Toby’s Panda

Issue #1: Joint Arrangement

 Case facts indicate this is a joint arrangement as major

decisions approved by both entities. A joint arrangement is
where two or more parties contractually agreed to share
control of an arrangement (IFRS 11).
 According to IFRS11, a joint arrangement is : a) Bound by
contractual agreement – yes, both parties agreed contractually
to open new stores. Terms that outline profit sharing.
 b) 2 or more parties have joint control – yes, unanimous
agreement is required for decisions relating to relevant
activities.
Issue #1: Joint Arrangement

 No single partner entirely controls the joint arrangement and

requires the other to participate in the decision-making
process. Therefore, a joint arrangement exists.
 Under IFRS 11, two types of joint arrangements: joint
operations and joint ventures. Additional guidance: Legal form –
arrangement has been set up as a separate corporation. Both
parties have share ownership in the company. This means it
could either be a joint operation or a joint venture.
 Terms of contractual arrangement – paragraph B27 provides a
list of factors.
Issue #1: Joint Arrangement

 The case fact suggesting Toby’s owns the assets it contributed

indicates this is a joint operation.
 However, the other factors seem to indicate that this is a joint
venture. For example, all other remaining assets and liabilities
are owned by the joint arrangement.
 Profits will be split 75-25 and both entities own net assets. We
can conclude that the terms of the contractual arrangement
indicate a joint venture.
Issue #1: Joint Arrangement

 The investment in Convenience is Everywhere should be

accounted for as a joint venture under the equity method (IAS
28). An investment in associate will be set up to record the
initial contributions.
 Journal entry: Dr. Investment in Associate xx Cr. Cash xx
 Subsequently, the 25% profit gained from the arrangement will
be capitalized to the investment account. Dr. Investment in
Associate Cr. Profit from joint venture
Issue #2: Rebates

 IAS 37 defines a provision as a liability of uncertain timing or

amount. This is met since the amount of rebates to be
redeemed is uncertain.
 Criteria to recognize: An entity has a present obligation (legal
or constructive) as a result of a past event – yes, there is a
constructive obligation to customers
 It is probable that an outflow of resources will be required to
settle the obligation – yes, $6 outflow per coupon redeemed
 A reliable estimate can be made of the amount – yes, valued at
$6, with estimated redemption rate of 60%
Issue #2: Rebates

 Since 80K coupons at $6/each were issued and there is 60%

likelihood of redemption, the liability is estimated at $288K.
Other side of entry is an offset to revenue.
 Under IFRS 15, the coupons are considered variable
consideration which should be offset against revenue. Dr.
Revenue $288K Cr. Provision $288K
 If more than 60% is redeemed in following year the additional
expense will be recognized in the following year. If less than
60% is redeemed when the coupons expired, the remaining
provision can be written off at the end of the following year.
Issue #2: Rebates

 In the following year – if customers receive cash when the

coupons are paid out, the journal entry has a Cr. Read case
facts for what customers are offered as part of rebate/coupons.
In this case cash is received.
Issue #3: Termination Benefits

 Analyze three characteristics of liabilities: Obligation – yes,

there is an obligation to provide the benefits (signed
agreements).
 Obligation to transfer an economic resource – yes, $4K per
employee is the cost of the package
 Past transaction – yes, Toby’s has signed an agreement with the
employees.
 Conditions for liability are satisfied
Issue #3: Termination Benefits

 According to IAS 19, an entity should recognize liability and

expense for termination benefits at the earlier of the following
dates: When the entity can no longer withdraw the offer of
those benefits – we will determine if this is met in the current
fiscal year
 When the entity recognizes costs for a restructuring that is
within the scope of IAS 37 (Provisions) and involves the payment
of termination benefits – N/A to this scenario
 For termination benefits payable resulting from entity’s
decision to terminate an employee’s employment, the entity
can no longer withdraw the offer when the entity has
communicated to the affected employees a plan of termination
that meets following criteria:
Issue #3: Termination Benefits

 Actions required to complete the plan indicate that it is

unlikely that significant changes to the plan will be made – yes,
the process of closure has already begun
 The plan identifies the number of employees whose
employment is to be terminated, their job classifications or
functions and their locations and the expected completion date
– yes, the number is 20 employees, the employees are
specifically identified & their location disclosed.
Issue #3: Termination Benefits

 The plan establishes the termination benefits that employees

will receive in sufficient detail that employees can determine
the type and amount of benefits they will receive when their
employment is terminated – yes, agreements have been
reached with the value of benefits disclosed ($4K).
 Measurement of expense / liability: if they are to be paid out
after more than one year from balance sheet date, must
discount to PV. N/A in this scenario.
Issue #3: Termination Benefits

 For offer made to encourage voluntary redundancy, based on

number of employees expected to accept the offer. N/A as this
is not a voluntary termination
 Journal entry: Dr. Termination Benefits Expense $80K Cr.
Termination Expense Liability $80K
Issue #4: Impairment Calculations for Store

 Although the roof and the store are amortized separately for
accounting purposes, they are both needed for the store to
make sales
 It would be unreasonable to isolate these two assets and test
their recoverable amount separately. They form a group of
assets that generate independent cash flows, and therefore the
entire store is likely considered a cash generating unit.
 We first determine FV here – since FV ($18M) is less than
carrying amount ($22M) we determine value in use
Issue #4: Impairment Calculations for Store

 The value in use is calculated as: Estimated future cash flows –

the pre-tax annual cash flows at the current condition is
estimated to be $1M/year for the next 30 years.
 The $4M/year is based on expected cash flows after expected
renovations. According to paragraph 44 future cash flows shall
be estimated for the asset in its current condition.
 The cash flows should not include any future restructuring or
improvement to the asset. As renovations are expected to
improve the store’s performance, they should be excluded from
our calculations.
Issue #4: Impairment Calculations for Store

 To discount estimated cash flows, a risk-free rate adjusted for

the asset’s risk should be used.
 The risk associated with the asset is incorporated in the
discount rate since the uncertainty is not incorporated in the
expected cash flows.
 The 6% rate of the mortgage for the store is appropriate since it
relates directly to the store.
 Value in use using 30 years, 6% rate & 1M/year is: $13.76M
Issue #4: Impairment Calculations for Store

 Recoverable amount is higher of value in use ($13.76M) and fair

value less costs to sell ($18M). Carrying amount is $22M.
Impairment loss is $4M.
 Journal entry: Dr. Impairment loss $4M Cr. Store $3.3 M Cr. Roof
$0.7M (we credit the carrying amount of the store and roof to
their respective accounts proportionately based on their
carrying values – see calc below):
 Store: $18M (carrying value of the store)/$22M (total carrying
value)4M impairment loss = $3.3M
 Roof: $4M (carrying value of roof)/$22M (total carrying
value)*$4M (impairment loss) = $0.7M
Issue #5: Liability for Management Referrals

 Analyze three characteristics of liabilities: Obligation – yes,

there is an obligation to provide the referral services.
 No legal obligation as not part of signed agreement, however it
is a constructive obligation – management will need to keep
their word to maintain trust in the community.
 Obligation to transfer an economic resource – Management will
be compensated for the time it spent on referrals.
 Past transaction – yes, verbal promise with the employees has
been made.
 Conditions for liability are satisfied
Issue #5: Liability for Management Referrals

 We still need to determine if a liability needs to be recorded . A

liability is recognized only when it provides users with
information that is useful, being relevant and faithful
representation:
 Relevance – considers the uncertainty of the existence of the
liability and the probability of the outflow of economic
resources. Determined that the liability does exist & seems
probable there will be an outflow as management likely to
make referrals
Issue #5: Liability for Management Referrals

 Faithful representation – this is impacted by the level of

measurement uncertainty. Recognition will not provide useful
info to relevant stakeholders if measurement uncertainty is too
high.
 In this situation, the company has not determined if it can
reasonably estimate the referral costs. Since there is no history
of referrals, cannot estimate based on past transactions.
 There is a high level of uncertainty, and therefore, despite
existence of liability it should not be recognized.
 Do not recognize liability until reasonable estimation is
possible. Until then, all costs incurred should be expensed.
Issue #6: Construction of Store

 Recognition: Probable future benefits – yes, the store will

generate sales. Reliably measured – yes, contractor has billed
invoices to Toby’s. It is irrelevant whether invoices have been
paid or not.
 Initial Measurement: $8M cost of the store – yes, this is directly
attributable to acquisition of the store.
 $100K legal – yes, this is a cost directly attributable to bringing
asset to use $50K non-refundable taxes – yes, same reasoning as
legal
Issue #6: Construction of Store

 $200K advertising – no, this is not directly attributable to

getting the store ready for use, it is just for advertising
purposes
 $300K interest – yes, per IAS 23, borrowing costs directly
attributable to acquisition of a qualifying asset must be
capitalized. A qualifying asset is defined as an asset that takes
substantial period of time to get ready for its intended use or
sale.
 We know the amount borrowed was due to the store’s
construction and also the construction time frame (Jan to Oct)
is considered a substantial period of time.
Issue #6: Construction of Store

 Interest can only be capitalized up to when the asset is

substantially complete. We need to prorate the interest
expense: 10/12*$300K = $250K. The remaining $50K should be
expensed.
 Componentization: The entire store should not be recorded to
one account. Major components should be separated and
depreciated separately.
Issue #6: Construction of Store

 Corrections that need to be made: Expense $50K of interest

expense incorrectly capitalized. Expense $200K of advertising
expense. Adjusting entry is as follows:
 Dr. Advertising Expense: $200K Dr. Interest Expense $50K Cr.
Store $250K