CONFIDENTIAL 1 AC/JULY2020/FAR660/SET1

UNIVERSITI TEKNOLOGI MARA

FINAL ASSESSMENT

COURSE : ADVANCED FINANCIAL ACCOUNTING AND

REPORTING 2
COURSE CODE : FAR660
EXAMINATION : JULY 2020
TIME : 3 HOURS

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of six (6) questions.

2. Answer ALL questions.

3. Start each answer on a new page.

4. Show your workings (if any) for each of the questions.

5. Answer ALL questions in English.

6. The answers must be in HANDWRITTEN.

This examination paper consists of 7printed pages.

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QUESTION 1

a. Capital market theorists suggest that managers have many incentives to voluntarily
provide accounting information to parties external to the firm and to have that
information verified by independent auditors (Godfrey et al., 2010, p. 54).

Required:

Explain the differences between the free-market approach and regulatory approach
that influence the amount of information to be disclosed in financial statements.
(5 marks)

b. The main reason for the government intervention to protect the public interest is due to
market failure.

Required:

Explain the statement above with regard to the public interest theory of regulation.
(5 marks)
(Total: 10 marks)

QUESTION 2

a. Malaysian Private Entities Reporting Standards (MPERS) is effective for financial

statements beginning on or after 1 January 2016. Although MPERS is a replacement
for PERS, a private entity may not necessarily adopt MPERS. Private entities have the
option to apply in its entirety either the MPERS or the Malaysian Financial Reporting
Standards (MFRS). A common question that private entities would ask is how far-off or
how different is the MPERS Framework as compared with the MFRS Framework.

Required:

Discuss the similarities and differences in the requirements between MPERS and
MFRS for the following items:

i. Employee benefits
ii. Leases
(10 marks)

b. Over the last several decades there have been significant efforts to integrate
sustainability into business, and encouraging progress has been made. A greater
number of companies are recognizing the need to make their operations more
sustainable and to report such activities to the stakeholders.

Required:

Discuss five (5) reasons why companies are getting more concerned about
sustainability issues.
(10 marks)
(Total: 20 marks)

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QUESTION 3

Pelangi Bhd, a public limited company in Johor has offered 2000 share options to each of its
500 employees on 1 January 2019. This agreement was approved by the Employees
Compensation Committee on 1 March 2019.

The fair values of each share option are estimated to be as follows:

1 January 2019 RM1.80

1 March 2019 RM2.00
31 December 2019 RM2.40
31 December 2020 RM3.00
31 December 2021 RM3.50

Each right is conditional upon the employees remained in service until the end of 2021. The
share option would vest at the end of the year 2021 with payment being made on 1 January
2022. The rights could be exercised until the end of the year 2024.

On 1 January 2019, the human resource department estimated that 10% of employees will
leave during the three-year period and therefore forfeit their share options.

Required:

a. Calculate the estimated amount that shall be recognized as an expense and

corresponding equity for the services rendered by the employees each year during the
vesting period.
(5 marks)

b. Explain the accounting treatment for the transaction in (a) above in accordance with
MFRS 2 Share-based payment.
(5 marks)

c. Advice on the differences in the accounting treatment for the transaction in (a) above if
the share-based payment involves share appreciation rights instead of share options.
(5 marks)
(Total: 15 marks)

QUESTION 4

a. In February 2019, Fiesta Bhd purchased 30,000 equity shares of Vaganza Bhd at a
price of RM6 per share. Transaction costs were RM3,000. On 31 December 2019,
these shares were traded at RM7.50. A dividend of RM0.30 per share was received on
30 September 2019.

Required:

Prepare the financial statements extracts as at 31 December 2019 relating to this

investment on the basis that the shares were bought for trading (note: conditions for
fair value through other comprehensive income have not been met).
(5 marks)

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b. Melinda Bhd issued 2,000 convertible bonds on 1 January 2019. The bond is
redeemable in three years at the price of RM4,000 per bond. The bonds pay interest
annually in arrears at an interest rate (based on nominal value) of 6%. Each bond can
be converted at the maturity date into 250 RM1 shares.

The prevailing market interest rate for three-year bonds that have no right of
conversion is 9%.

The discount factors are as follows:

Year 6% 9%
2019 0.942 0.917
2020 0.890 0.842
2021 0.840 0.772

Required:

i. Discuss the classification of financial instruments in accordance with MFRS 9

Financial Instruments.
(5 marks)

ii. Prepare an extract of the statement of financial position as at 31 December 2021

for the presentation of the compound financial instrument. Show all workings.

(5 marks)

c. On 1 March 2019, Pestle Bhd purchased 40,000 equity shares of Violet Bhd at a price
of RM8 per share. A dividend of RM1 per share was received on 30 November 2019.
Pestle Bhd’s financial year-end is on 31 December every year. Pestle Bhd chooses to
account for this equity instrument at fair value through other comprehensive income as
of 31 December 2019.

Required:

i. Explain the conditions that must be met if the equity instrument is to be held at
fair value through other comprehensive income and the accounting treatment for
the year ended 31 December 2019 in accordance with MFRS 9 Financial
Instrument.
(5 marks)

ii. Explain the three-stage impairment model established by MFRS 9.

(5 marks)

d. Rainbow Bhd, a publicly listed company, has requested your advice on accounting for
the financial instrument transaction. Rainbow Bhd purchased RM150,000 loan notes at
a 10% discount on their issue on 1 January 2019 intending to hold them until their
maturity on 31 December 2022. An interest coupon of 3% of par value is paid annually
on 31 December. Transaction costs of RM900 were incurred on the purchase. The
annual internal rate of return on the loan notes is 5.6%.

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Required:

Advise Rainbow Bhd on how this financial instrument is accounted for in its financial
statements for the year ended 2019 in accordance with MFRS 9 Financial Instruments.

(5 marks)
(Total: 30 marks)

QUESTION 5

a. According to MFRS 15 Revenue from Contracts with Customers, the transaction price
is the amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer, excluding amounts collected on
behalf of third parties. Hence, there are five (5) issues in determining the transaction
price.

Required:

List five (5) issues that have to be considered in determining the transaction price.

(5 marks)

b. The objective when allocating the transaction price is for an entity to allocate the
transaction price to each performance obligation (or distinct good or service) in an
amount that depicts the amount of consideration to which the entity expects to be
entitled in exchange for transferring the promised goods or services to the customer.
To meet the allocation objective, an entity shall allocate the transaction price to each
performance obligation identified in the contract on a relative standalone selling price
basis.

Required:

Explain briefly the process of allocation based on stand-alone selling prices.

(5 marks)

c. Aqua Nemo Bhd has entered into an agreement with THB Hotel to set up and install a
saltwater aquarium at the hotel lobby on 1 July 2019. Apart from supplying and setting
up the aquarium, Aqua Nemo Bhd has also offered a package for their service that
includes supplying the saltwater fish and corals as well as installing a hydro controller
that can be used to monitor the temperature of the aquarium. The hydro controller
needs to be updated and maintained in every three months for two years. This
maintenance will also be done by Aqua Nemo Bhd. THB Hotel agreed to pay
RM550,000 for the total contract price.

Aqua Nemo Bhd normally charges RM350,000 for the service on setting up the
aquarium and RM50,000 for the hydro controller. The updates and maintenance
services are separately charged at RM5,000 per visit. The saltwater fish and corals
supplied to THB Hotel can be acquired from other suppliers at RM160,000.

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On 20 August 2019, Aqua Nemo Bhd has completed the installation of the aquarium
and filled the tank with the saltwater fish and corals. The hydro controller was installed
on 1 September 2019 and the first visit on the maintenance of the controller has been
scheduled on 31 December 2019.

Required:

Discuss on the revenue of Aqua Nemo Bhd to be recognised from THB Hotel for the
financial year ended 30 June 2020 using the five-step model.
(10 marks)
(Total: 20 marks)

QUESTION 6

CitiScan Berhad is a company that specialized in excavator accessories since 1990. On 1

January 2019, CitiScan Berhad enters into a contract with Chaca Limited and Atira Berhad.
There are two different contracts between the parties. For a contract with Chaca Limited, it
will be a lease of an excavator and the excavator accessories that are used for mining
purposes. The maintenance fees of the excavator and the accessories are included in lease
payment for three (3) years. Chaca Limited is a local mining company that intends to use the
excavator at a copper mine. For Atira Berhad which is also a mining company, the contract
is just the same except maintenance fees are excluded from the contract. The contract also
conveys the right to use an additional loading truck. This loading truck is used by the lessee
to transport iron ores at another mine.

Required:

Advise whether the above contracts can be considered as a lease contract under MFRS 16
Leases.
(5 marks)
(Total: 5 marks)

END OF QUESTION PAPER

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