FAR560 – JUNE 2017

Suggested Solution

Question 1

a. i. An impairment loss is the amount by which the carrying amount / of an asset /

or a cash-generating unit / exceeds its recoverable amount./
(4 / x ½ = 2 marks)
ii. External sources of information

(1) there are observable indications that the asset’s value has declined
during the period significantly more than would be expected as a result of
the passage of time or normal use.

(2) significant changes with an adverse effect on the entity have taken place
during the period, or will take place in the near future, in the MFRS 136 ©
IFRS Foundation 1027 technological, market, economic or legal
environment in which the entity operates or in the market to which an
asset is dedicated.

(3) market interest rates or other market rates of return on investments have
increased during the period, and those increases are likely to affect the
discount rate used in calculating an asset’s value in use and decrease the
asset’s recoverable amount materially.

(4) the carrying amount of the net assets of the entity is more than its market
capitalisation.

Internal sources of information

(1) evidence is available of obsolescence or physical damage of an asset.

(2) significant changes with an adverse effect on the entity have taken place
during the period, or are expected to take place in the near future, in the
extent to which, or manner in which, an asset is used or is expected to be
used. These changes include the asset becoming idle, plans to
discontinue or restructure the operation to which an asset belongs, plans
to dispose of an asset before the previously expected date, and
reassessing the useful life of an asset as finite rather than indefinite.

(3) evidence is available from internal reporting that indicates that the
economic performance of an asset is, or will be, worse than expected.

(Any three / x 1 = 3 marks)

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 FAR560 – JUNE 2017
b. i) Total exploration and evaluation costs:
Year End Particular RM
Mining rights 5,000,000√
Professional fees – topographical studies 800,000√
Construction of quarters for workers 100,000√
Construction of tin mill 100,000√
Railways from Temangan 300,000√
Depreciation of equipment (RM100,000/10yrs 20,000√√
x 2yrs)
Rental of machineries (3 x RM50,000 x 2yrs) 300,000√√
Salaries and wages per annum (RM100,000 x 300,000√
3 yrs)
31/12/2014 Total Exploration and Evaluation Costs 6,920,000
(10√x 1 mark = 10 marks)

ii) Calculation of impairment loss and carrying value:

(a) 1/1/2015 Exploration and Evaluation costs 6,920,000√ OF

Less: Amortisation expenses (1,384,000)√√√
(6,920,000/10yrs x 2yrs)
31/12/2016 Carrying amount 5,536,000
31/12/2016 Recoverable amount 6,200,000√
NO Impairment Loss√ 664,000

(b) 1/1/2017 Written Down Value 5,536,000√

Less: Amortisation (5,536,000/8 yrs) (692,000)√√
31/12/2017 Carrying Value 4,844,000√ of

(10√ x ½ mark = 5 marks)

c. The full cost method capitalizes / all exploration and evaluation cost / irrespective of
whether an exploration proves to be successful / or unsuccessful. /

The pros and cons of full cost method:

Pros
Easy to calculate and to allocated the E&E
cost which is all cost related to E&E
activities to be capitalized
E&E cost incurred actually related to the
company main activity which is exploration
activities. Costs of unsuccessful are also
part and parcel of the main activities and
thus should be capitalized.
Capitalization of unsuccessful cost helps to
increase the overall net asset of the
company.
Cons
Expose to bigger impairment amount
because the higher E&E costs
Profit overstated or inflated due to
capitalization of costs associated with
unsuccessful E&E cost
Not fulfill the definition of an asset
because it capitalize the cost of
unsuccessful E&E cost

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 FAR560 – JUNE 2017
Category Successful effort Full cost
Used by Big company Small /startup company /
Cost center Single well/field Entire activities /
Unsuccessful exploration Expensed Capitalized /
Successful exploration Capitalized Capitalized /
Impairments Smaller Bigger /
Operating expenses Expensed Expensed /
Or any other relevant arguments
(10 / x ½ = 5 marks)
(Total = 25 marks)

Question 2

a. i. Analyse the amount (Statement of Financial position as at 31 December 2016).

Biological asset /
30 one year old calf
(30 x 1,500) 45,000 //
30 two year old calf
(30 x 1,800) 54,000 //
(5 / x 1 = 5 marks)

OR
RM
FVLCTS at 1 Jan 2016 (50 X 1000) 50,000/

Increases due to purchase 54,000/

Decrease due to sales (20 X 1000) (20,000)/
Gain due to price change (30X1300)-(30X1000) 9,000/
Gain due to physical change (30X1500) -
6,000/
(30X1300)
49,000
FVLCTS at 31 Dec 2016 (30 X 1500) + (30 X
1800) 99,000

Working
Biological Assets
b/d 50,000 3 Cost of sales 20,000
1 Cash 54,000
2 FV gain 15,000
 
  c/d 99,000
119,000 119,000
-
Dr Cr
RM RM
1 31/12/16 Biological assets 54,000
Cash 54,000

2 31/12/16 Biological assets 15,000

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 FAR560 – JUNE 2017

FV gain on remeasurement of BA 15,000

3 31/12/16 Cost of production 20,000

Biological assets 20,000

4 31/12/16 Cash 300,000

Sales 300,000

ii. Malaysia Agriculture Berhad

Statement of profit or loss for the year ended 31 December 2016.

RM
Sales of calves 300,000 /
Purchase of new calves (20,000) /
Fair value gain (9,000 + 6,000) 15,000//
Feeding and other operating expenses (40,000) /
Profit from operating activities 255,000

(5 / x 1 = 5marks)

b. Biological transformation comprises the processes of growth, degeneration,

production, and procreation that cause qualitative or quantitative changes in a
biological asset. //
(2 / x 1 = 2 marks)
The two stages of biological transformation of a biological asset:
(a) asset changes / through
growth / (an increase in quantity or improvement in quality of an animal or plant),
(ii) degeneration / (a decrease in the quantity or deterioration in quality of an
animal or plant), or
(iii) procreation / (creation of additional living animals or plants); or

(b) production / of agricultural produce / such as latex, tea leaf, wool, and milk.
(6 / x 1/2 = 3 marks)

c. Consumable biological assets are those that are to be harvested as agricultural

produce / or sold as biological assets /.
Examples of consumable biological assets are livestock intended for the production
of meat, livestock held for sale, fish in farms, crops such as maize and wheat, and
trees being grown for lumber. (any two examples //)

A bearer biological asset is a living asset / that:

(a) is used in the production or supply of agricultural produce; /
(b) is expected to bear produce for more than one period; and /
(c) has a remote likelihood of being sold as agricultural produce, except for incidental
scrap sales. /
Example of bearer biological asset, livestock from which milk is produced, grape
vines, fruit trees, and trees from which firewood is harvested while the tree remains.
(any two examples //)
(10 / x ½ = 5 marks)
(Total: 20 marks)

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 FAR560 – JUNE 2017

Question 3

a. The companies Act 1965 defines a subsidiary company as

(1) One in which the investor company / :

(i) controls the composition of the board of directors /
(ii) controls more than half of the voting power/
(iii) holds more than half of the issued share capital / (excluding preference
shares)

(2) A subsidiary of a subsidiary of the investor company. /

(5√ x 1 mark= 5 marks)

b.
Honey Bhd
Consolidated Statements of Profit or Loss and Other Comprehensive Income
for the Year ended 31 December 2016
RM
Turnover 1,500,000√ + 1,200,000√ -100,000√ 2,600,000
Cost of sales 375,000√ + 300,000√ -100,000√ + 5,000√√ urp
on closing inventory (580,000)
Gross profit 2,020,000
Investment income 65,500√ – (60,000√ x 80%√ =48,000) + 20,000 37,500
Selling and distribution 120,000√ + 80,000√ (200,000)
Administrative expenses 80,000√+ 50,000√ (134,000)
+ (20,000/5yrs = 4,000)√√ underdepn
machinery
- 8,000√ consultancy
- (10,000/5yrs = 2,000√√√ ) overdepn Motor
Vehicle
+ URP Machine (10,000)
Goodwill impairment 30,000 x 20%√√ (6,000)
Financial expenses 20,000√+ 10,000√ (30,000)
Profit before taxation 1,687,500
Less: Taxation 294,300√+ 228,000)√ (522,000)
Profit after taxation 1,165,500

Profit attributable √ to:

Equity holders of Parent √ 1,044,500
NCI√ (W1) 121,000
1,165,500
W1 Profit attributable to NCI
Sweet Bhd RM RM
Profit for the year √ 552,000
Preference dividends √ (35,000) X 60%√ 21,000
Profit for Ord shareholders 517,000
Adjustments:
Under depreciation of machinery (20k/5 yrs) √ (4,000)
URP of closing inventories (1/4 x 20k) √√ (5,000)
Over depreciation of motor vehicle √ 2,000
Profit on disposal of motor vehicle √√ (10,000)
Adjusted PAT 500,000 X 20% √ 100,000

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 FAR560 – JUNE 2017
121,000
(40√ x ½ mark = 20 marks)
c. Consolidated Statement of Changes in Equity (extract) for the year ended 31
December 2016.
Group profits NCI
RM RM
Balance brought W2 1,675,730√of W3 820,270 √of
down
Profit for the year√ 1,044,500 121,000
Appropriation:
Preference dividend - (7% x 500,000 x (21,000)√√√
60%)
Ordinary dividend (160,000)√ (60,000 x 20%) (12,000)√√

Balance carried 2,560,230 908,270

down

Working 2:
RM
Balance as at 1/1/2016 – Honey Bhd 1,250,650√
Sweet Bhd (RM985,350 – 450,000 – 4,000 x 425,080√√√
80%) = 531,350 X 0.80
Total group profits brought down 1,675,730

Working 3:

RM
FV NA of Sweet on DOA:
OSC 1,500,000
Retained earning 450,000
Share premium 100,000
ARR 20,000
FV NA 2,070,000
NCI interest 20% 414,000
Post-acquisition profits (985,350 -450,000 -4,000) = 106,270√√√
531,350 X 20%
Interest on PSC (500,000 X 60%) 300,000
Total non-controlling interest brought down 820,270

OR

FV NA of Sweet on 1/1/2016
(1500+100+20+985.35-4) X 20% 520,270
Interest on PSC 300,000
820,270

(20√x ½ mark = 10 marks)

(Total: 35 marks)

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 FAR560 – JUNE 2017

Question 4A

a. Inventories should be recognized at the lower of cost or net realizable value√:

First quarter:
Cost: RM2,000,000
NRV: RM1,800,000 ~ the lower
Therefore, the value of inventories should be written down to its NRV RM1,800,000√
in the first quarter of the statement of financial position√ and loss of inventory of
RM200,000√ should be recognized in the statement of profit or loss and other
comprehensive income√.
Third quarter:
Cost RM2,000,000 ~ the lower
NRV:RM2,100,000
Therefore, the value of inventories should be reversed up to its cost value of
RM2,000,000√ in the third quarter of the statement of financial position√. The loss of
inventory that previously been recognized in the statement of profit or loss in the first
quarter√ should be reversed back√ in the third quarter of the statement of profit or
loss and other comprehensive income√.
(10  x ½ mark= 5 marks)

b. MFRS 134 Interim Financial Reporting requires that an entity must apply the same
principles √ for measuring and recognising maintenance cost in the interim financial
reports as the annual reports √ . The maintenance cost should be recognized when it
has been incurred√ . In this case, the RM0.5 million maintenance cost should not be
recognized in the first quarter√ of the statement of profit or loss but in the second
quarter√.
(5 x 1 mark = 5 marks)

Question 4B

a. Basis for determining reportable segments:

i. Revenue basis ^ : the sales (internal and external) of the segment should be
equal to 10% or more than the combined sales of all operating segments of
the entity. √√

ii. Profit basis ^ : the profit (loss) of the segment should be equal to 10% or
more than the combined profit (loss) of all profitable (loss-making) operating
segments of the entity.√√

iii. Asset basis ^ : the value of the identifiable assets of the segment should be
equal to 10% or more than the value of the combined identifiable assets of all
operating segments of the entity. √√
(Any 2 x 2.5 marks = 5 marks)

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 FAR560 – JUNE 2017

b.
Operating Operating 10% threshold test Reportable
profits loss segments
RM RM
Manufacturing 9,000,000 9m/15m x 100 = 60% √√ YES ½ √
Automotive nil 2,000,000 2m/2m x 100 = 100% √√ YES ½ √
Supermarkets 4,000,000 4m/15m x 100 =26.67% √√ YES ½ √
Advertising 2,000,000 2m/15m x100 = 13.33% √√ YES ½ √
Total 15,000,000 2,000,000
(10√ x ½ mark = 5 marks)
(Total: 20 marks)

END OF SOLUTION