Financial Performance Analysis and IFRS Accounting Treatment - Game Co, Silverstone and Primoris

Financial Performance Analysis of Game Co

On successful completion of this assessment, you will be able to:

1. Prepare and present financial statements which conform with international accounting standards

2. Account for a variety of complex accounting transactions in accordance with international accounting standards, and evaluate these standards.
   
   
3. Evaluate accounting policy choice from the theoretical perspectives of economics and politics
   
   
4. Analyse and interpret financial statements using contextual information. Appraise the utility and limitation of financial statement analysis.

1. To develop students’ knowledge and skills in applying and evaluating accounting standards and the theoretical framework in: the preparation of financial statements for groups of entities; the accounting of financial instruments; and the use of and problems with various income measurement and assets valuation bases.

2. To provide students with a further understanding of the economics and politics behind accounting standards setting and the accounting policy choice made by companies; and

3. To advance students’ knowledge and skills in how to analyse and interpret financial statements and the limitations thereof

Game Co is a company selling digital goods both low cost and expensive computing tech products. The company has been suffering from the high increased cost of its stores in high street and it has not been able to pass on its customers. As the customer behaviour changed towards online shopping Game Co has implemented a cost cutting strategy in the prior year, and in the current year asked shareholders for funds to help reduce its debt burden.

The following financial information for the current year is available:

Statement of profit and loss for the year ended 30 June 2021

Note: An operating division was sold in 2021 at a gain of £2m. This gain was included in operating profits. No such transaction occurred in 2020.

Write a report using relevant financial ratios to analyse the financial performance of Game Co. Comment on the comparative performance for the two years and whether the management strategy is working.

Silverstone a subsidiary of Game Co. had share capital of £7.5 million in 50p equity shares at 1 July 2020. On 1 October 2020 it made a bonus issue of a 1 for 3. The financial statements at 30 June 2021 showed profit for the year of £12 million.

Calculate the basic EPS for Silverstone for the year ended 30 June 2021.

Primoris is a company which operates in energy/renewables market with a year end 30 June 2021. You have recently been appointed as a financial accountant, and the following issues are outstanding in the financial statements.

Primoris has a subsidiary Kaiser. During the year, Kaiser suffered a fire, which damaged many of its assets. Prior to the fire, Kaiser’s assets were valued as follows:

All current assets are stated at recoverable amounts. The fire destroyed uninsured machinery with a carrying value of £1 million. The recoverable amount of Kaiser is now estimated at £12 million, and no accounting entries have been made in relation to this.

Primoris has a number of subsidiaries. During the year, sales were made to subsidiary companies for a total sales value of £10 million. All these sales were made at a discount of 10% on the usual sales price. No disclosures have been made in relation to these transactions, as the previous financial controller argued that they were eliminated on consolidation and therefore did not need to be included in either the group financial statements, or the individual financial statements of Primoris Plc.

Calculation of Basic EPS for Silverstone

Primoris purchased a property for £5 million on 30 June 2011. Annual depreciation of £120,000 was charged for five years from 2012 to 2016 inclusive. On 30 June 2016, the property was revalued to £4.8 million and the appropriate annual depreciation was reassessed at £130,000. This was charged from 2017 to 2021 inclusive. The property has been revalued again on 30 June 2021 to £3.4 million. Primoris does not make an annual reserve transfer for excess depreciation

Primoris took out a loan from an overseas bank on 1 January 2021 to finance the acquisition of a solar plant. The loan value was $10 million, and interest is payable annually of 5%.

Exchange rates are as follows:

Average rate for year ended 30 June 2021 $1.55:£1

Explain the required IFRS accounting treatment of the above issues.

You work in the finance department of Quanta which provides infrastructure services for electric power, currently preparing the financial statements for the year ended 31 March 2021. The following issues are currently outstanding:

Quanta received a government grant in relation to an energy efficient asset purchased on 1 January 2021. The asset cost £2 million, and the grant received in relation to this totalled £500,000. The asset has a useful life of ten years with no residual value. The financial director of Quanta was unsure of how to treat this grant and has debited the amount to cash, and credited a sundry income account.

On 1 January 2021, Quanta sold a package of pipeline infrastructure and maintenance services to a customer for £18 million. Control of the pipeline infrastructure (and legal title) transferred to the customer on 1 January 2021. The cost of providing the maintenance services over the three-year agreed period is estimated at £3 million, and the normal mark-up on servicing is 20%. Quanta have accounted for the £18 million cash received as revenue.

Quanta has unrelieved tax losses carried forward at 30 June 2021 of £5 million. Quanta is currently showing a draft profit before tax in its statement of profit or loss of £6.5 million, and there are no significant one-off credits. Quanta forecast a profit for the next three years. The current tax rate is 20%.

Quanta purchased an equity share investment in Mears on 1 June 2021. The investment comprised 20,000 shares in Mears, representing a 2% shareholding, and the share price at acquisition was £15 each. Transaction costs of £10,000 were incurred on the purchase.

At 30 June 2021 the shares are trading at £20 each. Quanta intend to sell the shares by 31 July 2021.

State the required IFRS accounting treatment of the above issues.

The revised IFRS Conceptual framework (2018) introduces guidance on ‘measurement’ and it states that the decision which measurement method to be used should be based on which method would provide useful information to investors.

Explain the measurement basis according the Conceptual Framework 2018.

Relevance and faithful representation remain as the two fundamental qualitative characteristics of the Conceptual Framework.

Explain what is meant by ‘faithful representation’ according to the Conceptual Framework 2018.

In July 2020, Morgan Co purchased an investment property for £5 million, financed via a new loan. The loan contains various covenants, covering profitability targets, interest cover and asset values. The financial director of Morgan is anxious to meet these covenants; as otherwise, the bank could recall the loan. The investment property purchased has fallen in value by £1 million as at 30 September 2020. The financial director has asked the financial controller to value this property at the original cost of £5 million, less depreciation charged monthly over 25 years. The financial director does not want to incorporate the fair value of this property into the financial statements, as it would cause Morgan to miss the covenant targets set by the bank for the thrid quarter of 2020.

Advise the financial controller of the correct accounting treatment of this property and any ethical issues arising from the scenario.