Question 1

a)

b)
c)
d)

e)
f)
Transfer of the asseet 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 nad 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.

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.
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 acqusiiton 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.
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 the fair value of the forward contract.

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 doesnt not fit the business model that
Biaggi pursues currently, which is to sell high end quality clothes
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

Recommendations for Biaggi:

To adopt the COSO framework in its IT system, thereby improving the process to achive operational effectivness
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 inplaced for proper assess to IT systems. Employees
also have to be trained to take cybersecurity risks seriously.
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
 Year Amount Discount factor PV

NPV Proposal 1 1 280,000 0.909090909091 254545.4545

2 280,000 0.826446280992 231404.9587
3 280,000 0.751314800902 210368.1443
4 280,000 0.683013455365 191243.7675
5 280,000 0.620921323059 173857.9705
Principal 3,500,000 0.620921323059 2173224.631
Total 3234644.926
NPV Proposal 2
Year Amount Discount factor PV
1 876,534 0.909090909091 796849.0909
2 876,534 0.826446280992 724408.2645
3 876,534 0.751314800902 658552.9677
4 876,534 0.683013455365 598684.5161
5 876,534 0.620921323059 544258.651
Total 3322753.49

Calculations X3 X4 X5 x6
Cost of sales % of Rev 61.83% 64.60% 65.83% 68.47%
Increase in cost of sales - 27.48% 14.67% 17.06%
Increase in Retail cost - 11.60% 3.42% 6.48%
Distribution % rev 9.68% 8.71% 8.58% 8.03%
other operating exp % rev 2.93% 2.84% 3.63% 3.46%