FAR560 SUGGESTED SOLUTION DEC 2015

QUESTION 1

A.

i. Exploration expenditures are those costs incurred in the exploration and evaluation
phase and include the geological and geophysical surveys, licences acquisition and
costs of drilling and equipping exploratory wells.

ii. The methods are:

 The expense method

• The expense and subsequent reinstatement method
• The successful effort method
• The full cost method and
• The area of interest method

iii. Treatment of exploration expenses

Expense method
 All costs of exploration and evaluations are charged as expenses in the period
incurred.
 Method is argued to be more prudent because of the low probability of discovering
commercially recoverable deposits.
 Argument against this method:
o Overly prudent; does not result in proper matching of costs with revenues.
o Although probability of success is low, unrealistic to assume that all
exploration and evaluations would be unsuccessful.

Expense and subsequent reinstatement

 All costs of exploration and evaluations are initially charged as expenses in the period
incurred. Subsequently, when the prospect is successful and commercial production
is imminent, all costs of exploration and evaluations relating to that prospect are
reinstated.
 Method is argued to be justified because of the low probability of discovering
commercially recoverable deposits.
 Argument against this method:
o Overly prudent; does not result in proper matching of costs with revenues.
o Although probability of success is low, unrealistic to assume that all
exploration and evaluations would be unsuccessful.
o Method is open to abuse because of the different methods of reinstating the
costs previously written off.

Successful effort method

 Costs of exploration and evaluations are initially capitalised.
 When the prospect is abandoned, the capitalised costs are written off.
 Only costs that relate to the discovery of commercially recoverable deposits are
carried forward as part of the depletion base for future amortisation.
 Argument for: amount carried forward in the balance sheet is consistent with the
definition of asset – it possesses probable future benefits for the entity.

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  Argument against: does not result in proper matching of costs with revenues.
Full cost method
 Capitalise all exploration and evaluation costs regardless of whether the prospects
prove to be successful or unsuccessful.
 Views the entire exploratory activities as one comprehensive cost centre.
 Argument for:
o as a going concern in the extractive industry, the entity need to continually
search for commercially viable mines/deposits. Therefore, costs of
unsuccessful explorations are part of the costs of successful explorations.
o exploration and evaluation costs are all directed at increasing the entity’s pool
of commercially recoverable deposits
 The maximum amount to be capitalised is subject to a ceiling test – the aggregate of
the costs carried forward should not exceed the net recoverable amount of the
deposits.
 Argument against:
o method is not feasible for new entities without proven pool of reserves.
o method is in contrast with definition of assets because it capitalises the costs
of abandoned prospects.

Area of interest method

 Represents a compromise between successful effort method and full cost method.
 All costs of exploration and evaluations are capitalised for the area of interest which
proves to contain commercial deposits.
 If the search is unsuccessful, evaluations provide negative results or prospect is
abandoned, the capitalised costs are written off.
 Method lacks precision in defining what constitutes an area of interest.
 Application of this method is likely to be subjective and the entity may eventually
revert back to the successful method or the full cost method.

B. Statement of Profit or Loss for the year ended 30 June 2015

RM
Fair value less point-of-sale costs of consumable vegetable produced 8,000,000
Fair value less point-of-sale costs of bearer vegetable produced 6,000,000
Gain from change in fair value less point-of-sale costs of consumable 500,000
vegetables (2.5m -2m)
Gain from change in fair value less point-of-sale costs of bearer
vegetables (4.5m – 3.0 m) 1,500,000
Total farm income/ 16,000,000

Less expenses: Materials used in production (5,000,000)

Employee benefits (wages, salaries, etc.) (6,000,000)
Depreciation (1,000,000)
Transport cost (500,000)
Other operating expenses (1,000,000)
Profit before taxation 2,500,000

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QUESTION 2

a) Impairment loss for Year ended 30 June 2014

RM
Cost 1/7/13 200,000
Less: acc dep (200,000-50,000)/5 (30,000)
CA 170,000

RA
NSP 76,000

Value-in-use
Year ended cash flow DF@14% PV (RM)
30/6/2015 50 000 0.877 43,850
30/6/2016 41 000 0.769 31,529
30/6/2017 37 000 0.675 24,975
VIU 100,354

RA is the higher of VIU and NSP ; RA = 100,354

Impairment loss =170,000 -100,354
= 69,646

b) For year ended 30 June 2015

RM
CA 1/7/14 100,354
Less: Depreciation (100,354/4) (25,089)
CA 30/6/15 75,265

RA 190,000 > CA 75,265; therefore reversal is required.

CA without impairment: RM
Cost 200,000
Acc depreciation 30,000 x 2 yrs (60,000)
CA without impairment 140,000
CA before reversal 75,265
Amount of reversal 64,735

c) PPE should be presented in the statement of financial position at cost less

accumulated depreciation and accumulated impairment. Therefore, the machines
should be presented at RM100, 354 as at 30 June 2014 and RM140,000 as at 30 June
2015.

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QUESTION 3

a) Pandan Bhd holds 48% of the ordinary shares of Cumin Bhd. Ordinarily, this would
not give Pandan Bhd control over Cumin Bhd√√. However, under MFRS 10, if an
entity holds less than 50% of the voting rights of the investee, it can still have control
over the investee if it can appoint or remove members of the investee’s key
management personnel.

Since an agreement with two other shareholders of Cumin Bhd gives Pandan Bhd the
right to appoint or remove the directors of Cumin Bhd, Pandan Bhd is deemed to
have control over Cumin Bhd. Thus, Cumin Bhd is a subsidiary of Pandan Bhd.

(10√ x ½ = 5 marks)

b) Schedule for goodwill on consolidation, group retained profit and NCI

Goodwill on consolidation
Acquisition of SeraiBhd RM’000 RM’000
Consideration transferred 1,875
NCI [25% x 2,262] 565.5
2,440.5
FVNA
OSC 2,000
General Reserve 25
Retained profit 237 (2,262)
Goodwill 178.5
Impairment (8%) – (partial) (14.28)
Remaining Goodwill 164.22

Acquisition of Cumin Bhd

Consideration transferred 1,500
NCI [52% x 1,475] 767
2,267
FVNA
OSC 1,250
Retained profit 125
ARR : building 100 1,475
Goodwill 792

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 RETAINED PROFIT and NCI

GROUP NCI
RM’000 RM’000 RM’000
Pre-acquisition net assets – Serai 565. 5
– Cumin 767
Preference shares - Serai (200-20) 180

Retained Profit
Serai
Balance c/f [350 + 175] 525
Pre-acquisition profit (237)
Post adjusted profit 288 (75%) 216 (25%) 72

Cumin
Balance c/f [150 + 125] 275
Pre-acquisition profit (125)
150
Under depn- property [(100 / 40)2 yrs] (5)
URP inventory (60% x 12.5 x 20%) (1.5)
Post-acquistion adjusted profit 143.5 (48%) 68.88 (52%) 74.62

Pandan
Retained profit c/f [532 + 217] 749
Unrealised profit (land) (35)
Goodwill impairment (14.28)

Post-acquisition general reserves: 36.25

Serai [170 - 25 ] x 25%
CsoFP 984.6 1,695.37

c) CONSOLIDATED STATEMENT OF FINANCIAL POSITION OF PANDAN BHD

AS AT 30 June 2015
RM’000
Non current assets
PPE [(3,500 + 937 +1,250)+ 100 – 5 - 35] 5,747
Intangibles (875 + 300) 1,175
Goodwill [164.22 + 792] 956.22

Current assets
Inventory [750 + 650 + 305] -1.5 1,703.5
Bills receivable (175 + 675 + 37) - 100 787
Trade receivables [281 + 383 + 210] – 8 - 2 864
Bank [187 + 206 + 88] 481
Cash in transit 8
11,721.72

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Equity

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Ordinary shares 5,650
Non-redeemable preference shares 750
Share premium 900
Group General Reserves [270 + [(170 - 25 )x 75% ]] 378.75
Retained Profit√ 984.6
NCI√ 1,695.37
10,358.72
Non current liabilities
Long term loan [250 – 100] 150

Current liabilities
Trade payables [(468 + 110 + 25)– 2] 601
Bills payable [269 + 46 + 90] 405
Ordinary dividend payable[182 + (100 – 75)] 207
11,721.72

QUESTION 4

a. Depreciation:
RM RM
Costs 90,000
Accumulated depreciation (30,000)
Carrying amount 60,000
Disposed (10,000)
Remaining value 50,000
Depreciation 50,000/ 4 12,500
Depn of new equipment 60,000/5 12,000
Total depn expense per annum 24,500
Depreciation for the 3rd quarter 24,500/4 6,125

b. Insurance is paid for the whole calendar year but the entire amount cannot be
recognised as an expense in the third quarter ending 31 March 2015. Since
insurance paid in advance would be deferred in the annual financial statements, the
same treatment should apply in the interim financial reports. Therefore, only payment
for the quarter should be recognised as expense in the SOPL and OCI for the quarter
ended 31 March 2015 and the balance recognised as prepaid insurance. Amount to
be shown in the statement of financial position as at 31 March 2015 would be
250,000 x (3/4) = RM187,500.

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B.

a. (i) Characteristics of operating segments

 Engages in business activities which may earn revenues and incur expenses
 The operating results are reviewed by CODM to make decisions on resources
allocation and assessing segmental performance
 For which discrete information is available (para 5 MFRS 8)

(ii) Factors to be considered to identify business segment :

i) Nature of the product or services – refers to types of products or
services such as toothpaste, washing powders or car rental services.
ii) Nature of the production processes – refers to how the products are
produced or the services provided.
iii) Type or class of customer for the products or services – for example
types of customers based on income.
iv) Methods used to distribute the products or provide the services such
as by air, rail or road or by ship.

b. Reportable or non-reportable segments

Operating Segments

RM000 RM000 RM000 RM000 RM000

Revenue: 30,500 37,200 8,400 6,300 82,400

External

Internal 5,000 1,000 6,000

Total 30,500 37,200 13,400 7,300 88,400

10% threshold 30,500 x 100 37,200 x 100 13,400 x 100 7,300 x 100
test 88,400 88,400 88,400 88,400
= 34.5% = 42.1%/ = 15.2%/ = 8%/

Category Reportable Reportable Reportable Non-

Reportable