FAR660 – JUNE 2017

SUGGESTED SOLUTION FAR 660 FINAL EXAM JUNE 2017

QUESTION 1

Public Interest Theory:

 Regulation is to protect consumer interests by securing improved performance

when compared with an unregulated situation. √
 Regulation put in place to benefit society as a whole rather than vested
interests. √
 Regulatory body considered to represent interests of the society in which it
operates rather the private interests of the regulators.
 Assumes that government is a neutral arbitrator and assumed not to have any
set of own interest.
 The objective of serving public interest may not be fully achieved as this theory
ignores the fact that equity is a matter of viewpoint.
 Regulation is an outcome of a complex lobbying process where some parties
interests will be ignored.

Regulatory Capture Theory:

 This theory argues that those who are regulated have an incentive to dominate
the process, or in some way manipulate it to their advantage. √
 Assumptions:
 member of society will pursue self-interest to the point where the private
marginal benefit from lobbying regulators just equals the private marginal
cost.People lobbying for regulations that increase their wealth (the
regulator protect and increase their wealth) √
 government has no independent role to play in the regulatory process
but is simply an arbiter between battling interest groups√
 Capture is said to occur in any one of the situations:
- If the regulated entities control the regulation and the regulatory agency
- If the regulated entities succeed in coordinating the regulatory body’s
activities with their activities
- If the regulated entities neutralize or ensure non-performance by the
regulating body
- In the subtle process of interaction with the regulators, the regulated entities
succeed in co-opting the regulators into mutually shared perspectives
 Professional accounting bodies or the corporate sector seeks to control the
setting of accounting standards. They either have formal control over standard
setting representation on the relevant standard setting bodies, or significant
influence/control over the decisions made by the relevant setting bodies.

(any 5 points x 1 mark = 5 marks)

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 FAR660 – JUNE 2017

a) Why accounting standard setting process is a political in nature.

 Standard setting is viewed as a political process of its potential to significantly

affect wellbeing of a wide variety of interest groups. Different groups are
affected differently by accounting regulations. √
 For example, a standard banning recognition of doubtful debts expense might
be welcomed by firms that borrow heavily and are close to their borrowing
agreement leverage constraints. On the other hand, large banks with high public
profiles may be averse to the standard because it causes their profits to
increase, understates their risk. √
 In the presence of diverse and often conflicting interests, a regulatory group
must strike a balance between them by making political choices. For the
decision to be accepted by the people affected, the regulatory agency needs
political legitimacy.

Or any possible solutions.

(2 √ x 2.5 marks = 5 marks)

QUESTION 2

a) How CSR reporting contribute to the increase in shareholders’ wealth.

 Corporate Social Responsibility (CSR) reporting is an approach to give

businesses the opportunity to express their commitment to the society√. CSR
reporting is concerned with communicating business ethics and the company’s
accountability to a wide range of stakeholders including investors, employees,
supplier and customer√.
 Its reporting concerned with environmental protection (eco-efficiency) √ and
justice between peoples and generation (eco-justice) √
 Setting goals and managing company’s performance under a holistic economic,
environmental and social perspective√ is a key to long term local and
international business success√.
 CSR could improve the quality of information available to fund managers and
investors.√ Shareholders and potential shareholders can exercise effective
control only if they have clear and meaningful information about the company’s
past and future performance√.
 CSR reporting will enable them to make a proper assessment not only of past
performance but also of the directors’ view on the company’s future prospects√
and its approach to managing all those factors√ i.e environmental performance,
employees issues, relations with suppliers, customers and local communities
which are crucial to the company’s future success and reputation.
 CSR reporting information can brings positive financial implications√ to
investors√.
(any 5 points x 2√ = 10 marks)

b) Differences in requirements between MPERS and MFRS for the following

items:

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 FAR660 – JUNE 2017

i. Control of subsidiaries

Different concept of control. In MPERS, control over an investee means the

investors has the power to govern the financial and operating policies of the
investee so as to obtain benefits from its activities √. While for MFRS,
control must be demonstrated through 3 elements:power√, exposure to
variable returns and an investors’s ability to use its power to affect its
variable returns√.

ii. Goodwills

In MPERS, after initial recognition, goodwill is subsequently measured at

cost less accumulated depreciation and any accumulated impairment loss√.
Goodwill is amortised over its useful life or a max of 10 years if its useful life
cannot be reliably estimated √. In MFRSs, goodwill has an indefinite life,
hence, it is not amortised, however it is subject to annual impairment
testing√.

iii. Borrowing costs

MPERS requires all borrowing costs to be recognized as an expense in

profit and loss√ while MFRS requires borrowing costs directly attributable to
the acquisition, construction or production of a qualifying asset to be
capitalized as part of the cost of asset√

iv. Investment property

MFRS allows accounting policy choice of either fair value through profit and
loss or cost model√. In MPERS, entity must use the fair value model unless
FV could not be measured reliably without undue cost or effort√.
Or any acceptable answers

(10√ x 1 = 10 marks)

(Total: 20 marks)

QUESTION 3

a) Journal entries

1/7/2015
Dr Machinery √ RM2.5 million √√
Cr Share-based payment reserve RM2.5 million √
√√

1/7/2016
Dr Share-based payment reserve √ RM2.5 million √
Cr Ordinary Share capital √ RM2.5 million √

(10 √ x ½ mark = 5 marks)

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 FAR660 – JUNE 2017

b) Recognition and measurement of equity-settled share-based payment

transaction

Recognition:
The entity shall recognise the goods or services received or acquired in a
share-based payment transaction when it obtains the goods or as the
services are received √. In an equity-settled transaction, the entity receives
goods or services as consideration for equity instruments of the entity √.
Therefore, a corresponding increase in equity shall be recognised for the
goods or services received. √

Measurement:
The measurement basis used is the fair value of either goods or services
received√. The fair value should be measured at the date the entity obtains
the goods or services. √

(5√ x 1 mark = 5 marks)

c) Recognition and measurement of a share-based payment transaction if a

liability is recognized with regards to the transaction.

Recognition:
This transaction is a cash-settled share-based payment transaction in which
the entity acquires goods or services by incurring liability to the supplier of
the goods or services for amount that are based on the price of the entity’s
shares. √ Therefore, a corresponding increase in liability shall be recognised
for the goods or services received. √

Measurement:
The entity shall measure the above recognition at the fair value of the
liability. √ Until the liability is settled, the entity shall remeasure the fair value
of the liability at each reporting date and at the date of settlement. √ Any
changes in fair value is recognised in profit or loss for the period. √

(5 √ x 1 mark= 5 marks)

(Total: 15 marks)

QUESTION 4

a. Disclosure requirements related to the convertible bonds:

1. The values of the liability and equity components of the bond are to be
disclosed separately in the financial statements.
2. Interest income from the bond to be disclosed in the statement of profit
or loss and other comprehensive income.
3. Accounting policies on the recognition of the bonds.
4. Risks associated with the bonds and the risk management policy.
5. Terms of conversion into ordinary shares.
(5 marks)

b. Equity component of the convertible bonds at initial recognition.

Equity component of the convertible bond:

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 FAR660 – JUNE 2017

Year Discount Interest (6%) Principal Present value

factor RM RM RM
(9%)
1 0.917 √ 120,000 } √ 110,040
2 0.842 √ 120,000 } √ √ 110,040
3 0.772 √ 120,000 } 2,000,000 √ √ 1,636,640
NPV 1,847,720
Face value √ 2,000,000
Equity component √ 152,280

(10√ x 1 mark = 10 marks)

c. Five (5) types of financial risks under MFRS 7 Financial Instruments:

Disclosures.

1. Credit risk √
Risk that one party to a financial instrument will cause a financial loss for
the other party by failing to discharge an obligation. √√√

2. Liquidity risk √
Risk that an entity will encounter difficulty in meeting obligations
associated with financial liabilities. √√√

3. Market risk √
The risk that fair value or future cash flows of a financial instrument will
fluctuate because of changes in market prices. √√√

4. Currency risks √
The risk that the fair value or future cash flows of a financial instrument will
fluctuate because of changes in foreign exchange rates. √√√

5. Interest rate risks √

The risk that the fair value of future cash flow of a financial instrument will
fluctuate because of changes in market interest rates. √√√

6. Other price risk √

The risk that the fair value of future cash flow of a financial instrument will
fluctuate because of changes in market prices (other than interest rate risk
or currency risk). √√√
(Any 5 risks with explanation x 20√ x ½ = 10 marks)

d. The investments are classified as a financial asset held for trading. √ These
investments are usually acquired principally for the purpose of selling in the
near future √ or they are part of a portfolio of identified financial instruments
that are managed together and for which there is evidence of a recent actual
pattern of short-term profit-taking. √ It is probable that these investments
would be classified in financial instruments at fair value through profit or loss
(FIFVPL) category √ if there is intention to trade for short term profit margins.
√

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(5√ x 1 mark = 5 marks)

(Total: 30 marks)

QUESTION 5
a. An entity shall disclose qualitative and quantitative information about all of
the following:
 Revenue recognized from contracts with customers, including the
disaggregation of revenue√;
 Contract balances, including the opening and closing balances of
receivables, contract assets and contract liabilities√;
 Performance obligations, including when the entity typically satisfies its
performance obligations and the transaction price that is allocated to the
remaining performance obligations in a contract√;
 Significant judgments, and changes in judgments, made in applying the
requirements to those contracts√;
 Assets recognized from the costs to obtain or fulfill a contract with a
customer√.
(5√ x 1 mark =5 marks)

b. Criteria to be met in identifying the contract with the customer:

i. The parties to the contract have approved the contract√
ii. Each party’s rights√ in relation to the goods or services to be
transferred can be identified√
iii. The payment terms and conditions√ for the goods or services to be
transferred can be identified√
iv. The contract has commercial substance√
v. The collection of an amount of consideration to which the entity is
entitled to√ in exchange for the goods or services is probable. √
(Any 2 criteria x 2√= 4 marks)
(Any 1 criteria x 1√ = 1 mark)

c. The pricing for the additional products reflects the stand-alone selling price√√
of the products at the time of the contract modification and the additional
products are distinct from the original products √√. In accordance with MFRS
15, the contract modification for the additional 30 units of computers is, in
effect, a new and separate contract for future products that does not affect the
accounting for the existing contract √√.

Therefore, the amount of revenue for the year ended 31 December 2016:

Revenue from the original contract (contract 1):

Computers delivered until 31 December 2016 100 units√
Original agreed price RM3,000 per unit√
Total revenue from contract 1 RM300,000

Revenue from the original contract (contract 2):

Computers delivered until 31 December 2016 10 units√
Agreed price RM2,500 per unit√
Total revenue from contract 2 RM25,000

Total revenue for the year ended 31 December RM325,000

2016 from contract 1 and contract 2:

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(10√ x 1 mark = 10 marks)

Question 6

The contract does not contain a lease√ because there is no identified asset√. The
contract is for the vehicles√ and the vehicles can be changed at the discretion of
Flower Bhd√ (the lessor). Flower Bhd has the substantive rights√ to substitute the
vehicles that can be used√ by Fuchsia Bhd (the lessee) because Flower Bhd has
the practical ability to change the vehicles used at any time without Fuchsia Bhd’s
approval√ and Flower Bhd would benefit economically from substituting the
vehicles√.

Therefore, the rental payment will be treated as rental expenses√ in the statement
of profit or loss√ of Fuchsia Bhd.

(10√ x ½ = 5 marks)

END OF SOLUTION