FAR660 – JUNE 2019

SUGGESTED SOLUTION FAR 660 FINAL EXAM

JUNE 2019

QUESTION 1

a. Explain the main assumptions that underpin the regulatory capture theory. (refer Godfrey,
page 58).

Regulatory capture theory assumes,

All members of society are economically rational.√ Hence, each person will pursue his or
her self-interest to the point where the private marginal benefit from lobbying regulators
just equals the marginal cost. √ Regulators can potentally cause redistribution of wealth.
√ Therefore, people will lobby for regulation that increase their wealth, or they lobby to
ensure that regulations are ineffective in decreasing their wealth. √ The government has
no independent role to play in the regulatory process, and that interest groups battle for
control of the government’s coercive power to achieve their desired wealth distribution. √
(5√ x 1 marks = 5 marks)

b. Explain the benefits of regulation on financial accounting and reporting.

By having regulation, accounting methods, concepts and principles are standardised.

Some of the benefits of regulations are,

i. Standardisation can potentially spread expert knowledge and enhance

consistency. This will provide benefits to users of standardized products and
services in relation to develop network externalities, which means the value of a
product or services increases with the number of users. (1 point)

ii. It could reduce the litigation risk to auditors by providing justification decision.
Auditors can justify their professional decisions or actions by using standard to
show that they follow the best practices, and thus increase the value of their
professionalism. (1 point)

iii. It could lead to producing wide market cost savings. For instance, it would be
easier for users to manage information and make comparison across others. It
can be even save more costs if it requires disclosures that firms are willing to
provide voluntarily. The requirements of the regulation save the cost of
negotiating disclosures with many parties when the result does not vary much
across firms, it means the costs of conforming with a one size fits all regime are
low. (1 point)

iv. Studies show that regulation of reporting is most likely to produce optimal level of
disclosure and failure to disclose will affects the decision of investors, thus firms
will have influential incentives to disclose information in order to achieve higher
prices as they are concerned about maximising their value. This makes market
observer to presume that the firms that are not complying with the disclosure
requirements as trying to conceal bad news and hence bid down the price of the
firm. (1 point)
(any 2 points x 2.5 marks = 5 marks)
(Total: 10 marks)

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QUESTION 2

a. Discuss five (5) challenges for private entities on implementing MPERS.

• Constant change √- is a challenge for preparers, who must learn to be agile and flexible
in order to keep up. √
• Talent shortage √- Small size private entities cannot afford better quality accounting
service. √
• Additional costs √- Staff training, increased audit fees and additional valuation fees to
revalue some assets and liabilities. √ (1 point)
• Limited application guidance √- MPERS does not come with detailed application
guidance in some complex areas. Large private entities may need to refer to the
guidance in the MFRS framework for their accounting requirements. √
• Comparability of Financial Statements would be difficult to achieve √- MPERS
allow a preparer to not apply a particular requirement if it involves undue cost or effort.
For instance, biological assets need not be measured at fair value if determination of the
fair value involves undue cost or effort (excessive cost incurred in the process of
preparing accounts). What is considered as undue cost or effort is highly subjective and
very difficult to operationalize. This will make financial statements among companies not
comparable. √
• Certain areas are more difficult and costly to apply as compared to MFRS √. For
example, biological assets and Investment Properties must be measured at fair value.
However, under MFRS an entity is permitted to measure bearer plants and investment
properties using the cost model. √
(Any 5 points plus explanations x 2 marks = 10 marks)

b. Discuss how stakeholders’ expectations are considered and managed under each
branch of the stakeholder theory.

i. Under the moral (ethical) theory√, the stakeholder theory asserts that regardless
of whether stakeholder management leads to improved financial management,
managers should manage the business for the benefit of all stakeholders√. It
view the entity not as a mechanism for increasing the shareholders’ financial
returns√, but as a vehicle for coordinating stakeholders’ interests, and sees
management as having fiduciary relationship not only to the shareholders or
owners of the business but also to all other stakeholders√. Management shall
give equal considerations to the interests of all stakeholders and when these
interests conflict, management should act to attain optimal balance among
them√.

ii. Under the managerial branch√ of stakeholder theory, the stakeholders are
identified and ranked in accordance to the extent to which the entity believes they
interplay with the interests of the business√. Management is likely to attend to the
expectations of particular stakeholder√, who usually is the most powerful
stakeholder√. The more important the stakeholder to the organization, the more
effort will be exerted in managing the relationship√.
(10√ x 1 mark = 10 marks)
(Total: 20 marks)

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QUESTION 3

a. The transaction is a share-based payment transaction; hence it falls under MFRS 2

Share-based Payment Transaction√. Under this Standard, where the entity has a choice
of settlement i.e., either equity settled or cash settled, the entity should account for the
transaction as cash settled if it has the present obligation to settle in cash. It has the
present obligation to settle in cash if:
i. The settlement in equity instrument has no commercial substance√; or
ii. It has a past practice or policy of settling in cash√; or
iii. It generally settles in cash when the counterparty asks for cash settlement√.

In this case, the company should treat the acquisition of the machinery as cash-settled√
since the past practice for the company is to settle by cash for similar transactions.
(5√ x 1 mark =5 marks)

b.
Date Particulars Dr RM Cr RM
1/3/2018 √ Machinery [187,000 x RM2.75] ** √ 514,250
Liability ** √ 514,250
[to record the purchase of the machinery]√

1/4/2018 √ Liability ** √ 514,250

SOPL – change in fair value √ √ 9,350
[187,000 x (2.80-2.75)]
Cash [187,000 x RM2.80] ** √ 523,600
To record the change in fair value of the
liability and its settlement √
** award the full marks only if the figure and account is correct.
(10√ x ½ = 5 marks)
c. Recognition:

The entity shall recognize the goods or services received or acquired in a share-based
payment transaction when it obtains the goods or as the services are received√. In an
equity-settled transaction, the entity receives goods or services as consideration for
equity instruments of the entity√. Therefore, a corresponding increase in equity shall be
recognized for the goods or services received√.

Measurement:

The measurement basis used is the fair value of either goods or services received√.
The fair value should be measured at the date the entity obtains the goods or services√.
(5√ x 1 mark = 5 marks)
(Total: 15 marks)

QUESTION 4

a) This contract is within the scope of MFRS 9√. Future contract is a derivative financial
instrument in which it is a contract with the generic exchange-traded and is generally
settled through an offsetting (reversing) trade√. In this case, both parties enter into a
contract to exchange financial assets with each other (Lizzy Bhd, cash for government
bond and Buzzy Bhd, government bond for cash)√. During the six months, both parties

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have the contractual right and a contractual obligation to exchange financial

instruments√√.
(5√ x 1 = 5 marks)

b) Calculations:

Year b/f Interest (5%) Cash c/f

1 3,900,000 W1 195,000√ (80,000)W2 4,015,000√
2 4,015,000 200,750√ (80,000) 4,135,750
3 4,135,750√ 206,788 (80,000) 4,262,538
4 4,262,538 213,127√ 4,475,665√ -

W1 (40,000 x 100) – 100,000 = 3,900,000√√√

W2 (40,000 x 100 x 2%) = 80,000√√

Statement of Financial Position as at

Year 1 Year 2 Year 3 Year 4

2% debentures√ 4,015,000 4,135,750√ 4,262,538√ -
√

Statement of Profit & Loss For the year ended

Year 1 Year 2 Year 3 Year 4

Finance Cost√ 195,000√ 200,750√ 206,788√ 213,127√
(20√ x ½ mark = 10 marks)

c) Initially, the equity instruments is recognized at fair value including transaction costs.
Therefore, the investment in shares is initially recognized at RM520,000 on the
statement of financial position as an asset. √
As there was an irrevocable election, the company will have to classify the financial
asset at fair value through other comprehensive income. √√
At the reporting date (30 November 2019), the shares are re-measured to fair value of
RM710,000 √ on the statement of financial position.
The gain on the investment of RM190,000√ is shown through other comprehensive
income. √
On disposal of the shares, the share is derecognized with a gain of RM40,000 √ through
profit and loss√. Gain previously RM190,000√ in other comprehensive income is
transferred to retained earnings in the statement of changes in equity as a reserve
transfer√.
(10√ x 1 = 10 marks)

d) Expected Loss Model replaced the incurred loss model. It is a model for determining the
timing and measurement of impairment of financial assets held at amortised cost where
an entity‘s estimate of future expected credit losses is recognised as an adjustment to
the contractual effective interest rate at loan inception and throughout its existence. √√

It has three stages; stage 1 – 12 month expected credit loss; stage 2 – lifetime expected
credit loss; stage 3 – lifetime expected credit loss plus credit minus impaired. √√√

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(5√ x 1 mark = 5 marks)

(Total: 30 marks)

QUESTION 5

a. Five (5) indicators that revenue shall be recognize at a point in time:

 The entity has a present right to payment for the asset

 The customer has legal title to the asset
 The entity has transferred physical possession of the asset.
 The significant risk and rewards of ownership have been transferred to the
customer
 The customer has accepted the asset
(5 points x 1 mark = 5 marks)

b. Five (5) criteria that should be met in order for a contract with a customer to be consider
within the scope of MFRS 15:

i. the contract has been approved by the parties to the contract (in writing, orally, or
in accordance with other customary business practices) and are committed to
performing their respective obligations;
ii. each party’s rights in relation to the goods or services to be transferred can be
identified;
iii. the payment terms for the goods or services to be transferred can be identified;
iv. the contract has commercial substance; and
v. it is probable that the consideration to which the entity is entitled to in exchange
for the goods or services will be collected.
(5 points x 1 mark = 5 marks)

c. Step 1: Identify the contracts with the customer  –

Adrino enters into a contract with Azman & Co. on 1 April 2018 creating enforceable
rights and obligations and all the criteria are met.

Step 2: Identify the performance obligation(s) (PO) in the contract  –

two (2) PO:
 Accounting software 
 Two (2) year technical support service 

Step 3: Determine the transaction price –

The transaction price is the amount of consideration in a contract to which an entity
expects to be entitled from the customer in exchange for transferring promised goods or
services. In the contract with Azman & Co., Adrino IT Bhd has agreed to a contract price
of RM7,400. 

Step 4: Allocate the transaction price to the performance obligations

Performance Stand-alone Calculation Allocation of TP

obligation selling price (RM) (RM)
Accounting 6,000 (6,000/8,000)  X 5,550of
software 7,400

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Two (2) year 2,000 (2,000/8,000)  X 1,850of

technical support 7,400
service

8,000 7,400

Step 5: Recognize revenue when a performance obligation is satisfied  (for the

year ended 31 Dec 2018)

Adrino can recognised revenue at a point in time from the accounting software once it
was installed and ready to be used on 1 April 2018. √ Revenue from accounting software
recognized at 31 December 2018 is RM5,550

Revenue from providing the technical support service will only be recognized over time
for the 9 months period (1 April 2018 to 31 December 2018), because Adrino has not
yet fulfil its obligation to provide the service for the other 1 year and 3 months (1 January
2019 to 31 March 2020) √ . Revenue from technical support service recognized at the
end of year is 9/12 X 1,850 = RM1,387.50 only because 9/24 of the obligation to
provide the servicing is satisfied .

Total revenue to be recognized is RM 6,937.50 own figure.

(20  x ½ mark = 10 marks)
(Total: 20 marks)

QUESTION 6

MFRS 16 defines that a contract is (or contains) a lease if the contract conveys the right to
control the use of an identified asset for a period of time in exchange for consideration. The
contract does contain an identified asset where the delivery trucks are the underlying asset.
Furthermore, Harris does have the right to control the use of the delivery trucks since it is
predetermined in the contract that Harris able to determine when, where and which good are
to be transported using the trucks. Hence, this contract does contain a lease.

(5√ x 1 mark = 5 marks)

END OF SOLUTION