CONFIDENTIAL 1 AC/JUN 2018/FAR660

UNIVERSITI TEKNOLOGI MARA

FINAL EXAMINATION
ANSWER SCHEME

COURSE : ADVANCED FINANCIAL ACCOUNTING AND

REPORTING 2
COURSE CODE : FAR660
EXAMINATION : JUNE 2018

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SOLUTION 1

a. Regulatory approach is required to regulate the publication of accounting information

based on the following reasons:

 Free market approach is not workable because the market for accounting data is not
efficient. Hence, social equilibrium price for accounting information cannot be
achieved. √
 The free-rider problem can distort the market√
 Accounting information is a public good. In addition, not all users can be charged the
cost of producing the accounting information. √
 Once the information is released, it will be available to all users, including to those
who have not paid for it. This can reduce the company’s incentive to produce the
information. √ Only regulatory intervention can persuade companies to produce
information necessary to meet real demand and to ensure efficient market.
 A company has monopoly on the supply of information and is more likely to under
produce and sells at a higher price. √ Mandatory reporting will result in more
information at a lower cost.
( 5√ x 1 =5 marks)

b. Assumptions of the regulatory capture theory of regulation.

 All members of society are economically rational; √ therefore, each person will pursue his
or her self-interest√ to the point where the private marginal benefit from lobbying
regulators just equals the private marginal cost. √ Regulation has the potential to
redistribute wealth. Therefore, people lobby for regulations that increase their wealth, or
lobby to ensure that regulations are ineffective in decreasing their wealth. √

 The capture view assumes that the government has no independent role to play√ in the
regulatory process, and that interest groups battle for control of the government’s
coercive powers to achieve their desired wealth distribution.√
(Any 5√ x 1 =5 marks)
(Total: 10 marks)

SOLUTION 2

a. There is no difference between MPERS section 17 PPE and MFRS 116 PPE. √ The
similarities are :

1. Applies a `components’ approach to separately recognise and account for

each significant part of an item of PPE. √
2. Initial measurement is at cost. Enhancement principle of a subsequent
expenditure is not relevant. Each significant replacement is a new or new
component of an item of PPE. √
3. Subsequent measurement is at cost model or revaluation model. √

(4√ x 1 = 4 marks)
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Similarities and differences of MPERS section 27 Impairment of assets and

MFRS136 Impairment of assets:

MPERS section 27 MFRS136

Differences Test of impairment is If an entity carries goodwill or an

required at each reporting intangible asset with indefinite useful
date only if there is any life, impairment test must be
indication√ performed annually or more frequently
when impairment is evident,
regardless of whether there is any
indication of impairment. √ ; or
If without goodwill or intangible asset
with indefinite life, test for impairment
only if there is any indication of
impairments. √

If goodwill can be Goodwill must be allocated to its

allocated on a non- related CGUs. √
arbitrary basis, it is
allocated to CGUs for
impairment testing. √

similarities For assets carried on the cost model, any impairment loss is
recognised immediately in profit or loss. √
For assets carried on the revaluation model, any impairment loss is
treated as a revaluation decrease. √

(6√ x 1 =6 marks)
b. Discuss five (5) obstacles faced by accountants in embracing sustainability reporting.

1. No mandatory standards and clear guidelines.

2. No mandatory audit on environmental reporting.
3. Reporting of qualitative factors is difficult.
4. Measurement of performance from non-financial aspects is difficult to
determine.
5. Uncertainty as to which environmental issues that is relevant to stakeholders.
6. Increased costs to firms.

(Any five (5) obstacles with explanation x 2 = 10 marks)

“or any other relevant answers”
(Total: 20 marks)

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SOLUTION 3

a.
Year Particular Expense (RM) Equity (RM)

2015 100√ options x 45√ x RM12√ x 18,000 18,000√

1/3 √

2016 (110√ options x 35√ x RM12 x 12,800 30,800

2/3√) – RM18,000

2017 (115√ options x 43√ x RM12 x 28,540 59,340

3/3) – RM30,800

(10√ x ½ = 5 marks)

b. Explain with example the equity-settled share-based payment transactions and cash-
settled share-based payment transactions.

Equity-settled share-based payment transactions

Transaction where the entity receives goods or services as consideration√ for equity
instruments of the entity√ (including shares or share options) or receives goods or
services but has no obligation√ to settle the transaction with the supplier. √

Eg: call options given to employees to purchase an entity’s shares in exchange for
services √ (or any other possible example).

Cash-settled share-based payment transactions.

The entity acquires goods or services by incurring a liability√ to transfer cash or other
assets to the supplier√ of those goods or services for amounts that are based on the
price (or value) of equity instruments√ (including shares or share options) of the entity
or another group entity. √

Eg: Payments made to external consultants that are calculated based on entity’s share
price √ (or any other possible example).
(10√ x ½ = 5 marks)

c. The transaction is a share-based payment transaction, hence it falls under MFRS 2

Share-based Payment Transaction√. Under this standard, where the entity has a
choice of settlement that is, either equity settled or cash settled, the entity should
account for the transaction as cash settled if it has the present obligation to settle in
cash. √ It has the present obligation to settle in cash if:
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i. The settlement in equity instrument has no commercial substance; or

ii. It has a past practice or policy of settling in cash; or √√
iii. it generally settles in cash when the counterparty asks for cash settlement.

In this case, the company should treat the acquisition of the machinery as cash-
settled√ since the past practice for the company is to settle by cash for similar
transactions.
(5√ x 1 = 5 marks)
(Total: 15 marks)

SOLUTION 4

a. The derecognition of financial asset and financial liability in accordance to MFRS 9:

Financial asset Derecognised when the rights to cash flow expire √ or transferred √
(considering risk and rewards of ownership)
Financial Derecognised when the obligation is discharged, √ cancelled√ or
liability expires. √

(5√ x 1 mark = 5 marks)

b. Calculate the amount of liability and equity components of the convertible bonds for initial
recognition.
Year Discount factor Interest (8%) Principal Present value
(10%)
2018 0.909 √ 80,000 72,720√
2019 0.826 √ 80,000 √ 66,080 √
2020 0.751 √ 80,000 1,000,000√ 811,080 √
Liability 949,880
component
Proceeds 1,000,000√
Equity 50,120 √
component

(10√ x 1 mark = 10 marks)

c. i) Explain any three (3) types of financial risks under MFRS 9 Financial Instruments.

 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 √√ .
 Liquidity risk – risk that an entity will encounter difficulty in meeting obligation
associated with financial liabilities that are settled by delivering cash or another
financial asset √√ .
 Market risk – risk that fair value or future cash flows of a financial instruments will
fluctuate because of changes in market prices √√ .
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 Currency risk – the risk that foreign exchange rate changes cause the fluctuations in
cash flows or fair values √√ .

 Interest rate risk – the risk that interest rate changes cause the fluctuations in cash
flows or fair values. √√
 Other price risk – the risk that changes in other market prices, such as commodity
prices, equity prices, etc. cause the fluctuations in cash flows or fair values√√ .

(Any 3 types of risk + explanation x 2 = 6 marks)

ii) Frontline Bhd purchased RM10,000,000 equity shares of Global Venture

International PLC on the New York Stock Exchange.

Identify two (2) types of financial risks associated with the financial instrument.

Types of risk include:

1) market risk - risk that fair value or future cash flows of a financial instruments will
fluctuate because of changes in market prices √√

2) price risk - – the risk that changes in other market prices, such as commodity
prices, equity prices, etc. cause the fluctuations in cash flows or fair values √√.
3) currency risk - the risk that foreign exchange rate changes cause the fluctuations
in cash flows or fair values √√
(Any 2 risks x 2= 4 marks)

d. Derivative financial instrument

The standard defines derivatives as financial instrument or other contracts:

a) whose value changes in response to the change in a specified interest rate,
security price, commodity price or similar variables (underlying). √
b) that requires no initial net investment or initial net investment that is smaller
that would be required for other types of contract that would be expected to
have a similar response to changes in the market conditions; √ and
c) that is settled at a future date. √

Examples of derivative instruments are forward contracts, futures contracts,

swap contracts, options contracts, hybrid or synthetic instruments that
combine options in swap contracts or other hosr contracts, such as caps,
floors or collars in debt instruments. √√ (Any 2 examples)

(5√ x 1 =5 marks)
(Total: 30 marks)

SOLUTION 5

a. State all five (5) criteria that must be met to qualify as a contract..
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i. The parties to the contract have approved the contract and committed to perform
their respective obligations;

ii. The entity can identify each party’s rights regarding the goods or services to be
transferred;
iii. The entity can identify the payment terms for the goods or services to be
transferred;
iv. The contract has commercial substance;
v. It is probable that the entity will collect the consideration to which it will be entitled
for the goods or services
(5√ x 1 = 5 marks)

b. Performance obligation to be recognized over time if it meets one of the following

criteria:
i. The customer simultaneously receives√ and consumes√ the benefits as the
performance takes place√
ii. The entity’s performance creates or enhances an asset√ that the customer controls√
as the asset is created√ or enhanced
iii. The entity’s performance does not√ create an asset with an alternative use√ to the
entity and the entity has an enforceable√ right to payment for performance
completed to date√ .
(10√ x ½ = 5 marks)
c. Application of five step model in recognizing revenue.

Step 1: Identify the contract with the customer√

-Signed contract exists√ when both parties SmartEnergy Bhd enters into agreement with G-
Power Bhd creating enforceable rights and obligations and all the criteria are met√
( Approved • Rights of each party identified • Payment terms identified • Commercial
substance • Collectability)

Step 2: Identify the separate performance obligation√

-There are 2 separate performance obligation in the contract. Construction of the plant√ and
general maintenance√ of the plant are considered as distinct performance obligation since
both can be sold separately.

Step 3: Determine the transaction price √

(The transaction price is the amount of consideration an entity expects to be entitled from the
customer in exchange for transferring goods and services)
-The TP = RM1,000,000√

Step 4: Allocate the transaction price to the performance obligations√

The transaction price should be allocated based on their stand-alone fair values.
Therefore:

PO SO Allocation TP
Construction of plant 1,100,000√ (1,100,000/1,210,000)√ x 1,000,000 RM909,091√
General maintenance 110,000√ (110,000/1,210,000) √ x 1,000,000 RM90,909√
1,210,000 1,000,000
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Step 5: Recognize revenue when a performance obligation is satisfied√

No revenue√ is recognized for construction of plant since the control√ is only transferred at
the end of year 5. Revenue from general maintenance recognized at the end of year is 6/12√
x RM90,909√ = RM45,455
(20√ x ½ = 10 marks)
(Total: 20 marks)

SOLUTION 6

Under MFRS 117 Leases,√ lessees needed to classify the lease as either finance or
operating. √ If the lease was classified as operating, then lessees did not show neither asset
nor liability in their Statement of Financial Position√-.only the lease payments as an expense
in the Profit or Loss.√

New MFRS 16√ removes this discrepancy and requires lessees to show all the leases right
in their financial position puts most leases on SOFP. For lessee accounting, MFRS 16
applies a `right-of-use’ approach√ which requires a lessee to recognize assets and liabilities
for the rights and obligations created by lease contracts√. With MFRS 16, there will no
longer be a distinction of finance leases and operating leases for lessee accounting √. The
new standard also required a lessee to recognize assets and liabilities for all assets with
terms of more than 12 months, √ unless the underlying asset is of low value.√ MFRS 16
replaces the operating lease expense for those leases applying MFRS 117 with a
depreciation charge for lease assets and an interest expense on lease liabilities. √ This
would affect the current practice of many entities with significant operating lease
arrangements.√
(Any 10√ x ½=5 marks)

END OF SUGGESTED SOLUTION

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