Norman pg 21

Hotel sale

An income from sale is recognised if substantially all risks

and rewards of the asset are transferred to the buyer.

The sale of hotels to Conquest does not transfer the risks and

rewards as :-

i) Norman continues to operate the business for the

rest of the useful life, and

ii) The residue business will be transferred back to

Norman, and

iii) Norman bears most of the risks as income of

Conquest is guaranteed.

The asset is not derecognised from the book of Norman and shall

be depreciated as normal. Proceeds of $200m is shown as a non

current liability. Payment to Conquest should be analysed into

finance cost paid and principal repayment.

Rooms and vouchers

Customers paid, and in return get a room to stay, and a discount

voucher for next booking. The sale transaction contains multiple

elements. As the use of room and use of voucher are not

depending on each other, it can be said that the sale has two

distinct performance obligations.

Revenue of $300m is allocated to each performance obligation

based on their own observable prices. If the said price is not

available, then other approaches such as normal market price, or

estimated cost plus margin, or residual approach is used.

Assuming the $20m is the selling value of the vouchers, Norman

will only recogise 1/5 = $4m as this is a reliable estimation.

The $300m sale is then allocated to room sale at

$300m x ($300m / ($300m + $4m)) = $296.1m.

Voucher revenue is then at $300m x ($4m / ($300m + $4m)) =

$3.9m

Room sales is recognised to profit or loss after the customer's

stay. Voucher sales will be deferred to current liability, and

reclassify to profit or loss if the customer comes back within

three months. If they never return, then the voucher value will

be reclassify to profit or loss after its expiry.

Grant

Cash grant receive can be income related or asset related.

Income related grant is recognised to profit or loss if the

condition for performance is met. Asset related grant can be

accounted for using any one of the following accounting

policies :-

i) Basis adjustment : the grant is offset to the cost

of asset

ii) Deferred income : grant is recognised to liability

and is amortised over the useful

life of the asset

Although the grant is used to generate jobs, the real condition

for Norman to keep the grant is on the cost of the building. This

is an asset related grant and Norman can account for it using the

principles set out above.

If the cost of building does not meet the condition later, Norman

may consider to recognise a provision for repayment of grant.

Practice 2 21 Sirus

b) i) There are two types of retirement plan in IFRS :-

a) Defined contribution plan (DCP) : the legal and constructive

obligation of the employer is restricted to contribution made,

b) Defined benefit plan (DBP) : plan other than DCP. The

benefit of the employee is usually guaranteed.

For the two plan of Sirus, the first plan could be a DBP as

the benefit of the directors is guaranteed even after the death of

the directors. That makes the second plan looks like a DCP.

Regardless the type of plan, all employee benefit costs are

recognised to profit or loss based on accrual basis over the length

of the director service, and not after the retirement of the

directors.

As the estimation is complicated which include mortality rate,

inflation, length of services, actuarial valuation is needed in

measuring the costs.

(c) The first matter to consider is to decide the share of profit

is a staff costs to directors, or as a consideration transferred

to previous owners of Marne.

As the offer is served as an incentive to accept the purchase offer,

it seems like the sharing is a consideration transferred.

Conditional payment is contingent consideration, and will be

recognised regardless the likelihood of the occurrence.

Sirus should measure the the consideration at the present value

of $5m + $6m which are discounted at the appropriate rate.

Any unwinding effect is recognised as finance cost.

(d) Financial liability by default is accounted for using

amortised cost at the effective interest rate of the liability.

To Sirus, the rate is 8% if the loan is repaid based on the

original repayment schedule. If the early repayment is chose,

the penalty will increase the rate to 9.1%.

However, Sirus is considering the third option which is to repay

by next year. There is no facts from bank for the moment whether

the proposal will be adopted and what the final penalty will be.

Sirus may still use 8% to account for the loan for the year

ended 30 April 2008, which gives a finance cost of $160,000.

A loan is presented as current liability if, as at year end,

the entity does not have unconditional rights to defer the liability

to more than 12 months. In this case, Sirus still have such rights.

The loan will then be classified as a non current liability.

Practice 3 pg 22 Johan

Inventory is to be carried at the lower of cost and net realisable

value (NRV). As the handset's NRV of $150 - $1 = $149 is lower

than its cost, any unsold inventory is to be measured at $149,

leaving a loss of $51 per handset in profit or loss.

Revenue from sale of handset is recognised immediately after the

handset is transferred, but the revenue from call credit is to be

recognised over the six months period as the customer consumes

the credit. This will be on average of $18. The unused credit of

$3 is recognised to profit or loss only after the expiry of the

credit.

The dealer seems to be an agent to Johan, as :-

i) Dealer has no inventory risks (goods are returnable), and

ii) Fulfillment of the promise lies with Johan (mobile services),

and

iii) The return to dealer is in the form of commission

Johan cannot recognise revenue from sale of handset at the

point the goods were transferred to the agent. Revenue can only

be recognised when the hanset is transferred to end customer.

Commission payable becomes cost of sales. Revenue from

services is the recognise over the 12 month period.

Practice 4 pg 23 Aron

An option can be embedded into a host bond contract. Such

option is to be separated and accounted for accordingly if its

economic characteristic is different from the host.

To this case, the option is equity in nature as the conversion

is for fixed units of shares. Such option must be separated by

the following calculation :-

Year Cash flow Factor Present value

2007 to 2009 $6m 2.5313 $15.19m

2009 $100m 0.7722 $77.22m

Liability $92.41m

Equity (bal fig) $7.59m$100m

The equity option is not remeasured subsequently. The issue

cost is capitalised to liability and equity on pro rata basis.

The liability will then be measured at amortised cost model

at 9.38%, where the carrying amount will be at $100m at the

end of year 3.

Upon conversion, the shares issued are recorded as follows :-

Dr Liability $100m

Dr Equity option $7.59m

Cr Share capital

25m x $1 $25m

Cr Share premium $82.59m

(bal fig)

Practice 5 pg 23 Carpart

Revenue from sale of an asset is recognised when substantially

all risks and rewards of the asset are transferred to the customer.

To Carpart, risks and rewards are transferred, as :-

i) Customer enjoys the asset for 4 years out of 5 years

useful life, and

ii) fair value changes risks and responsibilities to keep

the car in good condition are with the customer

Carpart can derecognise the car and recognise the $20,000 as

revenue.

As to the second case, sunstantially all risks and rewards

were not transferred to customer as the repurchase option

is exercisable 2 years, being a non significant part of the total

useful life of 5 years.

The repurchase option is likely to be exercised. Carpart should

account for the transaction as an operating lease, and recognise

the 30% of the vehicle price as lease income over the two year

period.