Answers

1. (i)
Convertible Bonds

The convertible bond should have been split into a liability component and an equity component.
The liability component is calculated as the present value of the repayments, discounted using the
interest rate om a similar debt instrument without a conversion option i.e. 10 %. The equity
component is the balance of the proceeds.

The repayments are interest of $700,000 (10m bonds x $1 x 7 %) per year plus the
repayment of (10m x $1) 31st Dec 20X4.

Date Cash Flow Discount Rate PV

31/12/20X3 700,000 1/1.10 636363

31/12/20X4 10,700,000 1/1.10^2 8,842,975

Liability 9,479,338

Equity component will be only $520,662 ($10m – 9,479,338)

So adjustment will be required and equity needs to be reduced by the excess amount and remaining
amount needs to be recorded as liability in the Financial statements

Specialised Machines
Assets are understated and so is depreciation charges

As per IAS 16: Property, plant and equipment defines property, plant and equipment (PPE) as
assets that are to be used on a continuing basis in the company’s activities to provide access to
economic benefits and it should initially be recorded at it cost which is not simply the purchase
price of the asset. The cost should include the following items:

 Purchase costs,
 Costs directly related to getting the asset ready for use, including:
 Dismantling costs. The initial estimate of the costs of dismantling and removing the asset at the
end of its expected life, plus the costs of restoring the site after use when an obligation to incur
these future costs arises at the time the asset is acquired.
When a company acquires an asset it may have an obligation to dismantle the asset and restore the
site once the asset reaches the end of its life. The obligation must be included in the cost of the
asset, at the time that the asset is first recognised. And this cost should be the present value of the
estimated future costs i.e. PV of Future cost= $ 909,090 ( $1m x 1/1.10) It will then be added to
$5m which is the acquisition cost .As a part of the cost of the asset, it will be depreciated over the
asset’s life.

This treatment ensures that these costs related to specialised machines are matched to the
associated income earned from the specialised machine here during the its useful life.

Share Appreciation Right

Accounting Treatment

Actual leavers Estimate of further Number of employees whose

In the year leavers in the future interest is expected to vest

Year 1 2 5 45

Expense for services received and consumed

Year 1
A-Number of employees whose
interest is expected to vest 45
B-Number of rights 20,000
C-Fair value of the right $5

Total expected expense $4,500,000

(A x B x C)

Fraction of the vesting period 1/3

Liability at year end $1,500,000

Liability at the start -

Charge to P&L (Movement on

the liability) $1500,000

Adjustment:
Interest should be created and liability should be increased by the above calculated amounts.
(ii) Ethical Requirement:
2. a) (i)

License

As per IAS 38 Intangible Assets, must be recognised only when:

It meets the definition of an intangible asset (identifiability/entity controls a

resource/possible future economic benefits); and
 It satisfies the recognition criteria.
 An inflow of expected future economic benefits is probable; and
 the measurement of the cost of the asset must be reliable.

An intangible asset must initially be recorded at cost.

Explanation:

Johan has recorded the License at its original cost under non current assets as it qualifies all the
conditions of asset being considered as an Intangible. If a business pays licensing fees on a monthly
or on an annual basis that coincides with the end of the business’s fiscal year, the business does
not record a license asset. The fees that the business paid for those licenses are included as an
expense. If the license is for multiple years or accounting periods and is acquired by paying an
initial fee, the license is recorded as an asset on the balance sheet and its value equals what it cost
to acquire the license.

In this case it should be recorded as an asset because lump sump payment off $120m was made at
the time of acquisition for multiple years. Once recognised then it should be amortized over the
useful life of an asset if the useful life is definite and only check for impairment if asset (license)
is renewed for indefinite period of time.

There is no such clause in there for the renewal of license so 5 years will be considered as its
definite useful life and its cost should be amortized over that period and each year charge should
be made to profit and loss. Considering the fact that there still is a hope pf renewal as Johan says,
then in that case if its renewed for indefinite period, license should be stopped amortizing and will
be tested for impairment each year and makes sure that carrying amount doesn’t exceed
recoverable amount if the assets has been impaired. Testing should be carried on annual basis and
reversals or any increase should be taken into account each year. Along with this, license value
should be checked for any increase in value at each reporting date i.e. 30th Nov.
Basis of Calculation- Definite life (5-years)

Extracts from Statement of Financial Position

As at year end 30th Nov 20X7

Non-current Assets $000

License (W) (120m - $24,000) 96,000

Extracts from Profit & Loss

For the 30th Nov 20X7

Operating Expense
Amortization 24,000

If at any point any of the above conditions for recognition an is not fulfilled, then in that case he
has to derecognise the asset and book that as an expense.

(ii)
Sale & Leaseback

The accounting treatment for such a transaction depends on whether the initial transfer of the asset
from the seller/lessee to the buyer/lessor is a sale or not. This in turn depends on whether the
transfer involves the seller/lessee incurring and satisfying a performance obligation in accordance
with rules in IFRS 15: Revenue from contracts with customers.

The seller/lessee must account for the sale of the asset and the subsequent leaseback
of the asset.
Accounting for the sale involves:
 recognising the sale proceeds; and
 derecognising the original asset.
Accounting for the lease involves:
 recognising a lease liability; and
 recognising a right of use asset.

These different amounts interact and result in a change in net assets. This results in the recognition
of a gain/(loss) on the rights to the asset that have been transferred by the seller/lessee.
Another way of thinking about the gain/(loss) is that although the seller/lessee has sold an asset, it
has also retained a right to continue using it. Any gain or loss should relate only to the rights sold
and not those retained. The gain or loss is easily calculated as a balancing figure.

Calculation
The transfer qualifies as a sale according to IFRS 15 criteria.

Details of the asset:

Carrying amount = $3,200,000
Sale proceeds = $10,000,000
PV lease liability =$2,000,000

Measure the right of use asset

Right of use asset = 3,200,000 2,000,000/10,000,000
Right of use asset = 640,000

Gain/(loss) on disposal as a
balancing figure

Debit Credit
$ $
Cash 10,000,000
Asset 3,200,000
Lease liability 2,000,000
Right of use asset 640,000
Gain on disposal (balance) 5,440,000
10,640,000 10,640,000

(b)(i)

IAS 19 –Employee Benefits

Under a defined benefit plan IAS 19, the employer guarantees the amount of pension that
its employees will receive after they retire. A company might save cash into a separate fund (just
as for defined contribution plans) in order to build up an asset that can be used to pay the pensions
of employees when they retire. This would be known as a funded plan. If an employer does not
save up in this way, the plan is described as being unfunded.

The amount that an employee will receive is usually linked to the number of years that he or she
has worked for the company, and the size of his/her annual salary at retirement date (or on leaving
the company). Defined benefit plans are often known as “final salary schemes”. Therefore, method
used here by Johan for calculating expenses/liability each is according to what is prescribed by the
standards.

(ii)

Remeasurement

There could be certain movement in the defined benefit plan both assets or liabilities recorded and
that could be due to multiple factors like
 Current cash contributions to the plan
 current service cost
 past service cost
 gains or loss on settlement;
 net interest (expense or income); and
 remeasurement

All these Changes are taken to profit & loss statement except where there is a remeasurement
change and that is recorded in other comprehensive income due to artificial gains/losses.

Remeasurement changes occurs where is the difference in figure of expected value at the end and
Actual year end position which either results in gains and losses that is recorded in OCI.

So whatever difference arise in the figures calculated by Johan’s directors it needs to be assessed
for the any valuation change at each year end and compare it with expected values at same date
recognise the same in OCI.