UKAF4034 Advanced Corporate Reporting

UNIVERSITI TUNKU ABDUL RAHMAN

FACULTY OF ACCOUNTANCY AND MANAGEMENT
ACADEMIC YEAR 2021/2022
BACHELOR OF ACCOUNTING (HONOURS)
TUTORIAL 5 -answer
MFRS 3, 5, 10, 11 and 36

Question 1-
Refer to online questions and answers

https://forms.gle/n31yuKsAEdzkskBB9

Question 2
Joint manufacture of a product with entity B Under the principles of MFRS 11 – Joint
Arrangements – the agreement with entity B is a joint arrangement. This is because key
decisions, e.g. pricing and selling decisions, manufacturing specifications, require the consent of
both parties and so joint control is present.

MFRS 11 would regard the type of arrangement with entity B as a joint operation (use line by
line method, not Equity Method). This is because the two parties have rights to specific assets
and liabilities relating to the arrangement and no specific entity has been established.

Because of the type of joint arrangement, each entity will recognise specific assets and liabilities
relating to the arrangement (exact wording not necessary – just sense of the point).

This means that Alam Bhd will recognise revenues of RM11 million (RM22 million x 50%).

Alam Bhd will recognise bad debt expense of RM50,000 (RM100,000 x 50%).

Alam Bhd’s trade receivables at 30 September 20X7 will be RM2.5 million (RM5 million x
50%).

Alam Bhd will show a payable to entity B of RM750,000 (RM1.5 million x 50%) 30 September
20X7.

Alam Bhd’s inventories at 30 September 20X7 will be RM1.7 million (RM3.8 million – RM2.1
million).

Alam Bhd’s cost of sales will be RM5.3 million (RM7 million – RM1.7 million).

Note: Using Equity method is incorrect for Joint Operation.

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Question 3-answer
Portula Group
Consolidated Statement of Financial Position at 30 November 2016

RM’m

Non-current assets
Property, plant and equipment 610+650+360+89+36-49 1,696
Goodwill 190 +(119-50) 259
Intangible assets 246+30+35-9 302

Disposal group – NCA held for sale 33

Current assets 885+450+200-18 1,517

Total assets 3,807

Equity and liabilities:

Share capital 920

Other components of equity W6 928.58
Retained earnings W5 82.8
NCI W7 490.62

Non-current liabilities 493+131+95 719

Disposal group – NCL held for sale 3

Current liabilities 410+120+136-3 663

Total equity and liabilities 3,807

Working 1
Sarra Bhd
RM’m RM’m
COI 730
Fair value of non-controlling interest 295
Fair value of identifiable net assets acquired:
Share capital 400
Retained earnings 319
OCE 27
FV adjustment – land 89 (835)
Goodwill 190

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Working 2
Santala Bhd
RM’m RM’m

Cost of investment/consideration 320

Fair value of non-controlling interest 161

Fair value of identifiable net assets acquired:

Share capital 200

Retained earnings 106

OCE 20

FV adjustment – land 36 (362)

Goodwill 119

Less: Impairment of goodwill -50

69

Working 3
Impairment test
Sarra Bhd Santala Bhd

RM’m RM’m

Goodwill 190 119

Assets 1,130 595

Fair value adjustment 89 36

Total asset value 1,409 750

Recoverable amount (1,425) (700)

Impairment nil 50

There is no impairment in the case of Sarra but Santala’s assets are impaired. Goodwill of RM50
will be written off. The reason for the latter write down is because the directors feel that the
reason for the reduction in the recoverable amount is due to the intangible assets’ poor
performance.
Group reserves will be debited with RM28 million and NCI with RM22 million, being the loss
in value of the assets split according to the profit sharing ratio. Total goodwill is therefore
(RM190m + RM119m – RM53m impairment), i.e. RM259 million.
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Working 4
Intangible assets Portula Bhd should recognise the RM10 million as an intangible asset plus the
cost of the prototype of RM3 million and the RM5 million to get it into condition for sale. The
remainder of the costs should be expensed including the marketing costs. This totals RM9
million, which should be taken out of intangibles and expensed.
Dr Retained earnings RM9 million
Cr Intangible assets RM9 million

Working 5
Group Retained Earnings
Portula Bhd Sarra Bhd Santala Bhd

RM’m RM’m RM’m

From Question 895 442 139

Pre-acq (319) (106)

Post-acq 123 33

Intangible assets w/off (9·00)

Impairment loss on goodwill- Santala (28·00)

Impairment loss on disposal group (34·00)

Share of post-acq:

Sarra (70% x 123) 86·10

Santala (56% x 33) 18·48

928.58

Workings 6
Other components of equity
Portula Bhd Sarra Bhd Santala Bhd

RM’m RM’m RM’m

From Question 73 37 25

Pre-acq (27) (20)

Post-acq 10 5

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Share of post-acq:

Sarra (70% x 10) 7

Santala (56% x 5) 2.8

82.8

Working 7
Non-controlling interest
Sarra Bhd Santala Bhd

RM’m RM’m

Pre-acq 295 161

Share of post-acq RE:

Sarra (30% x 123 ) 36.9

Santala (44% x 33) 14.52

Share of post-acq OCE:

Sarra (30% x 10) 3

Santala (44% x 5) 2.2

Impairment loss of GW (22)

334.9 155.72

Total NCI = RM490.62 million

Working 8
Disposal group
RM’m

PPE 49

Inventory 18

Current liabilities (3)

Proceeds (30)

Impairment loss 34

The assets and liabilities will be shown as single line items in the statement of financial position.
Assets at (RM67m – 34 m) i.e. RM33 million and liabilities at RM3 million. A plan to dispose of
net assets is an impairment indicator.
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(b) An asset or disposal group is available for immediate sale in its present condition, if
the entity has the intention and ability to transfer the asset or disposal group to a buyer.
There is no guidance in the standard on what constitutes available for immediate sale but
the guidance notes set out various examples.
Customary terms of sale such as surveys and searches of property do not preclude the
classification as held for sale. However, present conditions do not include any conditions
that have been imposed by the seller of the asset or disposal group, such as if planning
permission is required before sale. In this case, the asset is not held for sale. The problem
is determining whether the entity truly intends to dispose of the group of assets.

A sale is ‘highly probable’ where it is significantly more likely than probable that the sale
will occur and probable is defined as ‘more likely than not’. MFRS 5 attempts to clarify
what this means by setting out the criteria for a sale to be highly probable.
These criteria are:
• there is evidence of management commitment
• there is an active programme to locate a buyer and complete the plan
• the asset is actively marketed for sale at a reasonable price compared to its fair value •
the sale is expected to be completed within 12 months of the date of classification, and
• actions required to complete the plan indicate that it is unlikely that there will be
significant changes to the plan or that it will be withdrawn.

Because the standard defines ‘highly probable’ as ‘significantly more likely than
probable’, this creates a high threshold of certainty before recognition as held-for- sale.
MFRS 5 expands on this requirement with some specific conditions but the uncertainty
still remains. Thus, a number of issues have arisen over the implementation of the
standard, mainly due to the fact that there is subjectivity over the requirements of the
standard.

(c) A company may distribute non-cash assets. The transfer of the asset from Sarra to
Portula amounts to a distribution of profits rather than a loss on disposal. The shortfall
between the sale proceeds and the carrying amount is RM1 million and this will be
treated as a distribution. Sarra has retained earnings of RM442 million available at the
year end plus the sale of the non-current asset will ‘realise’ an additional amount of
RM400,000 from the revaluation reserve. It is likely that the sale will be legal, depending
upon the jurisdiction concerned. If the transaction meets the criteria of MFRS 5 Non-
current Assets Held for Sale and Discontinued Operations, then the asset would be held
in the financial statements of Sarra in a separate category from plant, property and
equipment and would be measured at the lower of carrying amount at held-for-sale date
and fair value less costs to sell. If the asset is held for sale, MFRS 116 Property, Plant
and Equipment does not apply.

The boundary between ethical practices and legality is sometimes blurred. Questions
would be asked of the directors as to why they would want to sell an asset at half of its
current value, assuming that RM2 million is the current value and that RM1 million is not
a fair approximation of fair value. It may raise suspicion. Corporate reporting involves
the development and disclosure of information, which should be truthful and neutral.
Both Sarra and Portula would need to make related party disclosures so that the
transaction is understood by stakeholders.

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The nature of the responsibility of the directors requires a high level of ethical behaviour.
Shareholders, potential shareholders, and other users of the financial statements rely
heavily on the financial statements of a company as they can use this information to make
an informed decision about investment. They rely on the directors to present a true and
fair view of the company. Unethical behaviour is difficult to control or define. However,
it is likely that this action will cause a degree of mistrust between the directors and
shareholders unless there is a logical business reason for their actions. Shareholders in
most jurisdictions who receive an unlawful dividend are liable to repay it to the company.

Question 4 (a) answer

It appears as if the acquisition of Alam Co should be treated as a subsidiary acquired exclusively

with a view for resale. The usual criteria for an asset to be classified as held for sale as per
MFRS 5 Non-current Assets Held for Sale and Discontinued Operations include:

 The sale must be highly probable;

 The sale must be expected to be complete within 12 months;
 The asset must be actively marketed at a reasonable price;
 Management must be committed to a plan of sale and it is unlikely that any significant
changes to the plan will be made.

The sale has not taken place within 12 months of acquisition; however, an exception is permitted
where the sale is still deemed to be highly probable and the delay was caused by events which
were unforeseen and beyond the control of management. The sale is still expected early in 20X5
and the legal dispute was unforeseen, so this exception seems applicable.

It appears clear that management was immediately committed to the sale as Damai Co did not
wish to have active involvement in the activities of Alam Co. Alam Co should therefore be
treated as a subsidiary acquired exclusively with a view to resale. It should not be consolidated
into the Damai group financial statements. Alam Co should initially be valued at fair value less
costs to sell with any subsequent decreases in fair value less costs to sell taken to consolidated
profit or loss. As a subsidiary acquired exclusively for resale, Alam Co would be classified as a
discontinued activity and earnings for the year disclosed separately in the consolidated statement
of profit or loss of the Damai group.

Question 4 (b)-answer

Answer
The Conceptual Framework for Financial Reporting states that an entity controls an economic
resource if it has the present ability to direct the use of the economic resource and obtain the
economic benefits which flow from it. An entity has the ability to direct the use of an economic
resource if it has the right to deploy that economic resource in its activities. Although control of
an economic resource usually arises from legal rights, it can also arise if an entity has the present
ability to prevent all other parties from directing the use of it and obtaining the benefits from the
economic resource. For an entity to control a resource, the economic benefits from the resource
must flow to the entity instead of another party.

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Although the Conceptual Framework gives some guidance on the definition of control, existing
MFRS Standards also provide help in determining whether Timah controls the mine and
therefore should account for it as a business combination. MFRS 10 Consolidated Financial
Statements states that an investor controls an investee when it is exposed, or has rights, to
variable returns from its involvement with the investee and has the ability to affect those returns
through its power over the investee. Further, MFRS 15 Revenue from Contracts with Customers
lists indicators of the transfer of control of an asset to a customer. One of the indicators is that the
customer has the significant risks and rewards of ownership of the asset which is basically
exposure to significant variations in the amount of economic benefits.

A business combination is defined in MFRS 3 Business Combinations as a transaction or other

event in which an acquirer obtains control of one or more businesses. A business is further
defined as ‘an integrated set of activities and assets that is capable of being conducted and
managed for the purpose of providing a return…..’ Thus, the producing mine represents a
business and Timah now owns a majority of the interest in the business.

However, this is not a business combination as Timah does not have the ability to affect
decisions unless another participant agrees to vote with Timah. Although Timah will control
52% of the mine, it cannot direct the use of the economic resource unless one of the other
participants agrees with an operating decision proposed by Timah and approval is given by 72%
of participants.

However, Timah can prevent the other parties from directing the use of the mine if the purchase
goes ahead, because the other two parties cannot make an operating decision without Timah’s
consent.

Prior to the purchase of the additional investment, the approval of decisions required agreement
by 72% of the participating interests. A joint control situation existed between the entities.
Following the additional purchase, if there is still a joint control situation, the acquisition of an
additional interest in a joint operation should apply all of the principles on business combinations
accounting in MFRS 3 and other MFRS Standards with the exception of those principles which
conflict with the guidance in MFRS 11 Joint Arrangements. These requirements can apply also
to the initial acquisition of an interest in a joint operation. For there to be a joint control situation,
there must be an agreement signed by the venturers which stipulates which of the parties are
required to give unanimous consent.

Question 5 -answer

i) Goodwill should be calculated as follows:

Fair value method Proportional method
RM millions RM millions
Consideration 90 90
Non-controlling interest (NCI) at acquisition 22 17.6
Net assets at acquisition (88) (88)
––– ––––
Goodwill 24 19.6
––– ––––
NCI at acquisition under proportional method is RM17·6m (20% x RM88m).
The fair value of the net assets at acquisition is RM88m as per part a(i) (RM65m + RM23m#).

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Tutorial note: Goodwill under the proportional method could also be calculated as:
Consideration RM90m
Less FV of net assets acquired (80% x RM88m) (RM70·4)m
Goodwill on acquisition RM19·6m

#Additional explanation note on questions raised.

What’s the use of information given on the land and building?
The fair value of the factory site should be valued as if converted into residential use as per
MFRS 13. Since this cannot be determined on a stand-alone basis, the combined value of the
land and buildings is calculated. The $1 million demolition and planning costs should be
deducted from the market value of $24 million. The fair value of the land and buildings should
be $23 million. The fair value of the identifiable net assets at acquisition are $88 million ($65m +
$23m).

Why the information of depreciated replacement costs not useful?

Depreciated replacement cost should only be considered as a possible method for estimating the
fair value of the asset when other more suitable methods are not available. This may be the case
when the asset is highly specialised and market data is therefore limited or unavailable. This is
not the case with the factory site. In any case, the rise in value of land and properties particularly
for residential use would mean that to use depreciated replacement cost would undervalue the
asset. The exit value for the asset, whether it was based on the principal or most advantageous
market, would need to be the same as the entry price. Depreciation may not also be an accurate
reflection of all forms of obsolescence including physical deterioration. The estimate would need
to be adjusted for such factors even where industrial use remained the best use of the asset.

ii)
An impairment arises where the carrying amount of the net assets exceeds the recoverable
amount. Where there is a clear indication of impairment, this asset should be reduced to the
recoverable amount. Where the cash flows cannot be independently determined for individual
assets, they should be assessed as a cash generating unit. That is the smallest group of assets
which independently generate cash flows. Impairments of cash generating units are allocated
first to goodwill and then pro rata on the other assets. It should be noted that no asset should be
reduced below its recoverable amount.

Fair value method

The overall impairment of Hasil Co is RM30 million (RM106m + goodwill RM24m –
RM100m). The damaged building should be impaired by RM4 million with a corresponding
charge to profit or loss. Since RM4 million has already been allocated to the land and buildings,
RM26 million remains. The goodwill should therefore be written off and expensed in the
consolidated statement of profit or loss.

Of the remaining RM2 million, RM1·25 million will be allocated to the plant and machinery
(15/(15 + 9) x 2m) and RM0·75 million will be allocated to the remaining intangibles (9/(9 + 15)
x 2m). As no assets have been previously revalued, all the impairments are charged to profit or
loss. RM24 million (80% x RM30m) will be attributable to the owners of Tanah Co and RM6
million to the NCI in the consolidated statement of comprehensive income.

The allocation of the impairment is summarised in this table:

Original value Impairment Revised CV
RMm RMm RMm
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Land and buildings 60 4 56

Plant and machinery 15 1·25 13·75
Intangibles other than goodwill 9 0·75 8·25
Goodwill 24 24 0
Current assets (at recoverable amount) 22 0 22
–––– –––– –––––
Total 130 30 100
–––– –––– –––––
Proportionate method
The basic principles and rule for impairment is the same as the fair value method and so RM4
million will again first be written off against the land and buildings. The problems arise when
performing the impairment review as a cash generating unit. When NCI is measured using the
proportional share of net assets, no goodwill is attributable to the NCI since goodwill is not
included within the individual net assets of the subsidiary. This means that the goodwill needs to
be grossed up when an impairment review is performed so that it is comparable with the
recoverable amount. Under the fair value method, the NCI fully represents any premium the
other shareholders would be prepared to pay for the net assets and so goodwill does not need to
be grossed up.

The goodwill of RM19·6 million is grossed up by 100/80 to a value of RM24·5 million. This
extra RM4·9 million is known as notional goodwill. The overall impairment is now RM30·5
million (RM106m + RM24·5m – RM100m) of which RM4 million has already been allocated.
Since the remaining impairment of RM26·5 million exceeds the value of goodwill, the goodwill
is written down to zero. However, as only RM19·6 million goodwill is recognised within the
consolidated accounts, the impairment attributable to the notional goodwill is not recognised.
Only RM19·6 million is deducted in full from the owners of Tanah Co’s share of profits since
there is no goodwill attributable to the non-controlling interest. The remaining RM2 million
impairment is allocated between plant and machinery and intangibles (other than goodwill). NCI
will be allocated 20% of RM6m (RM4m + RM2m), i.e. RM1·2 million. Consolidated retained
earnings will be charged with 80% of RM6m (i.e. RM4·8m) plus RM19·6 million goodwill
impairment (i.e. RM24·4m in total). The allocation of the impairment is summarised in this
table:

Tutorial note: Notional goodwill and impairment of notional goodwill does not impact on the
consolidated financial statements.
Original carrying Impairment Revised carrying
amount amount
RMm RMm RMm
Land and buildings 60 4 56
Plant and machinery 15 1·25 13·75
Intangibles other than goodwill 9 0·75 8·25
Goodwill 19·6 19·6 0
(Notional goodwill) 4·9 4·9 0
Current assets (at recoverable amount) 22 22
––––– –––– –––––
Total 130·5 30·5 100

Question 6-answer
a)
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It seems that Niaga Co and FAM jointly control 4-Digit Co and it appears as though the
arrangement is a joint venture (MFRS 11 Joint Arrangements) as the parties have joint control of
the arrangement and have rights to the net assets of the arrangement. Joint control is the
contractually agreed sharing of control of an arrangement, which exists only when decisions
about the relevant activities require the unanimous consent of the parties sharing control. This is
the case with 4-Digit Co.

A joint venturer recognises its interest in a joint venture as an investment and accounts for that
investment using the equity method in accordance with IAS 28 or MFRS128 Investments in
Associates and Joint Ventures unless the entity is exempted.

b)
MFRS® 5 Non-current Assets Held for Sale and Discontinued Operations defines a discontinued
operation as a component of an entity which either has been disposed of or is classified as held
for sale, and

(i) represents a separate major line of business or geographical area of operations;

(ii) is a single co-ordinated plan to dispose of a separate major line or area of operations;

(iii) is a subsidiary acquired exclusively for resale.

Both entities would be components of the Bijak group since their operations and cash flows are
clearly distinguishable for reporting purposes. Pandai has been sold during the year but there
appears to be other subsidiaries which operate in similar geographical regions and produce
similar products. Little guidance is given as to what would constitute a separate major line of
business or geographical area of operations. The definition is subjective and the directors should
consider factors such as materiality and relevance before determining whether Pandai should be
presented as discontinued or not.

To be classified as held for sale, a sale has to be highly probable and the entity should be
available for sale in its present condition. At face value, Aman would not appear to meet this
definition as no sales transaction is to take place.

MFRS 5 does not explicitly extend the requirements for held for sale to situations where control
is lost. However, the International Accounting Standards Board (the Board) have confirmed that
in instances where control is lost, the subsidiaries’ assets and liabilities should be derecognised.
Loss of control is a significant economic event and fundamentally changes the investor–investee
relationship. Therefore situations where the parent is committed to lose control should trigger a
reclassification as held for sale. Whether this should be extended to situations where control is
lost to other causes would be judgemental. It is possible therefore that Aman should be classified
as held for sale but to be classified as a discontinued operation, Aman would need to represent a
separate major line of business or geographical area of operation.

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