IAS 19 Employee benefits, IFRS 2 Share options & IAS 24 Related
parties
Question B3.1: BGA2 plc is a listed chemical company. It runs a defined
benefit pension scheme. The PV of the scheme obligations at 1/11/X1 was
£18,360,000; the FV of the scheme assets on the same date was
£17,770,000. During the y/e 31/10/X2 £997,000 was paid in scheme
contributions. The current service cost for the year was £1,665,000 and
benefits paid were £1,860,300. The applicable interest rate for the year
was 6.5%.The PV of the scheme obligations on 31/10/X2 was £18,655,500
and the FV of the scheme’s assets then was £18,417,180.
Required:
(i) Give the accounting entries to record the movements on the
pension scheme assets and liabilities for the year ended
31/10/X2.
(ii) Draft the appropriate extracts from the financial
statements of BGA2 for the year ended 31/10/X2.
i) Fund liabilities (£)
Dr Cr
PV of obligation b/f 18,360,000
Current service cost 1,665,000
Interest cost (6.5% x 18,360,000) 1,193,400
Benefits paid 1,860,300
Re-measurement adjustment (β= 702,600
gain)
PV of obligation c/f 18,655,500
21,218,40 21,218,40
0 0
Fund assets (£)
Change in assets Dr Cr
b/f @ FV 17,770,000
Interest income (6.5% x 17,770,000) 1,155,050
Contributions 997,000
Benefits pd 1,860,300
Re-measurement adjustment 355,430
(β=gain)
FV assets c/f 18,417,18
0
20,277,48 20,277,4
0 80
ii) SoFP
20X2 (£)
FV assets c/f 18,417,180
PV of obligation c/f -18,655,500
Net fund obligation (-) -238,320
Income statement (P&L a/c) (£)
20X2 (£)
Current service cost (dr) 1,665,000
Net interest cost (dr) (1,193,400-1,155,050) 38,350
Other Comprehensive Income (£)
20X2 (£)
Net re-measurements (702,600+355430) 1,058,030
(cr)
IAS 17 Leases
Question B4.1: Dalmatian Ltd is a private dog rescue company that
round up stray dogs and take them to a rescue centre. In order to raise
some extra cash in the business, on 1 January 20X4 Dalmatian Ltd entered
into a sale and lease back agreement with a bank in relation to its rescue
centre building. Under the agreement, Dalmatian will receive £700,000
now and will then lease the building for 5 years making 5 annual lease
payments of £60,000 each in arrears on 31 December each year. Other
information is as follows:
Remaining useful life of rescue centre 50 years
Lease term (on lease back agreement) 5 years
Proceeds on sale £700,000
Carrying value of rescue centre on 1 January £140,000
20X4
Interest rate implicit in lease 8%
Present value of lease payments £240,000
Required: Explain how Dalmatian Ltd should recognise the profit
on the sale of this transaction in their financial statements for the
year ended 31 December 20X4.
Sale
As the transfer qualifies as a sale, the carrying amount of the building
will be removed from the SFP and instead Dalmatian will recognise a
right-of-use asset.
Dalmatian must measure the right-of-use asset as the proportion of the
previous carrying amount which relates to the rights retained:
Carrying amount of asset before sale x PV of lease payments
Sale proceeds
£140,000 x 240,000/700,000
= £48,000
The lease liability is the present value of the lease payments under the
contract, being £240,000.
The profit or loss on the sale is the proportion of the total gain on the
sale which relates to the rights transferred:
Total gain = sale proceeds £700,000 – carrying amount £140,000 =
£560,000
Profit on sale = £560,000 x (700,000 – 240,000)/700,000 = £368,000
The journal entry to record the sale and leaseback transaction on 1
January 20X4
Cr Property £140,000
Dr Cash £700,000
Dr Right-of-use asset £48,000
Cr Lease liability £240,000
Cr Profit on sale £368,000
Leaseback
The right-of-use asset is subsequently depreciated over the shorter of
the lease term and useful life of the asset, being the lease term of 5
years, so depreciation is £48,000/5 = £9,600.
Dr Depreciation (P&L) £9,600 Cr Asset £9,600
The carrying amount of the right-of-use asset at 31 December 20X4 is
£38,400 (48,000 – 9,600).
Subsequently, accrue interest at 8% and record payments of £60k in
arrears on the lease liability:
Interest @
b/f 8% Cash c/f
20X4 240,000 19,200 -60,000 199,200
20X5 199,200 15,936 -60,000 155,136
Cash paid of £60,000 is an outflow in the Statement of Cash Flows:
£19,200 is an operating activity; and £40,800 is a financing activity. Dr
LL/ Cr Cash £60,000
Interest of £19,200 is recorded as a finance cost in the P&L
Dr Finance cost (P&L)/Cr LL £19,200
The total LL at the year-end in the Statement of Financial Position is
£199,200, of which
o £155,136 is the non-current liability; £44,064 is the current
liability
Question B4.2: Dalmatian Ltd is a private dog rescue company that
round up stray dogs and take them to a rescue centre. In order to raise
some extra cash in the business, on 1 January 20X4 Dalmatian Ltd entered
into a sale and lease back agreement with a bank in relation to its rescue
centre building.
Under the agreement, Dalmatian will receive £700,000 now and will then
lease the building for 5 years making 5 annual lease payments of £60,000
each in arrears on 31 December each year.Other information is as follows:
Remaining useful life of rescue centre 50 years
Lease term (on lease back agreement) 5 years
Proceeds on sale £700,000
Carrying value of rescue centre on 1 January £140,000
20X4
Interest rate implicit in lease 8%
Present value of lease payments £240,000
Required: Explain how Dalmatian Ltd should recognise the profit on the
sale of this transaction in their financial statements for the year ended 31
December 20X4.
a) Explain, with journals, the accounting treatment in the year
ended 30 June 20X5 of the two lease agreements above:
i) Agreement 1
ii) Agreement 2
b) Provide extracts from the financial statements for the year ended
30 June 20X5 in respect of Agreement 1.
Part a)
Substance over form is an accounting concept that should be
applied to all accounting areas. Leasing is an example of the
application of this concept. To recognise the substance of a
transaction, its economic reality should be reflected rather than
merely its legal form.
IFRS 16: Leases looks at the economic reality of a lease, rather than
looking at legal ownership.
Because the effect of the lease transaction is such that in
commercial effect it is similar to borrowing the money and buying
the asset outright, IFRS 16 requires the asset and, what is in effect,
a related loan to be recognised.
Part b)
Agreement 1) Crane
Initially, Wigwam must recognise an asset and corresponding lease
liability at the PVLP, being £44,823. Dr Asset/ Cr Lease Liability
£44,823
Subsequently, the asset should be depreciated over the shorter of
the useful life and lease term, both 8 years.
This gives rise to a depreciation expense to be recognised in the
£ 44,823
profit or loss of: =£ 5,603 Dr P&L Depreciation expense/Cr
8 years
Asset £5,603
The carrying amount of the asset in the Statement of Financial
Position at the year-end is £44,823 - £5,603 = £39,220.
The subsequent treatment of the lease liability is to record interest
accruing at the implicit rate of 8%. Annual payments of £7,800 to
the lessor must also be recorded.
b/f Interest Cash c/f
(8%)
20X5 £44,823 £3,586 (£7,800) £40,609
20X6 £40,609 £3,249 (£7,800) £36,058
£3,586 is recorded as a finance cost in the P&L during the year.
Dr Finance Cost/ Cr Lease Liability £3,586
£7,800 is a payment shown in the statement of cash flows
o £3,586 is shown as an operating activity
o £4,214 (£7,800 - £3,586) is shown as a financing activity
o Dr Lease liability/Cr Cash £7,800
The total liability at the year-end is £40,609
o £ 4,551 (£40,609 - £36,058) is a current liability
o £36,058 is a non-current liability
Agreement 2
Telephones are an example of a low value asset given in IFRS 16.
Therefore Wigwam can elect to expense the lease through the P&L.
No asset or lease liability will be shown on the SFP.
Instead, the lease rental expense is recognised in the profit or loss
on a straight line basis over the three year lease term.
In the year ended 20X5, Wigwam should recognise
0+3+3 10
Lease rental expense= x months=£ 1,667
3 years 12
Since Wigwam has not paid any cash this year they must recognise
a corresponding accrual (or liability).
Dr Lease rental expense (P&l)/ Cr Accrual £1,667
Part c)
Statement of financial position
Assets: Right of use asset (at carrying amount) £39,220
Non-current liabilities: Lease liabilities £36,058
Current liabilities: Lease liabilities £4,551
Statement of profit or loss
Depreciation (£5,603)
Finance cost (£3,586)
Statement of cash flows
Cash from operating activitie:Payments in respect of lease liabilities
£3,586
Cash from financing activities: Payments in respect of lease liabilities
£4,214
IAS 38 Intangible assets
Question B5.1: Tappy Ltd designs and sells computer games. During the
year ended 30 September 20X4 they launched two new games as follows:
Game 1: Lost Underworld
Lost Underworld is a series of computer games created by Tappy Ltd. One
member of staff has been working on developing and expanding the Lost
Underworld brand in the last year and estimates the costs associated with
this to be £320,000.
Required: Discuss with reasons whether or not the Lost
Underworld brand can be capitalised as an intangible asset on the
Statement of Financial Position.
Game 2: High Seas Pirate Adventure
Rather than developing this game by itself, on 1 February 20X3 Tappy Ltd
purchased the exclusive rights to make and distribute the High Seas Pirate
Adventure game. The costs involved in the purchase are as follows:
Cost £
Purchase price £220,000
Legal fees associated with the sale £32,000
Directors’ meeting time to discuss the £17,000
purchase
General overheads allocated to the £8,000
purchase
It is currently believed that the High Seas Pirate Adventure game will be
popular for three years, before it is anticipated that new games releases
will make the game obsolete.
Required: Explain the accounting treatment of the High Seas Pirate
Adventure game in the financial statements for the year ended 30
September 20X4.
a) Per IAS 38, internally generated intangibles such as the Lost
Underworld brand cannot be recognised in the financial statements,
since the cost of developing the asset cannot be separated from the
cost of developing the business as a whole.
b)
Per IAS 38, the High Seas Pirate Adventure game can be
recognised as an intangible asset since it meets the recognition
criteria as follows:
The asset is identifiable – the rights were purchased by Tappy Ltd
and are capable of separate disposal.
The asset is controlled by Tappy Ltd – they hold the rights to the
game and as such as the only company able to make and
distribute the game.
Economic benefits are expected to flow to Tappy Ltd as a result of
holding these rights from the sale of games under the license.
The cost can be measured reliably at the directly attributable
price of £252,000 (220 + 32).
Initially, the asset should be measured at its purchase price
(£220k) plus all directly attributable costs (legal fees £32k), so at
£252,000.
The directors’ time and general overheads cannot be capitalised
since they are not directly attributable, and therefore £25,000
(£17k + £8k) should be recorded as an expense in the P&L.
Subsequently, the intangible asset should be amortised over its
useful life of three years.
Therefore in the year ended 30 September 20X4, 8 months of
depreciation (1 Feb – 30 Sept) should be recorded as follows:
(
Depreciation= )
£ 252,000
3 years
8
x months=£ 56,000
12
The carrying amount of in the intangible asset at the year-end is
£196,000 (£252k – £56k).
Question B5.2: On 1 January 20X5 Boxer invested in a 3 year licence
that permits them to produce and sell a new product. The costs involved
in the purchase are as follows:
£
Purchase price £106,000
Legal fees associated with the sale £8,000
Directors’ meeting time to discuss the £13,000
purchase
General overheads allocated to the £2,000
purchase
Required:
i) Explain the accounting treatment of the licence in the
financial statements for the year ended 31 December 20X5 if
Boxer have a policy to use the cost model to hold all assets.
Your answer should include a discussion of the recognition
criteria set out in IAS 38: Intangible Assets.
ii) Explain why it is not possible for Boxer:
a) not to amortise the licence; or
b) to measure the licence at fair value on 31 December
20X6.
i)
Per IAS 38, the licence can be recognised as an intangible asset
since it meets the recognition criteria as follows:
o The asset is identifiable – the licence was purchased by Boxer
Ltd and is capable of separate disposal.
o The asset is controlled by Boxer Ltd – without the licence,
other firms cannot make the product.
o Economic benefits are expected to flow to Boxer Ltd as a
result of sales of the product made under the licence.
o The cost can be measured reliably at the directly attributable
price of £114,000.
Initially, the asset should be measured at its purchase price (£106k)
plus all directly attributable costs (legal fees £8k), so at £114,000.
The directors’ time and general overheads cannot be capitalised
since they are not directly attributable, and therefore £15,000 (£13k
+ £2k) should be recorded as an expense in the P&L.
Subsequently, the intangible asset should be amortised over its
useful life of three years.
Therefore in the year ended 31 December 2015
(
Amortisation= )
£ 114,000
3 years
=£ 38,000
The carrying amount of in the intangible asset at the year-end is
£76,000 (£114k – £38k).
ii)
a) Boxer must amortise the licence because it has a definite useful life,
being three years.
b) Intangible assets may be revalued only if there is an active market,
meaning that the items are homogenous (there are a lot of identical
assets), buyers and sellers are always available, and the market price is
always readily available. The licence is not homogenous and therefore
measurement at fair value is not possible
