Assignments as Substitute for Final Examination (Spring 2020)

Assignment-01

Course Name: Corporate Financial Reporting

Course Code: AIS 4303

Submitted To:
Dr. James Bakul Sarkar
Associate Professor
School of Business & Economics

Submitted By:
Name: Sayma Sultana Lina
ID: 114 171 017
Section: A

Date of Submission: May 15th ,2020

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Question # 1: A provision shall be recognized when an entity has a present legal obligation as a
result of a past event. Do you agree? Explain.
ANS:
Yes, I agree with the statement that a provision should be recognized when an entity has a
present obligation as a result of past event. It means that the obligation needs to exist because of
events which have already occurred at the year-end and give rise to a potential outflow of
economic resources and can make reliable estimate of the amount of the obligation. This
obligation can either be legal or constructive. However, a mere obligation or intention to make a
payment is not enough to justify a provision. There must be an actual obligation to make a
payment.
For example, ABC company has a policy of refunding purchases of defective products to his
customers even though it is not under legal obligation to do so. However, the policy is generally
well known. In this situation a provision is required.

Question # 2: Should you keep provision for an onerous contract?

ANS:
Yes, I think that we should keep provision for an onerous contract. An onerous contact is a
contract in which the unavoidable cost of meeting the obligations under the contract exceed the
economic benefits expected to be received under it.
For example, a company signs a multiyear agreement to rent office space then moves or
downsizes while the agreement is still in effect and leave the office space which it now has no
use.
Signing of the contract is the past event giving rise to the obligation to make the payments,
discounted if the effect is material, will be measure of the excess of cost over the benefits.

Question # 3: The Board of Directors of ACI Formulations Limited in their meeting held on 27
April 2014 have recommended cash dividend @ 30% i.e., Tk. 3 per share of Tk. 10 each
aggregating to Tk. 135,000,000 for the year ended 31 st December 2014 subject to approval of the
shareholders’ in the AGM scheduled to be held on June 11 2015. Should ACI adjust the
subsequent event or disclose the event by note? Explain.
ANS:

ACI Should not adjust the subsequent event. ACI should disclose the event by note in notes and
disclosure.

From the question, we can see that the recommendation of 30% dividend is in subject of
approval from the shareholders’ in AGM meeting which will be held on 11 June, 2015.It means

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that before going for any adjustment we need to wait for the meeting’s decision. Therefore, at the
year ended 31st December ,2014, we cannot adjust this subsequent event. We have to disclose the
event by note in the part of notes and disclosure.

Question # 4: “The basic EPS could be misleading to users”. Explain how?

ANS:

The basic EPS could be misleading to users because ‘Basic EPS’ increases the number of shares
at future date without a proportionate increase in resources .If any entity issues a bond
convertible into an ordinary share, it will increase the basic EPS of the entity but no fresh capital
will be generated. However, earning will rise as the entity doesn’t have to pay any interest on
bond. We should show the Diluted EPS under the income statement so that the shareholder could
know how worse EPS could be.

For example, suppose ordinary shares 400. Company’s net income 1200. Here, the basic EPS is
3. But 8 convertible bonds convert into 80 shares, interest of the bond is 10. So now EPS would
be 1200+10/400+80= 2.52. Thus, basic EPS could be misleading to users.

Question # 5: What do you mean by theoretical ex-rights price (TERP)? Explain with an
example.
ANS:
A theoretical ex-rights price (TERP) is the market price that a stock will theoretically have
following a new rights issue.
For example,
if there was a 1 for 3 rights issue for $4 and the market price before this was $6.
Therefore, 3 shares at $6 market price = $ 18
1 new share at $ 4 right price = $ 4
Now the shareholder has 4 shares with a value of $22. So, the TERP is $22/4 = $5.50
It starts with the number of shares previously held by an individual at their market price and adds
with the number of new shares purchased at the rights price. Then we can find the TERP by
dividing the total value of shares by the number held.

Question # 6: Differentiate fair value on recurring basis with fair value on non-recurring basis
with an example of each.
ANS:
Differences between fair value on recurring basis with fair value on non-recurring basis is given
below:

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 Recurring Basis Non-recurring Basis
Fair value on a recurring basis arises when a Fair value on a non-recurring basis arises
reporting standard requires fair value to be when a reporting standard requires fair value
measured on an ongoing basis. to be measured at fair value only in certain
specified circumstances

For example, impairment test of property, For example, during the application of
plant and equipment is a continuous process consolidation or business combination the
which have to be done every year. items are measured at fair value at the date of
acquisition.

Question # 7: What do you mean by the terms ‘Identical’ and ‘Similar’ with respect to fair value
measurement?
ANS:
With respect to fair value measurement, the term “identical” refers to the items which are exactly
the same. Unadjusted quoted prices and information in active markets for items identical to the
asset or liability being available and can be measured. It means they are observable for the asset
or liability either directly or indirectly.
For example, Anwar textile wants to know the fair value of their textile machines they are using.
They can know the fair value by comparing the price of the machines with the price of the
machine selling in the market.
With respect to fair value measurement, the term “similar” refers to the items which are not
exactly same. This may include quoted prices for similar assets or liabilities in active markets or
quoted prices for identical or similar assets or liabilities in markets that are not. Usually, they
require some degree of adjustment to arrive at a fair value measurement.
For example, ABC company use wants to know the fair value of the tractor they use. However,
the tractor is currently market out and company don’t make that type of tractor anymore. In this
situation. ABC company can measure the tractor fair value by comparing the price of similar
type of tractor available in the current market which is has been using for the same purpose.

Question # 8: Inventories are valued at the lower of cost and net realizable value (NRV). What
do you mean by NRV? Cite an example of NRV
ANS:

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In terms of inventory ,it refers that the inventory should be reported at the lower of its cost and
its net realizable value (NRV) to ensure that their inventory and income statement are not
overstated .In the ordinary course of business, NRV is the estimated selling price less the
estimated costs of completion and the estimated costs necessary to make the sale.
For example, ABC has a green widget in inventory with a cost of $50. The market value of the
widget is $130. The cost to prepare the widget for sale is $20
Here, the net realizable value is $60($130 market value - $50 cost - $20 completion cost).
As, Inventories are valued at the lower of cost and net realizable value, the company continues to
record the inventory item at its $50 cost.

Question # 9: Differentiate revenue and income with an example in light of IFRS 15.
ANS:
Differences between revenue and income in light of IFRS 15 is given below:

Revenue Income
Income arising in the course of an entity’s Increases in economic benefits during the
ordinary activities. Revenue is a very specific accounting period in the form of inflows or
term. enhancements of assets or decreases of
liabilities that result in an increase in equity,
other than those relating to contributions from
equity participants. Income is a general term.
For example, it arises out of the trading For example, it might come from trading
activities of the business such as total selling activities like total selling merchandise as
merchandise or providing services. well as non-trading activities like investment
income.

Question # 10: What is the essential characteristic of performance obligation? Explain the two-
step process to identify whether goods or services are distinct.

ANS:

The essential characteristic of performance obligation is the word distinct.

There is two-step process to identify whether goods or services are distinct and they are,

 the customer can benefit from the good or services on its own or in conjunction with
other readily available resources.

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 For example, ABC company enter into a contract to construct a building for its client.
Before they started, they built a small temporary house for their workers. Here, this will
not bring any benefit to its customer.

 the entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract.
For example, ABC company enters into a contract to manufacture and install customized
equipment and provide maintenance services for a five-year period. Here, there are two
separate performance obligation.