SUGGESTED ANSWERS

SET A

QUESTION 1

Acquisition of Hobbit in Summer on 1 July 2009

Parent NCI Total

RM million RM million RM million Consideration transferred 100 100/ FVNCI at date of acquisition 80 80/ FVNA at date of acquisition: Equity 125 Retained earnings 9/ FV adjustment 8/ OCE 6/ --------

148

(88.8)

(59.2)

(148) Goodwill 11.2 20.8 32 Goodwill impaired (1.8)/ (1.2)/ ( 3) 9.4 19.6 29

Acquisition in Sunny on 1 July 2011

Parent NCI Total

RM million RM million RM million Consideration transferred - Direct - Indirect 40 x 60%

60/ 24/

84 FVNCI at date of acquisition 40/ 40 FVNA at date of acquisition: Equity 80 Retained earnings 3/ -----

83

(54.78)

(28.22)

(83) Goodwill 29.22 11.78 41 Goodwill impaired (1.32)/ (0.68)/ (2) 27.9 11.1 39

Acquisition in Autumn on 1 January 2012 RM million Consideration transferred: 80 x 40% = 32 /4 x 2 x 3

48// FVNA at date of acquisition: Equity 80 Retained earnings PFY 26 x 6/12 = 13/ a + n b/f 20 113 x 40%

(45.2) Goodwill 2.8 Impaired 10% (0.28)/ 2.52

RM million Consideration transferred 48 Share of post acquisition profits: 26 x 6/12 x 40%

5.2/ Goodwill impaired (0.28)/ URP 1/125 x 25 x 40% (0.08)/ Carrying value of investment in associate 52.84

Analysis of retained earnings

Hobbit Summer Sunny Autumn

RM million RM million RM million RM million Balance b/d 41 31 49 46 Pre acquisition profits (9) (3) (33) Post acquisition profits 22 46 13 URP (0.08)/ (1.5)/ Depreciation : 1.6 x 3 years (4.8)// Dividends proposed (12)/ (3.75)/ (2.4)/ Dividends receivable : From Summer 3.75 x 60% Sunny 2.4 x 30% 2.4 x 60%

2.25/ 0.72/

1.44/

Goodwill impaired: Summer Sunny Autumn

(1.8)/ (1.32)/ (0.28)/

Post acquisition profits 13.39 43.6 13 Share of post acquisition profits: Summer 13.39 x 60%/ Sunny 24.6 x 66%/ Autumn 13 x 40%/

8.03 28.78

5.2

To CSFP 70.5

NCI - Summer 40%

RM million FVNCI at date of acquisition 80 Share of post acquisition profits: 13.39 x 40%

5.36/ OCE 1.6/ Goodwill impaired (1.2)/ Indirect investment 40 x 40%

(16)/ To CSFP 69.76

NCI - Sunny 34%

RM million FVNCI at date of acquisition 40 Share of post acquisition profits: 43.6 x 34%

14.82/ Goodwill impaired (0.68/) To CSFP 54.14

Analysis of OCE

Hobbit Summer

RM million RM million Balance b/d 7 10 Pre acquisition (6) Share of post acquisition 4 4 x 60% 2.4 To CSFP 9.4

Consolidated statement of financial position of Hobbits Group as at 30 June 2012

RM million PPE 130 + 110 + 119 + FV 8 depreciation 4.8 362.2// Goodwill 39 + 29 68/ Investment in associate 52.84/ ITA 5

CA 58 + 56 + 34 1.5 / 146.5 Total assets 634.54

Equity 240 + shares issued 16/ 256 Share premium 32/ OCE 7 + 2.4/ 9.4 Retained earnings 70.5

NCI 69.76 + 54.14 123.9 NCL 20 + 10 + 15 45 CL 45 + 35 + 9 84 Dividends proposed Hobbit 12/

Dividends to NCI 3.75 x 40% + 2.4 x 10% 1.74// Total equity and liabilities 634.54

Consolidated statement of comprehensive income for the year ended 30 June 2012

RM million

Revenue 250 + 180 +125 -10 545/ COS (80 + 60 + 40 10 + URP1.5 + URP

depreciation 1.6

(173.1)///// Gross profit 371.9 Other income 2 + 3 5/ Operating expenses 68 + 47 + 29 + goodwill impaired 3 + 2 (149)/ Share of net profit of associate 26/2 x 40% - goodwill impaired 0.288 4.84// Profit before tax - URP 0.08 232.74 Taxation (25 + 16 + 10) (51)/ Profit for the year 181.74 OCI 5 + 4 9/ Total comprehensive income for the year 190.74

Profit for the year attributable to: RM million

NCI : Summer

Sunny

60 1.5(URP) 1.6(Deprn) goodwill impaired 3 x 40% 46 goodwill impaired 2 x 34%

21.56//

14.96/ Parent / 145.22 181.74

Total comprehensive income attributable to: RM million

NCI : Summer

Sunny

64 -1.5 (URP) 1.6(Deprn) goodwill impaired 3 x 40% 46 goodwill impaired 2 x 34%

23.16//

14.96/

Parent/ 152.62 190.74

Retained profit b / fwd RM Hobbit (38) Summer (29 preacq [9] Deprn [1.6 x 2] x 6% (24.72) PFTY 145.22 Dividend (Hobbit) (12) Retained profit c / fwd 70.5

75/3 = 25 marks

QUESTION 2

Petroco Bhd Statement of Comprehensive Income for the year ended 30 June 2012

RM

Revenue 22,425,000 Cost of sales (W1) (12,987,000) Gross profit 9,438,000 Income from investments 260,000 Administrative expenses (W1) (2,128,100) Distribution expenses (1,860,000) Other operating expense (W1) (2,281,300) Profit from operations 3,428,600 Finance expense (W1) (125,650) Profit before tax 3,302,950 Taxation (435,000 + 60,000) (495,000) Profit for the year 2,807,950 Other Comprehensive Income

Revaluation surplus - land 500,000 Total comprehensive Income 3,307,950

20 x = 10 marks

Petroco Bhd Statement of changes in equity for the year ended 30 June 2012

Share capital

Share premium

Revaluation reserve

Retained earnings

RM RM RM RM As at 1 July 2011 7,650,000 827,000

-

1,182,000 PYA

100,000 (100,000) Profit for the year 2,807,950 Interim dividend (90,000) Revaluation surplus - 500,000 As at 30 June 2012 7,650,000 827,000 600,000 3,799,950

Total Reserves: 5,226,950 8 x - 4 marks

Petroco Bhd Statement of financial position as at 30 June 2012

RM RM

Non - Current Assets:

Property, plant and equipment (W2) 7,228,400 11 Investments 3,250,000 Intangibles: license 8,745,200 Patents and trademarks 555,000

19,753,600 Current Assets:

Inventories 1,240,000 Trade receivables (1,883,000 200,000)

1,683,000

Bank and cash (1,750,000 77,500)

1,672,500 4,595,500

Non-Current Assets Held For Sale (1,150,000 x 95%)

1,092,500

25,446,600

Equity and Liabilities

Share capital 7,650,000

Reserves 5,226,950

12,876,950 Non Current Liabilities

Long term loan 500,000 deferred tax liability 560,000 lease creditor 77,500 1,137,500

Current Liabilities

Trade payables 246,000 Accruals and provisions (14,000 + 931,500 + 93,150)

1,038,650

lease creditor 167,500 Other payables 10,000,000

11,452,150

25,466,600

33 x 1/3 = 11 (Total 25 marks)

Note: The ticks () are counted based on the face of financial statements. The ticks () in the workings are only for reference. Workings:

(W1) Allocation of expenses cost of sales admin others finance

As per question 12,735,000

1,682,000 100,000 Interim dividend (90,000) Lease interest see below 22,500 Depreciation - building 83,100 Depreciation - machinery 192,000 Depreciation - vehicles 163,000 Depreciation- leased machinery 60,000 Amortisation - licence 2,186,300 Impairment - NCAHFS 95,000 Bad debt written off 200,000 Interest unwinding cost 93,150

12,987,000 2,128,100 2,281,300 125,650

(W2) Leased Machinery

Year RM 1 July 2011 Cash 300,000 (-) payment (77,500) 30 June 2012 Balance c/f 222,500 1 July 2012 (+) Interest (10% x 222,500) 22,500 245,000 (-) payment (77,500) 30 June 2013 Balance c/f 167,500

(W3) Property, Plant and equipment

Land

Building Plant &

Machinery Motor

Vehicles Leased

Machinery Cost/Valuation

As at 1 July 2011 1,500,000 4,780,000 1,920,000 815,000 Reclassification to NCAHFS (1,250,000) Revaluation surplus 500,000 Addition 300,000 As at 30 June 2012 2,000,000 3,530,000 1,920,000 815,000 300,000

Accumulated depreciation

As at 1 July 2011 191,000 384,000 326,000 Eliminations to NCAHFS (62,500) Charge for the yearsee below

83,100

192,000

163,000

60,000 As at 30 June 2012 - 211,600 576,000 489,000 60,000 Carrying amount as at 30 June 2012 2,000,000 3,318,400

1,344,000

326,000

240,000 11

Total PPE = 7,228,400

Depreciation charge building

NCAHFS before classification = 12,500 (1,250,000 x 6/12)

50 Remaining: 3,530,000 = 70,600 50 83,100

Acc. Depreciation eliminated due to reclassification to NCAHFS:

1,250,000 x 21/2 = 62,500 50

(W4) Intangible NCA: License and Provision for restoration landscape:

The PV of RM1,500,000 discounted at 10% over 5 years:

RM1,500,000 x 0.621 = 931,500

Intangible NCA: License = RM10,000,000 + 931,500 = RM10,931,500

Amortisation = RM10,931,500 = RM 2,186,300 5 Carrying amount at 30 June 2012 = RM8,745,200

Finance cost: Unwinding discount (931,500 x 10%) = RM93,150

QUESTION 3

1. The change in the useful lives of the asset and a change in accounting method of depreciation is a change in accounting estimates. The effect of the change in the accounting estimate should be included in the determination of the net profit or loss in:

- The period of the change, if the change affects only that period; or - The period of the change and future periods, if the change affects both.

The change in the useful life of the equipment will affect both the current period and the future depreciation charge. Therefore the depreciation charged for the current year should be calculated as below: 300/10 x 2 years = 60 p.a NBV at 1 July 2011 = 240/5 years = 48 p.a for current year and future period/

The change in depreciation method from straight line method to reducing balance method is allowed and be treated as a change in accounting policy only if the change will result in a more appropriate presentation of events or transactions in the financial statements of the company. The accounting treatment is to apply the change retrospectively. However, if the company is unable to determine the cumulative effect, then it can apply the new method prospectively and adjust the comparative information from the earliest date practicable//.

2. A non-current asset held for sale is measured at the lower of carrying amount and fair value less cost to sell and classify under current assets. No depreciation is charged on these assets and the company is not allowed to make use of the asset as it must be available for immediate sale. (MFRS 5)/

Since the economy has improved and the company is using the plant to help cope with the demand, there is a change of plan and therefore the plant must be re classify as a non current asset (PPE) subject to depreciation as required by MFRS 116./

On re classification, the asset should be measured at the lower of: Carrying amount before classification as held for sale less depreciation, as if the

asset were never classified as held for sale, and / Its recoverable value/

The above adjustment to the carrying amount of the non current asset may result in a gain or loss. This amount will be included in profit or loss from continuing operations./

3. The sale of goods and the sale of the car are related party transactions. MFRS 124 requires disclosure of transactions with key personnel and sales of assets to directors where control exists. An important aspect of MFRS124 is the assessment of both the materiality and significance of the transactions to the reporting company. Transactions need only be disclosed if they are material. Transactions are material where the users of financial statements might reasonably be influenced by such transactions///

In this case, Johan has purchased RM360,000 of goods from the company and a car for RM50,000 with a market value of RM60,000. Johan effectively controls Wellness. Although neither of these transactions is material or significant to the company or the directors, in the spirit of good corporate governance, transactions with directors are extremely sensitive and therefore disclosure would be recommended.//

4. The cost of an item comprises of the initial purchase price, including taxes, duties after deducting trade discounts, and any other directly attributable costs incurred in bringing the asset into working condition and intended location and use and decommissioning costs./

Finance expenses of RM30,000 should be expensed to statement of comprehensive income. It cannot be capitalized as it is not related to a qualifying asset. The deferred payment has to be discounted to present value.

RM000 Gross cost: 2,000 Less discount (200) 1,800

RM000 Initial cost of machinery:-

Site preparation 60 Rectification cost 15 Payment on delivery: 1,800 x 6% 1,080

Deferred payment 720 x 0.909 = 654/ 1,809

SCI (extract) for year ended 30.6.2012

Finance expenses 30/ Depreciation 1809/5 361.8/ Financial cost 65.4/

SFP (extract) as at 30.6.2012

PPE 1,809 Acc deprn (361.8) 1,447.2

Current liability

Deferred payment: 654 + 65.4 = 720/

(9/3 = 3 marks)

5. This a sale and leaseback arrangement and cannot be treated as a sale as in substance Wellness still enjoy the economic benefits of using the asset .The proceeds from the sale should be treated as a secured loan as it is a financing arrangement . As the lease back is an operating lease and the selling price is greater than the fair value, the gain is not recognised immediately but is defer and amortize //

Dr Bank 800,000/ Accumulated depreciation 150,000/ Cr Machine 800/ Deferred gain 50/

Statement of comprehensive income 100

Dr Lease rental expense 200,000/ Cr Bank 200,000/

Dr Deferred gain 10,000/ Cr Statement of comprehensive income 10,000/

(Total: 9/3 = 3 marks)

QUESTION 4

(a) (i) The two accounting concepts:

Accruals The effects of transactions and other events are recognized when they occur (and not as cash or its equivalent is received or paid) and they are

recorded in the accounting records and reported in the financial statements in the period to which they relate.

Prudence In the preparation of financial statements, prepare need to be cautious in the exercise of judgement to ensure that income and assets are not overstated and expenses and liabilities are not understated.

(1 each: total 3 marks)

(ii) Accounting inventory by adjusting purchases for the opening and closing inventories is a classic example of the application of the accruals principle whereby revenues earned are matched with costs incurred. Closing inventory is by definition an example of goods that have been purchased, but not yet consumed. In other words the entity has not yet had the benefit (i.e. the sales revenue they will generate) from the closing inventory; therefore the cost of the closing inventory should not be charged to the current years income statement.

At the year end, the value of an entitys closing inventory is, by its nature, uncertain. In the next accounting period it may be sold at a profit or a loss. Accounting standards require inventory to be valued at the lower of cost and net realisable value. This is the application of prudence. If the inventory is expected to sell at a profit, the profit is deferred (by valuing inventory at cost) until it is actually sold. However, if the goods are expected to sell for a (net) loss, then that loss must be recognized immediately by valuing the inventory at its net realisable value.

Note: other appropriate examples would be acceptable. (5 marks)

(b) (i) Calculation of impairment loss for the machine as at 30 June 2012

RM Cost 1 July 2010 880,000 Acc. Depreciation (1 July 201030 June 2012) 176,000 Carrying amount 30 June 2012 704,000 Recoverable amount: higher of: Net selling price RM525,000 Value in use RM443,224 525,000

Impairment loss 179,000

Value in Use as at 30 June 2012

Year Estimated Cash flow RM

Discount rate (10%)

Discounted Amount RM

2013 123,660 0.909 112,407 2014 122,300 0.826 101,020 2015 115,350 0.751 86,628 2016 112,330 0.683 76,722 2017 107,000 0.621 66,447 VIU 443,224

Statement of Financial Position as 30 June 2012

Machine RM Cost 880,000 Accumulated depreciation. (176,000)

Impairment loss 179,000) Carrying amount 525,000

(10 x = 5 marks)

(ii) Any 4 indicators of impairments: (a) Market value declines (b) Negative changes in technology, markets, economy, or laws (c) Obsolescence or physical damage (d) Worse economic performance than expected and other relevant indicator

(c) (i) Initial recognition of the HFT investment is at cost and the transaction costs are charged to the Income Statement:

Dr. HFT Investment RM5,600,000 Cr. Bank RM5,600,000

(Being recognition of investment: 1,000,000 shares x RM5.60)

Dr. Income Statement RM28,000 Cr. Bank RM28,000

(Being transaction costs (RM5,600,000 x 0.5%) taken through profit and loss because the investment is classified as HFT)

Subsequent measurement is at fair value with gain or loss taken to profit and loss:

Dr. HFT Investment RM400,000 Cr. Income Statement RM400,000 (Being the gain on HFT investment recognized in profit for the year)

8 x = 4 marks

(ii) The investment made by LBS should be classified as held to maturity investment since LBS would like to hold it until redemption date.

Initial measurement of the investment will be at fair value (which is its cost) plus any associated issue costs . The journal entry will be:

DR. Investment in HTM investment RM8,400,000

Cr. Bank RM8,400,000

Subsequent measurement will be based on amortised cost basis:

Year end Opening balance

Effective interest 8.5%

Interest received (8% x RM8m)

Closing balance

RM000 RM000 RM000 RM000 30 June 2011 8,400 714 (640) 8,474 30 June 2012 8,474 720 (640) 8,554

The investment will be recorded at RM8,554,000 in the statement of financial position as at 30 June 2012.

12 x = 6 marks