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HKICPA QP Exam (Module a) Sep2008 Answer

HKICPA QP Exam (Module a) Sep2008 Answer

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Module A (September 2008 Session)
Page 1 of 12
 To : Janice CHEUNG (Director)From : David LI, Accounting Managerc.c. : Michelle CHOW, Julian LIN, Fiona MERRILL (Directors)Date : dd/mm/yyyyI refer to your e-mail dated 18 May 2008 regarding your queries about the draftconsolidated financial statements for City as at 31 March 2008.
Answer 1(a)(i)
Pledged bank deposits
 HKAS 1 requires the face of the statement of financial position to include a line item thatpresents the cash and cash equivalents.HKAS 7 states that cash comprises cash on hand and demand deposits while cashequivalents are short-term, highly liquid investments that are readily convertible to knownamounts of cash and which are subject to an insignificant risk of changes in value.Since pledged bank deposits are not readily convertible to known amounts of cash withoutan insignificant risk of changes in value, they are not included in the cash and cashequivalents.
HKAS 1 also specifies that additional line items, headings and subtotals shall be presentedon the face of the statement of financial position when such presentation is relevant to anunderstanding of the entity’s financial position.Paragraph 14 of HKFRS 7 requires an entity to disclose:
the carrying amount of financial assets it has pledged as collateral for liabilities orcontingent liabilities, including amounts that have been reclassified in accordancewith paragraph 37(a) of HKAS 39; and
the terms and conditions relating to its pledge.Paragraph 31 of HKFRS 7 requires an entity to disclose information that enables users ofits financial statements to evaluate the nature and extent of risks arising from financialinstruments to which the entity is exposed at the reporting date.Pledged bank deposits and their relevant financial liability create a potentially significantexposure to risks and hence their terms and conditions warrant disclosure.The amounts represent deposits pledged to banks to secure banking facilities granted tothe Group. This denotes that as at 31 March 2008, bank deposits of HK$8,904,000 (2007:HK$19,754,000) had been pledged to secure City’s banking facilities.
Module A (September 2008 Session)
Page 2 of 12
HKAS 1 requires that “an asset shall be classified as current when it satisfies any of thefollowing criteria:(a) it is expected to be realised in, or is intended for sale or consumption in, the entity’snormal operating cycle;(b) it is held primarily for the purpose of being traded;(c) it is expected to be realised within twelve months after the end of the reportingperiod; or(d) it is cash or a cash equivalent (as defined in HKAS 7 Statement of Cash Flows)unless it is restricted from being exchanged or used to settle a liability for at leasttwelve months after the end of the reporting period.All other assets shall be classified as non-current. Therefore, the bank deposits and cashshould be classified into three items in accordance with the nature of the amount, i.e. cashand cash equivalents, pledged bank deposits classified as current assets and pledged bankdeposits classified as non-current assets.The amounts denote that deposits amounting to HK$2,322,000 (2007: HK$13,522,000)have been pledged to secure short-term bank borrowings and are therefore classified ascurrent assets; and the remaining deposits amounting to HK$6,582,000 (2007:HK$6,232,000) have been pledged to secure long-term borrowings and are thereforeclassified as non-current assets.The pledged bank deposits will be released and reclassified from “Pledged bank deposits”to “Bank balances and cash” upon settlement of the relevant bank borrowings.
Answer 1(a)(ii)
Club membership
 The club membership represents entrance fees paid to clubs held on a long-term basis.Typically, it is recognised as an intangible asset since it is an identifiable non-monetaryasset without physical substance.
The accounting for an intangible asset is based on its useful life. An intangible asset witha finite useful life is amortised, and an intangible asset with an indefinite useful life is not.Therefore, an entity shall assess whether the useful life of an intangible asset is finite orindefinite.HKAS 38 requires an intangible asset to be regarded as having an indefinite useful lifewhen, based on an analysis of all of the relevant factors, there is no foreseeable limit to theperiod over which the asset is expected to generate net cash inflows for the entity.The term ‘indefinite’ does not mean ‘infinite’. The useful life of an intangible asset reflectsonly that level of future maintenance expenditure required to maintain the asset at itsstandard of performance assessed at the time of estimating the asset’s useful life, and theentity’s ability and intention to reach such a level. A conclusion that the useful life of anintangible asset is indefinite should not depend on planned future expenditure in excess ofthat required to maintain the asset at that standard of performance.Since there is no foreseeable limit to the period over which the club membership isexpected to generate net cash inflows for City, the management of City considered the clubmembership as having an indefinite useful life.
Module A (September 2008 Session)
Page 3 of 12
An intangible asset with an indefinite useful life should not be amortised. Therefore theclub membership, which is considered by the management of the Group as having anindefinite useful life, will not be amortised until the useful life is determined to be finite uponreassessment of the useful life annually by the management.The useful life of the club membership should be reviewed each reporting period todetermine whether events and circumstances continue to support an indefinite useful lifeassessment for that asset. If they do not, the change in the useful life assessment fromindefinite to finite should be accounted for as a change in an accounting estimate.As a result, the club membership with indefinite useful life is carried at cost less anyidentified impairment loss and is tested for impairment annually.During the year ended 31 March 2008, the club membership shall be tested for impairmentby comparing its carrying amount with its recoverable amount. If the recoverable amountexceeds the carrying amount, the management can conclude that no impairment lossneeded to be charged for the current year and hence the carrying amount of the clubmembership remains the same throughout the two years.
As an intangible asset assessed as having an indefinite useful life, HKAS 38 requires Cityto disclose the carrying amount of the club membership and the reasons supporting theindefinite useful life assessment.
Answer 1(a)(iii)
Equity-settled share-based payment transactions - Share options granted toemployees of the Group
 HKFRS 2 defines equity-settled share-based payment transactions as transactions in whichthe reporting entity receives goods or services as consideration for equity instruments of theentity, which equity instruments can include shares or share options.For equity-settled share-based payment transactions, the entity shall measure the goods orservices received, and the corresponding increase in equity, directly, at the fair value of thegoods or services received, unless that fair value cannot be estimated reliably. If the entitycannot estimate reliably the fair value of the goods or services received, the entity shallmeasure their value, and the corresponding increase in equity, indirectly, by reference tothe fair value of the equity instruments granted.There is a general assumption that transactions with employees cannot be reliablymeasured on the basis of the value of the services being provided. Therefore,transactions with employees are typically measured at the fair value of the equityinstruments being granted.The grant date is 1 May 2006. The requirement for the holder to be in employment withCity when he exercises the options is effectively a vesting condition.The vesting date should be 1 May 2007, which is the first date that the option holder isentitled to exercise the options. The options vest over the one year ending 1 May 2007.Since the option vest over the one year ending 1 May 2007, it is presumed that the servicesto be rendered by the director as consideration for the options will be received in the oneyear vesting period.

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