Professional Documents
Culture Documents
Answer the following ONE compulsory question which relates to the Case below. Marks
will be awarded for logical argumentation and appropriate presentation of the answers.
CASE
You are the accounting manager of Pass Holdings Limited (“PHL”), a listed company in Hong
Kong, engaged in the trading of construction materials. The balance sheets of PHL and its
investee companies, Success Insight Limited (“SIL”) and Outstanding Achievement Limited
(“OAL”), at 31 March 2007 are shown below:
Additional information:
PHL acquired 60% of the ordinary shares of SIL on 1 April 2006 for $20 million when the
issued ordinary share capital and the reserves of SIL were $20 million and $4 million
respectively.
At the date of acquisition of SIL, the fair value of its equipment was considered to be
$2 million greater than its carrying amount in SIL’s balance sheet though the economic
useful life remains unchanged. SIL had acquired the equipment on 1 April 2004 and the
equipment is depreciated on cost over 10 years.
PHL acquired 30% of the ordinary shares of OAL on 1 April 2006 for $10 million when the
issued ordinary share capital and the reserves of OAL were $15 million and $3 million
respectively.
PHL holds a property which was let out, charging arm’s length rentals, to SIL who uses it as
an office and a showroom. PHL acquired this property on 1 April 2006 at a price of
$54.9 million. The estimated useful life of the property was 50 years from 1 April 2006.
The fair value of the property at 31 March 2007 remains at $54.9 million and the rental
income to PHL for the year amounts to $3 million. This property is included in PHL’s
balance sheet in its fair value as an investment property. PHL adopts the cost model and
uses the straight-line method to depreciate property, plant and equipment.
After you sent a summary of the consolidated financial results of the PHL Group to PHL’s
directors for review, one of the directors, who is not a certified public accountant, sends you
an e-mail as follows:
Could you please clarify the following points relating to PHL’s draft financial summary which I
have just reviewed?
1) In your cover note you mentioned that part of the profit from the sales made by SIL
to OAL has been eliminated. I am puzzled about this elimination. Why is there
such an elimination of profit? Since PHL has not sold anything to OAL, what has
caused this elimination in PHL’s accounts?
2) I am also puzzled about the investment property that was found in the balance sheet
of PHL but not in the consolidated balance sheet. What has happened to this
investment property?
Best regards,
Peter
(a) Prepare a memorandum in response to the issues raised by Mr. Peter CHAN.
(15 marks)
(ii) consolidation adjustments for the year ended 31 March 2007, including but
not limited to fair value adjustment, re-classification of assets, elimination
of intragroup transactions, equity accounting and minority interests
(ignore taxation); and
(21 marks)
* * * END OF SECTION A * * *
(QUESTIONS)
Answer ALL of the following questions. Marks will be awarded for logical argumentation
and appropriate presentation of the answers.
Ms. Li, the Finance Manager of a company listed on The Stock Exchange of Hong Kong
Limited, is assessing the segment reporting requirements under HKFRS 8 Operating
Segments included in the financial statements of the company and has tentatively concluded
that:
(a) the company has a free choice in determining a business activity or business activities
as an operating segment;
(c) segment information should be prepared in conformity with the accounting policies
adopted for preparing and presenting the financial statements of the company; and
(d) during the financial year, the company disposed of the businesses of one of its
reportable segments. The company is required to restate the comparatives segment
information in the financial statements for the current year.
Required:
Wealth Credit Limited (“WCL”) is a finance company which is engaged in the provision of
loans.
As Borrower A had not repaid the loan on 30 November 2006, WCL agreed to extend the
credit for both the principal amount and interest due for another two years with no interest for
the extended term.
Required:
(a) Explain whether WCL should recognise an impairment loss in respect of the
loan to Borrower A in its financial statements for the year ended
31 December 2006 and calculate the amount of impairment loss, if any.
(7 marks)
(b) Determine whether WCL should derecognise the loan to Borrower B in its
financial statements for the year ended 31 December 2006.
(5 marks)
Broom Limited entered into an agreement to acquire 100% interest in Fortune Limited, a
company operating convenience stores in Hong Kong. The acquisition date was
1 November 2006.
During the negotiation process between Broom Limited and the shareholders of Fortune
Limited, it was agreed that twenty Fortune Limited convenience stores would be closed
down within three months of the change in control. Redundancy notices were sent to the
staff of the twenty convenience stores immediately after Broom Limited has taken control
over Fortune Limited. The closure of these stores was completed on 18 January 2007.
Total payment made in January 2007 for redundancy of staff was HK$1,850,000.
Prior to the date of acquisition, Fortune Limited had entered into a retrenchment package for
two directors, such that if the company were to be acquired by another party these two
directors would become entitled to a one-off aggregate payment of HK$1,200,000 each.
The payment was made on 6 December 2006.
On 1 September 2005, Fortune Limited granted a share option to the managing director to
acquire 50,000 shares of the company with a 3-year vesting period. The option had a strike
price of HK$10 per share and the fair value determined at the grant date was HK$180,000.
On 31 October 2006, Fortune Limited cancelled the share option and agreed to pay the
managing director HK$210,000 for the cancellation. The payment was made on
28 December 2006. The fair value of the share option at the date of cancellation was
HK$200,000.
For the acquisition, Broom Limited engaged a certified public accountancy firm to perform a
due diligence exercise on Fortune Limited’s financial statements. The due diligence report
was issued on 30 October 2006. A fee of HK$300,000 was paid for this service on
25 November 2006.
Required:
(a) Fortune Limited’s financial statements for the year ended 31 December 2006;
and
(8 marks)
(b) Broom Limited’s consolidated financial statements for the year ended
31 December 2006.
(8 marks)
Peak Medical Technology Corporation (“PMT”) conducts research and product development
for an anaesthetic injection under contract with WY Corporation (“WY”), a pharmaceutical
company. The research and development contract requires that WY pays PMT an up-front
amount of HK$1.5 million when the contract is signed, HK$2 million upon the successful
completion of clinical trials, and HK$1.5 million upon the delivery of the first pilot unit of the
injection. All payments are non-refundable. The total cost of completion of the project is
estimated to be HK$3 million.
PMT has invested HK$25 million in equipment for its research and development centre,
which has an anticipated useful life of eight years. Depreciation is charged on a
straight-line basis. In the period of acquisition, PMT received a government grant of
HK$10 million towards purchase of the equipment, which is conditional on certain
employment targets being achieved within the next four years.
Required:
Determine how PMT should recognise and measure by reference to the relevant
accounting standards: