FINANCIAL ACCOUNTING & REPORTING Question No. 1 BC Fruits Ltd, a fruit bottling and canning company, is planning to expand its operations. ‘The directors are hoping to increase the range of preserved fruit products and in doing so will need to invest in new equipment. ‘They are also hoping to open a new facility in the northem part of the country. ‘The CFO has been asked to prepare a report on the following issues of conceptual framework. You are the Finance Controller ofthe company and your CFO wants to address all issues in his report and has asked for your assistance. Requirements: Prepare brief notes for the CFO, addressing each of the following and using the Conceptual Framework as & source of reference: a) Identify potential providers of finance for BC Fruits Ltd and their information requirements in respect of financial statements, 4 b) Explain the terms ‘performance’ and ‘position’ and identify which of the financial statements will assist the user in evaluating performance and position, 6 ©) Indicate why, for decision-making purpos: PE a) Potential providers of finance Information requirements s, the financial statements alone are insufficient, 5 - The existing shareholders of the - The profit before interest of BC Fruits Ltd, to company and potential ~— new determine risk. shareholders - through a new issue of share capital - Existing and future lenders and - The trend of profitability of BC Fruits Ltd together creditors to the company. witha history of dividend payments, This will enable them to assess retum and risk of their investment. - The financial structure of BC Ltd, to determine the level of debt finance as a measure of risk. = The company's liquidity or ability to pay out dividend and redeem share capital ‘The company’s ability to generate cash and the timing and certainty of its generation. ~The liquidity of the company and its ability to repay interest and capital instalments. ~The existing level of debt and any security over that debt. b) Performance and position and the financial statements which assist in evaluation: Performance ‘The financial performance of a company comprises the return it obtains on the resources it controls. Performance can be measured in terms of the profits of the company and its ability to generate cash flows. 27 | PageManagement will be assessed on their skill in achieving the highest level of performance, given the resources available to them. Information on performance can be found in: = The statement of profit or loss and other comprehensive income - The statement of changes in equity. - The statement of cash flows Position ‘The financial position of the company is evaluated by reference to: (i) Its economic resources and claims (Gi) its capital structure, ic its level of debt finance and sharcholders' fund. (iii)its liquidity and solvency ‘The user of the financial statements can then make assessments on the level of risk, ability to generate cash, the likely distribution of this cash and the ability of the company to adopt to changing circumstances. ‘The statement of financial position is the prime source of information on a company's position but the statement of cash flows will also indicate a company's cash position over a period of time. ©) Financial statements - inherent limitations as a tool of decision-making Financials statements are prepared by reference to a relatively rigid set of accounting standards applicable to all companies, regardless of the sectors of the economy they operate in, As a result, information for individual and specialized companies may not be forthcoming, Further, the preparation of financial statements is based on estimates and judgements by the management and therefore are not a source of totally verifiable information, Financial statements primarily use the historical cost convention. They can identify trends from the past which may be relevant to the future, but they are not forecasts and are therefore less helpful when ‘making predictions. In deciding whether or not to invest in a company, a decision-maker will also want access to non- financial data not contained in the financial statements such as: (i)_A discussion of business risks and opportunities (ii) An evaluation of the quality of management (iii) narrative analysis of position and performance. or You are the Finance Controller of PQS Limited that wholesales and distributes toys and provides services to other companies. The following balances have been extracted from the company's books of accounts as, at 31 December 2018. or) Amount in Tk Ordinary share 800,000 5% redeemable preference shares 200,000 Share premium account 350,000 Retained earings at | January 2018 2,000,000 Revenue 11,899,000 Purchase 8,935,000 Inventories at 1 January 2018 974,000 Staff cost - distribution 270,000 Staff cost - administration 352,000 Depreciation charge for the year Freehold land and buildings 30,000 Distribution equipment 116,000 Other plant and equipment 160,000 28 [PageGeneral expenses 432,000 Interest receivables 41,000 Interest payables 35,000 Taxation - charge for the year 336,000 Dividend paid Ordinary shares - final regarding 2017 60,000 Ordinary shares - interim regarding 2018 30,000 5% redeemable preference shares - for 2018 10,000 Patent rights 200,000 Freehold land & buildings - cost 1,200,000 Distribution equipment - cost 800,000 Other plant & equipment - cost 1,400,000 Accumulated depreciation at 31 December 2018 Freehold land and buildings 130,000 Distribution equipment 320,000 Other plant and equipment 250,000 ‘Trade receivables 1,600,000 Trade Payables 850,000 Cash and cash equivalents 300,000 Tax liability 400,000 Additional information (@) Included in revenue are invoices totaling Tk. 120,000 in relation to distribution services rendered under a contract to a customer who is very unhappy with the quality ofthe services provided, The overall outcome of the contract is uncertain and management believes that of the Tk. 90,000 costs incurred to date under the contract, probably only Tk. 65,000 will be reimbursed by this customer. (b) The patent was acquired during the year, Amortization of Tk. 20,000 should be charged to administration expenses. (©) _ Inventories at 31 December 2018 were valued at Tk. 1,304,000 (@ Costs not specifically attributable to one of the profit or loss expenses headings should be split 50:50 between distribution costs and administrative expenses (©) Inventories carried at Tk. 846,000 were purchased from France in Euros and payment is due on 2 March 2019. At the date of the transaction the exchange rate was Tk. 100 to €1. At 31 December 2018 the exchange rate was Tk. 95 to €1 (A final ordinary share dividend for2018 of Tk. 50,000 was proposed in May 2019, payable on 28 June 2019, (g) Tk. 450,000 cash was received during the year as a result of a rights issue of ordinary shares. The nominal value ofthe shares issued was Tk. 100,000, (h) On 1 June 2018 the company made the decision to sell its loss-making soft toy division as a result of severe competition from the Far East. The company is confident that the closure will be completed by 30 April 2019. The division's operations represent in 2018 10% of revenue (after all adjustments), 15% of cost of sales, 10% of distribution costs and 20% of administrative expenses. No disclosure are necessary in the statement of financial position. Requirements: Prepare PQS Limited's statement of profit or loss and statement of changes in equity for the year 31 December 2018, a statement of financial position at that date and movement schedules and notes in accordance with the requirements of IFRS, to the extent the information is available. 25 29 | PagePURao ek need ‘Workings notes: ‘Amount in Tk. 1 Revenue: Revenue as per Trial Balance 11,899,000 Less: Contract under dispute (120,000) Add: Recoverable cost 65,000 11,844,000 2 Analysis of expenses Cost of sales Distribution cost Admin, Expenses Opening inventory 974,000 Purchases 8,935,000 Staff cost 270,000 352,000 Depreciation: Land and buildings 15,000 15,000 Distribution equipment 116,000 Other PPE, 80,000 80,000 General expenses 216,000 216,000 Amortization of patent 20,000 Foreign exchange loss (note 3) 44,526 Closing inventories 4,304,000) 8,605,000 697,000 727526 3 Foreign exchange loss: Payable at date of transaction 846,000 Payable at year end date (846,000 x 100/95) (890,526) Exchange loss at end of reporting period 4 Continuing / discontinuing analysis Continuing, Discontinued Total Operation (Tk) Operation (Tk.) Teka Revenue (note 1 - 90:10) 10,659,600 1,184,400 11,844,000 Cost of sales ( note 2 - 85:15) (7,314,250) (1,290,750) (8,605,000) Gross Profit 3,345,350 (106,350) 3,239,000 Distribution cost (note 2 - 90:10) (627,300) (69,700) (697,000) Admin, Expenses (note 2 - 80:20) (582,021) (145,505) (727,526) Profiti(loss) from operation 2,136,029 (821,555) 1,814,474 Finance cost (35,000+10,000) (45,000) - (45,000) Investment income 41,000 - 41,000 Profivi(loss) before tax 2,132,029 (321,555) 1,810,474 Income tax (336,000) - (336,000) ‘Net profit(loss) for the year 1,796,029 (G21,555) Tara aT 30| Page‘Statement of profit or loss for the year ended on 31 December 2018 Continuing operations Taka Revenue (note 4) 10,659,600 Cost of sales ( note 4 (7,314,250) Gross Profit 3,345,350 Distribution cost (note 4) (627,300) Admin, Expenses (note 4) (582,021) Profit from operation 2,136,029 Finance cost (35,000+10,000) (45,000) Investment income 41,000 Profit before tax 2,132,029 Income tax (336,000) Profit for the year from continuing operations 1,796,029 Discontinued operations Loss for the year from discontinued operations (note 4) (521,555) Profit for the year 1.474474 Statement of changes in equity for the year ended on 31 December 2018 Share Share Retained Total Capital (Tk.) Premium (Tk) Eamings (Tk) Taka Balance at 1 January 2018 700,000 2,000,000 2,700,000 Changes in equity for 2018: Issue of share capital 100,000 350,000 450,000 Dividends (90,000) (90,000) Total comprehensive income 1474474 1,474,474 Balance at 31 December 2018 800,000, 350,000, 3.384.474 4 474 Notes a) The profit from operations is arrived at after charging Depreciation (30,000+1 16,000+160,000) 306,000 Amortization of intangibles 20,000 Employee benefits (270,000+352,000) 622,000 Foreign Exchange loss 44,526 b) 2 A final ordinary share dividend for 2018 of Tk. 50,000 is proposed for payment on 28 June 2019. On | June 2018 the company classified its soft toy division as held for sale, The division had been loss- making for some time duc to severe competition from the Far East. It is expected that the closure will be completed by 30 April 2019. Amount in Tk. attributable to the division in 2018 were: revenue Tk. 1,184,000, expenses Tk. 1,505,955 and pre-tax loss Tk. 321,555 31 | PageStatement of financial position as at 31 December 2018 ASSETS Non-current assets Property, plant and equipment Intangible Carrent assets Inventories Trade and other receivables (1,600,000 - 55,000) Cash and cash equivalents Total assets EQUITY AND LIABILITIES Equity Ordinary share capital Share premium Retained earnings Total equity ‘Non-current liabilities Preference share capital Current liabilities Trade and other pay. Taxation Les (850,000+44,526) Total equity and liabilities PROPERTY, PLANT AND EQUIPMENT Freehold land & buildings Cost e ALI Jenuary 2018 1,200,000 At31 December 2018 1,200,000 Depreciation At I January 2018 100,000 Charge for the year 30,000 At31 December 2018 Carrying amount ‘At31 December 2018 1,070,000 At January 2018 1,100,000 INTANGIBLES Cost at 31 December 2018 Amortization Camying amount at 31 December 2018 a2 [Page Taka 2,700,000 180,000 1,304,000 1,545,000 300,000 800,000 350,000 384,474, Taka 2,880,000 4,534,474 894,526 400,000 200,000 1,294,526 Distribution Other plant equipment & equipment 800,000, 1,400,000 204,000 116,000 480,000 596,000 6,029,000, Total 200,000 (20,000) 180,000Pragati Limited has entered into the following transactions during the year ended 31 December 2018, @ (b) © @ On | October 2018, Pragati Limited received Tk, 400,000 in advance subscription. The subscriptions are for 20 monthly issues of a magazine published by Pragati Limited. Three issues of the magazine had been dispatched by the year end. Each magazine is of the same value and cost approximately the same to produce. A batch of unseasoned timber, which had cost Tk. 250,000 was sold to BM Limited for Tk. 100,000 on 1 January 2018. Pragati Limited has an option to repurchase the timber in 10 years'time. The repurchase price will be Tk. 100,000 plus interest charges @ 8% per anumn from January 2018 to the date of repurchase. The ‘market value ofthe timber is expected to increase as it seasons. Pragati Limited made a major sale on I January 2018 for a fee of Tk. 450,000 which related to a completed sale and after-sales support for three years. The cost of providing the after-sales support is estimated at Tk. $0,000 per anumn, and the mark-up on similar after sales only contracts is 20% on cost. ‘The food division of Pragati Limited operates its retail outlets on a franchise basis. On 1 January 2018 a new ‘outlet was opened, the franchisee paying a fee of Tk. $00,000 to cover the initial services. The franchise is for five years, and the franchisee will pay an additional fee of Tk, 60,000 commencing on | January 2018 to cover marketing, managerial and other support services provided by Pragati Limited during the franchise period. Pragati Limited has estimated that the cost of providing these services is Tk. 80,000 per anumn, and has achieved a gross margin of 20% on providing similar services on other contracts Requirements: a (i Prepare extracts from Pragati Limited's financial statements for the year ended 31 December 2018, clearly showing how each of the above would be reflected. Notes to the financial statements are not required. 16 With reference to transaction (b) above, explain the concept of ‘substance over form 4 eee (® Financial statement extracts Statement of financial position as at 31 December 2018, EQUITY AND LIABILITIES Non-current liabilities Borrowings (100,000+8,000) 108,000 Deferred income (note 2) 280,000 Current liabilities Deferred income (note 2) 340,000 ‘Statement of profit or loss for the year ended 31 December 2018 Revenue (note 1) 790,000, Finance cost (8%x100,000) 8,000 Working notes: 1 Revenue ‘Transaction (a) [3/20x400,000] 60,000 ‘Transaction (c) Sales [450,000-(50,000x120%x3)] 270,000 ‘Aftersales support year | (50,000x120%) 60,000 33 | PageTransaction (4) Initial fee [500,000-(40,000x5) 300,000 Continuing fee year 1 (80,000x100/80) 100,000 2 Deferred income Current ‘Non-current ‘Transaction (a) [400,000x12/20, $/20)] 240,000 100,000 Transaction (c) [50,000x120% for year 2 & 3) 60,000 60,000 ‘Transaction (d) [100,000-60,000 for year 2 to 5] 40,000 120,000 340,000 280,000 i) Transaction (b) and substance over form Ina straight forward transaction its commercial effects is the same as its legal form. However, in more complex transaction the true substance of the transaction may be different from its legal form, with one party having the risks and rewards of ownership but another party having legal title to the asset In such circumstances recording the legal form of the transaction would not be sufficient to provide a fair presentation in the financial statements. ‘This transaction appears unusual as the initial sale is below fair value, which raises question about its substance, Pragati Limited has a call option significantly below the current fair value which is expected to increase over time. The terms of the transaction are that itis almost certain that the timber will be reacquired, hence this is essentially a sale and repurchase agreement. Pragati Limited has retained the risks and rewards of ownership, even though legal title has passed. The transaction is effectively a financing agreement secured on the timber, and does not give rise to revenue, The proceeds of Tk. 100,000 are therefore recognized as borrowings in non-current liabilities. In the year ended on 31 December 2018, Pragati limited should recognize a finance cost of Tk. 8,000 (8% of Tk. 100,000) which will increase the borrowings. Madina Ltd, has investments in two companies, a subsidiary, Beta Ltd, and an associate, Gama Ltd. You are the in-charge of audit team for Madina Group. While reviewing the consolidated financial statements of the Group, following issues came to your notice- a) The draft consolidated statement of financial position at 31 December 2018 has been prepared by simply adding together each line of the individual statements of financial position of Madina Lt (parent company) and Beta Ltd. b) The investment in Gama Ltd is being carried at cost. ‘The draft consolidated statement of financial position as at 31 December 2018 is shown below, together with the individual statement of financial position of Gama Ltd at the same date: 34] PageMadina Group (Draft consolidated) Gama Ltd. ASSETS BDT BDT ‘Non-current assets Property, plant and equipment 4,000,000] 350,000] Investments 7,786,000] 0 11,786,000 000 Current assets Inventories 600,000 70,000] Trade and other receivables 1,295,000] 50,000 Cash and cash equivalents, 250,000] 17,000 107 Total assets EQUITY AND LIABILITIES Equity Ordinary share capital (BDT 1 shares) 3,400,000] 300,000] Share premium account 1,000,000} 15,000] Revaluation surplus 750,000] | Retained earings 1,450,000] -525,000] 6,600,000 =10,000 Current liabilities Trade and other payables 7,206,000] 400,000] Income tax 125,000] 67,000] 7,331,000 467,000 Total equity and liabilities 13,931,000 457,000 Additional information: a) Madina Ltd, acquired 80% of Beta Ltd on 1 Jamuary 2018 when Beta Lid’s equity was as follows: Equity-Beta Ltd BDT Ordinary share capital (BDT 1 shares) 1,400,000 Share premium account 100,000 Revaluation surplus 500,000 Retained Famings Equity On 31 December 2018 Beta Ltd’s retained earings were BDT 1,250,000 and its revaluation surplus was BDT 350,000. All other components of equity were unchanged. ‘The consideration for the equity stock was paid in below manner- i) Madina Ltd, had taken over an overdue loan of BDT 7,600,000, wich Madina Ltd, had immediately paid off. ii) Madina Ltd. handed over a sedan car with carrying amount of BDT 200,000. The car had a fair value of BDT 1,000,000. No entry was passed in the books of Madina Ltd b) The fair values of the assets and liabilities of Beta Ltd. at the date of acquisition were equal to their carrying amounts, with the exception of inventory. On I January 2018 the fair value of Beta Ltd’s inventories was BDT 125,000 but their carrying amount was BDT 108,000, At 31 December 2018 half, of these inventories were still held by Beta Ltd. 35 | Page©) Madina Ltd has decided to measure goodwill and the non-controlling interest using the proportionate method. ) Madina Group acquired 40% of Gama Ltd on 30 June 2018 for BDT 186,000 when the retained earings of Gama Ltd were BDT 150,000. Gama Ltd. had declared 50% cash dividend, on 30 September 2018, ©) Gama Ltd. had a disaster in operation during the 4% quarter, which had led to negative retained earnings at the end of the year. 1) On I January 2018 Madina Ltd. sold a machine to Beta Ltd for BDT 180,000. The machine had a carrying amount in Madina Ltd’s books of BDT 156,000. The estimated remaining useful life of the ‘machine was reassessed on the date of sale at six years. 2) In October 2018, Madina Ltd, sold goods to Gama Ltd. for BT 20,000, making a gross profit margin of 30%. At 31 December 2018 Gama Ltd held one-third of these goods in its inventories. h) Inventories in the statements of financial position of all three companies at 31 December 2018 were based on physical inventory counts carried out on 31 December 2018, i) However, on 10 January 2019 Beta Ltd received a report from one of its customers, showing that on 31 December 2018 the customer held BDT 23,600 (at cost to the customer) of Beta Ltd’s inventories on a sale or return basis. Beta Ltd makes a gross profit margin of 25% on all sales but has not yet raised any invoices for this transaction. Requirement: Prepare the consolidated statement of financial position of Madina Ltd. as at 31 December 2018. 25 eed Madina Lid Group Consolidated statement of financial position As of 31 December 2018 Assets Bor Non-current assets Property, plant and equipment (4,000,000-200,000(w8)-20,000(w7) 3,780,000) Investments (w 4) 0 Goodwill (W2) 6,206,400) 70,486,400 Current assets Inventories [600,000+(8,500+17,700) w1 626,200 ‘Trade and other receivables 1,295,000] Cash and cash equivalents 250,000 2,171,200 12,657,600 36 |PageEquity and liabilities Equity Ordinary share capital (3,400,000-1,400,000) Share premium (1,000,000-100,000) Revaluation surplus (750,000-350,000-150,000 (w1)x80%) Retained camings (WS) Non-controlling interest (working 3) Current liabilities Trade and other payables Income tax ‘Working 1 Net assets of Beta Ltd. 2,000,000] 900,000] 280,000] 1,521,360] 4,701,360 625,240 5,326,600 7,206,000] 125,000] 7,331,000 12,657,600 Post Post acq Year end Acquisition acquisition Category Ordinary share capital 1,400,000 1,400,000 0 Share premium 100,000 100,000 0 Revaluation surplus 350,000 $00,000 -150,000 -150,000 Retained earnings 1,250,000 350,000 900,000 Fair value adjustment (inventories) ((125,000-108,000)2) 8500 17,000 8,500 (125,000-108,000) at acquisition Inventory - sale or return (23,600x75% 17,700 © 17,700 _ 909,200 126,200 2,367,000 759,200 759,200 Workings 2: Goodwill - Subsidiary Beta Ltd. Consideration transferred Loan taken over Fair value of asset (sedan car) transferred Net assets at acquisition Non-controlling interest at acquisition (2,367,000(w1)x20% Workings 3 Non-controlling interest Share of net assets at acquisition (2,367,000 (W1) x 20%] Share of post-acquisition profits/(loss) (759,200 x 20%) [ref wl] Workings 4: Investment in associate Cost: |Add: Share of post-acquisition profits [{-325,000-(150,000-300,000x50%)} x 40%] Less: Dividend out of reacquisition profit (150000x40%) Less: Proportionate Unrealized Profit on sale of inventory (W6) 17,600,000 1,000,000 8,600,000 2,367,000 473,400, 706,400 473,400 151,840 625,240 186,000, 130,000] (60,000) (800)| 800) 37 | PageHowever, Madina's share of loss wont be recognized once carrying amount of investment reduces to nil Accordingly, post acquisition loss recognized in P&L would stand at (130,000-4,800= 125,200 and investment value = Nil Workings. Retained earnings Draft consolidated (1,450,000 ~ 1,250,000) Gain on sale of PPE ( Car, 1,000,000-200,000) Profit - Beta Ltd (909,000 x 80%) Share of profit Gama Ltd (W'4) Less: Dividend out of pre-acquisition profit of Gama (Ws) Less: Proportionate Unrealized Profit on sale of inventory (W6) Less: Property, plant and equipment unrealized profit (W7) Workings 6: Proportionate Unre: Sales price Cost Gross profit ae Proportionate unrealized profit (40%) Workings 7: Proportionate Unrealized Profit - PPE. PPE balance in Parent Company as of reporting date (180,000 x 5/6 years) Asset would have been in Subsidiary book (156,000 x 5/6 years) Working 8: Loss on disposal of sedan ear Fair value of sedan car transferred Carrying amount as of transfer date Gain on disposal of sedan ear Working 9: Equity - Beta Ordinary share capital (BDT 1 shares) Share premium account Revaluation surplus Retained camings Equity 38| Page % 100% 70% 30% 150,000, 130,000, 20,000, 1,000,000 200,000 800,000 Acquisition 1,400,000 100,000 300,000 200,000 800,000 727,360 (125,200) (60,000) (800) (20,000) 1521360, Associate RDT 20,000 14,000 6,000 2,000 300 31 December 2018 1,400,000 100,000 350,000 1,250,000 (00,000(a) CB Ltd. isa reputed multinational company in Bangladesh. The company was intially registered as a private limited company, but very recently the company was converted to a Public Limited Company. In the process, the company had issued shares to @ number of new investors The Head of Reporting of CB Ltd, has just completed preparing the consolidated financial statements of the company. During the audit kick-off meeting, the newly appointed audit manager had asked if all the related party disclosures have been properly made. The audit junior has raised question about adequacy of related party disclosure in below circumstances: i, Mr. C, who owns 51% share in the company has acquired 20% stake in BZ Limited. The audit managers view is BZ. Limited should be treated as a related party of CB Limited. ii, CX is the only importer of raw material for the company. CB has a significant amount of dues to CX. Mr. X, the Chair of CX, often visits CB Premises. During his last visit, he had visited company warehouse and had wamed management about the working environment at factory premises. The audit manager asked why CX or Mr. X has not been considered as a related party. iii, Mr. Z is appointed as the Chief Operating Officer. His wife, Mrs. P, has a raw material supply contract with the company since long. However, upon appointment, Mr. Z, stopped ordering further ‘material from her company, lest it should be questioned by the board. The audit manager is convinced that the contract needs to be disclosed. Mr. Z will not like to disclose such dormant contract as a related party disclosure. Requirements: You, as a newly appointed professional accountant, were asked to advise if related party disclosure would be needed in above cases. Share your advice and underlying justification, 2x36 (b) A Limited has prepared below Profit or Loss Statement for the year ended 30 June 2019, A Limited Statement of Profit or Loss For the year ended 30 June 2019 Taka Revenue 1,000,000, Cost of goods sold (250,000) Gross profit Operating expenses Selling expense (120,000) ‘Advertisement, Promotion expense (270,000) ‘Administrative expense (300,000) Total operating expenses (690,000) Operating profit 604,000 Finance income, net 24,000 Profit before tax 84,000 Income tax expense 25,000 Net profit after tax 59,000 ‘You are the engagement partner for the audit of the company. Your Engagement Manager is having a review meeting with you where he has asked for your opinion on below matters: 39 | Pagea) ») °) One of the suppliers of A Limited has imposed penal interest of USD 10,000 due to delay in payment of annual maintenance fees. The bank has denied to remit the amount without permission from the Government, Historically, the Government has never allowed remittance against penal interest. On September 30, the Government enacted a new environment law, by virtue of which local environment office would be able to levy Taka 200 per Kg. of by-products from its manufacturing plant. Until 30 June 2019, the company had produced 1,000 KG of such by-product. No provision was made. An item has been produced at a manufacturing cost of Taka 18,000 against a customer's order at an agreed price of Taka 23,000. The item was in inventory at the year-end awaiting delivery instructions In July 2019 the customer was declared bankrupt and the most reasonable course of action seems to be to make a modification to the unit, costing approximately Taka 3,000, which is expected to make it ‘marketable to other customers at a price of about Taka 19,000. Requirements: Please give your opinion in each of the above cases, in light of IFRS. Also assist your manager in re- ‘constructing the Profit or Loss account. 33-9) Answer to the Question No. 5 (a) ii) Mr. C, who owns 51% share in the company has acquired 20% stake in BZ Limited. The audit ‘managers view is BZ Limited should be treated as a related party of CB Limited ‘An entity would be considered as a related party if it is under significant influence of a person who controls or has joint control over the reporting entity, Mr.C has 51% stake in CB Ltd and has significant influence over BZ limited (as he owns 20% of shares in the company). Accordingly, BZ and CB are related parties. CX supplies is the only importer of raw material for the company. CB has a significant amount of dues to CX. Mr. X, the Chair of CX, often visits CB Premises. During his last visit, he had visited company warehouse and had warned management about the working environment at factory premises. The audit manager asked why CX or Mr. X has not been considered as a related party. A supplier, with whom an entity transacts a significant volume of business, simply by virtue of the resulting economic dependence. Even though, the supplier seems to exercise pressure/power/control over the company, such control may be considered in any monopoly business. Accordingly, Mr. CX will not be a related party to CB. Mr. Z, is appointed as the Chief Operating Officer. His wife, Mrs. P has a raw material supply contract with the company since long. However, upon appointment, Mr. Z, stopped ordering further material from her company, lest it should be questioned by the board. The audit manager is convinced that the contract needs to be disclosed. Mr. Z, won't like to disclose such dormant contract as a related party disclosure Mrs. P, being spouse of COO is a related party by definition, ‘The profit or loss and financial position of an entity may be affected by a related party relationship even ifrelated party transactions do not occur. The mere existence of the relationship may be sufficient to affect the transactions of the entity with other parties. For example, a subsidiary may terminate relations with a trading partner on acquisition by the parent of a fellow subsidiary engaged in the same activity as the former trading partner. Altematively, one party may refrain from acting because of the significant influence of another—for example, a subsidiary may be instructed by its parent not to engage in research and development. Accordingly, the company should disclose the contract, if material 40|PageENA enue 0} Requirement (a) A provision is recognized iff below criteria are met« a) an entity has a present obligation based on past even b) itis probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and ©) _areliable estimate can be made of the amount of the obligation In the case mentioned, even though, the entity might have present obligation against past event, outflow of resources embodying economic benefits is uncertain. Accordingly, no provision would be needed. Requirement (b) The effect of possible new legislation is taken into consideration in measuring an existing obligation when sufficient objective evidence exists that the legislation is virtually certain to be enacted. The variety of circumstances that arise in practice makes it impossible to specify a single event that will provide sufficient, objective evidence in every case. Evidence is required both of what legislation will demand and of whether it is virtually certain to be enacted and implemented in due course. In many cases sufficient objective evidence will not exist until the new legislation is enacted, Accordingly, it may be argued that there was no present obligation based on past event, until the law was enacted. No provision would be needed. Requirement (C) Bankruptcy of a customer immediately after reporting date usually indicate that the condition also prevailed ‘on the reporting date, and accordingly considered as an adjusting even, Due to bankruptcy of the customer, the contractual amount is no longer recoverable. The net realizable value for the item should be calculated as follows- Expected realizable value from alternate customer 19000 Additional costs to be incurred -3000 Not realizable value 16000 Cost of inventory 18000 Lower of the above to be recognized in the financials 16000 Amount to be charged off 2000 41 | Pa