Assignment: Contemporary Issues in Financial Accounting
Section 1
The trial balance for Diologics plc as at 31 March 2021 is given below:
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£'000
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£'000
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Cost of sales and Revenue
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4,000
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12,000
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Inventories as at 31 March 2021
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750
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Distribution Costs
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2,200
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Administrative Expenses
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3,400
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Loan Interest Paid
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130
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Land at valuation as at 1 April 2020
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3,000
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Buildings - Written Down Value at 31 March 2021
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2,040
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Plant and Equipment - Written Down Value at 31 March 2021
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2,770
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Trade Receivables and Payables
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1,250
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540
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Allowance for Receivables
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50
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Bank
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25
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240
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Ordinary Share Capital (£1 Shares)
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4,000
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Share Premium
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50
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Revaluation reserve
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200
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5% Bank loan, repayable 2023
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2,000
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Retained earnings
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610
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Current Tax
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10
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Deferred Tax as at 1 April 2020
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35
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Ordinary Dividends paid
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150
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19,732
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19,732
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The following notes are also relevant:
i. Land is non-depreciable and is to be revalued at £4 million on 31st March 2021.
ii. The tax written down value of Diologics' assets at 31 March 2021 was £300,000 less than their reported book values in the financial statements. The income tax rate applicable to Diologics is 25%.
iii. Diologics leased new testing equipment on 1 January 2021. The cash price of the equipment is £275,000 and the lease term is 5 years. Diologics must pay £65,950 annually in advance. The company uses the actuarial method to allocate the finance charge at a rate of 10% per annum. There is no depreciation charged in the year of acquisition. The first lease payment has been treated as an expense under distribution expenses.
iv. The tax liability for the current year is estimated to be £130,000. The balance on the Current tax liability account represents the difference between the tax liability estimate included in the accounts last year and the amount due and paid.
v. Diologics is about to start building 20 smart meters for an Industrial park. The work should be finished by October 2021 and they will then be transported to the industrial park and installed. The total value of the contract is £2 million. The customer has paid Diologics £400,000 deposit in advance of the work starting, to help cash flow for the purchase of raw materials etc. This amount has been included in revenue.
Task:
Prepare the following statements for Diologics for the year ended 31 March 2021
i. Statement of total Comprehensive Income
ii. Statement of Changes in Equity
iii. Statement of Financial Position
You are not required to prepare notes to the financial statements, but you should show all your workings and round to the nearest ‘000.
iv. The Chief Financial Officer asks you to write a 150-word brief explaining how the leased testing equipment should be treated in the current year's financial statements.
Section 2
Question I
Fly High Company has made ticket sales of £8 million cash for the year ended 31 December 2020. All the monies have been received at the time of issuing the tickets. The company has a frequent flyer scheme whereby it gives 10 points for every £100 spent on tickets by customers. Each point has a redemption value of £1. The points can be redeemed for future flights and expire within 24 months. The company expects that 95% of the points will be redeemed.
Task:
i. Briefly outline the 5-step revenue model from IFRS 15.
ii. Assuming all ticket sales in 2020 are to customers who are all members of the frequent flyer programme, identify the performance obligations in each ticket sale.
iii. If Mr Johnston a member of the frequent flyer programme flew to Hong Kong on a flight costing £2,000. How would the revenue be recognised in 2020?
Question II
A Conceptual Framework can be defined as ‘a constitution, a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function and limits of financial accounting and financial statements.' (Cotter, 2012).
Task:
i. Critically discuss the benefits to the various stakeholder categories of a Conceptual Framework for financial reporting.
ii. You are preparing the monthly financial accounts for your uncle who runs his own company, Wong Brothers Limited. He asks you about a particular transaction as follows. Wong Brothers bought goods worth £300,000 and received 6 months' credit from the supplier. Your uncle says he cannot understand why he must record this transaction until he pays the amount in 6 months' time. Please advise your uncle, using the definition and recognition requirements of the Conceptual Framework.
Question III
The Gunther group parent company is based in Germany and prepares consolidated accounts in Euros. One of its subsidiary companies, Smith Limited, is based in the UK, trades primarily in £sterling and draws up its accounts in £sterling.
Task:
i. Explain to Gunther's Finance Director how the financial statements of Smith Limited should be translated into Euros for consolidation purposes, considering assets & liabilities, and income & expenses, and explaining how exchange differences should be treated. Your answer should be in accordance with IAS 21 The Effects of changes in Foreign Exchange Rates.
ii. Explain what is meant by the phrase ‘Deferred Tax' and discuss the arguments for adjusting for deferred tax in the financial statements of a company.
Question IV
Peaky Blinders Inc. changed its accounting policy in 2020 with respect to the valuation of inventories. Up to 2019, inventories were valued using a weighted-average cost (WAC) method. In 2020 the method was changed to first-in, first-out (FIFO), as it was considered to more accurately reflect the usage and flow of inventories in the economic cycle. The impact on inventory valuation was determined to be
i. On December 31, 2018: an increase of £10,000
ii. On December 31, 2019: an increase of £15,000
iii. On December 31, 2020: an increase of £20,000
The income statements prior to adjustment are as follows (numbers are in £000)
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2020
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2019
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Revenue
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250
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200
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Cost of sales
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100
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80
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Gross profit
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150
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120
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Administration costs
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60
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50
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Selling and distribution costs
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25
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15
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Net profit
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65
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55
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Task:
i. Revise the income statement for the year to 31 December 2020 (with comparative for 2019).
ii. Assuming that Peaky Blinders Inc. complies with IFRS, firstly, what are the circumstances in which Peaky Blinders may change an accounting policy. Secondly, how these changes are accounted for in line with IAS8. Thirdly, if the management need to make a decision regarding a new policy that is NOT addressed by IASB, what do they need to consider when making this judgment.
Question V
Mosby Brothers Inc. is part of a big industrial group of companies that complies with IFRS. Mosby Brothers Inc. is seeking advice from IFRS specialists on whether the following transactions need to be reported under IAS24 and, if so, to what extent.
• Remuneration and other payments made to the entity's chief executive officer (CEO) during the year 2020 were as follows.
i. An annual salary of £2 million
ii. Share options and other share-based payments valued at £1 million
iii. Contributions to retirement benefit plan amounting to £1 million
iv. Reimbursement of his travel expenses for business trips totalling £1.2 million
• Sales made during the year 2020 to:
i. Mosby Parents Inc.: This is a parent company, and the value of sales is £35 million.
ii. Ted Inc.: This is an associate company, and the value of sales is £25 million.
iii. Eriksen Inc.: A company which have three directors in common, and the value of sales is £10 million.
Task:
i. Advise Mosby Brothers Inc. on related party transactions that need to be disclosed and draft a sample related party transactions footnote for the CEO payments to guide the entity.
ii. What are the main disclosures requirements under IAS24?
Question VI
IFRS Practice Statement: Management commentary is a narrative report that provides a context within which users can interpret the financial position, financial performance and cash flows of an entity.
Task:
To what extent do you agree with the following statements and why?
i. "IFRS Practice Statement: Management Commentary falls inside the scope of international standards, and it is mandatory to for companies to comply with the practice statement".
ii. "There are some similarities between the national UK Guidance on the Strategic Report and the international Practice Statement: Management Commentary".
Format your assignment according to the following formatting requirements:
i) The answer should be typed, using Times New Roman font (size 12), double spaced, with one-inch margins on all sides.
ii) The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
iii) Also include a reference page. The Citations and references must follow APA format. The reference page is not included in the required page length.