TITLE BCOM ACCOUNTING

SUBJECT FINANCIAL ACCOUNTING 2A

SUBJECT CODE FNA 210
TEST/EXAM SICK TEST MEMO
SEMESTER 1ST SEMESTER
DATE WRITTEN 07 MAY 2018

TOTAL MARKS 120

DURATION 2 HOURS
PASS MARK 50%
WEIGHTING 60%
EXAMINER ELSON PHIRI

REQUIREMENTS:

Learner Requirements: Stationery, Examination Book

Please answer ALL questions.

PLEASE READ THE ASSESSMENT RULES AND REGULATIONS THAT FOLLOW

Learners are warned that contravening any of the examination rules or disobeying the instructions of an
invigilator could result in the examination being declared invalid. Disciplinary measures will be taken which
may result in the students’ expulsion from Damelin.

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ASSESSMENT RULES AND REGULATIONS

Please ensure that you have read and fully understand the following assessment rules and regulations prior
to commencing with your assessment:
1. To be permitted access to the examination, a learner must arrive with:
- an Identity Document or other official proof of identity (for example,
- a student card, passport or driver's licence card with photo); and
- the required exam stationery.
2. No learner may enter the examination room more than 30 minutes after the examination sitting has
commenced and no candidate may leave the room less than one hour after the examination sitting
has commenced.
3. No extra time will be allowed should a student arrive late.
4. All learners must sign the Attendance Register for the examination on arrival.
5. It is the responsibility of learners to familiarise themselves with the examination rules prior to sitting
for the examination.
6. All examinations are to be written on the date and time officially stipulated by the College.
7. It is the responsibility of learners to ensure that they are writing the correct paper and that the
question paper is complete
8. Cell phones must be switched off prior to entering the exam venue. Cell phones and wallets may be
placed under candidates' chairs rather than at the front of the room.
9. Learners may not handle cell phones or wallets during the exam.
10. No weapon of any description may be taken into the assessment room.
11. All personal belongings are to be placed at the front of the examination room. Personal belongings
brought to the examination are at the owner's risk.
12. Smoking is not permitted and learners will not be allowed to leave the examination room in order to
smoke
13. Once the examination has commenced, all conversation of any form between candidates must
cease until after candidates have left the room, after the examination.
14. Only the official College examination book, as supplied by the College, may be used.
15. Learners must ensure that their student number is written on the answer book.
16. Learners are responsible for ensuring that they follow the instructions in the examination for
submitting their answers.
17. Please read the instruction appearing on the examination paper carefully
18. The number of every question must be clearly indicated at the top of every answer.
19. No pages may be torn out of the answer book. All question papers and scrap paper must be handed
to the invigilator after the examination.
20. Learners finishing earlier are to leave the examination room as quietly as possible on the instruction
of the invigilator, and may not talk until outside the building where the examination is being written.
21. Only under exceptional circumstances will a learner be permitted to leave the examination room
during the examination, and if the invigilator gives permission. An invigilator must accompany the
learner. Only one learner at a time may be absent from the examination room.
22. Candidates may not act dishonestly in any respect.

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Question 1 [Framework for the preparation of financial Statements] [30]

One of the objectives of the IFRS Foundation is to promote and facilitate the adoption of IFRS Standards
through the convergence of national accounting standards and IFRS Standards. (IFRS Constitution,
paragraph 2(d)).

Required:

a) Discuss the meaning of ‘convergence’. [5]

b) Critically explain the difference between ‘convergence’ and ‘adoption’. [10]
c) Discuss why a country may resist adoption of IFRS. [5]
d) Discuss the position of the United States in relation to adoption and convergence.[10]

Solution Question 1

a) The purpose of convergence is to try to reduce the differences between International Financial
Reporting Standards and the standards of a specific country (that country’s national GAAP). It
involves discussion and collaboration between that country’s standard-setters and the IASB in
order to assess the differences and reach an agreement on how to minimise them.
The Constitution of the IFRS Foundation clarifies that the ultimate objective is the adoption of
IFRSs, and that convergence is simply a means to achieve adoption.
The terms harmonisation and convergence are often used interchangeably. Whereas
‘harmonisation’ was previously the buzz word, ‘convergence’ is now the new focus. In fact, the
Constitution of the IFRS Foundation refers only to the term ‘convergence’.

b) Convergence came about as a stepping stone due to resistance from some countries to a full-
scale adoption of the IFRSs. Where a country believes that it is unable to adopt the IFRSs,
convergence is an option.
The main reason why most companies want to use IFRSs in their financial statements is the
ability to demonstrate to the investor community that their financial statements are IFRS-
compliant. For that purpose, it is not sufficient that the standards have converged. The only
claim compliance with IFRS is to apply all the standards as issued by the IASB and make the
compliance representation required by IAS 1.
While convergence may be the necessary preparation for some countries to adopt IFRSs, the
simplest, least costly and most straightforward approach is to adopt the complete body of
IFRSs in a single step rather than opting for long-term convergence.

c) Differences between a country’s national GAAP and the IFRSs are so vast that the
complications and related cost of converting to IFRSs are expected to outweigh the benefits.
 Countries that believe that their national standards are superior to that of the IFRSs.

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  The IFRSs are principles-based (in fact, one of the objectives in the development of an
IFRS is to ensure that it is ‘based upon clearly articulated principles’) whereas the
United States, for example, uses US GAAP which, although is intended to be principles-
based, tends to be highly rules-based due to their litigious society The US argues that
the pure principles-based approach is unsuitable since it opens the door to potential
litigation, which is less defensible than their relatively rules-based approach.

d) The USA was initially completely opposed to the international standard-setting process.
However, after numerous US corporate collapses, the US Financial Accounting Standards
Board (FASB) and the International Accounting Standards Board (IASB) agreed to a process of
convergence.

The process of convergence between the IASB and the FASB started in September 2002 when,
after a joint meeting by the two bodies, the ‘Norwalk Agreement’ was issued in which both
parties acknowledged their commitment to the development of high-quality, compatible
accounting standards that could be used for both domestic and cross-border financial
reporting.
In February 2006, a Memorandum of Understanding (MoU) between the FASB and the IASB was
issued. The title of the MoU was ‘A Roadmap for Convergence between IFRSs and US GAAP:
2006–2008’.

In 2009, in the wake of the financial crisis, the Group of 20 Leaders (G20) called for standard
setters to redouble their efforts to complete convergence in global accounting standards by
June 2011. Following this request, in November 2009 the IASB and the FASB published a
progress report describing an intensification of their work programme, including the hosting of
monthly joint board meetings and providing quarterly updates on their progress on
convergence projects. In their joint statement, they explicitly underlined ‘we aim to complete
each major project by the end of June 2011, consistent with the milestones established by the
2008 update of the MoU’. However the positive momentum towards IFRS did not continue, the
decision to be taken in 2011 was postponed.

The US Securities Exchange Commission (SEC) was to decide in 2011 whether it would allow its
domestic companies listed in the US to use IFRSs, but subsequently postponed this to 2012.
But in October 2012, the SEC announced that, due to ‘the US Presidential Elections and other
priorities in Washington, it was unlikely that the SEC would return to the topic of domestic use
of IFRSs until early 2013’.2 However, the last ‘joint IASB and FASB progress report’ was
released in 2012, suggesting that although further work is continuing (evidenced by monthly
joint meetings between the FASB and IASB), the issue of domestic use of IFRSs is not high on
the agenda.

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 Although Christopher Cox, the previous Chairman of the SEC, vowed that the process would be
complete by 2016, this clearly became impossible.

The reason may be found in an illuminating speech by the SEC's previous chief accountant,
James Schnurr, in which he explained that, although the SEC is still committed to the objective
of setting a single set of high-quality globally accepted standards, ‘there is virtually no support
to have the SEC mandate IFRS for all registrants’ and ‘there is little support for the SEC to
provide an option allowing [U.S. public] companies to prepare their financial statements under
IFRS’. As a result, he said it was unlikely that he would promote IFRS-based financial
statements as a legislative requirement.3
Although the convergence project between the IASB and the FASB has a long way to go, the
effects of having successfully reduced many differences between the IASB’s IFRSs and FASB’s
US GAAP have already been felt by foreign companies listed in the US since they are no longer
required to prepare the complex and time-consuming reconciliation between their IFRS-based
financial statements and the results that would have been achieved using US GAAP.

Question 2 [Presentation of financial Statements] [30]

Quick Fix Limited is a manufacturing company engaged in the production of adhesives. The company has
not performed well over the past three financial years.

In order to improve on the poor past profits, the Board of Directors approved a R2 000 000 advertising
promotion during the year ended 31 December 2008, with the aim of improving the sales revenue in the
future. The advertising promotion includes the production of a television advert and the printing of
brochures. The television advert was filmed, edited and finalised during November 2008 and the brochures
were designed, printed and delivered to Quick Fix Limited during December 2008.The advert will appear on
television and the brochures distributed during January to March 2009.

The accountant insists on recognising the R2 000 000 payment as an asset at 31 December 2008.His
reasoning is that future sales will increase as the number of customers grow as a direct result of the
advertising campaign.

Required:

Discuss whether you agree with the accountant, making reference to the conceptual framework. Suggest
an alternative treatment if you disagree. [30]

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Solution Question 2

Issue
The issue in question is whether the C2 000 000 payment for the advertising promotion should be
expensed or capitalised as an asset.
Asset definition
 a resource controlled by the entity;
 as a result of past events; and
 from which future economic benefits are expected to flow to the entity.

Discussion of the asset definition

 The filmed television advert and the brochures are a resource controlled by the entity.
 There is a past event, being the production and design of both the advert and the
brochures.
 The future economic benefits are expected to flow in through increased future sales.

All the elements of the definition of an asset are therefore met.

Recognition criteria for an asset
 the future economic benefits expected to flow to the entity must be probable; and
 the asset must have a cost or value that can be measured reliably.

Discussion of the asset’s recognition criteria

 The cost can be reliably measured as the C2 000 000 has already been spent.
 The issue relates to the uncertainty of the probability of the future benefits. The company
cannot control how the public will react to the advertising i.e. whether they will react
positively, which will result in an increase in sales, or whether they will react negatively,
which will result in a decrease in sales, or whether they are indifferent, which will result in
no change to sales. This lack of control over the flow of future economic benefits and the
difficulty in linking any future increase in the inflow of economic benefits directly to the
advertising means that the probability criteria needed for recognition is not met.
So although the definition of an asset is met, only one and not both the recognition criteria of an
asset are satisfied. Therefore the accountant may not capitalise the amount.
Expense definition
 decreases in economic benefits;
 during the accounting period;
 in the form of outflows or depletions of assets or incurrence of liabilities;
 that result in decreases in equity, other than those relating to distributions to equity
participants
Discussion of the expense definition
 The advertising promotion has been paid and can be seen as the outflow of an economic
benefit through the depletion of an asset (bank account).

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  The expenditure was approved by the board and paid prior to the year end; hence it occurs
‘during the accounting period.’
 The payment does not represent a distribution to equity participants.

All the elements of the definition of an expense are therefore met.

Recognition criteria for an expense
 there is a decrease in economic benefits related to a decrease in an asset or an increase in
liability,
 that can be measured reliably.

Discussion of the expense’s recognition criteria

 There is a decrease in economic benefits as there has been a decrease in the asset bank.
 The cost of the item can be reliably measured as there is an amount of C2 000 000 that has
been paid.

Both the recognition criteria for an expense have been met.

Conclusion
As all the elements of the definition and the recognition criteria of an expense have been met, the
advertising promotion of C2 000 000 should be recognised as an expense in the statement of
comprehensive income, for the year ended 31 December 20X8.

Question 3 [Property, Plant and Equipment] [30]

Maroon Limited has plant that cost R100 000 on 1/1/2001.Depreciation is provided over the useful life of 5
years on a straight line basis to a nil residual value.

The company uses the revaluation model for subsequent measurement of its property, plant and equipment
and accounts for revaluations on the net replacement value method. The fair values listed below were
measured using the cost approach.

 The fair value as determined by an independent valuer, at 1/1/2002 amounts to R120 000
 The fair value as determined by an independent valuer, at 1/1/2003 amounts to R50 000
 The fair value as determined by an independent valuer, at 1/1/2004 amounts to R50 000

The company transfers the maximum amount possible from the revaluation surplus to retained earnings on
an annual basis.

NB: Ignore impairments

Required:

Journalise the transactions for the years ended 31 December 2002, 2003 and 2004. [30]

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Solution [30 marks]

1 January 2002 Debit Credit

Plant: Accumulated depreciation 20 000√
Plant: Cost 20 000√
NRVM: set-off of accumulated depreciation before
revaluation √

Plant: Cost [CA 80 000-FV 120 000] 40 000√

Revaluation surplus(OCI) 40 000√
Increase in value√

31 December 2002
Depreciation: Plant[FV 120 000÷4 years remaining] 30 000√
Plant: Accumulated depreciation 30 000√
Depreciation of asset√

Revaluation surplus[40 000÷4 years remaining] 10 000√

Retained earnings 10 000√
Transfer of revaluation surplus to retained earnings :over
life of the asset√

1 January 2003
Plant: Accumulated depreciation 30 000√
Plant: Cost 30 000√
NRVM: set-off of accumulated depreciation before
revaluation √

31 December 2003
Depreciation: Plant[FV (50 000-0)÷3 years remaining] 16 667√
Plant: Accumulated depreciation 16 667√
Depreciation of asset√

1 January 2004
Plant: Accumulated depreciation 16 667√
Plant: Cost 16 667√
NRVM: set-off of accumulated depreciation before
revaluation √

31 December 2004
Depreciation: Plant[FV (50 000-0)÷3 years remaining] 25 000√
Plant: Accumulated depreciation 25 000√
Depreciation of asset√
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Revaluation surplus[10 000 ÷ 2 years remaining] 5 000√
Retained earnings 5 000√
Transfer of revaluation surplus to retained earnings :over
life of the asset√

√=1 mark Award 3 marks for workings

Question 4 [Intangible Assets] [30]

Adam Limited is a successful engineering business. Over the past number of years, the company has
achieved a market share of its products of 30%.At a recent board meeting, the directors suggested
recognising an intangible asset for this market share.

Required:

Briefly discuss whether the market share can be recognised as an intangible asset in terms of IAS 38
Intangible Assets.

NB: A discussion of the recognition criteria is not required.

Solution

An intangible asset is defined as:

• an identifiable,

• non-monetary asset,

• without physical substance.

An asset is defined as:

• a resource,

• controlled by the entity,

• as a result of a past event,

• from which an inflow of future economic benefits is expected.

The market is a resource in that it generates sales for the company.

The event was the creation of the customer loyalty that constitutes the market share (perhaps
through entertainment, advertising etc). This event is a past event if the creation occurred before
year-end.

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Future economic benefits can be expected from the market through sales made to customers that
form part of the market.

There is, however, little or no control over a market since a company’s market can be easily
usurped by another company offering better products, service, advertising etc.

Therefore, the market does not meet the definition of an asset.

Further, although the market share does not have physical substance and is non-monetary, the
market share fails the definition of an intangible asset because it is not identifiable. The reasoning
for this is explained below.

An asset meets the Identifiability criterion in the definition of an intangible asset when it:

• Is separable, or

• Arises from contractual or other legal rights.

An asset is separable if it:

• ‘is capable of being separated or divided from the entity and sold, transferred, licensed, rented or
exchanged, either individually or together with a related contract, identifiable asset or liability,

• regardless of whether the entity intends to do so’.

Thus, the market share is clearly not separable from the business as a whole. Furthermore, the
market share does not arise from contractual or other legal rights.

Therefore, the market share does not meet the definition of an asset or an intangible asset and
must thus be expensed (not controllable and not identifiable).[30 marks]

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