Exhibit 3

Havanna has decided to sell its main office building to a third party for $5 million and lease it back on a ten-
year lease. The current fair value of the property is $5 million and the carrying value of the asset is $4.2 million.
The present value of the lease payments has been calculated as $3.85 million. The remaining useful life of the
building is 15 years. The transaction constitutes a sale in accordance with IFRS 15 Revenue from Contracts
with Customers. The CEO of Havanna believes this represents a very good deal and told that the profit on
disposal of $0.8 million must be reported in the statement of profit and loss as it will help to ensure that the
company meets the covenants imposed by the bank in respect of Havanna's interest cover ratio. He reminded
that you are new to your role and that recording a profit on this transaction will be of benefit to your future
success and the business as a whole.

Required:

i. Advise the directors of Havanna on how to account for this sale, with reference to the principle
International Financial Reporting Standards. (5 marks)
ii. Comment on the effect of the transaction on Havanna’s interest cover and briefly discuss the impact on
the bank covenants of the introduction of IFRS 16 Leases. (3 marks)
iii. In your role as a financial controller, prepare notes for discussion with Havana's whistleblowing helpline
in respect of any potential ethical issues that arise from the above scenario, with reference to ACCA's
Code of Ethics and Conduct. (2 marks)

Answer

Part (i)

Refer to another working paper

Part (ii)

CEO wants to record 100% of the profit on disposal (0.8m) based on IFRS 15 Revenue, does not want to record
under IFRS 15 and 16 because wants to ensure that the company meets the covenants imposed by the bank in
respect of Havanna's interest cover ratio.
IFRS 15

Profit increase by 800k so the no. of time for interest cover will increase. This can help Havanna to meet its
bank covenants.

IFRS 15/16

PBIT decrease is because only record 184k, and interest increase is due to finance cost increase so this will
cause interest to become higher and result in decreasing of no. of time for interest cover. This will causes
Havanna most likely be unable to meet bank covenants.

Part (iii)

The question (last sentence) means if the finance controller is reluctant to show 800k profit and only shows
184k profit, then the finance controller will be fired.

This indicates the CEO is intimidating the finance controller, the finance controller is under influence and
biased so he cannot act objectively.

Problems:

Use the wrong accounting method – integrity problem

Not compliance with IFRS 15/16 – no professional competence and due care

– no professional behavior

The CEO is concerned about his self-interest so got a self-interest threat.

Whistleblower helpline – if really do so, it is a breach duty of confidentiality

- If really want to do it, must give a good reason or justification, such as for the public good interest
- If dh good justification then Havanna can sue back the finance controller