FAR660 – FEB 2020 (SPECIAL EXAM)

SUGGESTED SOLUTION FAR 660

FEBRUARI 2020

QUESTION 1

a. Explain the assumption of public interest theory in ability to protect the public interest.
 Regulators were assumed to act in the interest of public. √
 Will only introduce regulation if the benefits to the public are greater than the
cost. √
 There are agents who will seek regulation on behalf of the public. √
 Regulation is not introduced to support particular vested interest. √
 Regulators are not assumed to be driven by self-interest. √
(5√ x 1 mark = 5 marks)

b. Explain how regulatory capture theory able to explain regulation in capital markets.

 Regulation is initially introduced to protect public interest. √

 However, once regulation introduced, the parties that been subjected to regulation
tend to be able to capture the regulation process to protect or increase their wealth.
√
 Capture is said to occur if the regulated entities:
 control the regulation and the regulatory agency. √
 succeed in coordinating the regulatory body's activities, so that their private
interest is satisfied. √
 manage to neutralise or insure non-performance by the regulating body. √
 entities use a subtle process of interaction with the regulators to ensure a
mutual perspective. √
 This theory assumes that the parties subject to regulation can form into a group or
subgroup capable of capturing the process. √
 In addition, capture will normally become apparent to observers in the community. √
(any 5√ x 1 mark = 5 marks)
(Total: 10 marks)

QUESTION 2

a. Discuss the three differences for the recognition and measurement of the government
grant under the MFRS and MPERS.

MPERS MFRS
Applies an income approach in that all Applies an income approach to the
government grants are income transactions recognition of government grants. [MFRS
rather than capital transactions. √ 120.16]. √

If there is no specified future performance For recognition, there must be reasonable

condition imposed, the grant is recognised in assurance that: (a) the entity will comply
income when the grant proceeds are with the conditions and (b) the grants will
receivable. √ be received [MFRS 120.7]. √

If there are specified conditions imposed, the Recognise grants in profit or loss on a
grant is recognised in income only when the systematic basis over the periods in which
conditions are met. √ the entity recognises as expenses the
Grants received before the revenue related costs for which the grants are

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 FAR660 – FEB 2020 (SPECIAL EXAM)

recognition criteria are satisfied are intended to compensate [MFRS 120.12]. √

recognised as a liability. [S24.4]. √
Government grants shall be measured at the
fair value of the asset received or receivable
[S24.5]. √
No exception provided for non-monetary
government grants transferred at nominal
value. √
Amended MPERS requires that a government
loan at below-market interest rate be
measured at fair value and the benefit of the
loan treated as a grant. √
Non-monetary government grants, such
as transfer of land at nominal value, may
be measured at fair value by reference to
the fair value of the asset receive or at the
nominal amount paid [MFRS 120.23]. √
Additional guidance is provided on the
treatment a government loan at below
market rate of interest. √
The loan is measured at the present value
of the future payments and accounted for
as a financial liability. √

The difference between the nominal value

and the present value is a treated as a
government grant [MFRS 120.10A] √
(MFRS - any 5√ x 1 mark = 5 marks)
(MPERS - any 5√ x1 mark = 5marks)
(Total: 10 marks)

b. Discuss the three theories in relation to the social and environmental performance.

1. 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 √

2. 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 stakeholder theory - 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. √

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 FAR660 – FEB 2020 (SPECIAL EXAM)

3. 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)
(any 10√ x 1 = 10 marks)
(Total: 20 marks)

QUESTION 3

a. Equity and employment benefit expense:

Date Equity (RM) Expense (RM)

31/12/2017 100,000√ x (10-4)√ x RM6.00√ x 1/3√ 1,200,000 1,200,000

31/12/2018 [100,000 x (10-2)√ x RM6.00√ x 2/3√ ] 3,200,000√of 2,000,000

– 1,200,000

31/12/2019 [100,000 x (10-3)√ x RM6.00 x 3/3] – 4,200,000 1,000,000√of

3,200,000

(10√ x ½ mark = 5 marks)

b. The employees share option scheme is a transaction with the employees (equity settled)
√ of the company. Therefore, under MFRS 2, the scheme should be recognized at the
grant date √ and measured using the fair value of the option on the grant date√. The
grant date is the date when approval is obtained√ and therefore the grant date is on 1
January 2017 as the share option scheme were offered and accepted by the
executives√. Furthermore, in this case, the option has a vesting condition. Hence, it
should be recognized at each reporting date throughout the vesting period. √
(any 5√ x 1 mark = 5 marks)

c. Types of share-based transactions that fall under the scope of MFRS 2 Share-based
payments transaction:

Type Explanation Example

Equity-settled √ An entity issues its own Employee share ownership
equity instruments, or those scheme (ESOS). √
of another member of the
same group, as
consideration for goods and
services received. √

Cash-settled √ An entity or another Share appreciation rights. √

member of the same group
pays cash calculated by
reference to the price of
equity instrument as
consideration for goods and

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 FAR660 – FEB 2020 (SPECIAL EXAM)

services received. √
Choice of equity-settled The supplier of goods and Purchase of machinery
or cash-settled √ services or the entity where the contract allows
receiving those goods or settlement either by shares
services may choose or cash equivalent to a
whether the entity settles in specific value of shares. √
cash or by issuing equity
instruments. √
(Any 2√ for types x 1 mark = 2 marks) + (Any 2√ for explanations x 1 mark = 2 marks) +
(Any 2√ for examples x ½ mark = 1 mark) = 5 marks

QUESTION 4
a. The acquisition of equity in another company creates a contract √ between the investing
company, Curry Bhd and the issuing company, Smiley Bhd. This contract is a financial
instrument because;
i. It gives rise to both a financial asset of one entity (Curry Bhd) and a financial
liability of another entity (Smiley Bhd). √
ii. The investing company (Curry Bhd) now owns the shares (financial asset)√ of
issuing company (Smiley Bhd).
iii. Curry Bhd has a contractual right (the right to receive cash or another FA) from
another entity (Smiley Bhd). √
iv. Smiley Bhd has a contractual obligation (the obligation to deliver cash or another
FA) to another entity (Curry Bhd). √
(5√ x 1 mark = 5 marks)

a. b. i.

Year ends Extracts Statement of profit or Extracts Statement of financial

loss position
Finance costs 6% Loan notes
RM RM
31 Dec 2018 28,300 293,300
31 Dec 2019 29,330 304,630
31 Dec 2020 30,460 317,000
31 Dec 2021 31,000 -

Working
Year RM
2018 Capital balance (300,000 @ 95%) less 283,000 √√
2,000
Interest 10% 28,300 √
Interest paid (300,000 @ 6%) (18,000) √
-----------
293,300
-----------
2019 Interest 10% 29,330 √
Interest paid (300,000 @ 6%) (18,000) √
------------
304,630
------------
2020 Interest 10% 30,460 √
Interest paid (300,000 @ 6%) (18,000) √
-----------
317,000

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 FAR660 – FEB 2020 (SPECIAL EXAM)

-----------
2021 Interest 10% 31,000 (round up) √
Interest paid (300,000 @ 6%) (18,000) √
-----------
330,000
Capital repaid 330,000
-----------
Nil
======
(10 √ x ½ = 5 marks)

ii. The standard defines transaction costs as `incremental costs that are directly
attributable to the acquisition, issue or disposal of a financial asset or financial liability.√
Since the investment is classified as measured at fair value through profit or loss, √ Piru
Bhd should record the initial measurement at RM400,000√ excluding the transaction
costs.√ The transaction cost are recognised as an expense in profit or loss.√
(5√ x 1 = 5 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). √√
(Type of risks 5√ x ½ mark = 2.5 marks)
(2√ for explanation of each type of risk x 1½ marks = 7.5 marks)

d. Advise the company on the accounting treatment for the equity instrument.

The equity instrument shall be classified as FVTPL √ because the company plans to sell
or trade √ the shares. Thus, changes in fair value √ of the financial asset including
losses are to be recognized in SOPL √. When the financial asset is derecognized, the
gains or loss will be recognized in SOPL. √ According to MFRS 9, the reclassification of
equity instrument is not permissible.√ Therefore, Iffah Bhd could not reclassify the equity
investment to FVTOCI.

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 FAR660 – FEB 2020 (SPECIAL EXAM)

(Any 5√ x 1 mark = 5 marks)

QUESTION 5

a. The five steps in the revenue recognition process are:

1. Identify the contract(s) with customers. √
2. Identify the separate performance obligations in the contract.√
3. Determine the transaction price.√
4. Allocate the transaction price to the separate performance obligations.√
5. Recognize revenue when each performance obligation is satisfied.√
(5√ x 1 mark =5 marks)

b. Customer - A party that has contracted with an entity √ to obtain goods or services that
are an output of the entity’s ordinary activities in exchange for consideration.√

Transaction price-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.
(5√ x 1 mark =5 marks)

c.
Step 1: Identify contract with a customer√

ATP Bhd entered into a 2 year contract with Local Mobile Operator for a Platinum Plus
100GB data plan. √

Step 2: Identify the separate performance oblifgations (PO) in the contract. √

There are 2 PO in the contract. Free iPhone and Platinum Plus 100 GB data plan √√

Step 3: Determine the transaction price(TP). √

TP = RM250 x 24 months

= RM6,000 √

Step 4: Allocate transaction price to separate PO. √

PO Standalone (RM) Alocation(RM) TP allocation(RM)

Free samsung 2,400√ 2400/6912√ x 6,000√ 2,083.33√ sof
telephone
3 GB data plan (188 x 24) = 4,512√ 4512/6912√ x 6,000√ 3916.67√ sof
6,912 6,000.00

Step 5: Recognise revenue when entity satisfies PO. √

Fye 31 December 2018 31 December 2019

Telephone RM2,083.33√ -
Data plan RM1,958.33√ RM1,958.33√
(20√ x ½ =10 marks)
(Total: 20 marks)

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 FAR660 – FEB 2020 (SPECIAL EXAM)

QUESTION 6

The contract does not contain a lease √. The factory is an identified asset √. Camelia Bhd does
not control the use of the factory because DTextile Bhd makes all decisions about the
operations of the factory. √ Camelia Bhd does not have the right to direct how and for what
purpose the factory is used during the three-year period of use √. Camelia Bhd’s rights are
limited to specifying output from the factory in the contract with DTextile Bhd √. Camelia Bhd
has the same rights regarding the use of the factory as other customers purchasing shirts from
the factory.
(5√ x 1 mark = 5 marks)
(Total: 5 marks)

END OF SOLUTION