BKAR3033 FINANCIAL ACCOUNTING & REPORTING III (A211)

MINI CASE 1
Due Date: 14/11/2021

Instruction: You are required to answer ALL questions

QUESTION 1

Gramax Health Bhd (GHB), a company operates in a health industry, is working in a project
to develop a test kit that is able to determine the level of immunity a person has towards
Covid-19 based on his or her antibodies with higher accuracy rate compared with other similar
test kits that are available in the market. In a recent business combination, GHB acquires a
research and development (R&D) project of Vital Life Bhd (VLB) to develop a similar test kit
with the one it develops. GHB does not intend to complete the project that had been acquired
as it would compete with its own project. Its main intention to acquire the project is to prevent
its competitors from obtaining access to the technology.

Meanwhile, as part of its effort to fund its R&D projects, on 31 December 2019 GHB issued
at par in a private placement a RM3 million 5-year fixed rate bond with an annual 10%
interest coupon rate. On 31 December 2020, GHB’s credit spread has deteriorated due to a
change in its non-performance risk. If the bond was issued on 31 December 2020, the
instrument would need to have an interest rate of 11%. In reducing its reliance on third party
service, GHB also plans to acquire Magnificent Sdn Bhd, a local transportation company.
Magnificent Sdn Bhd’s estimated cash flow (before tax) for the next four years are
RM167,500, RM182,200, RM191,300, and RM198,300 with probability of attainment of the
cash flows are 95% for the first two years and 85% afterwards. The cash flows of Magnificent
Sdn Bhd beyond year four is expected to be indefinite. The estimated weighted average cost
of capital for Magnificent Sdn Bhd is 9% although it is expected that an additional risks
premium of 1% will be applicable to Magnificent Sdn Bhd due to its smaller size and unlisted
status. GHB accounting year ends on 31 December.

REQUIRED:

(a) Discuss the process of determining the fair value of the asset acquired from VLB as
prescribed by MFRS 13 Fair Value Measurement.

(b) Determine the fair value of the bond at the end of December 2020.

(c) Assume the effective company tax rate remains unchanged at 24% for 2021 to 2025.
Calculate the fair value of Magnificent Sdn Bhd, at the end of December 2020 using
discounted cash flow method. Round up your answer to the nearest RM.

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QUESTION 2

Dressvy Bhd is a manufacturer and supplier of men and women clothes. It operates in one
district in northern area of Malaysia. The factory contains a large amount of equipment that is
used in the manufacture of clothes. The company owns both the factory and the land on which
the factory stands. The land was acquired in 2008 for RM500,000 and the factory was built in
that year at a cost of RM950,000. Both assets are recorded at cost, with the factory having a
carrying amount at 31 December 2019 of RM450,000.

In recent years, there has been a property boom in that district with residential houses prices
doubling such that the average price of a house is approximately RM800,000. A recent
valuation of the land on which the factory stands as performed by a property valuation group
and based on recent sales of land in the area has the land at a value of RM1.2 million. The
land is now considered prime residential property given its closeness to the city and, with its
superb sea views, its suitability for building service apartments. It would cost RM220,000 to
demolish the factory to make way for these apartments to be built. It is estimated that to build
a new factory on the current site would cost around RM1.5 million.

Dressvy Bhd also owns two special machines that are used it the manufacturing of the
garments. These machines were ordered from a company in Europe. In measuring the fair
value of these machines, the board of the directors of Dressvy Bhd was advised by the
company accountant to base on the data gathered from the principal market in which the
machines are traded. Recent survey carried out by the company indicates that the same type of
machine are sold in three different active markets that are located in China, Russia and
Poland. Data gathered for the two markets are as follows:

Market in China Market in Russia Market in Poland

Volume (annual) 3,000 4,090 4,300
Trades (per month) 14 15 17
Price (per unit) 25,000 (in RM) 26,100 (in RM) 28,000 (in RM)
Transportation costs (per 1,500 (in RM) 2,300 (in RM) 2,500 (in RM)
unit)
Transaction costs (per 700 (in RM) 1,200 (in RM) 2,000 (in RM)
unit)

However, due to a new trade policy enforces by Poland government, the market in that
country is not accessible for uncertain period of time. Some of the directors then suggest that
they should refer to the data from market in Russia in determining the fair value of the special
machines as it has the second highest volume and level of activity after market in Poland.

Required:

(a) Based on the four (4) procedures stated in IFRS/MFRS 13 Fair Value Measurement
discuss how the directors of Dressvy Bhd would measure the fair value of the land and
factory as of 31 December 2019.
(b) Determine the fair value of the land and factory as at 31 December 2019.
(c) Determine the principal market and the most advantageous market for the special
machines. Price in which market that shall be referred to in determining the fair value
of the special machines. Justify your answer.
(d) Determine the fair value of the special machines as at 31 December 2019.

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QUESTION 3

Background

Green Tower Bhd (GTB) is a conglomerate investment company established in Malaysia

since 1990. To date, GTB has 10 subsidiaries with diversified industries specialising in
construction and property development. The year 2020 certainly did not take off with a good
start for the industry, the nation and worldwide. Since February 2020, countries around the
globe face the unprecedented economic, health, and financial impact of the COVID-19 global
crisis. This event almost certainly bring on new measures, policies and regulations with which
GTB must comply to support recovery and future growth of the industry in Malaysia.

Heading new challenge

In 2020, GTB took measures to increase its resilience against market uncertainties and made
strategic initiatives to maximise on future opportunities. GTB has been preparing itself to
further widen its horizons. The board of GTB has identified a potential acquisition target,
Indah Sdn Bhd, located in Alor Setar, Kedah. Indah Sdn Bhd is an unlisted, family-run
company that owns and operates commercial buildings since 2010. After several months of
discussion and negotiations, the owners of Indah Sdn Bhd expressed interest to sell their
business and hope to raise RM60 million for the equity plus another RM18 million to pay off
all borrowings. The company reported a total assets value of RM70 million in its recent
2019’s statement of financial position. Most of its assets were in cash and equivalents except
for property, plant and equipment which had a carrying value of RM50 million as at
December 2019. Based on an expert opinion, the value of Indah Sdn Bhd’s property, plant
and equipment could reach up to RM65 million for its land and new buildings are in the
centre of Alor Setar township. Careful examination of Indah’s book indicated that its current
assets included receivables amounted to RM3 million from Swan Sdn Bhd which is
undergoing liquidation process. None of this amount can be salvaged. Indah Sdn Bhd has 2
million shares outstanding.

GTB decided to upscale Indah Sdn Bhd to support GTB’s new image of eco-friendly building
and green sustainable construction. All renovation works will be completed before the
launching of the new upgraded building by the end of 2021. To properly determine the fair
value of Indah Sdn Bhd, the chief financial controller of GTB prepared a three-year cashflow
forecast for Indah Sdn Bhd. He also provided the probability estimates to account for
conceivable business risks related to the amount of cashflow attained for the given years. The
probability is expected to remain constant at 80% after year 3. The following table presents
the relevant cash flow and probability estimates regarding Indah Sdn Bhd:

Year 0 Year 1 Year 2 Year 3

Total revenues (RM) 60,000,000 75,000,000 94,000,000

Total fixed annual costs (RM) 1,000,000 1,300,000 1,550,000
Total variable cost (RM) 3,000,000 4,500,000 6,000,000
Renovation costs (RM) 50,000,000
Probability of attainment 95% 90% 80%

All revenues and expenses are expected to grow at the historical rates. Net cash flows beyond
year 3 is expected to sustain indefinitely. The estimated weighted average cost of capital for

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GTB is 10% although a similar non-listed company as Indah Sdn Bhd is expected to incur
additional premium of 2% for added risks and volatility. The effective tax rate applied to
Indah Sdn Bhd remains unchanged at 24% for all years. The following table presents the
present value factor for single sum and annuity.

Present Value Table

Period Single sum Ordinary annuity
1% 10% 12% 10% 12%
1 0.990 0.909 0.893 0.909 0.893
2 0.980 0.826 0.797 1.736 1.690
3 0.971 0.751 0.712 2.487 2.402
4 0.961 0.683 0.636 3.170 3.037
5 0.951 0.621 0.567 3.791 3.605
6 0.942 0.564 0.507 4.355 4.111

REQUIRED:
(Round up all final answers to the nearest RM)

(a) Calculate the fair value of Indah Sdn Bhd on 1 January 2020 based on the following
methods. Round up growth rates to TWO (2) decimal places.

(i) Net asset valuation method

(ii) Discounted cash flow method.

(b) What is the difference between an entity’s principal market and its most advantageous
market as discussed in MFRS 13 Fair Value Measurement?

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