Section A – THIS ONE question is compulsory and MUST be attempted

Johan Bohan Dohan

Non current Asset
Property, Plant and Equipment 332 76 83
Investment in Bohan 80
Investment in Dohan 60
Current Asset 40 20 16
. . .
452 156 99

Equity Shares 200 60 50

Retained Earnings 220 40 30
Non current liabilities 28 40 18
Current liabilities 4 16 1
. . .
452 156 99
The following notes are relevant:
1 Johan purchased it’s shareholding in Bohan, a public limited company on 1 January 2010, and Bohan purchased
it’s shareholding in Dohan on 31 December 2010. The purchase consideration comprised cash of $80m for 80% of the
equity holding of Bohan. Johan wishes to use the ‘full goodwill’ method for all acquisitions. The fair value of net assets as
at the date was $70m. The fair value adjustment relates to building with residual useful life of six years from the date
of acquisition. Purchased goodwill is impaired by $6m as at 31 December 2010. The fair value of the non controlling
interest and retained earnings of Bohan were as follows:

1 January 2010 31 December 2010

Fair Value of NCI 20 24
4 13
Retained Earnings

2 On 31 December 2010, Bohan acquired 60% equity interests of Dohan, a public limited company. The purchase
consideration comprised cash of $22m. The fair value of net assets as at the date was $60m. The entire fair value
adjustment relates to property with estimated residual useful life of 4 years. Purchased goodwill is not impaired. The
fair value of the non controlling interest and retained earnings of Dohan were as follows:

1 January 2010 31 December 2010

Fair Value of NCI (40%) 30 40

Fair Value of NCI (52%) 38 52

4 6
Retained Earnings
3 Bohan has sold inventory to Johan in October 2010. The sale price of the inventory was $10 million. Johan sells
goods at cost plus 20% to third parties. At the year-end, $6m of inventory sold to Johan remained unsold. Dohan sold
goods valued at $20m to Bohan based on profit margin of 20% and one half remained unsold.
4 Johan has a defined benefit plan with plan asset valued at $20m and present value of obligation at $18m as at 1
January 2010. The net employee asset $2m has been included within the Property, Plant and Equipment. The actuarial gain
or losses has been previously recognized in equity. Cash contribution and current service costs are $3m and $5m
respectively. Fair value of plan asset and present value of obligation are $28m and 25m respectively. The expected rate of
return and interest on present value of obligation are as follows:
Date Expected return Interest on present value of obligation
10% 8%
1 January 2010
12% 9%
31 December 2010

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5 Property located in a foreign country is purchased for €50m when the exchange rate is €2 per $1 as at 1 January
2010. The property is to be depreciated at 10% per annum and the exchange rate as at 31 December 2010 is €2.2
per $1.
6 Included within the current asset is trade receivable of $5m as at 1 January 2010 is subjected to stringent
impairment testing annually where expected cash flows would be two payments of $2m each 31 December 2011 and
2012. The discount rate of 8% should be used when discounting.
7 Johan has approved a curtailment exercise regarding the defined benefit plans. There shall be no compensation
for such curtailment but the Directors has offered voluntary retrenchment benefits in replaced for the defined benefit
plan hoping that most employees reaching retirement age would opt for voluntary retrenchment instead. The benefits
paid out for retrenchment is based on a sliding scale where employees reaching age of 45 years would receive more
as compared to employees opting for the retrenchment benefits at 55 years. With this, the Directors hoped that
employees would voluntarily leave the company before reaching the retirement age. The Directors have liaised with
the employee union and it seems that this exercise is legal in view of poor economic recovery in the country.

Required:
(a) Prepare a consolidated statement of financial position for the year ended 31 December 2010 for the
Johan Group. (35 marks)

The directors of Johan have heard that the International Accounting Standards Board (IASB) has issued amendments
to the rules regarding defined benefit plan. The directors believe that the IASB has issued these amendments to achieve
comparability of financial statements. On 20 August 2009, the IASB published for public comment proposals to amend
the discount rate for measuring employee benefits. IASB proposed to eliminate the requirement to use yields on
government bonds. In addition, on 29 April 2010, IASB published an exposure draft to improve the recognition and
presentation of defined benefit plans. Among the improvements include removing the choice of not recognizing
actuarial gains and losses which leads to the corridor approach.

Required:
(b) Describe the two main amendments to the recognition and presentation of defined benefit plans by the IASB,
discussing how these amendments complies with the principles under the Framework. (7 marks)

(c) Discuss the implication of the curtailment and whether such practice can be deemed to be ethically acceptable.
(6 marks)
Professional marks will be awarded for clarity and quality of discussion. (2 marks)

(50 marks)

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Section B – TWO questions ONLY to be attempted

2 Burley, a public limited company, operates in the energy industry. It has entered into several arrangements with other
entities as follows:
(i) Burley and Slite, a public limited company, jointly control an oilfield. Burley has a 60% interest and Slite a 40%
interest and the companies are entitled to extract oil in these proportions. An agreement was signed on 1
December 2008, which allowed for the net cash settlement of any over/under extraction by one company. The
net cash settlement would be at the market price of oil at the date of settlement. Both parties have used this
method of settlement before. 200,000 barrels of oil were produced up to 1 October 2009 but none were
produced after this up to 30 November 2009 due to production difficulties. The oil was all sold to third parties at
$100 per barrel. Burley has extracted 10,000 barrels more than the company’s quota and Slite has under
extracted by the same amount. The market price of oil at the year-end of 30 November 2009 was $105 per
barrel. The excess oil extracted by Burley was settled on 12 December 2009 under the terms of the agreement at
$95 per barrel.

Burley had purchased oil from another supplier because of the production difficulties at $98 per barrel and has oil
inventory of 5,000 barrels at the year-end, purchased from this source. Slite had no inventory of oil. Neither
company had oil inventory at 1 December 2008. Selling costs are $2 per barrel.

Burley wishes to know how to account for the recognition of revenue, the excess oil extracted and the oil
inventory at the year-end. (10 marks)

(ii) Burley also entered into an agreement with Jorge, and Heavy, both public limited companies on 1 December
2008. Each of the companies holds one third of the equity in an entity, Wells, a public limited company, which
operates offshore oilrigs. Any decisions regarding the operating and financial policies relating to Wells have to be
approved by two thirds of the venturers. Burley wants to account for the interest in the entity by using
proportionate consolidation, and wishes advice on the matter.

The oilrigs of Wells started operating on 1 December 1998 and are measured under the cost model. The useful
life of the rigs is 40 years. The initial cost of the rigs was $240 million, which included decommissioning costs
(discounted) of $20 million. At 1 December 2008, the carrying amount of the decommissioning liability has grown
to $32·6 million, but the net present value of decommissioning liability has decreased to $18·5 million as a result
of the increase in the risk-adjusted discount rate from 5% to 7%. Burley is unsure how to account for the oilrigs
in the financial statements of Wells for the year ended 30 November 2009.

Burley owns a 10% interest in a pipeline, which is used to transport the oil from the offshore oilrig to a refinery
on the land. Burley has joint control over the pipeline and has to pay its share of the maintenance costs. Burley
has the right to use 10% of the capacity of the pipeline. Burley wishes to show the pipeline as an investment in
its fi nancial statements to 30 November 2009. (9 marks)

(iii) Burley has purchased a transferable interest in an oil exploration licence. Initial surveys of the region designated
for exploration indicate that there are substantial oil deposits present but further surveys will be required in order
to establish the nature and extent of the deposits. Burley also has to determine whether the extraction of the oil
is commercially viable. Past experience has shown that the licence can increase substantially in value if further
information as to the viability of the extraction of the oil becomes available. Burley wishes to capitalise the cost of
the licence but is unsure as to whether the accounting policy is compliant with Singapore Financial Reporting
Standards (4 marks)

Professional marks will be awarded in question 3 for clarity and expression. (2 marks)
Required:
Discuss with suitable computations where necessary, how the above arrangements and events would be
accounted for in the financial statements of Burley.
(25 marks)

(Attachment from P2 Dec 2009)

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3 The directors of Aron, a public limited company, are worried about the challenging market conditions which the
company is facing. The markets are volatile and illiquid. The central government is injecting liquidity into the economy.
The directors are concerned about the significant shift towards the use of fair values in financial statements. IAS 39
‘Financial Instruments: recognition and measurement’ defines fair value and requires the initial measurement of
financial instruments to be at fair value. The directors are uncertain of the relevance of fair value measurements in
these current market conditions.

Required:
(a) Briefly discuss how the fair value of financial instruments is determined, commenting on the relevance of fair
value measurements for financial instruments where markets are volatile and illiquid. (4 marks)

(b) Further they would like advice on accounting for the following transactions within the financial statements for the
year ended 31 May 2009:
(i) Aron issued one million convertible bonds on 1 June 2006. The bonds had a term of three years and were
issued with a total fair value of $100 million which is also the par value. Interest is paid annually in arrears
at a rate of 6% per annum and bonds, without the conversion option, attracted an interest rate of 9% per
annum on 1 June 2006. The company incurred issue costs of $1 million. If the investor did not convert to
shares they would have been redeemed at par. At maturity all of the bonds were converted into 25 million
ordinary shares of $1 of Aron. No bonds could be converted before that date. The directors are uncertain
how the bonds should have been accounted for up to the date of the conversion on 31 May 2009 and have
been told that the impact of the issue costs is to increase the effective interest rate to 9·38%. (6 marks)

(ii) Aron held 3% holding of the shares in Smart, a public limited company. The investment was classified as
available-for-sale and at 31 May 2009 was fair valued at $5 million. The cumulative gain recognised in
equity relating to the available-for-sale investment was $400,000. On the same day, the whole of the share
capital of Smart was acquired by Given, a public limited company, and as a result, Aron received shares in
Given with a fair value of $5·5 million in exchange for its holding in Smart. The company wishes to know
how the exchange of shares in Smart for the shares in Given should be accounted for in its financial records.
(4 marks)

(iii) The functional and presentation currency of Aron is the dollar ($). Aron has a wholly owned foreign
subsidiary, Gao, whose functional currency is the zloti. Gao owns a debt instrument which is held for
trading. In Gao’s financial statements for the year ended 31 May 2008, the debt instrument was carried at
its fair value of 10 million zloti.
At 31 May 2009, the fair value of the debt instrument had increased to 12 million zloti. The exchange rates
were:
Zloti to $1
31 May 2008 3
31 May 2009 2
Average rate for year to 31 May 2009 2·5

The company wishes to know how to account for this instrument in Gao’s entity financial statements and
the consolidated financial statements of the group. (5 marks)
(iv) Aron granted interest free loans to its employees on 1 June 2008 of $10 million. The loans will be paid
back on 31 May 2010 as a single payment by the employees. The market rate of interest for a two-year
loan on both of the above dates is 6% per annum. The company is unsure how to account for the loan but
wishes to classify the loans as ‘loans and receivables’ under IAS 39 ‘Financial Instruments: recognition and
measurement’. (4 marks)

4
 Required:

Discuss, with relevant computations, how the above financial instruments should be accounted for in the
financial statements for the year ended 31 May 2009.

Note. The mark allocation is shown against each of the transactions above.
Note. The following discount and annuity factors may be of use
Discount factors Annuity factors
6% 9% 9· 38% 6% 9% 9· 38%
1 year 0·9434 0·9174 0·9142 0·9434 0·9174 0·9174
2 years 0·8900 0·8417 0·8358 1·8334 1·7591 1·7500
3 years 0·8396 0·7722 0·7642 2·6730 2·5313 2·5142

Professional marks will be awarded in question 2 for clarity and quality of discussion. (2 marks)

(25 marks)

(Attachment from P2 June 2009)

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4 (a) The U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB)
initiated their joint project on revenue recognition primarily to clarify the principles for recognizing revenue. In U.S.
generally accepted accounting principles (GAAP), revenue recognition guidance comprises more than a hundred
standards—many are industry-specific and some can produce conflicting results for economically similar transactions. In
International Financial Reporting Standards (IFRSs), the principles underlying the two main revenue recognition standards
(IAS 18, Revenue, and IAS 11, Construction Contracts) are inconsistent and vague, and can be difficult to apply beyond
simple transactions. In particular, those standards provide limited guidance for transactions involving multiple components
or multiple deliverables.

Required:
(i) Discuss the reasons why the current revenue standards may fail to meet the needs of users and could be
said to be conceptually flawed; (7 marks)
Professional marks will be awarded for clarity and quality of discussion. (2 marks)
(b)
(i) On February 29, Vendor enters into a contract with a customer to provide, deliver, and install
manufacturing equipment for $15,000, due on delivery. Vendor delivers the equipment on March 31 and installs it
during April. Title to the equipment passes to the customer at delivery. Vendor separately sells the equipment
(inclusive of the delivery service) and installation service for $14,000 and $2,000, respectively. Vendor does not
sell delivery services separately from equipment. For simplicity, warranties or any other performance guarantees
are ignored. (7 marks)

(ii) On January 2, 2010, SoftwareCo enters into a contract to create a software program for a customer and
to provide two years of software support. The software is transferred to the customer on June 30, 2010, and the
support services are transferred over the following two years. The customer is obliged to pay the entire
transaction price of $400,000 on delivery of the software. (5 marks)

(iii) On December 31, 2010, Manufacturer sells production equipment to a customer for $5,000.
Manufacturer includes a one-year warranty service with the sale of all its equipment. The customer receives and
pays for the equipment on December 31, 2010. (4 marks)

Required:

Show the accounting entries in the year of the sale based on the discussion paper;

(25 marks)

End of Question Paper