Tuto 1

Question 1

Discuss whether each of the items should be recognized in the statement of financial position of
Alpha, considering only the definitions of an asset and a liability and the recognition criteria from
the Conceptual Framework.

Answer:
Scenario 1: Prepaid Marketing cost (Prepaid Expenses - Asset)
Alpha has decided to prepay its marketing cost of $800,000 in May20X5.

Alpha will need to recognize the prepaid marketing cost in its Statement of Financial Position for 30
June 20X5. The prepaid marketing cost is an economic resource for Alpha, whereby Alpha has the
control and rights to utilize the marketing services that it has already paid in advance, because of
decision in May 20X5.

Recognition of prepaid marketing costs also provides information to users of financial statement
(especially marketing agencies) that Alpha have prepaid its marketing costs in advance and therefore
have a right to receive economic benefit in future.

Thus, meets the definition of assets recognition criteria.

1. Definition of asset
- Economic resource
- Is in control
-
2. Recognition of asset
-
3. Conclusion (Therefore recognize as)

Scenario 2: Provision for restoration cost

Alpha has entered into a lease contract for an office building, where it requires Alpha to restore the
site to its original conditions upon vacating the premises.

Alpha will need to recognize the provision for restoration cost in its Statement of Financial Position
for 30 June 20X5. The provision for restoration cost is a present obligation for Alpha as Alpha will
need to incur the restoration cost to remove the fixtures and fittings and repaint the office when the
lease expires on 31 January 20X9 due to lease contract in February 20X5.

The recognition provides useful information to users of financial statements that Alpha has provide a
proper estimation of provision for the restoration costs that the entity will incur in the future.

As such, meets the recognition criteria for liability.

1. Definition
2. Recognition
3. Conclusion
Question 2

Discuss the extent to which the accounting treatment of the Bottle brand is consistent with the
Conceptual Framework.

Answer:

Bottle Brand is a highly respected publishing company which are internally generated and have
received extensive for both online and press coverage. The brand is identifiable, controlled by Bottle
and are able to obtain economic benefits or generate cash flows for Bottle should the brand is sold,
transferred or licensed to others. Thus, meet the definition for intangible assets.

Bottle is probable to receive cash inflows attributable to Bottle brand and the cost of the assets can
be measured realiably. Thus, its should be recognized as Intangible Assets in Bottle’s financial
statements as it meets the recognition criteria in the conceptual framework.

1. Is it economic resource controlled by entity

2. Conceptual framework states that elements should only be recognize if this provides
relevant information or a faithful represent of assets or liability
3. Internally generated brand – recognition criteria for Intangible asset,
4. Whether brand(Int assets) consistent with framework – definition, so company should
recognize
Question 3

Using Conceptual Framework, discuss how an entity might account for an investment in
cryptocurrency that it holds to trade.

Answer:

Cryptocurrencies are digital currencies that operate independently of a central bank and represent
ownership interests which can be used as a medium of exchange. Cryptocurrency is an intangible,
non-monetary asset that is identifiable and separable if it capable of being separated from the holder
and sold, transferred, licenced, rented, exchanged individually or with related contract. Hence, it do
appear to meet the definition of IAS 38 intangible assets.

Thus, cryptocurrency are initially measured at cost.

The market price of cryptocurrency is highly volatile. and subsequently measured at cost less
accumulated ammortisation and impairment losses.

1. May need to look if it is invesntory (look at nature of the cryptocurrency – what it is used for)

https://www.accaglobal.com/gb/en/student/exam-support-resources/professional-exams-study-
resources/strategic-business-reporting/technical-articles/cryptocurrencies.html
Question 4

a) I- Discuss the possible concerns where an entity may wish to disclose information in its
financial statements and whether Exposure Draft on the Conceptual Framwerk for
Financial Reporting helps in determining the boundaries for disclosures.

[answer will be given by Sir Haziq]

ii- Discuss the use and limitations of the proposed calculation of ‘underlying profit’ by
Rationale

[answer will be given by Sir Haziq]

Underlying profit:
- is an internal profit calculation made by a company to show what it believes a more
accurately reflection of how much money it generates.

EBITDA: Provides info on company’s performance (mainly for employees)

- Finan indicator to evaluate profitability with different capital structure

Use of Underlying profit

- can be used by management to manipulate information in the financial statements to
make them look good

b) Discuss, with example, the nature of reclassification adjustments and arguments for and
against allowing reclassification of items to P&L

Nature of reclassification adjustments

- Example

Arguments for allowing reclassification of items to P&L

Arguments against allowing reclassification of items to P&L