Advanced Financial Accounting – period 4 2023/2024

Assignment 2
All answers should include an explanation or discussion. Answers should be based on IFRS
(i.e. IAS/IFRS) only, not on Dutch GAAP or any other local GAAP. Please refer to the relevant
standard and paragraph numbers to support your answer. Please mention your name and
student number in the file name and in your paper.

Question 1 (20 points)

a. A company produces electronic equipment. During the year, it has received a large fine because of failure to
comply with health and safety regulations at its production plant. Can the company allocate part of the fine
to the cost of items produced during the year, and still in inventory at year end? Explain. (10 points)

b. The business model of a company consists of buying up older residential property (houses, apartments, etc.),
refurbishing and modernizing them, and selling them at a profit. Are these properties in the scope of IAS 2
or in the scope of IAS 40? Explain. (10 points)

Question 2 (10 points)

Blue leases an asset from Red as of 1 January 2023. The lease contract is for five years (non-cancelable).

A first lease term of €100 is payable on 1 January 2023, followed by payments of €200 on 31 December 2023
through 31 December 2027. Red’s initial direct costs related to the contract (paid in cash on 1 January 2023) are €80.
Blue’s initial direct costs (also paid in cash on 1 January 2023) are €100.

The fair value of the asset on 1 January 2023 is €1120. The carrying amount of the asset on Red’s balance sheet prior
to the commencement of the lease was €900. The expected residual value of the asset at the end of the lease is
€300. At that point, the lessor expects to sell the asset to a third party.

Give the journal entries related to the lease for 2023 for both Blue and Red. You may assume that the interest rate
implicit in the lease is 5%. Briefly explain your answers.

Question 3 (20 points)

IAS 16.60 states the principle for choosing a depreciation method. It is often assumed in practice that linear
depreciation (the ‘straight-line method’) is a good approximation of the ‘pattern in which an asset’s future economic
benefits are expected to be consumed by the entity’. Discuss for the following items what the appropriate
depreciation method under IAS 16 would be:
 a. A machine is expected to produce 1 million products a year for the next ten years. The expectation is that all
products will be sold, but that the sales price of the products will gradually drop from €10 during the first
year to €5 in the tenth year. (10 points)

b. A machine can produce up to 1 million products per year. The expectation is that it will produce between
200.000 and 900.000 products a year for the next ten years. Production is profitable even at low volumes.
Being able to respond to large swings in demand is important for the company. A high production volume in
a single year does not reduce capacity in the remaining years. (10 points)

Question 4 (20 points)

a. A pharmaceutical company builds a research laboratory. All of the activities carried out in the laboratory will
fall into the ‘research phase’ as defined in IAS 38. Does this mean that the costs of building the laboratory
must be expensed? Explain your answer. (10 points)

b. Can a database with customer data which a company has built itself, based on its own sales transactions, be
recognized as an intangible asset?
Can such a database be recognized as an intangible asset if it is bought from another company? (10 points)

Question 5 (30 points)

The following information is taken from the 2022 financial statements of IAG, an airline group. The information
refers to a loyalty scheme based on ‘Avios’, which are points that customers can earn when purchasing services from
the group.

Customer loyalty programmes

The Group operates four loyalty programmes: the British Airways Executive Club, Iberia Plus, Vueling Club
and the Aer Lingus Aer Club. The customer loyalty programmes award travellers Avios to redeem for various
rewards, primarily redemption travel, including flights, hotels and car hire. Avios are also sold to commercial
partners to use in loyalty activity.

Avios issuance

When issued, the standalone selling price of an Avios is recorded within Deferred revenue on ticket sales in
current liabilities until the customer redeems the Avios. The standalone selling price of Avios is based on the
value of the awards for which the points could be redeemed. The Group also recognises revenue associated
with the proportion of Avios which are not expected to be redeemed, referred to as ‘breakage’, based on the
results of modelling using historical experiences and expected future trends in customer behaviour, up until
the reporting date. The amount of such revenue recognised is limited, where necessary, such that the risk of a
significant reversal of revenue in the future is remote.

Required:

a. At which point(s) in time is the revenue associated with ‘breakage’ recognized? Explain. (15 points)

b. As indicated, ‘Avios are also sold to commercial partners to use in loyalty activity’. For instance, a hotel
chain outside of the group might offer its customers Avios points for stays in the hotel, which the customer
could then redeem by booking flights with IAG. At which point(s) in time do you think that IAG recognizes
revenue for the sale of these points to partners? (15 points)