CHAPTER 5 CONSOLIDATED ACCOUNTS: STATEMENTS OF FINANCIAL POSITION– COMPLICATIONS
1.1 Details of investment in finance lease
Gross investment
in lease
Net investment
in lease
Not later than one year 2,715,224 1,492,383
Later than one year but not later than five years 8,845,672 6,659,893
Later than five years - -
11,560,896 8,152,276
(W1) Year ended
Instalment
at year end Interest Principal
Net Investment
in Lease
Gross Investment
in Lease
9,450,000 14,276,120
31/06/2015 2,715,224 1,417,500 1,297,724 8,152,276 11,560,896 31/06/2016 2,715,224 1,222,841 1,492,383 6,659,893 8,845,672 31/06/2017 2,715,224 998,984 1,716,240 4,943,653 6,130,448 31/06/2018 2,715,224 741,548 1,973,676 2,969,977 3,415,224 31/06/2019 2,715,224 445,247 2,269,977 700,000 700,000
9.10 LODHI TEXTILE MILLS LIMITED
Particulars Debit Credit
Generator A
(i) Cash / Bank 6,000,000
Accumulated depreciation – Generator 2,500,000 Loss on sale/ Impairment loss
*1,500,00 0
Property, plant and equipment - Generator 10,000,000
*(This amount comprises of impairment loss amounted to Rs. 1 million and loss on disposal amounted to Rs. 0.5
million.)
(ii) Assets subject to finance lease - Generator 6,000,000
Liabilities against assets subject to finance lease 6,000,000
Generator B
(i) Cash / Bank 6,000,000
Accumulated depreciation – Generator 6,000,000
Property, plant and equipment - Generator 12,000,000
(ii) Assets subject to finance lease - Generator 6,000,000
Liabilities against assets subject to finance lease 6,000,000
(iii) Impairment loss 1,000,000
Accumulated impairment (ASFL) - Generator 1,000,000
Generator C
(i) Cash / Bank 8,000,000
Accumulated depreciation – Generator 3,000,000 Property, plant and equipment - Generator
10,000,00 0 Deferred income OR Surplus on revaluation of
fixed assets 1,000,000
(ii) Assets subject to finance lease - Generator 8,000,000
Liabilities against assets subject to finance lease 8,000,000
9.11 NOMAN ENGINEERING LIMITED Journal entries
Date Description
Debit Credit Rs.000 Rs.000
1-Jul-2014 Bank 20,000
Accumulated depreciation (18,750-15,000) 3,750
Property, plant and equipment 18,750
Deferred gain on disposal (20,000-15,000) 5,000
(Disposal of plant under sale and finance
lease back)
1-Jul-2014 Property, plant and equipment 20,000
Long term finance lease liability 20,000
(Plant acquired under sale and lease back)
31-Dec-2014 Long term finance lease liability W.1 1,127
Interest expense W.1 1,373
Bank 2,500
(Payment of 1st. Instalment of lease
liability)
30-Jun-2015 Long term finance lease liability 1,204
Interest expense 1,296
Bank 2,500
(Payment of 2nd. Instalment of lease
liability)
30-Jun-2015 Deferred gain on disposal (5,000/6) 833
Gain on disposal 833
(Deferred gain on amortised over the life of
the plant)
30-Jun-2015 Depreciation expense (20,000/6) 3,333
Accumulated depreciation 3,333
(Depreciation for the year for plant)
Note: If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the asset shall be fully depreciated over the shorter of the lease term and its useful life.
W1:
Liability against finance lease Instalment payments
Interest at 13.731%
Principal balance
Balance 1-Jul-2014 20,000
Payments made on 31-Dec-2014 2,500 1,373 (1,127) 30-Jun-2015 2,500 1,296 (1,204)
5,000 2,669 (2,331)
Balance 30-6-2015 17,669
CHAPTER 10 – IAS 37: PROVISIONS CONTINGENT LIABILITIES AND CONTINGENT ASSETS AND IAS 10: EVENTS OCCURRING AFTER THE REPORTING DATE
10.1 BADAR
Decommissioning costs
IAS 37 Provisions, Contingent Liabilities and Contingent Assets only permits a provision to be made if three conditions are met:
(i) The company has a present obligation, either legally or constructively, as a result of a past event;
(ii) Probable outflow of resources is required to settle the obligation; and (iii) A reliable estimate is available.
Although there is no legal requirement to restore the site, the company has established a constructive obligation by setting a valid expectation in the market, due to its published policies and past practice, from which it cannot realistically withdraw.
It therefore appears probable that Badar will have to pay money to improve the site and so a provision should be created for the expected amount. As the expected payment of Rs.100,000 will not be settled for three years, the provision should be discounted and entered at its net present value of Rs.75,131 (Rs.100,000/(1.1)3).
Over the three years, the discounting should be unwound and charged to profit or loss as finance costs, resulting in a provision of Rs.100,000 by the end of the third year.
The cost of the construction work has been correctly capitalised. The cost of the future decommissioning work should be added to this asset so that the total costs of the site can be matched to the revenue from the copper over the period of mining.
This will result in an asset of Rs.575,131 which should be depreciated over the three year life in line with anticipated revenues.
10.2 GEORGINA
(1) Litigation for damages
Under IAS37, a provision should only be recognised when:
an entity has a present obligation as a result of a past event
it is probable that an outflow of economic benefits will be required to settle the obligation
a reliable estimate can be made of the amount of the obligation.
Applying this to the facts given:
Georgina’s legal advisors have confirmed that there is a legal obligation.
This arose from the past event of the sale, on 1 September 2015 (i.e.
before the year end).
Probable is defined as ‘more likely than not’. The legal advisors have confirmed that it is likely that the claim will succeed.
A reliable estimate of Rs.500,000 has been made.
Therefore a provision of Rs.500,000 should be made.
Counter-claim
IAS37 requires that such a reimbursement should only be recognised where receipt is ‘virtually certain’. Since the legal advisors are unsure whether this claim will succeed no asset should be recognised in respect of this claim.
(2) Claim for unfair dismissal
In this case, the legal advisers believe that success is unlikely (i.e. possible rather than probable). Therefore this claim meets the IAS37 definition of a contingent liability:
a possible obligation
arising from past events
whose existence will be confirmed only by the occurrence or non- occurrence of one or more uncertain future events.
The liability is a possible one, which will be determined by a future court case or tribunal. It did arise from past events (the dismissal had taken place by the year end).
This contingent liability should be disclosed in the financial statements (unless the legal advisors believe that the possibility of success is in fact remote, and then no disclosure is necessary).
(3) Returns
Applying the IAS37 conditions in (1) to the facts given:
Although there is no legal obligation, a constructive obligation arises from Georgina’s past actions. Georgina has created an expectation in its customers that such refunds will be given.
As at the year end, based on past experience, an outflow of economic benefits is probable.
A reliable estimate can be made. This could be 1% × 400,000 but since the returns are now all in the actual figure of Rs.3,500 can be used.
Therefore a provision of Rs.3,500 should be made.
(4) Closure of division
Applying the above IAS37 conditions in (1) to the facts given:
A present obligation exists because at the year end there is a detailed plan in place and the closure has been announced in the press.
An outflow of economic benefits is probable.
A reliable estimate of Rs.300,000 has been made.
However, IAS37 specifically states in respect of restructuring that any provision should include only direct expenses, not ongoing expenses such as staff relocation or retraining. Therefore a provision of Rs.250,000 (300,000 – 50,000) should be made.
10.3 EARLEY INC
(a) IAS 10 (revised) Events After the Statement of financial position Date states that assets and liabilities should be adjusted for events occurring after the statement of financial position date that provide additional evidence relating to conditions existing at the statement of financial position date. It specifically includes the example of bad debts, where evidence of bankruptcy of a debtor occurs after the year end.
In this case, Nedengy appears to have recovered part of the debt and as such only Rs.200,000 needs to be provided. It may be argued that the receivership has occurred as a result of events occurring after the statement of financial position date, as a result of a change in legislation for example, but this is unlikely.
IAS 18 Revenue states that when uncertainty arises about the collectability of an amount already included in revenue, the amount should be recognised as an expense.
(b) It is likely that the fall in the value of the property will fit the IAS 10 (revised) definition of adjusting events noted in (a) above, unless, again, it can be argued that the decline in the property market occurred after the year-end.
IAS 36 Impairment of assets and IAS 16 Property, Plant and Equipment require that the carrying amount of property, plant and equipment should be reviewed periodically in order to assess whether the recoverable amount has fallen below the carrying amount. Where it has, the property, plant and equipment should be written down to the recoverable amount, either through the statement of profit or loss as an expense, or though other comprehensive income to revaluation reserve in shareholder’s equity, but only to the extent that the balance on the revaluation reserve relates to a previous revaluation surplus on the same asset.
(c) IAS 2 Inventories requires that inventories be stated at the lower on cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
Unless Earley was making a significant margin on the tricycles, it is likely that the reduction in selling price of 30% will necessitate a write- down to net realisable value, especially considering the transportation costs to Iraq which must be included. If the Iraqi option is unlikely to proceed, it may be necessary to write the tricycles down to scrap value.
(d) Under IAS 10, the nationalisation is likely to be regarded as a non-adjusting event that merely requires disclosure in the financial statements. IAS 27 Consolidated Financial Statements and Accounting for Investments in
Subsidiaries, requires that an investment in a enterprise should be accounted for as an investment (under IAS 39: Financial Instruments: Recognition and Measurement) from the date that it ceases to fall within the definition of a subsidiary and does not become an associate. It seems here that Earley has neither control nor significant influence, nor even an investment as the assets have been in fact, expropriated. The loss of the investment should be
accounted for in the year in which it occurred, but disclosed in the current year.
If the loss of the subsidiary results in Earley no longer being a going concern, then the event becomes an adjusting event.
(e) & (f) Both of the events described are non-adjusting event which should be disclosed, but not adjusted for in the current year financial statements.