st January 2013, Rooney took out a loan to finance the construction of the asset. Interest is charged on the loan at the rate of 5% per annum. The annual interest must be paid in four equal instalments at the end of each quarter. Rooney capitalises interest on manufactured assets in accordance with the rules in IAS 23 Borrowing costs.

  The costs (excluding finance costs) of manufacturing the asset were Rs. 28 million. 

Required: State the IAS 23 rules on the capitalisation of borrowing costs, calculate the cost of the asset on initial recognition and explain the amount of borrowing cost capitalised.

(b) The press comprises two significant parts, the hydraulic system and the ‘frame’. The hydraulic system has a three year life and the ‘frame’ has an eight year life. Rooney depreciates plant on a straight line basis. The cost of the hydraulic system is 30% of the total cost of manufacture. 

  Rooney uses the IAS 16 revaluation model in accounting for diamond presses and revalues these assets on an annual basis.

  Revaluation surpluses or deficits are apportioned between the hydraulic system and the ‘frame’ on the basis of their year end book values before the revaluation. 

Required: Explain the IAS 16 rules on accounting for significant parts of property, plant and equipment and show the accounting treatment of the diamond press in the financial statements for the financial years ending:

(i)                  31st March 2016 (assume that the press has a fair value of Rs. 21 million)

(ii)                (ii) 31st March 2017 (assume that the press has a fair value of Rs. 19.6 million).

EHTISHAM

The following information relates to the financial statements of Ehtisham for the year to 31 March 2015.  The head office of Ehtisham was acquired on 1 April 2012 for Rs. 1million. Ehtisham intend to occupy the building for 25 years. On 31 March 2014 it was revalued to Rs. 1.15 million. On 31 March 2015, a surplus of vacant commercial property in the area had led to a fall in property prices and the fair value was now only Rs. 0.8 million. 

Required: Explain the correct accounting treatment for the above (with calculations if appropriate).   

ADJUSTMENTS LIMITED

Adjustments Limited has carried out a review of its non-current assets.

(a) A lathe was purchased on 1 January 2009 for Rs. 150,000. The plant had an estimated useful life of twelve years, residual value of nil. Depreciation is charged on the straight line basis. On 1 January 2015, when the asset’s net book value is Rs. 75,000, the directors decide that the asset’s total useful life is only ten years.

(b) A grinder was purchased on 1 January 2012 for Rs. 100,000. The plant had an estimated useful life of ten years and a residual value of nil. Depreciation is charged on the straight line basis. On 1 January 2015, when the asset’s net book value is Rs. 70,000, the directors decide that it would be more appropriate to depreciate this asset using the sum of digits approach. The remaining useful life is unchanged.

(c) The company purchased a fifty year lease some years ago for Rs. 1,000,000. This was being depreciated over its life on a straight line basis. On 1 January 2015, when the net book value is Rs. 480,000 and twenty-four years of the lease are remaining, the asset is revalued to Rs. 1,500,000. This revised value is being incorporated into the accounts.

Required: Explain the effects of these changes on the depreciation for the year to 31 December 2015. 

FARADAY PHARMACEUTICAL LIMITED

Faraday Pharmaceutical Limited (FPL) acquired a building for Rs. 200 million on July 1, 2011. The following information relating to the building is available:

(i)                  It is being depreciated on the straight line basis, over 20 years.

(ii)                FPL uses the revaluation model for subsequent measurement of its property, plant and equipment and accounts for revaluations on the net replacement value method. The details of revaluation carried out by the independent valuers during the past years are as follows:

Revaluation date                             Fair value (Rupees in million)

   July 1, 2012                                                     230

   July 1, 2013                                                      170

   July 1, 2014                                                     180

(iii)               FPL transfers the maximum possible amount from the revaluation surplus to retained earnings on an annual basis.

(iv)               There is no change in the useful life of the building.

Required: Prepare the journal entries to record the above transactions from the date of acquisition of the building to the year ended June 30, 2015. 

SPIN INDUSTRIES LIMITED

On September 1, 2014, Spin Industries Limited (SIL) started construction of its new office building and completed it on May 31, 2015. The payments made to the contractor were as follows:

  Date of Payment                               Rupees

September 1, 2014                          10,000,000

December 1, 2014                            15,000,000

February 1, 2015                               12,000,000

June 1, 2015                                        9,000,000

In addition to the above payments, SIL paid a fee of Rs. 8 million on September 1, 2014 for obtaining a permit allowing the construction of the building.

The project was financed through the following sources:

(i)                  On August 1, 2014 a medium term loan of Rs. 25 million was obtained specifically for the construction of the building. The loan carried mark up of 12% per annum payable semi-annually. A commitment fee @ 0.5% of the amount of loan was charged by the bank.  Surplus funds were invested in savings account @ 8% per annum. On February 1, 2015 SIL paid the six monthly interest plus Rs. 5 million towards the principal.

(ii)                Existing running finance facilities of SIL:

·         Running finance facility of Rs. 28 million from Bank A carrying mark up of 13% payable annually. The average outstanding balance during the period of construction was Rs. 25 million.

·         Running finance facility of Rs. 25 million from Bank B. The mark up accrued during the period of construction was Rs. 3 million and the average running finance balance during that period was Rs. 20 million.

Required: Calculate the amount of borrowing costs to be capitalised on June 30, 2015 in accordance with the requirements of International Accounting Standards. (Borrowing cost calculations should be based on number of months).

GRANITE CORPORATION

On 1 March 2014, Granite Corporation (GC) started the construction of a new plant to meet the growing demand for its products. The new plant was completed at a cost of Rs. 100 million on 31 May 2015.

GC financed the cost of the project from the following sources:

(i)                  On 1 March 2014, a 7-year loan of Rs. 70 million was obtained specifically for the construction of the plant. The loan carried mark-up @ 13% per annum payable semi-annually. An arrangement fee @ 1% of the loan amount was paid to the bank.

Two instalments, each comprising of repayment of principal of Rs. 5 million with interest, were paid on 31 August 2014 and 28 February 2015.

(ii)                GC also has a running finance facility of Rs. 100 million carrying mark-up @ 14% per annum. Average utilization of this facility, prior to commencement of construction was Rs. 10 million. Any additional amount required for the project was provided through this facility.

(iii)               Surplus funds were used to reduce the running finance utilization or invested in savings account @ 8% per annum.

Payments made to the contractor were as follows:

Payment date                    Rs. m

01 March 2014                      25

31 January 2015                    65

30 September 2015               10

The construction work was suspended from 1 February 2015 to 28 February 2015. The suspension was caused due to delay in shipment of essential components for the installation of the plant.

Required: Calculate the amount of borrowing costs that may be capitalised during the years ended 30 June 2014 and 2015 in accordance with the requirements of International Financial Reporting Standards.

FAZAL

The following information relates to the financial statements of Fazal for the year to 31 March 2015.

The IT division has begun a training course for all managers in a new programming language at a cost of Rs. 200,000. The consultants running the training course have quantified the present value of the training benefits over the next two years to be Rs. 400,000. The project cost has been included in the statement of financial position as a current asset. The accounting policy note identifies that the costs will be written off over the next two years to match the benefits. 

Required: Explain the correct accounting treatment for the above (with calculations if appropriate).

HENRY

During 2015 Henry has the following research and development projects in progress.

Project A was completed at the end of 2014. Development expenditure brought forward at the beginning of 2015 was Rs. 412,500 on this project. Savings in production costs arising from this project are first expected to arise in 2015. In 2015 savings are expected to be Rs. 100,000, followed by savings of Rs. 300,000 in 2016 and Rs. 200,000 in 2017.

Project B commenced on 1 April 2015. Costs incurred during the year were Rs. 56,000. In addition to these costs a machine was purchased on 1 April 2015 for Rs. 30,000 for use on the project. This machine has a useful life of five years. At the end of 2015 there were still some uncertainties surrounding the completion of the project.

Project C had been started in 2014. In 2014 the costs relating to this project of Rs. 36,700 had been written off, as at the end of 2014 there were still some uncertainties surrounding the completion of the project. Those uncertainties have now been resolved and a further Rs. 45,000 costs incurred during the year.

Required: Show how the above would appear in the financial statements (including notes to the financial statements) of Henry as of 31 December 2015.