Question 1:

a) Transfer of the asset is considered as a sale in accordance with IFRS 15 because Biaggi
will have no rights to repurchase the warehouse and Smith Ltd is responsible for
maintaining and insuring the warehouse. A gain/loss with regards to the rights is
recognized. the right of use asset is depreciated while lease liability is amortized.
The seller-lessee (Biaggi) will measure the right of use asset arising as the proportion of
the previous carrying amount of the assert that related to the right of use retained.

Calculations:
Fair value = 2M, Rental = 250k
PV future lease payment = 250 x 6.145 = 1,536,250

Right of use assets = CA 1.8m x 1,536,250/2,000,000 = 1,382,625

1,525,250 - 1,382,625 = 417,375

200,000 x 1,536,250/2,000,000 = 153,625 ( gain on disposal - 200,000-153,625= 46,375)

Journal Entries:
1 July X5:
DR Right of use Assets 1,382,625
DR Cash 2,000,000
CR PPE 1,800,000
CR Lease Liab 1,536,250
CR Gain on disposal 46,375

1 July X5
DR Lease Liab
CR Int Exp
30 June X5
DR Finance Charge 153,625
DR Lease Liab
CR Cash
b) Comparing both proposals, Proposal 1 seems to require a lower payment each year.
Nonetheless, the company has to prepare for the last year where a huge sum has to be
repaid

As for proposal 2, it is more risker as company has to fulfill a bigger payment each year,
especially not viable for a cash position of just 150 million in 20X4. Therefore, proposal 1
seems to be a better plan.

c) Cost of Sales - Cost of sales as a percentage of revenue has increased significantly from
61.83% to 68.47%. This spike is of concern because the depreciation of equipment may
be at a much higher rate. Moreover, cost of procuring the clothes may be increasing
drastically. Maybe more contracts has to be made with suppliers regarding this.

Retail cost - Retail cost pertain to quality of products with store operations, employee
cost and utility cost. Given that this is a retail industry, i would expect retail cost to have
gone up with increasing revenue but the increase was not as significant compared to
revenue which is a cause of concern. This may reduce the quality of product and
experience in the long term
 Distribution cost - it has stay rather constant which means proper management of
logistics is underway, a good news for the company. The acquisition of the UK
warehouse may be beneficial and reducing the distribution cost.

Other operating expense - relatively constant, a good sign given that revenue increased
with increasing marketing cost.

In short, revenue may have increased but increasing procurement cost and
mismanagement of retail and employee expense resulted in a larger proportionate
increase in expense.

d) A forward contract is a private agreement between two parties giving the buyer
an obligation to purchase an asset. In this case, Biaggi is able to acquire a set amount of
given currency at a future date with the agreed exchange rate.

It allows Biaggi to hedge the risk of weakening sterling pounds by entering into a
forward contract. Similarly, if sterling was to increase in value, Biaggi would make a loss
from the fair value of the forward contract.

e) I would advise Biaggi to not take up the retail contract.

Calculations:
Year1 : (15-12.70)x300,000 = 690,000 - 500,000 = 190,000 (profit for year 1)
year 2: (15-12.95) x300,000 = 615,000 - 500,000 = 115,000 (profit 2nd year)

A total profit of 305,000 will be generated from this retail contract. While it may seem
to be a venture for Biaggi to test the market of another target audience, the synergy
created is not worth it given the risk of loss of branding image.

Sartore appeals to general public with standardized shirt, a different customer group
whereas Biaggi supplies premium clothes to the higher echelon of the niche market.
This may result in a loss of its brand image , a value worth more than the mere 305k
profit from this venture. This strategy doesn’t not fit the business model that Biaggi
pursues currently, which is to sell high end quality clothes

f) Biaggi Pte Ltd is in the retail industry selling clothes in physical stores. However, the
operating cost pertaining to running the stores are mostly online, which includes
employees and customers data. These information must be secured properly.

The rise of e-commerce and protection of customer data - given that ecommerce will
be of vital importance, the integrity of customer data must be protected to be analyzed
properly to increase revenue, secure the brand image of Biaggi
Logistics - Biaggi confirmed the orders from suppliers through the EDI. This means that
data breach may occur and false sales orders may be created. Supply chain
management systems have to be well protected. to ensure the stocks flow properly to
the customers

Changing consumer demands - proper data management also means able to foresee
future fashion trends ahead of demands, this will prepare Biaggi for changing consumer
taste, allowing them to open new markets with growing demand, thereby increasing
revenue./sales

I would advise Biaggi to adopt the COSO framework in its IT system, thereby improving
the process to achieve operational effectiveness and efficiency, financial reporting
reliability and compliance with applicable laws and regulations compliance. The five
layers includes control environment, risk assessment, control activities, information and
communication and monitoring.

A proper risk assessment of the systems with the suppliers should be done. Following
which, a structured top-down approach should be taken to ensure that controls are in
place for proper assess to IT systems. Employees also have to be trained to take
cybersecurity risks seriously.
Question 2

a)

b)
Growth of Division B at risk – Operating profit was assumed to grow at 2% annually,
which is unrealistic especially given that the successful Pro-pan division B future growth
is expected to be lower over the years which goes contrary to the assumption made.

Benefit from one-off event and R&D funding required for further growth – the success
of pro-pan was largely beneficial from the rescue and reorganization by Orton. This one-
off event may have its effect dwindle off over the years. Maintaining this cash cow is
important but looking out for new rising stars such as exploring the growth of division A
is important

Over issuance of shares to staff – dilution of shares may occur when the shares vest
following the employees vesting on the shares
c) At first glance, it may seem like the contract isn’t lucrative given the increased fixed
cost and lowered sales price of $18. However, one has to note that by entering into this
contract, RC is eliminating competition from the market, which may benefit RC in the
long run. A contract with Domstore may potentially open a new realm of market for RC
in the future, especially important in the context of division B shrinking in revenue.

Nonetheless there are certain risks involved such as the fact that the control systems
report has to be handled over to Domstore. The integrity of RC’s own customer data
may be at risk. Furthermore, It is unwise to pass Domstore information regarding RC’s
own operations and processes. As such, the details of the contract must be drafted
properly in such a way that RC’s own data/process/IT assets are properly safeguarded
from Domstore.

e) LL could offer a robust audit check on the IT systems to prevent RC from falling for the
self-review threat. LL should offer an objective and independent audit on the design and
operations of RC’s systems irrespective of the upcoming contract with Domstore. This is
to ensure that LL isn’t pressued into giving a better report for RC to fulfill the condition
of the contract.

To do so, LL could clarify the objective of the IT systems with RC, stating that the goal of
the engagement is to safeguard the IT system. The responsibilities of the controls lie in
the management and if certain conditions are not met, LL may not want to take up the
engagement.