2.

1 Explain the required IFRS financial reporting treatment of Issues (1) to (4)
above in Murgese Ltd’s financial statements for the year ended 31 March 2020,
preparing all relevant calculations.

Situation 1 Workbook 303 Chapter 6

Inventory Per IAS 2, Inventories, inventories should be measured at the lower of
cost and net realisable value (NRV). The two types of inventory units should be
considered separately.

Jaka
For Jaka only cost information is provided. Cost comprises all costs of
purchase, cost of conversion and other costs incurred in bringing the inventories
to their present location and condition.
To value the finished goods correctly, the costs of conversion need to be
taken into account. The costs of conversion consist of two main parts:
- costs directly related to the units of production eg direct materials and labour
- fixed and variable production overheads that are incurred in converting
materials into finished goods

IAS 2 emphasises that fixed production overheads must be allocated to

items of inventory on the basis of normal capacity of the production facilities.
Normal capacity is the expected achievable production based on the average over
several periods/seasons, under normal circumstances. (5,000 units in this case)
However, for the variable production overheads, it should be allocated to each
unit based on the actual use of production facilities. (4,000 units)

RM
Variable production overhead
Materials 32,000

Direct labour 20,000

Variable overheads 12,000

Total variable overhead 64,000

Variable overhead per unit (64,000/ 4,000) actual 16

 Fixed overhead per unit (7,500/ 5,000) normal production 1.5

Total cost per unit 17.50

Total cost of finished goods (17.50 x 400) 7,000

400 units counted

Aztecas
For the Aztecas again the inventories should be measured at the lower of
cost and NRV. NRV is the estimated selling price in the ordinary course of business
less the estimated costs of completion and the estimated costs necessary to make
the sale.
The NRV is lower than cost and therefore the inventories should be valued
at this amount. Hence the inventories figure should be valued at £1,800 (150 x £12).

Conclusion
The overall inventories figure should therefore be included in the draft
financial statements. This will decrease cost of sales and hence there will be an
increase to profit of £8,800 (7,000 + 1,800) and inventories in the statement of
financial position will increase by £8,800.

Situation 2
Impairment is the situation where RA is expected less than CA. (RA<CA)

The work carried out on the machine was general maintenance rather than
replacement parts as such. All repairs and maintenance costs should be expensed
to profit or loss and not capitalised as part of property, plant and equipment.
So, the £5,000 incurred should be credited back to property, plant and
equipment and debited to expenses. This is because it is not probable that there will
be future economic benefits flowing from it over and above the benefits flowing from
the original cost, when the asset was first recognised.
Debit Credit
Maintenance expenses 5,000

Property, plant and equipment – 5,000

machine
1 April 2019 – Machine RM5,000
Depreciation = 5,000/ 10 = 500
CA for machine = RM4,500

The requirement for significant maintenance work being necessary would

have raised concerns over the machine’s carrying amount and hence an impairment
review was carried out. It is a triggering indication of possible impairment.
Assets should be carried at no more than their recoverable amount.
Recoverable amount is the higher of value in use and fair value less costs to sell.
Carrying amount at 31 March 2020 was £39,000, however the maintenance
cost of £5,000 after depreciation need to be reversed (£500):
RM

Carrying amount at 31 Mar 2020 39,000

Less: CA of maintenance work (4,500)

Revised amount 34,500

Recoverable amount (RA)

= FV less cost to sell or VIU; whichever is higher

= (£30,000 - £1,000) or £32,000 whichever is higher

= £29,000 or £32,000 whichever is higher

= £32,000

VIU > FV less cost to sell, then the RV = £32,000

CA = RM34,500

Impairment loss

= CA – RA

= 34,500 - 32,000

= RM2,500
 Value in use was assessed at £32,000 and fair value less costs to sell being
£29,000. The machine should therefore be written down to £32,000, with £2,500
recognised as an impairment loss as part of profit or loss for the period.

Situation 3
Per IFRS 16, Leases the receipt of £2,500 appears to constitute an incentive
to enter into the agreement and therefore it should be accounted for as a reduction
in the initial measurement of the right of use asset which will be included within non‐
current assets on the statement of financial position.
Therefore, the right of use asset will be calculated by taking the present value
of the future lease payments using the 7% implicit in the lease and reducing it by
£2,500 (the lease incentive).

Present value of the future lease payment = 15,000 x 2.62432 = 39,365

Present Value of an Ordinary Annuity of $1 ----- 7% n = 3

Recognise a right of use asset as part of non-current assets at £36,865

(39,365 – 2,500)
As this will be included as a non‐current asset in the financial statements
(recognising that the company will gain economic benefit from the leased asset), it
should be depreciated over the shorter of the lease term (3 years) or its useful
life (30 years).
Therefore, depreciation of £12,288 (£36,865 / 3 years) will be expensed to
the statement of profit or loss. And at 31 March 2020 the right of use asset will be
held at its carrying amount of £24,577 (36,865 – 12,288).

No option to purchase (The shorten of the lease term or the asset’s useful life)
IF got option to purchase (Then choose useful life)
Currently, the lease payment has been expensed to operating expenses and
the lease incentive recognised as revenue. Both of these should be reversed with
only the interest being expensed (to finance costs) in respect of the lease interest
incurred.
The lease liability should initially be recognised at the present value of the
lease payments of £39,365. The amortised cost method is used to determine the
year end lease liability.
 Year CR CR DR CR
Balance b/f 1 Interest Accrued Payment 31 Mar Balance c/f 31
April 7% 31 Dec Mar

31 Mar 39,365 2,756 (15,000) 27,121

2020
31 Mar 27,121 1,898 (15,000) 14,019
2021

The lease liability should be split between current and non‐current liabilities.
Non-current liabilities will be £14,019 and current liabilities at £13,102 (27,121 –
14,019). And finance costs of £2,756 should be recognised as part of profit or loss
for the period.

Date Item and explanation Debit (RM) Credit (RM)

1 April 2019 Right of use asset account 36,865

Lease Liability 36,865

(To record the right of use of asset and lease liabilities at commencement date)

Date Item and explanation Debit (RM) Credit (RM)

31 Mar 2020 Depreciation 12,288

Accumulated depreciation 12,288

(To record the depreciation of item)

31 Mar 2020 Profit or loss: Finance Cost 2,756

Lease Liabilities 2,756

(To record the interest accrued)

Date Item and explanation Debit (RM) Credit (RM)

31 Mar 2020 Lease Liabilities 15,000

Cash 15,000

(To record the repayment of capital)

Situation 4 Chapter 3 Pg 142
Pottok Ltd is owned by one of the close members of the family (daughter) of a
member of Murgese Ltd’s key management personnel, Fallabella.
Per IAS 24, Related Party Disclosures, this makes Pottok Ltd a related party
of Murgese Ltd. Therefore, the sale of goods to Pottok Ltd is a related party
transaction.
All related party transactions should be disclosed, as they are material by
nature. Disclosure should include:
- Nature of the related party relationship – the daughter of a director owns a
majority share in Pottok Ltd, a customer

- Amount of the transaction – sales of £25,000

- Any outstanding balances at 31 March 2020 - £9,000 outstanding

However, the fact that Pottok Ltd is given favourable credit terms does not
need to be disclosed or the names of the related parties.
2.2 Calculate Murgese Ltd’s:
- revised profit for the year ended 31 March 2020; and
- basic earnings per share.

Revised profit for the year ended 31 March 2020

RM

Profit for the year 1,671,400

Inventory 8,800

Maintenance of machine (5,000)

Depreciation of PPE ### 500

Debit in PPE initially then depreciated (means need add

back)
Impairment (2,500)

Finance costs (2,756)

Depreciation (12,288)

Reverse incentive (2,500)

Reverse payment 15,000

Revised profit for the year ended 31 March 2020 1,670,656

Basic earnings per share

Bonus share – as if the shares have always been in issue

Weighted average number of shares outstanding

= (400,000 x 5/4) + (50,000 x 3/12) no need x 5/4 because is after bonus share
issued
= 500,000 + 12,500
= 512,500

Basic earnings per share

= 1,670,656 / 512,500
= RM3.26
2.3 Describe the differences between IFRS and UK GAAP in respect of the
financial reporting treatment of Issue (3) above.

Issue 3 – Lease workbook pg345

UK GAAP IFRS

Types of lease - operating lease There is no distinction for

- finance lease
There are no recognition
exemptions.
lessees. All leases are
accounted for in the same
way, subject to the optional
recognition exemptions for
short term leases and leases
of low-value assets.

Is it a lease? Lease classification is based To decide on whether it is a

on the risks and rewards of lease or not establish whether
ownership there is the right:

- To obtain substantially
all of the benefits; and

- To direct the use of the

asset.

Recognition of Finance lease - yes, based A 'right-of-use' asset is

the asset on fair value at the inception
of the lease.
Operating lease - not
capitalised on the balance
sheet.
recognised and presented as
a non-current asset in the
statement of financial position,
unless the optional recognition
exemptions are applied.

Recognition of Finance lease - yes, based Yes, a lease liability is

the lease liability on the present value of
lease payments.
Operating lease - no liability
is recognised.
recognised for all lease
contracts within the scope of
IFRS 16, unless the optional
recognition exemptions are
applied.