BKAR 3033 FINANCIAL ACCOUNTING & REPORTING III (A211)

MINI CASE 4
MFRS 108 CHANGES IN ACCOUNTING POLICY ESTIMATES & ERRORS AND
MFRS 110 SUBSEQUENT EVENTS AFTER REPORTING DATE
DUE DATE: 4 JAN 2022

QUESTION 1

Mutiara Bhd (MB) is a holding company which operates mainly in construction and property
development industry. The company’s annual report for the year ended on 31 December 2016
had already been prepared by the company’s accountant. On 3 March 2017, MB’s board of
directors announced that the 2016 annual report will be issued on 30 April 2017. The
following transactions have not been included in the preparation of MB’s financial statement
for 2016:

1. On 1 June 2016, MB issued RM500,000, 10% , 5-year notes at par to finance a

plant expansion in Kulim, Kedah. MB is to pay annual payment of interest every
1 June and the existing plant is currently pledged for collateral for the loan. In
2016, mistakenly ignore any entry regarding the accrued interest.

2. As at 31 December 31 2016, MB had a receivable of RM400,000 from Pelita Sdn

Bhd. On 26 February 2017, MB has been informed that Pelita Sdn Bhd has been
placed under receivership. There is no provision of doubtful debt that had been
made in respect of this debt as it was considered to be wholly collectible. MB
expects to collect only 30 per cent of this amount subsequent to the completion of
receivership process.

3. On 1 January 2016, MB proposed to change its depreciation base on one of its

major plant asset from a 50-year useful life to a 20-year useful life. If this
changed have been made in prior year, retained earnings for 2015 would have
been RM200,000 less. The effect of this change on 2016 income alone is a
reduction of RM40,000.

4. On 5 February 2017, as part of its expansion strategy in Langkawi, MB acquired

another 550,000 ordinary shares of RM1.00 each, representing 25 per cent of
equity interest in Nilam Sdn Bhd for a total consideration of RM1.65 million.
Consequent to the acquisition, Nilam Sdn Bhd has become a wholly owned
subsidiary company of MB.

5. In early January 2014, MB started to breed chickens and ducks in one of its
operating segment in Langkawi. On 1 January 2016, MB decided to change its
inventory valuation method of its biological assets from cost method to the new
fair value method in accordance with MFRS 141 Agriculture. Accordingly, MB
would make an assessment on the fair value of all changes in prices and changes
in the physical assets of its ducks and chickens at every reporting date.

REQUIRED:

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 In accordance with MFRS 108 Accounting Policies, Changes in Accounting Estimates
and Errors and MFRS 110 Events after the Reporting Period,

(i) Classify each of the above transaction into: either a change of accounting policy
(Policy), change of accounting estimates (Estimates), an error (Error) or
subsequent events after the reporting dates (Events),

(ii) Identify the accounting treatment,

(iii) Explain the appropriate accounting treatment for the transactions. Prepare your
answers based on the following format:

(i) Transaction (ii) Accounting (iii) Detail of accounting treatment

treatment
1. Error Retrospective Adjustment to ….

QUESTION 2

A. Maxim Bhd is one of the largest industrial products manufacturers in Malaysia. The
financial statements of the company that ended on 31 March 2019 has been authorised for
issue by its directors on 30 June 2019. The following were material transactions or events
that occurred in 2019:
1. Maxim Bhd investments in listed shares that are held-for-trading were classified as
at fair value through profit or loss. As at 31 March 2019, these investments were
recorded at the market value on that date, which was RM460,000. Due to uncertainty
in the market, on 1 May 2019, the fair value of the investments had fallen to
RM420,000.
2. Maxim Bhd had among its receivables a debtor, Netlife Sdn Bhd with a balance of
RM230,000 as at 31 March 2019. On 11 June 2019, Maxim Bhd was informed that
Netlife Sdn Bhd, due to its financial difficulty, had been placed under receivership
and the likelihood for Maxim to collect the receivable amount is remote.

3. On 31 March 2019, Maxim Bhd had reported a contingent liability in respect of

lawsuit against the company by an employee who was injured in 2018. The case was
heard for the first time on 31 May 2019 and the judge determined that Maxim Bhd
was liable to pay damages and costs totalling RM1.2 million.
4. On 30 April 2019, Maxim Bhd issued bonds for RM3 million, with interest of 6%
payable semi-annually.
5. As part of its upstream expansion strategy, on 20 June 2019, Maxim Bhd acquired
75% equity interest of Rax Bhd and 55% equity interest of Jax Bhd, for purchase
consideration of RM2.1 million and RM1.8 million, respectively. Consequent to the
acquisition, both Rax Bhd and Jax Bhd have become a subsidiary company of
Maxim Bhd.

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 REQUIRED:

Discuss the accounting treatment of the above events in the financial statements in
accordance to MFRS 110 Events after the Reporting Period.

QUESTION 3

Ikonic Bhd has been operating in hospitality and construction industry for more than five
decades. The company’s annual report for the year ended on 30 June 2019 had already been
prepared by the company’s accountant. The board of the director of the company announced,
on 1 August 2019, that the annual report of the company will be issued three months after the
company’s year-end. The following are additional information and events which have not
been considered in the preparation of Ikonic’s Bhd financial statement:

1. Ikonic Bhd had among its receivable a debtor, Comfort Guess Bhd. with a balance
of RM368,000 as at 30 June 2019. There is no provision of doubtful debt that had
been made in respect of this debt since the board of director of IKONIC Bhd. was
of the opinion that the debt was wholly collectible. On 31 July 2019, IKONIC
Bhd. was informed that Comfort Guess Bhd., due to its financial difficulty, had
been placed under receivership and none of the amount can be collectible.

2. Ikonic Bhd purchased a building in the middle of 2013 at a cost of RM12 million.
The building was estimated to have a useful life of 45 years. Ikonic Bhd has
depreciated the whole building using straight line method over 45 years,
commencing from 2013. However, the building comprises of an escalator and
other fixtures which have significantly different useful lives. In August 2018, the
newly appointed accountant of Ikonic Bhd realises that the escalator and other
fixtures of the building should be separately depreciated. However, the details
accounts of these fixed assets have not been kept and it is impracticable for the
company to determine the respective costs and accumulated depreciation amounts
of these assets if they had been separately depreciated since 2013.

3. On 7 July 2019, as part of its expansion strategy, Ikonic Bhd had acquired
550,000 ordinary shares of par value of RM1.00 each, representing 100% of
equity interest in Luxury View Bhd for a total consideration of RM1.3 million.
Consequent to the acquisition, Luxury View Bhd has become a wholly owned
subsidiary company of Ikonic Bhd.

4. In June 2017, Ikonic Bhd entered into a contract to build a luxury resort. The
project is scheduled to be completed in June 2022. The contact price is RM417
million. The company, for the accounting year ended on 30 June 2017 and 2018
adopted the completed contract method under which no profits is recognised until

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 the project is completed. When it is realised that it is the percentage of completion
method that shall be adopted as per requirement of MFRS 111 Construction
Contract, the company immediately adopted this method for the accounting year
ended on 30 June 2019.

REQUIRED:
Based on MFRS 108 Accounting Policies, Changes in Accounting Estimates and Errors
and MFRS 110 Events after the Reporting Period,
i. classify each of the above transaction whether it is a change of accounting
policy, change of accounting estimates, an error or subsequent events after the
reporting dates and

ii. explain the appropriate accounting treatment for the transactions.

QUESTION 4

Nanisa recently graduated from public renowned university in Malaysia majoring in

accounting. Last month, she was appointed as a junior accountant at Silver Village Bhd
(SVB) a well-established company listed on Bursa Malaysia since 2000. Her task is to help
Ms Naila in reviewing the company financial statements ended 31 October 2020 which is
expected to be published in January 2021. SVB profit before tax in 2020 and 2019 were
reported as RM450 million and RM395 million, respectively. The beginning balance of
retained earnings in 2019 and 2020 were RM250 million and RM550.2 million, respectively .
The company tax rate is 24% and there is no change in company tax rate since 2018.
During the final check on the financial statement Nanisa discovered the following items:
1. SVB owned several assets classified as property, plant and equipment. In November
2017, SVB bought an equipment for RM2.5 million with the expected useful life of
10 years without residual value. On 31 July 2020, based on valuation by the asset
valuer, the equipment is expected to generate income for another 12 years without
residual value. Depreciation for 2020 is charged based on new depreciation rate.
SVB adopt partial year depreciation method to account for its depreciation.

2. In December 2018, SVB ventured in plantation industry and owned 100 acres of
land cultivated with palm tree. The cost of its biological asset at the acquisition date
was determined at RM100 million and the depreciation rate was 15% per annum.
SVB applied cost method to account for its biological asset since 2018 even though it
has a reliable information regarding the fair value of its biological assets. The fair
value of its biological assets were at RM100 million, RM110 million and RM150
million, respectively in 2018, 2019 and 2020.

3. On 1 November 2019, SVB decided to adopt average cost method for the inventory
valuation. Since its inception year, SVB has been using the First In First Out (FIFO)

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 method. SVB believed that the value of inventory in it’s Statement of Financial
Position is more accurate by adopting the average cost method as compared to FIFO
method. SVB decision has affected both of inventory value and cost of goods sold as
listed below:
Inventory (RM in Million) Cost of Goods sold ( RM in
Million)

Date FIFO Average Cost FIFO Average Cost

31 October 2018 50 40 400 410

31 October 2019 80 100 520 500

31 October 2020 120 70 600 650

4. On 10 October 2020, SVB was summoned for a breach of contract for RM100,000.
Based on the company’s lawyer opinion, it is very likely that company will lose the
case. The amount of loss has not been considered in the current year financial
statements.

5. On 1 January 2021, SVB sold inventory to Suria Bhd for RM3,300,000 after less
trade discount of RM200,000. The inventory has been recorded at the cost of
RM3,500,000 at the end of financial year.

6. As an expansion of its business, SVB planned to acquire Blue Car Agency (BCA) a
successful e-hailing company. The discussion regarding the acquisition of BCA was
conducted in December 2020. If the takeover bid of BCA is successful, SVB needs to
pay RM10 million for the transfer of ownership.

7. SVB is being sued by one of its employee beneficiary due to the death of their family
member while at work due to land collision at the plantation site on 1 January 2021.
The case will be pronounced in court in May 2021. The family sued SVB for
RM500,000 due to the loss of their family member.

REQUIRED:

(a) Based on the above situation identify whether the items can be classified under
MFRS 108 Accounting Policies, Changes in Accounting Estimates and Errors or
MFRS 110 Events after the Reporting Periods. Justify your answer.
(b) Discuss the accounting treatments for the above situations in the financial statements.
Provide journal entries where necessary.
(c) In accordance with MFRS 108 Accounting Policies, Changes in Accounting
Estimates and Errors and MFRS 110 Events after the Reporting Periods, prepare
the comparative Statement of Profit or Loss and Other Comprehensive Income and

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Statement of Retained Earnings for the year ended 31 October 2020 to account for
the effects of the above situations.