FAR660 – DEC 2016

SUGGESTED SOLUTION FAR 660 FINAL EXAM

DECEMBER 2016

QUESTION 1

a) The primary purpose of accounting is to provide information useful for

decision making. In this context, explain the argument of the free-market
approach in providing accounting information. √
 Advocates of the free-market approach argue that accounting information
can be considered in the same way as any other product where the
demand and supply forces should operate . √
 Therefore, when there is a demand for accounting information by users there
will be a supply of such information from companies in the form of financial
statements because an equilibrium price can theoretically be found for
accounting information. √
 When there is a demand for accounting information by users, a supplier is
willing to provide the information for a price. The price will be adjusted to one
where the supplier still finds it advantageous to furnish the information
and the users believe the cost is equal to or less than the benefits of the
information, otherwise the information will not be provided. √
 In order words, free-market forces can determine what type of accounting
data to provide and the necessary standards that underlie them√.
(or any acceptable answers)
(Any 2 x 2.5 = 5 marks)

b)
 The market for accounting information will be more efficient with government
intervention because the central reason for government intervention is to
protect the public interest. √
 Public interest theory is based on the assumption that the economic market
are subject to a series of market imperfections or transaction failures,
which if left uncorrected will result in both inefficient and inequitable
outcomes and proposes that government or their agents introduce regulation
to compensate for market failure√.
 Regulation is intended to protect the interest of individuals and society as a
whole, with regulation society is better off than otherwise. In relation to
financial reporting, the assumption is that regulation will improve
information flows thus improving capital market efficiency. √
 In this theory the government is an independent party. Its agents respond
to requests from ‘entrepreneurial politicians’ and public interest groups
to intervene in the market√. While it could be argued that these parties are
acting in part with self-interest, the regulatory intervention is claimed to have
some overall genuine public interest.

(or any acceptable answers)

(Any 2 x 2.5 = 5 marks)
(Total: 10 marks)

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 FAR660 – DEC 2016

QUESTION 2

a. Legitimacy Theory:

 relies on social contract which represents the norms and expectations of

the community in which an organisation operates √
 an organisation is deemed to be legitimate if it complies with the social
contract terms√
 accounting disclosure is one way in which an organisation can legitimise
its ongoing operations √

Stakeholder Theory:

 instead of society as a whole, only a particular stakeholder groups are

considered √
 these stakeholders demand different information and firms will respond
to their demands in a variety of way √
 Ethical/normative branch of ST - all stakeholders have the rights to be
treated fairly by an organisation regardless of the power of the
shareholders involved, issues of stakeholder power are not directly
relevant and it assumes that management should manage the
organisation for the benefit of all stakeholders, disclosures are
considered to be responsibility driven √
 Positive/managerial branch – organization tends to satisfy the
information demand of shareholders that are important to the
organisation’s ongoing survival, a stakeholder’s power to influence
corporate management is viewed as a function of the stakeholders’
degree of control over resources required by the organisation. √

Institutional Theory:

 explain the existing organisational structures and that particular operating

or reporting policies and structures might be employed because of
pressures from the stakeholders who expect to see particular practices in
place √√
 explain why there is often a degree of correspondence between the
institutional practices used within different organisations √

(or any acceptable answers)

(10√ x 1 = 10 marks)

b) i)Importance of implementing MPERS

MPERS applies to private entities as defined by the Companies Act 1965.

These are companies that are not required to prepare or lodge financial
statements under laws administered by the Malaysian Securities Commission
or Bank Negara Malaysia√ and are not a subsidiary or jointly controlled by
such an entity√. In other words these are mainly small and medium-sized
entities (SMEs). SMEs are important to the economic transformation process
of the country. As they gain regional and global importance, it is imperative
that they be equipped with the ability to prepare highly credible financial

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 FAR660 – DEC 2016

statements based on globally accepted financially reporting standards√. Since

MPERS is modelled on the IFRS for SMES, preparing financial statements
based on MPERS would enable them to grab or create√ opportunities for
expansion in the regional and/or global business environment.

(or any acceptable answers)

(4√ x 1 = 4 marks)

ii) Differences between MPERS and MFRS

private companies as defined in the Malaysian Companies Act 1965 that are not required to prepare or lodge financial statements under laws administered by the Malaysian Securities Commission or Bank Negara Malaysia (the Malaysian Central Bank), and are not a subsidiary, associate, or jointly controlled by such an entity.

i. There are some minor changes to the titles used in the MPERS
framework similar to MFRS framework. For example, the title “statement
of financial position” should be used to replace “balance sheet” and
“statement of comprehensive income” should be used to replace “income
statement”. However, in MFRS, the latter is titled “statement of profit or
loss and other comprehensive income”. √

ii. MFRS requires a third statement of financial position (as at the beginning
of the comparative period) to be presented whenever there is a
retrospective application of a change in policy, a retrospective
restatement on correction of errors, or a reclassification of line items, if
the effect on that the statement is material. There is no such requirement
in MPERS. √

iii. Both MFRS and MPERS prescribe minimum line items to be presented
on the face of the statement of financial position. However MPERS also
requires that investment property measured at cost less accumulated
depreciation and impairment be presented separately from property, plant
and equipment (PPE) even if it is accounted for as a class within the
scope of PPE. √

iv. In the statement of comprehensive income (MPERS) and the statement

of profit or loss and other comprehensive income (MFRS), both
frameworks requires that the items disclosed under ‘other comprehensive
income be segregated into those that may be reclassified to profit or loss
and those that will never be reclassified to profit or loss. In MPERS, OCI
items that will never be recycled to profit or loss are: (a) actuarial gains or
losses of defined benefit plans, (b) revaluation surplus of PPE and (c)
exchange translation differences of foreign operations. The only OCI item
that may be reclassified to profit or loss is fair value gain or loss of
hedging instrument in a cash flow hedge. √

(or any acceptable answers)

(Any 3 x 2 = 6 marks)
(Total: 20 marks)

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 FAR660 – DEC 2016

QUESTION 3

a)
Year Equity (RM)
2014 100 √ x 300 √ x RM15 √ x 1/5 √ 90,000
2015 (100 √ x 110% √) x (300√ -15√ -20 √) x RM15 x 2/5 √ 174,900

(10√ x ½ = 5 marks)

b) Effect on equity reserves without the increase in sales condition:

Year Equity (RM)

2013 100 √ x (300 -15-20)√ √√ x RM15 √ x 2/5 √ 159,000
Current equity reserve with sales condition (from b) √174,900
Difference √ (15,900)

If the non-market performance vesting condition (increase in sales) does not

exist, there would be no changes in the options granted (only number of
employees will be changed). √ The new equity reserves calculated would be RM
159,000 and would be lower than the current equity reserve amount of RM
174,900. √

(10√ x ½ = 5 marks)

c) two (2) types of share-based transactions are:-

i. Cash-settled transaction √
An entity or another member of the same group pays cash calculated
by reference to the price of its own equity instrument as consideration
for goods and services received. √√√

Example: share appreciation rights entitle employees to cash

payments equal to the increase in the share price of a given number
of the company’s shares over a given period.√

ii. Choice of equity-settled or cash-settled transaction√

The supplier of goods and services or the entity receiving those goods
or services may choose whether the entity settles in cash or by issuing
equity instruments. √√√

Example: Purchase of machinery where the contract allows settlement

either by shares or cash equivalent to a specific value of shares. √

(10√ x ½ = 5 marks)

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 FAR660 – DEC 2016

QUESTION 4
a.
Debit Bank√ 9,800,000√
Issue costs√ 200,000√
Credit Contributed 10,000,000√
share capital√

Debit Bank√ 5,000,000√

Credit Bond payable√ 5,000,000√

(10√ x ½ = 5 marks)
b (i)

Period Discount Interest Principal Total Present

rate payment repayment value
1 Jan 2015 1 0 0 0√
31 Dec 2015 0.9091 350,000√ 350,000 318,185√
31 Dec 2016 0.8264 350,000√ 350,000 289,240√
31 Dec 2017 0.7513 350,000√ 5,000,000√ 5,350,000√ 4,019,455√
Total liability component 4,626,880√
Total equity component 373,120√
Total proceeds of the bond issue 5,000,000√

(12√ x ½ = 6 marks)
(ii) Risks –
Interest rate risk√ – the fair value varies according to the changes of
interest rate market because investment at a fixed rate increase in value
when the market goes down. √

Credit risk √– risk that one party to a financial instrument will fail to
discharge an obligation and cause the other party to incur a financial
loss√

Liquidity risk√ - a risk that an entity will encounter difficulty in raising funds
to meet commitments associated with financial instruments√
(Any 2 x 2√ = 4 marks)

c.(i) A financial asset or a financial liability should be recognized in the entity’s

SOFP when

- Substantially all the risks and rewards √ associated with the asset
or liability have been transferred to the entity. √

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 FAR660 – DEC 2016

- The cost or fair value √ of the asset or the amount of the obligation
assumed can be measured reliably. √
(4√ x 1 = 4 marks)
(ii) 1. Accounting policies√ – including the criteria applied in determining
when to recognize a financial asset, a financial liability or an equity on SOFP
and when to cease to recognize it. √
2. A general description√ including significant terms and conditions that
may affect the amount, timing and certainty of future cash flows. √
3. Exposure to interest rate risk √– including contractual repricing or
maturity dates and effective interest rates. √
(6√ x 1 = 6 marks)

b. Statement of financial position as at 31 December 2015 (extract)

Non-current liabilities
3.5% convertible bond ᴧ 4,626,880√
Equity
Ordinary share capital √ 10,000,000√
Equity component of bond ᴧ 373,120√
(4√ x 1 = 4)
( 2 ᴧ x ½ = 1)
(5 marks)
(Total: 30 marks)

Question 5

a. Five (5) criteria that must be fulfilled in determining whether the contract with
a customer falls within the scope of MFRS 15 are:
-The parties to the contract have approved the contract√.
-Each party’s rights in relation to the goods or services to be transferred can
be identified√.
-The payment terms and conditions for the goods or services to be
transferred can be identified√.
-The contract has commercial substance√.
-The collection of an amount of consideration to which the entity is entitled to
in exchange for the goods or services is probable√.

(5√ x 1 = 5 marks)

b. IASB and FASB initiated a joint project to clarify the principles for recognising
revenue and to develop a common revenue standard because they want to:

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 FAR660 – DEC 2016

i. Remove inconsistencies and weaknesses in existing revenue

requirement
In IFRS, there was significant diversity in practice because existing
standards contained limited guidance for a range of significant topics,
such as accounting for contracts with multiple elements; should these
be accounted for as one overall obligation, or as a series of separate
(albeit related) obligations?
Under US GAAP, concepts for revenue recognition had been
supplemented with a broad range of industry specific guidance, which
had resulted in economically similar transactions being accounted for
differently. Therefore, a single revenue standard will remove
inconsistencies and weaknesses in existing revenue requirement.
ii. Provide a more robust framework for addressing revenue issues.
Previously, US GAAP has complex, detailed and disparate revenue
requirements for specific transactions and industries such as software,
real estate and construction contracts. As a result, different industries
use different accounting for similar transactions. Conversely, IFRS has
two main revenue recognition standards with limited implementation
guidance that may be difficult to understand and apply. Thus, a
common revenue standard should provide a more robust framework
for addressing revenue issues and improve comparability of revenue
recognition practices across entities, industries, jurisdictions and
capital markets
iii. Provide more useful information to users of financial statements
through improved disclosure requirements.
The new standard introduces an overall disclosure objective together
with significantly enhanced disclosure requirements for revenue
recognition. These are accompanied by an explicit statement that
immaterial information does not need to be disclosed and that the
disclosure requirements should not be used as a checklist. In practice,
even if the timing and profile of revenue recognition does not change,
it is possible that new and/or modified processes will be needed in
order to obtain the necessary information.

iv. Simplify the preparation of financial statements by reducing the

number of requirements to which an entity must refer.IFRS 15
establishes a single and comprehensive framework which sets out
how much revenue is to be recognised, and when. The core principle
is that a vendor should recognise revenue to depict the transfer of
promised goods or services to customers in an amount that reflects
the consideration to which the vendor expects to be entitled in
exchange for those goods or services.
v. Revenue will now be recognised by a vendor when control over the
goods or services is transferred to the customer. In contrast, IAS 18
based revenue recognition around an analysis of the transfer of risks
and rewards; this now forms one of a number of criteria that are
assessed in determining whether control has been transferred.

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 FAR660 – DEC 2016

Therefore, a common revenue standard reduces the number of

standards/interpretations to which an entity must refer. √
(Any 2 x 2.5 = 5 marks)

c. The goods or services in the contract above are distinct √ because:

-The promise to transfer each good and service to the customer is separately
identifiable from each other.
-The software is delivered before other goods or services are transferred and
it remains functional without the updates and the technical support. Hence,
the customer can benefit from each of the goods and services .
-The installation service that was routinely performed did not significantly
modify the software. Thus, the installation service was considered as
separate output promised by Amber Bhd.
-Software updates did not affect the function of the software√. It showed that
the customer can benefit from the use of the software even without the
software updates.
-Even though Amber Bhd promised to provide technical support for 1 year,
the service was regarded as separate service since the customer can use the
software with or without the technical support.
(or any acceptable answers)

(Any 5 points x 2 =10 marks)

(Total: 20 marks)

Question 6

Leases proposes that a lessee should recognise its asset and liability for the rights
and obligations created by the lease√. The lessee would recognise a right-of-use
asset and a lease liability for leases of more than 12 months√.

Both the asset and the liability are initially measured at the present value of lease
payments√. The right-of-use asset also includes any costs incurred that are directly
related to entering into
the lease√. The lease liability would be measured in the same way regardless of the
nature of the underlying asset√.

there is a difference between a lease, and a lease for which the lessee merely pays
for use. Lessee typically consumes a part of any equipment or vehicle that it leases
(such as aircraft, ships, mining equipment, cars and trucks).

In a lease for which the lessee pays for the part of the underlying asset that it
consumes (or uses up) during the lease term√, the lessor prices the lease to recover
the value of the part of the asset consumed√ as well as obtaining a return on its
investment in the asset√.

In a lease where the lessee merely uses the underlying asset without consuming
more than an insignificant part of it√, the lessor prices the lease to obtain a return on
its investment in the underlying asset√.

(10√ x ½ = 5 marks)

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 FAR660 – DEC 2016

(Total : 5 marks)

END OF SOLUTION