million at 30 April 20X8, and a further $6 million at 30 April 20X9.

These amounts will be paid in

cash shortly after the respective year ends. (5 marks)
(d) Sirus raised a loan with a bank of $2 million on 1 May 20X7. The market interest rate of 8% per
annum is to be paid annually in arrears and the principal is to be repaid in 10 years time. The terms
of the loan allow Sirus to redeem the loan after seven years by paying the interest to be charged
over the seven year period, plus a penalty of $200,000 and the principal of $2 million. The effective
interest rate of the repayment option is 9.1%. The directors of Sirus are currently restructuring the
funding of the company and are in initial discussions with the bank about the possibility of
repaying the loan within the next financial year. Sirus is uncertain about the accounting treatment
for the current loan agreement and whether the loan can be shown as a current liability because of
the discussions with the bank. (5 marks)
Required
Discuss the principles and nature of the accounting treatment of the above elements under
International Financial Reporting Standards in the financial statements for the year ended 30 April
20X8. (Total = 20 marks)

16 DT Group 36 mins
DT, a public limited company, has decided to adopt the provisions of IFRSs for the first time in its financial
statements for the year ending 30 November 20X1. The amounts of deferred tax provided as set out in the
notes of the group financial statements for the year ending 30 November 20X0 were as follows:
$m
Tax depreciation in excess of accounting depreciation 38
Other temporary differences 11
Liabilities for health care benefits (12)
Losses available for offset against future taxable profits (34)
3
The following notes are relevant to the calculation of the deferred tax liability as at 30 November 20X1:
(a) DT acquired a 100% holding in a foreign company on 30 November 20X1. The subsidiary does not
plan to pay any dividends for the financial year to 30 November 20X1 or in the foreseeable future.
The carrying amount in DT's consolidated financial statements of its investment in the subsidiary at
30 November 20X1 is made up as follows:
$m
Carrying value of net assets acquired excluding deferred tax 76
Goodwill (before deferred tax and impairment losses) 14
Carrying amount/cost of investment 90
The tax base of the net assets of the subsidiary at acquisition was $60m. No deduction is available
in the subsidiary's tax jurisdiction for the cost of the goodwill.
Immediately after acquisition on 30 November 20X1, DT had supplied the subsidiary with
inventories amounting to $30m at a profit of 20% on selling price. The inventories had not been
sold by the year end and the tax rate applied to the subsidiary's profit is 25%. There was no
significant difference between the fair values and carrying values on the acquisition of the
subsidiary.
(b) The carrying amount of the property, plant and equipment (excluding that of the subsidiary) is
$2,600m and their tax base is $1,920m. Tax arising on the revaluation of properties of $140m, if
disposed of at their revalued amounts, is the same at 30 November 20X1 as at the beginning of the
year. The revaluation of the properties is included in the carrying amount above.
Other taxable temporary differences (excluding the subsidiary) amount to $90m as at 30 November
20X1.
(c) The liability for health care benefits in the statement of financial position had risen to $100m as at
30 November 20X1 and the tax base is zero. Health care benefits are deductible for tax purposes

Exam question bank 491

 when payments are made to retirees. No payments were made during the year to 30 November
20X1.
(d) Under the tax law of the country, tax losses can be carried forward for three years only. The taxable
profits for the years ending 30 November were anticipated to be as follows:
20X1 20X2 20X3
$m $m $m
110 100 130
The auditors are unsure about the availability of taxable profits in 20X3 as the amount is based
upon the projected acquisition of a profitable company. It is anticipated that there will be no future
reversals of existing taxable temporary differences until after 30 November 20X3.
(e) Income tax of $165m on a property disposed of in 20X0 becomes payable on 30 November 20X4
under the deferral relief provisions of the tax laws of the country. There had been no sales or
revaluations of property during the year to 30 November 20X1.
(f) Income tax is assumed to be 30% for the foreseeable future in DT's jurisdiction and the company
wishes to discount any deferred tax liabilities at a rate of 4% if allowed by IAS 12.
(g) There are no other temporary differences other than those set out above. The directors of DT have
calculated the opening balance of deferred tax using IAS 12 to be $280m.
Required
(a) Calculate the liability for deferred tax required by the DT Group at 30 November 20X1 and the
deferred tax expense in profit or loss for the year ending 30 November 20X1 using IAS 12.
(15 marks)
(b) Prepare a brief report for the Directors commenting on the effect that the application of IAS 12 will
have on the financial statements of the DT Group. (5 marks)
(Total = 20 marks)

17 Courtney 18 Mins
The following transactions relate to Courtney for the year ended 31 December 20X7.
(a) Courtney purchased 6,000 kg of materials on December 20X7 to use in their production process.
The supplier is located in Erehwon where the currency is the Won.
The goods cost 300,000 Wons and have not been paid for at the year end.
The relevant exchange rates are:
1 December US$1 = 20 Wons
31 December US$1 = 16 Wons
Show how this transaction will be included in the financial statements at 31 December 20X7.
(b) Courtney's finance manager does not understand the difference between functional and
presentation currencies. Courtney's local currency is the US$. They are a wholly owned
autonomous subsidiary of a large corporation based in Europe who reports group results in Euros.
Define functional and presentation currencies in relation to Courtney and in its parent.
(10 marks)

18 Farmer Gyles
Gyles has just bought a farm in Europe and would like to know various things about IAS 41 Agriculture.
(a) Distinguish a biological asset from agricultural produce.
(b) State four ways in which biological assets can be transformed.
(c) State the general rule for measuring biological assets.
(d) Briefly explain the issues relating to recognition of agricultural produce.

492 Exam question bank

16 DT Group
(a) Calculation of deferred tax liability
Carrying Tax Temporary
amount base differences
$m $m $m
Goodwill (note 1) 14 – –
Subsidiary (note 1) 76 60 16
Inventories (note 2) 24 30 (6)
Property, plant and equipment (note 3) 2,600 1,920 680
Other temporary differences 90
Liability for health care benefits (100) 0 (100)
Unrelieved tax losses (note 4) (100)
Property sold – tax due 30.11.20X4 (165/30%) 550
Temporary differences 1,130
Deferred tax liability 1,320 at 30% 396
(680 + 90 + 550)
Deferred tax liability 16 at 25% 4
Deferred tax asset (200) at 30% (60)
Deferred tax asset (6) at 25% (1.5)
1,130 338.5

Deferred tax liability b/d (given) 280

Deferred tax attributable to subsidiary to goodwill (76 – 60) 25% 4
Deferred tax expense for the year charged to P/L (balance) 54.5
Deferred tax liability c/d (from above) 338.5

Notes
1 As no deduction is available for the cost of goodwill in the subsidiary's tax jurisdiction, then
the tax base of goodwill is zero. Paragraph 15(a) of IAS 12, states that DT Group should not
recognise a deferred tax liability of the temporary difference associated in B's jurisdiction
with the goodwill. Goodwill will be increased by the amount of the deferred tax liability of
the subsidiary ie $4 million.
2 Unrealised group profit eliminated on consolidation are provided for at the receiving
company's rate of tax (ie at 25%).
3 The tax that would arise if the properties were disposed of at their revalued amounts which
was provided at the beginning of the year will be included in the temporary difference
arising on the property, plant and equipment at 30 November 20X1.
4 DT Group has unrelieved tax losses of $300m. This will be available for offset against
current year's profits ($110m) and against profits for the year ending 30 November 20X2
($100m). Because of the uncertainty about the availability of taxable profits in 20X3, no
deferred tax asset can be recognised for any losses which may be offset against this
amount. Therefore, a deferred tax asset may be recognised for the losses to be offset
against taxable profits in 20X2. That is $100m 30% ie $30m.

Exam answer bank 533

 (b) Report
To: The Directors, DT Group
From: Accountant
Date: XX.XX.XX
Effect of application of IAS 12 on financial statements
The application of IAS 12will have the following effect on the financial statements of the DT group:
The deferred tax liability of DT Group will rise in total by $335.5 million ($338.5m – $3m), thus
reducing net assets, distributable profits, and post-tax earnings.
The profit for the year will be reduced by $54.5 million which would probably be substantially more
under IAS 12 than the old method of accounting for deferred tax.
A prior period adjustment will occur of $280m – $3m as IAS are being applied for the first time
(IFRS 1) ie $277m.
The borrowing position of the company may be affected and the directors may decide to cut
dividend payments.
However, the amount of any unprovided deferred tax may have been disclosed under the previous
GAAP standard used.
IAS 12 brings this liability into the statement of financial position but if the bulk of the liability had
already been disclosed the impact on the share price should be minimal.
I hope that this report is helpful to you.
Signed, Accountant

17 Courtney
(a) Courtney must recognise the purchase of goods at the exchange rate in place at the date of the
transaction.
Therefore:
300,000 Wons/20 = $15,000
DR Purchases $15,000
CR Trade payables $15,000
At the year end, the supplier has not been paid, so the liability is still outstanding. It must be
translated at the closing rate at the year end and any exchange gains or losses recognised in the
statement of profit or loss.
The liability at 31 December 20X7 is:
3000,000 Wons/16 = $18,750
It has increased and Courtney must recognise an exchange loss of $3,750 (18,750 – 15,000).
DR Statement of profit or loss $3,750
CR Trade payables $3,750
(b) Functional currency is the currency of the primary economic environment in which the entity
operates. Determining an entity's functional currency involves looking at the currency that
influences sales prices and costs. Additionally, if an entity raises finance in its home currency, that
is likely to be its functional currency.
In Courtney's case, it operates in US$, which is the functional currency.
The presentation currency is the currency in which the financial statements are presented.
Courtney may well prepare financial statements in their functional currency (US$), but the parent
company reports in Euros, so Courtney's results will have to be translated into Euros so that they
can be consolidated. The group presentation currency is the Euro.

534 Exam answer bank