Critical Appreciation of International Financial Reporting

Purpose of IASB's Conceptual Framework Document

Knowledge:

1. Critical appreciation of the current key issues in international financial reporting

2. Critical understanding of the conceptual framework as a paradigm for accounting

3. Critical understanding of the uses and limits of financial information

4. Critical understanding of financial reports for strategic decision making

5. An ability to demonstrate cognitive skills of critical thinking and analysis Instructions:

· This assessment is in two (2) parts.

· Part A is compulsory. Answer all questions in Part A.

· Answer any other two (2) questions in Part B

Please note that this is an individual assignment and the policy of the University on “Policy on Cheating, Collusion and Plagiarism” applies.

Question 1: IASB’s Conceptual Framework

(a) The International Accounting Standards Board (IASB) devises and publishes International Financial Reporting Standards (IFRS Standards) while it revised versions of International Accounting Standards (IAS Standards) originally published by the International Accounting Standards Committee (IASC). The IASB has also published the Conceptual Framework for Financial Reporting reflecting some of the attributes that make financial information useful to the various users of financial statements.

You are required to:

(a) explain the main purposes of the IASB’s Conceptual Framework document?

(b) discuss the assumption which (according to the IASB’s Conceptual Framework) underlies the preparation of financial statements.

(c) explain the main concepts of capital maintenance, making references to the IASB’s Conceptual Framework.

(d) identify and explain the meanings of five qualitative characteristics and attributes of financial statements including how they respectively make financial information useful as entrenched in the IASB’s Conceptual Framework.

(e) critically discuss how concept of materiality is fundamental to financial reporting.

Question 2: IFRS1 - First-time Adoption of International Financial Reporting Standard Prisca Plc adopts international standards for the first time in its financial statements for the year to 31 December 2019. These financial statements provide comparative figures for the previous five years. According to the IFRS 1 - First-time Adoption of International Financial Reporting Standard, you are required to:

(a) explain the terms "first IFRS reporting period" and "date of transition" as defined by IFRS1.

(b) what are the requirements of IFRS1 which must be satisfied by Prisca Plc when preparing these financial statements?

1. Expected selling expenses for each vehicle are 6% of the expected selling price.

2. A quarter of the conversion costs relate to materials, but 20% of the cost of materials used in the conversions are considered to be abnormal wastage, due to a poor quality type of material that has been used.

Assumption Underlying Financial Statements Preparation

To ensure the correct valuation of the company’s inventories is reflected in the final accounts, the company follows the guidance provided in IAS 2 Inventories.

Required:

Compute, in accordance with IAS 2 Inventories, the value at which the inventory of vehicles as at 30 June 2020 should be shown in the final accounts of Portville Plc; and also determine the total cost of abnormal wastage of materials that has been incurred on the conversion of the four vehicles.

Question 4: IFRS16 - Lease

(a) In accordance with the provisions of IFRS 16, explain how leases should be accounted for in the financial statements of the lessee. (10 marks)

(b) Arsebee Limited leases an asset on a non-cancellable lease contract with a primary termof five years from 1 January 2020. The rental is £1,950 per quarter payable in advance.

Arsebee Limited has the right to continue to lease the asset after the end of the primary period for as long as they wish at a nominal rent. In addition, Arsebee Limited is required to pay all maintenance and insurance costs as they arise. The leased asset could have been purchased for cash at the start of the lease for £30 000. The leased asset has a useful life of eight years.

Required:

i. Calculate the interest rate implicit in this lease arrangement.

ii. Assuming the asset has a zero residual value and that it is leased for a further two years after the primary period, show the accounting entries over the life of the lease as required in the books of Arsebee Limited.

Question 5: IFRS9 – Financial Instruments

(a) State whether the following financial assets would be measured at amortised cost, fair value through comprehensive income, or fair value through profit or loss, in accordance with IFRS 9:

i. Surples Ltd holds investments to collect their contractual cash flows of principal and interest, but would sell an investment in isolated circumstances.

ii. Checkcoy Plc’s business model is to purchase portfolios of loans. If payment on the loan is not made on a timely basis, the entity contacts the debtor by phone, email or post to extract the cash flows.

iii. Reinbow Ltd holds bonds in various currencies with stated maturity dates and intends to hold the bonds to maturity. Payments of principal and interest to the entity are linked to the inflation index of the currency in which the loan is issued.

iv. Thamesway Ltd holds a bond issued by InvestCorp Ltd with an interest rate of8%. The bond is redeemable at par or may be converted into InvestCorp Ltd shares. An equivalent bond without the conversion option would pay an interest rate of 10%.

(b) Identify the three main types of risk associated with financial instruments according to IFRS7 and outline the main disclosures required by IFRS 7 in relation to each of these risks.

(c) CitiFin Plc prepares financial statements to 31 December each year. On 1 January 2020 the company bought £700,000 of 8% loan stock for £680,970. Interest is receivable on 31 December each year and the loan stock will be redeemed at a18% premium on 31 December 2024. The effective rate of interest is 10% per annum and CitiFin Plc intends to hold the loan stock until it is redeemed. Required: Calculate the amount of interest income that should be recognised in the financial statements of CitiFin Plc for each of the years to 31 December, 2020, 2021, 2022, 2023 and 2024. Also calculate the amount at which the loan stock should be shown in the statement of financial position at each of those dates. (12 marks) Question 6: IAS7 - Statement of Cash Flows The Statement of Comprehensive Income of Cross Dale Limited for the year to 31st December 2019 is shown below. The company's statement of financial position as at that date (with comparative figures for 2018) is also shown.