FNA1002

FINANCIAL ACCOUNTING
GROUP PROJECT

HYFLUX LTD

B26 GROUP 6

DING DOU

TRAN THI THUY LINH

NGUYEN THAI DUNG

TUTOR:
KATHRINE YUEN

DEPARTMENT OF FINANCE & ACCOUNTING

SCHOOL OF BUSINESS
NATIONAL UNIVERSITY OF SINGAPORE

SEMESTER 2
SESSION 2005/2006
Question 1:
Hyflux is a water and fluid treatment company. While the Hyflux Company main
activities are investing on subsidiary companies and producing membrane system, the
nature of business undertaken by Hyflux Group includes trading and manufacturing.

Main types of revenue include sale of industrial processes: separation, concentration and
purification treatments for manufacturing process streams; water treatment processes and
products like seawater desalination, raw water purification, wastewater cleaning, water
recycling, water reclamation and ultra pure water production for municipal and industrial
clients. In fiscal year 2004, industrial products sale contributes 73%, ie. nearly 65
millions, to its revenue of 88.7 millions S$. The rest is contributed by selling of
municipal products (19%) and consumer products (8%). Revenue comes mainly from
China (82%) and Singapore (10%)

Main types of expense are raw materials and consumables used (35,917,000S$),
personnel expenses (9,302,000S$) and deprecation & amortization costs (3,533,000S$).
In 2004, no cost for development, which used to be one of main expenses in 2003.

Question 2:

Revenue recognition means realize and record revenue. The revenue is recorded right
after it is earned, which means upon delivery of goods or upon completion of services.

Hyflux revenue recognition policy is:

“Revenue is recognised to the extent that it is probable that the economic benefits will
flow to the Group and the revenue can be reliably measured. The following specific
recognition criteria must also be met before revenue is recognised:
(i) Project and contract income
When the outcome of a contract can be reliably measured
- Revenue is recognised using the percentage-of-completion method, measured by the
contract value of work performed to date (based on project milestones) to estimated total
contract value.
When the outcome of a contract cannot be reliably measured
- Revenue is recognised only to the extent of contract costs incurred that is probable to be
recoverable.
(ii) Sale of goods
Revenue is recognised upon the transfer of significant risk and rewards of ownership of
the goods to the customer which generally coincides with delivery and acceptance of the
goods sold.
(iii) Interest
Interest income is recognised on a time proportion basis (taking into account the effective
yield on the asset) unless collectibility is in doubt.
(iv) Dividends
Dividend income is recognised when the shareholder’s rights to receive payment is
established.”
The revenue recognition for Sale of good is correct as it recorded the revenue after the
delivery of the goods and acceptance of the goods sold.
The revenue recognition for Interest and projects, contracts, which can be reliably
measured, are correct, as these above statements imply that they will record only part of
the total revenue, which is earned during the accounting period.
The policy also emphasis the importance of reliability principle as it divide the revenue of
project, contract into two categories.

Question 3:

Title/Year 2004 2003

Accounts receivable (S$ ’000) 54,388 22,128
Total assets (S$ ’000) 305,408 115,854
Percentage of total assets hold as (54,388 / 305,408) x 100 (22,128 / 115,854)x100=
accounts receivable (%) = 17.8 19.1

Compared to 2003, in 2004, the ratio decreases by 1.3%.

Hyflux uses Allowance for bad debts method. Basing on the reliable information and
experience, Hyflux estimates the amount of uncollectible bad debts. Then, it records that
amount into a contra- account of trade receivable named “Provision for bad debts”. The
amount of trade receivable on the balance sheet is the net amount, which means trade
receivable minus provision for bad debts.
This method is appropriate according to GAAP. First, it does not overstate assets and
understate expense (conservatism principle). Second, it agrees with accrual accounting
and matching principle, meaning, records the expense when it incurs during the same
period that it earns revenue. It does not wait until it is clear that debtors cannot pay like
direct write-off method, i.e in different period.
In 2004, Hyflux records S$ 3,332K for doubtful bad debts. This is about 6% of the total
account receivable and 4% of the total revenue. The Allowance method is appropriate
since account receivable is a small proportion of trade receivable and total revenue.

Question 4:
Hyflux has four main types of inventory: raw materials, work in progress, finished goods,
and goods in transit.
Generally, Inflation makes price keep increasing. The inventories purchased from
different time and different suppliers is at different costs .Thus, it is difficult to make the
record for inventories sold without any assumption or recording any single product sold.
So, there is the need for using one of those standard cost flow assumption: FIFO, LIFO,
weighted average cost and specific identification.
Hyflux policy for inventory is “valued at lower cost and net realisable value”. It means
that Hyflux uses FIFO (subjected to inflation, costs usually increase).
The assumption is appropriate. First, Hyflux has a complicated inventory with lots of
different thing. It is difficult to record any single items. Moreover, the inventory mainly
contains raw materials, which is used not so long after purchased for the production
process.
The historical costs of inventories is 5,474,000 + 327,000 = 5,801,000 S$
In those items, there are finished goods at net realizable value, which mean the market
values are least than the historical costs. Thus, a provision for obsolescence is recorded
(S$327K).

Question 5:
Hyflux policy for depreciation its property, plant and equipment is:
“Depreciation is computed on a straight-line basis over the estimated useful life of the
asset as follows:
Plant and machinery 4 - 5 years Motor vehicles 4 - 5 years
Computers 1 - 4 years Office equipment 4 - 5 years
Leasehold properties and improvements over the lease period
Furniture and fittings 4 - 10 years Renovation 4 - 5 years”
The construction in progress does not depreciate until it is completed and ready to be
used (recorded at development costs, not depreciation as not ready to be used).
The above policy is one of the standard methods accepted by GAAP. It looks reasonable
as Hyflux estimates the useful life appropriately. The depreciation for leasehold
properties and improvements at most is the lease period (cannot be longer). Base on these
assumption, the depreciation rates for Plant and machinery, motor vehicles, office
equipments and renovation are about 20-25% per year, whereas those for furniture and
fittings are about 10-25% per year, those for computers are 25-100% per year. This is the
appropriately result of wear and tear and obsolescence.
Managers consider the tradeoffs in choosing a depreciation method out of the 3 main
types. The straight-line method divides the depreciation equally throughout the asset’s
life; this makes computation easy and more convenient. The units-of-production method
provides a much better estimate of depreciation and the asset’s remaining useful life as it
is based on usage. Whereas the Double-declining-balance (DDB) method accelerates
depreciation in the early years, lowering reported net profits and thus decreases income
tax. There will be additional cash to invest using the DDB due to avoidance of taxation.

During 2004, Hyflux disposes S$ 359,000 of its assets, including motor vehicles
(S$251K), computers (S$ 13K), office equipments (S$86K), and renovation (S$9K). It
experiences a lost of S$ 103,000.
Journal entry on 31st, Dec 2004 for disposal property, plant and equipment:

31st Dec 2004 Dr Accumulate depreciation : S$ 91K

Cash : S$ 165K

Loss on disposal of PP&E : S$ 103K

Cr Property, plant and equipment : S$ 359K

Question 6:
Hyflux has total intangible assets of S$14,534,000, which including: goodwill (193K),
intellectual property rights (1,900K), development costs (10,610K) and licensing fees
(1,840K).
The policies of Hyflux for amortization or impairment are:
(i) Goodwill
Goodwill represents the excess of the cost of the acquisition over the fair value of
identifiable net assets acquired. Goodwill is stated at cost less accumulated amortisation
and any impairment losses. Goodwill is amortised on a straight-line basis over the period
of expected benefits not exceeding 5 years.
(ii) Intellectual property rights
The initial cost of acquiring intellectual property rights is capitalised and amortised on a
straight-line basis over the period of their expected benefits, which normally does not
exceed 5 years.
(iii) Research and development expenditure
Research and development costs are charged against income in the period incurred except
for development costs that are expected to have future benefits. Development costs that
have been capitalised are amortised on a straight-line basis over the period of their
expected benefits, which normally does not exceed 10 years.
(iv) Licensing fees
The initial cost of acquiring licenses is capitalised and amortised on a straight-line basis
over the period of the licensing agreement.
All intangible assets of Hyflux except Goodwill, which have finite lives, are amortised
using straight-line method. This agrees new method of accounting.
The record of intangible asset for development costs, but not for research costs is also
appropriate.
Under the new accounting method, goodwill is not amrotised anymore. Instead, it will be
subjected to annual impairment test. However, with old method, the policy of Hyflux is
accepted.