ACCA DipIFR question papers and answers on IAS 21 from June 2014
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All questions on IAS 21 Intangibles which have appeared in ACCA DipIFR from June 2014 have been indexed here. The answers are based on the standards prevalent at the exam point in time.
For the benefit of the readers, we have put the following sequentially to help them understand better
- Question - Relevant portion of the exam pertaining to the standard has been recreated
- Answer - Answers as shared by the ACCA Examination team which was required for the question
- Examiners Feedback - Feedback on answers given by the students for that exam, this is a critical part of learning as students can learn from mistakes which other students did
You are the financial controller of Omega, a listed company which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). The year end of Omega is 31 March and its
functional currency is the $. Your managing director, who is not an accountant, has recently prepared a list of questions for you concerning current issues relevant to Omega:
Under the principles of IAS 21 – Foreign Currency Transactions – the asset and liability would initially be recognised at the rate of exchange in force at the transaction date – 1 January 2014. Therefore the amount initially recognised would be $200,000 (2 million kroner x 1/10).
The liability is a monetary item so it is retranslated using the rate of exchange in force at 31 March 2014. This makes the closing liability $250,000 (2 million kroner x 1/8).
The loss on re-translation of $50,000 ($250,000 – $200,000) is recognised in the statement of profit or loss.
The machine is a non-monetary asset carried at historical cost. Therefore it continues to be translated using the rate of 10 kroner to $1.
Depreciation of $12,500 ($200,000 x 1⁄4 x 3/12) would be charged to profit or loss for the year ended 31 March 2014.
The closing balance in property, plant and equipment would be $187,500 ($200,000 – $12,500). This would be shown as a non-current asset in the statement of financial position.
ACCA Examiners feedback on the answers given by students
Many good answers were also provided to this part. However, not all candidates appreciated that the purchased machine, being a non-monetary asset that is measured under the cost model, would continue to be reported using the rate of exchange in force at the date of acquisition.
Delta is an entity which is engaged in the construction industry and prepares financial statements to 30 September each year. The financial statements for the year ended 30 September 2015 are shortly to be authorised for issue. The following events are relevant to these financial statements:
On 1 August 2015, Delta purchased a machine from a supplier located in a country whose local currency is the groat. The agreed purchase price was 600,000 groats, payable on 31 October 2015. The asset was modified to suit Delta’s purposes at a cost of $30,000 during August 2015 and brought into use on 1 September 2015. The directors of Delta estimated that the useful economic life of the machine from date of first use was five years. Relevant exchange rates were as follows:
– 1 August 2015 – 2·5 groats to $1.
– 1 September 2015 – 2·4 groats to $1.
– 30 September 2015 – 2·0 groats to $1.
– 31 October 2015 – 2·1 groats to $1.
The machine and the associated liability would be recorded in the financial statements using the rate of exchange in force at the transaction date – 2·5 groats to $1. Therefore the initial carrying amount of both items is $240,000 (600,000/2·5).
The liability is a monetary item so it would be retranslated at the year end of 30 September 2015 using the closing rate of 2 groats to $1 at $300,000 (600,000/2) and shown as a current liability.
The exchange difference of $60,000 ($300,000 – $240,000) is recognised in profit or loss – in this case a loss.
The machine is a non-monetary asset measured under the cost model and so is not retranslated as the exchange rate changes.
The modification costs of $30,000 are added to the cost of the machine to give a total cost figure of $270,000.
The machine is depreciated from 1 September 2015 (the date it is brought into use) and so the depreciation for the year ended 30 September 2015 is $4,500 ($270,000 x 1/5 x 1/12).
The machine will be shown as a non-current asset at a closing carrying value of $265,500 ($270,000 – $4,500).
ACCA Examiners feedback on answers given by students in the exam
This question was generally well answered by the majority of candidates attempting it. However a significant minority of candidates made a careless error of multiplying the foreign currency (groat) figure to convert into $ rather than dividing it. A smaller minority of candidates seemed unaware of the distinction between monetary and non-monetary items in a ‘foreign currency context’. Therefore there were some examples of the ‘re-translation’ of PPE, which was not appropriate. Ar minority of candidates incorrectly stated that the exchange differences on re-translation should be recognised in other comprehensive income rather than profit or loss.
Delta is an entity which prepares financial statements to 30 September each year. The financial statements for the year ended 30 September 2016 are shortly to be authorised for issue. The following events are relevant to these financial statements:
On 1 September 2016, Delta sold a product to Customer X. Customer X is based in a country whose currency is the florin and Delta has a large number of customers in that country to whom Delta sell similar products. The invoiced price of the product was 500,000 florins. The terms of the sale gave the customer the right to return the product at any time in the two-month period ending on 31 October 2016. On 1 September 2016, Delta estimated that there was a 22% chance the product would be returned during the two-month period. The product had not been returned to Delta by 15 October 2016 (the date the financial statements for the year ended 30 September 2016 were authorised for issue). On 15 October 2016, the directors estimated that there was an 8% chance the product would be returned before 31 October 2016. The directors of Delta considered that the most reliable method of measuring the price for this transaction was to estimate any variable consideration using a probability (expected value) approach. Exchange rates (florins to $1) are as follows:
– 1 September 2016 – 2 florins to $1.
– 30 September 2016 – 2·1 florins to $1.
– 15 October 2016 – 2·15 florins to $1.
– 31 October 2016 – 2·2 florins to $1.
Explain and show how this event would be reported in the financial statements of Delta for the year ended 30 September 2016.
When the customer has a right to return products, the transaction price contains a variable element. When this element can be reliably measured, it is taken account of in measuring the revenue.
The information regarding the change in likelihood of return after 30 September 2016 is an adjusting event as it gives more information about conditions existing at the reporting date.
Therefore the revenue in florins for the year ended 30 September 2016 will be 460,000 (500,000 x 92%).
This will be recognised in the financial statements of Delta using the rate of exchange in force at the date of the transaction (2 florins to $1). Therefore revenue of $230,000 will be recognised.
Delta will initially recognise a trade receivable of 500,000 florins. This will be initially recognised in $ as $250,000. At the year end, the trade receivable will be re-translated using the closing rate of 2.·1 florins to $1 because it is a monetary item. The closing trade receivable will be $238,095 (500,000/2·1).
The loss on re-translation of the trade receivable of $11,905 ($250,000 – $238,095) will be recognised in profit or loss.
The difference (in florins) of 40,000 between the revenue recognised (460,000) and the trade receivable (500,000) will be recognised as a refund liability. This liability will initially be included in the financial statements at $20,000 (40,000/2).
The refund liability is monetary so it will be re-translated to $19,048 (40,000/2·1).
The gain on re-translation of $952 ($20,000 – $19,048) will be recognised in profit or loss.
ACCA Examiners Feedback on answers
In part (b) most candidates were able to correctly quote relevant sections from IFRS 15 – Revenue regarding the recognition of revenue. However a significant number of candidates were unable to correctly compute the refund liability that should have been provided for. Common errors here included applying IAS 37 - Provisions, Contingent Assets and Contingent Liabilities rather than IFRS 15. This often led to the incorrect conclusion that the refund liability was contingent and should be disclosed, rather than recognised. Even where the need to compute a refund liability was recognised, many candidates incorrectly used 22% rather than 8%, on the (incorrect) basis that the estimate made on 15th October 2016 was a non-adjusting event after the reporting date. It was pleasing to note, though, that most candidates were able to gain some marks in this part by correctly applying the requirements of IAS 21 – Foreign Currency Transactions – to this scenario.
Delta is an entity which prepares financial statements to 31 March each year. The functional currency of Delta is the dollar ($). The following events have occurred which are relevant to the year ended 31 March 2018:On 1 February 2018, Delta purchased some inventory from a supplier whose functional currency was the dinar. The total purchase price was 3·6 million dinars. The terms of the purchase were that Delta would pay for the goods in two instalments. The first instalment payment of 1,260,000 dinars was due on 15 March 2018 and the second payment of 2,340,000 dinars on 30 April 2018. Both payments were made on the due dates. Delta did not undertake any activities to hedge its currency exposure arising under this transaction. Delta sold 60% of this inventory prior to 31 March 2018 for a total sales price of $480,000. All sales proceeds were receivable in $. After 31 March 2018, Delta sold the remaining inventory for sales proceeds which were in excess of their cost.
Relevant exchange rates are as follows:
– 1 February 2018 – 6·0 dinars to $1.
– 15 March 2018 – 6·3 dinars to $1.
– 31 March 2018 – 6·4 dinars to $1.
Under the principles of IAS 21 – The Effects of Changes in Foreign Exchange Rates – the purchase of inventory on 1 February 2018 would be recorded using the spot rate of exchange on that date. Therefore Delta would recognise a purchase and an associated payable of $600,000 (3·6 million dinars/6).
Delta would recognise revenue of $480,000 in the statement of profit or loss because goods to the value of $480,000 were sold prior to 31 March 2018.
Delta would recognise $360,000 ($600,000 x 60%) in cost of sales because the revenue of $480,000 is recognised.
The closing inventory of goods purchased from the foreign supplier would be $240,000 ($600,000 – $360,000) and would be recognised as a current asset. This would not be re-translated since inventory is a non-monetary asset.
The payment of 1,260,000 dinars on 15 March 2018 would be recorded using the spot rate of exchange on that date, therefore the payment would be recorded at $200,000 (1,260,000 dinars/$6·3).
The closing payable of 2,340,000 dinars (3,600,000 dinars – 1,260,000 dinars) is a monetary item, therefore would be translated at the rate of exchange in force at the year end (6·4 dinars to $1). Therefore the closing payable (recorded in current liabilities) would be $365,625 (2,340,000 dinars/$6·4).
The difference between the initially recognised payable ($600,000) and the subsequently recognised payment ($200,000) is $400,000. Since the closing payable is $365,625 (see above), Delta has made an exchange gain of $34,375 ($400,000 – $365,625). This gain is recognised in the statement of profit or loss, either under other income category or as a reduction in cost of sales.
ACCA Examiners Feedback on answers
The question was satisfactorily answered by the majority of candidates attempting it.
On 1 April 20X4 Gamma purchased an overseas property on credit for 4.4 million crowns. Of the initial carrying amount, 60% of the value of the property was attributed to the buildings element. On 1 April 20X4 Gamma estimated that the useful life of the buildings element was 40 years. On 30 June 20X4 Gamma paid 4·4 million crowns to the seller. Gamma uses the revaluation model to measure property. On 31 March 20X5 Gamma estimated that the fair value of the property was 4·8 million crowns.
The only entries made by Gamma in its draft financial statements regarding the purchase of the property were to record the cash paid on 30 June 20X4 as an operating expense in the statement of profit or loss. Relevant exchange rates are:
1 april 20X4
2 crowns to $1
30 June 20X4
1.76 crowns to $1
31 March 20X5
1.6 crowns to $1
Under the principles of IAS® 21 – The Effects of Changes in Foreign Exchange Rates – the property will initially be recorded using the rate of exchange in force at the date of purchase.
Therefore the property will be recorded at an initial carrying amount of $2·2 million (4·4 million crowns/2). A liability of $2·2 million will also be recorded.
When the liability is settled on 30 June 20X4, a payment of $2·5 million will be required (4·4 million crowns/1·76). This will create an exchange loss of $300,000 which will be debited to profit or loss.
Under the principles of IAS 16 – Property, Plant Equipment – the buildings element of the property will be deprecated over its useful life of 40 years. This means that depreciation of $33,000 ($2·2 million x 60% x 1/40) will be required for the year ended 31 March 20X5.
Since the property is measured using the revaluation model, the closing carrying amount will be its fair value in crowns translated into $ using the rate of exchange in force at the year end. In this case, the closing $ carrying amount will be $3 million (4·8 million crowns/1·60).
The valuation gain of $833,000 ($3 million – ($2·2 million – $33,000)) will be recognised in other comprehensive income under the principles of IAS 16.
The property will be presented as a non-current asset in the statement of financial position at its closing carrying amount of $3 million.
The majority of candidates were aware that an exchange difference would arise on the settlement of a payable for the purchase of the property and that this difference would be recognised in the statement of profit or loss. Calculations of this difference were, on the whole, of a satisfactory standard.
The majority of candidates also correctly stated that the property was a non-monetary asset whose carrying amount is not routinely affected by fluctuations in the exchange rate. They were also able to correctly conclude that surpluses on the year-end revaluation of the property would be recognised in other comprehensive income. Relatively few candidates appreciated that, when a non-current asset is revalued, and that asset is denominated in a foreign currency, the exchange rate used to translate that property in the financial statements is the rate in force at the date of the revaluation, rather than at the date the property was originally recognised. A reasonably significant minority of candidates performed all the depreciation and revaluation computations for the property crowns (the currency in which the purchase price of the property was payable) rather than $ (the functional currency of Gamma, the reporting entity).