College of Business,

Hospitality and Tourism

Studies
School of Accounting
ACC702 International
Corporate Reporting
Trimester III, 2016
Group Assignment
Weighting: 10% of total
assessment for this unit.

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ACC 702 GROUP ASSIGNMENT

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SOLUTION
QUESTION 1
The journal entries to be recorded on books of accounts are:
1. Dr Intangible Assets accumulated amortization $4000
Cr Intangible Assets cost
$4000
(Being elimination of accumulated depreciation against the cost of the asset)
2. Dr Intangible Asset cost
$6000
Cr Revaluation Reserve
$6000
(Being uplift of net book value to revalued amount)
The net results Sari that the assets have a revised a carrying amount of $12000 ($1000- $4000+
$6000)
QUESTION 2
How do account for a patent?
A patent is considered an intangible asset; this is because a patent does not have physical
substance, and provides long-term value to the owning entity. As such, the accounting for a
patent is the same as for any other intangible fixed asset, which is:

Initial recordation. Record the cost to acquire the patent as the initial asset cost. If a
company files for a patent application, this cost will include the registration,
documentation, and other legal fees associated with the application. If the company
instead bought a patent from another party, the purchase price is the initial asset cost.

Amortization. The owner of the patent gradually charges the cost of the patent to expense
over the useful life of the patent, usually using the straight-line amortization method.

Impairment. If a patent no longer provides value, or a reduced level of value, recognize

an impairment to reduce or eliminate the carrying amount of the asset.

DE recognitions. Once the company is no longer making use of the patented idea, the
asset can be derecognized by crediting the balance in the patent asset account and
debiting the balance in the accumulated amortization account. If the asset has not been
fully amortized at the time of DE recognition, then any remaining unamortized balance
must be recorded as a loss.

Consider the following additional points when considered the accounting for patents:
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ACC 702 GROUP ASSIGNMENT

R&D expenditures. Note that the research and development (R&D) costs required to
develop the idea being patented cannot be included in the capitalized cost of a patent.
These R&D costs are instead charged to expense as incurred; the basis for this treatment
is that R&D is inherently risky, without assurance of future benefits, so it should not be
considered an asset.

Useful life. A patent asset should not be amortized for longer than the life span of the
protection afforded by the patent. If the expected useful life of the patent is even shorter,
use the useful life for amortization purposes. Thus, the shorter of a patent's useful life and
its legal life should be used for the amortization period.

Capitalization limit. In practice, the costs of obtaining a patent may be so small that they
do not meet or exceed a company's capitalization limit. If so, charge these costs to
expense as incurred. In many larger companies with higher capitalization limits, this
means that patents are rarely recorded as assets unless they have been purchased from
other entities.

QUESTION 3
Because it is hard to tell if the research will actually result in real profits. If
research was capitalized then companies would have to book massive,
unpredictable write-downs whenever they found out that a research project
didn't pay off. It's better not to give investors false hope - that's why we have
the accounting principle of conservatism. Research and development costs
are incurred to develop new products or processes, to improve present
products, or to discover new knowledge. R & D expenditures present
problems of
identifying the costs associated with particular activities, projects, or
achievements, and
determining the magnitude of the future benefits and the length of
time over which such benefits may be realized.
R & D activities may incur costs classified as follows:
materials, equipment, and facilities,
personnel, (
c) purchased intangibles,
contract services, and (e) indirect costs.
QUESTION 4
PART 1
Consideration
Fair
value
$610000

of

shares

issued

(100000

$6.10)

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ACC 702 GROUP ASSIGNMENT

Land
$340000
Plant
$295000
Inventory
$95000
Cash
$15000
Accounts
($20000)

Payable

Loan
($80000)
Fair
$635000

value

of

identifiable

net

assets

Fair
$635000

value

of

identifiable

net

assets

Less
$610000
BARGAIN
$25000

Consideration

Transferred
PURCHASE

PART 2
Land
$340000
Plant
$295000
Inventory
$95000
Cash
$15000

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ACC 702 GROUP ASSIGNMENT

Accounts

Payable

$20000
Loan
$80000
Gain

on

business

combination

(Consideration

Transferred)

$25000
Bank
$610000
Part 3
Consideration
Fair
value
$750000

of

shares

issued

(100000

Consideration
$750000
Less
$635000

Fair

$7.50)

Transferred
value

of

identifiable

net

assets

Goodwill
$115000

Land
$340000
Plant
$295000
Inventory
$95000
Cash
$15000
Goodwill
$115000
Accounts

Payable

$20000

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ACC 702 GROUP ASSIGNMENT

Loan
$80000
Issued

capital

$750000
QUESTION 5
Nature of goodwill

Is it an asset?
2 types: Internal vs external/acquired goodwill
Nature of internal goodwill: undervalued/unrecorded assets, core goodwill
Nature of acquired goodwill? Core goodwill: going concern & combination
Why did acquirer pay for goodwill? Synergy extra benefits

How to account for it

Internal goodwill IAS 38: not recognized as cannot determine a cost
Acquired goodwill
Recognized only in a business combination
Measured as a residual under para 32
Subject to annual impairment test
If allocated to CGU, write off first if impairment loss
If reversal of impairment loss, no reinstatement of goodwill
Future effects on Statement of Comprehensive Income
No cause for concern
No annual amortization
Only expense if impairment loss
Impairment loss cushioned by various accounting treatments such as use of cost method
for PPE, non-recognition of internally generated goodwill & internally generated
intangibles
QUE4STION 6
($16 million offered - the disposal costs of $2 million) = The fair value less cost to sell of the oil
platform is $14 million.
The value-in-use of the platform will be $24 million - $10 million= $14 million.
The carrying amount of the platform is $20 million - $10 million= $10 million.
Therefore, the recoverable amount of the cash-generating units exceeds its carrying amount, and
it is not impaired.
QUESTION 7
The fair value less costs to sell is ($20million -1 million) = $19million
The value in use is ($26million - $8million) = $18 million.
The carrying value is ($28million -$8miliion) = $20million
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ACC 702 GROUP ASSIGNMENT

Therefore, the recoverable amount ($19million) is less than its carrying value ($20million), and
the asset is impaired
QUESTION 8

Carrying value
Office Building
Recoverable Amount
Impairment loss

X (m)

Y(m)

TOTAL(m)

10
add 2
12
Less 9
3

15
add 3
18
Less 19
0

25
add 5
30

The impairment loss is allocated on the basis of 2/12 against the building ($0.5million) and
10/12 against the other assets ($2.5Million)
QUESTION 9
With reference to IAS 19 Employee Benefits, sick leave entitlements that are unused are to be
paid out when the employee leaves the company or organization. These sick leave entitlements
are commonly known as vesting sick leave entitlements. As the employee continues to work for
the organization, the entitlements continue to accrue. The accounting treatment used is the same
as to account for annual leave. While assigning probabilities to the odds that the employee will
actually take the leave, a liability will be recognized and this will not be dependent upon it.
Suppose the sick leave is considered to be non-vesting, entitlements will only be paid when the
employee is sick, and they will not be paid out when the employee terminates employment. With
regards to non-vesting sick leave, accounting entries must be made which recognize the
employees entitlements to sick leave based on past service, and the probability that the sick
leave will actually be taken. For example, if an individual employee on a salary of $50 000 has
an entitlement to two weeks sick leave and it is expected that the employee has a 50 per cent
probability of taking one week leave, and a 50 per cent probability of taking no leave, then the
accounts would need to recognize a liability of $50 000 x 1/52 x 0.50 = $481 in relation to the
employee.
QUESTION 10
International Accounting Standards (IAS 19) is an accounting rules which as a main motive of
benefiting the employees in every possible way, which includes:
1. Short term benefits (e.g. wages, salaries, annual leave, social security contributions, paid
sick leave and other monetary benefits such as medical care, housing cars, and subsidized
goods and services).
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ACC 702 GROUP ASSIGNMENT

2. Post-employment benefits (e.g. retirement benefits, pensions, post-employment life in

insurance and post-employment medical care).
3. Other long term benefits (e.g. long service leaves, long-term disability benefits.).
4. Termination benefits.
This accounting standard principle requires, the benefits provided to the employees to be
recognized in the same period in which the benefits are earned by the employee, relatively when
this is paid or payable.
Post-employment benefit plans:
Post-employment benefits are consisting of both formal and informal schedules, this is a process
where an entity delivers post-employment benefits to one or more employees that is retirement
benefits (which includes pensions or lump sum payments), life insurance and medical care. The
accounting treatment for a post-employment benefit plan is determined by on the economic
element of the plan and results I n the plan being classified as either a defined contribution plan
or defined benefit plan.
DEFINED CONTRIBUTION PLANS
DEFINED BENEFIT PLAN
In defined contribution plan, the entity pays In defined benefit plans, these are postfixed contributions into a trust but has no legal employment benefit plans other than a defined
or constructive responsibility to make further contribution plans. These plans create an
payments if the fund does not have sufficient obligation on the entity to provide agreed
assets to pay all of the employees entitlements benefits to current past employees and
to post-employments benefit. The entitys effectively places actuarial and investment risk
obligation

is

therefore

effectively

place on the entity.

actuarial and investment risk on the employees.

Defined contribution plans
In defined contribution plans, the value is recognized in the period is the contribution due in
exchange for services rendered by employees during the period. Contributions to a defined
contribution plan which are not expected to be wholly settled within 12 months after the end of
the annual reporting period in which the employee renders the related service are discounted to
their present values.
Defined benefit plans
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ACC 702 GROUP ASSIGNMENT

Basic requirement

Measurement

Past service costs

Organizations are encouraged to recognize its net defined liability or asset

in its statement of financial position. Nevertheless, the measurement of
net defined benefit asset is lower of any surplus in the fund and asset
ceiling.
The Measurement of net defined benefit liability or assets involves the
submission of an actuarial valuation method, the acknowledgment of
benefits to periods of services, and the use of actuarial assumptions.
Benefit obligation in determining the net deficit or surplus.
The process of measurement in defined benefit plan is carried out with
sufficient regularity; including amount recognized in the financial
statements do not differ materially from those that would be determined
at the end of the reporting periods.
The past service cost is the term that is used to determine the change in a
defined benefit obligation for employee service in the periods, that is due
to changes in plan arrangements in the current period.
Past service is expected to be either positive or negative. In tis criteria
past service cost is recognized as expense in the earlier date when a plan
is amen dent or when the entity recognizes any termination benefits, or
related restructuring costs under IAS 37.
Any gain or loses on the settlement of a defined benefit plan are
recognized when the settlement occurs.

QUESTION 11
Termination benefits
Termination benefits represent quite a different cup of tea than the previous 3 categories. Why?
Because they are not provided in exchange for the service of the employee; instead, they are
provided in exchange for the termination of employment. However, be careful here, because the
termination benefit sometimes includes the benefit for BOTH the termination of employment
AND the service of employee at the same time. For example, a company closes one of its
production plants and offers the bonus of 1 000 USD to all employees who will be laid off. But
because this company needs qualified people to perform the closure, it offers the bonus of 3 000
USD to each employee who stays with the company until the closure is completed. In this small
example, the bonus of 1 000 USD paid to all fired employees represents termination benefit and
additional 2 000 USD paid to all employees who stay until the closure is completed represents
the benefit for the employees service, mostly classified as other long-term benefit in line with
IAS 19.

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ACC 702 GROUP ASSIGNMENT

How to account for termination benefits

The primary question here is WHEN to recognize the liability and expense for termination
benefits. It is at the earlier of:
when the company can no longer withdraw the offer of those benefits (either the
termination plan exists or employee accepts the offer of benefits) and
when the company recognizes cost for a restructuring (IAS 37) and involves the payment
of termination benefits.
The next question is HOW to recognize termination benefits. This depends on the specific terms
of the benefits:
if the termination benefits are expected to be settled wholly before 12 months after the
end of the reporting period, then we should apply the requirements for short-term
employee benefits (so recognize it as an expense to profit or loss on undiscounted basis)
if the termination benefits are not expected to be settled wholly before 12 months after
the end of the reporting period, then we should apply the requirements for other longterm employee benefits (so recognize it as an expense to profit or loss on discounted basis
QUESTION 12
For Fair value
1. Fair value is a rational and unbiased estimate of the potential market
price of a good, service, or asset and therefore provides users with
more relevant information.
2. The impact of fair value is the result of market forces.
3. Fair value the best reflects market conditions.
4. Most relevant measurement approach for current decision making. The
amount that will be received for an item or that will need to be paid for
an item is decision useful information.
5. Objective if determined by reference to the market price for an item.
The market price is set by forces outside the entity. It is not biased by
judgement and cannot be manipulated or influenced by management
Against Fair value
1. Subjective where a market price is unavailable. Some items are not
regularly traded in an active market and an estimate of the items fair
value must be made
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ACC 702 GROUP ASSIGNMENT

2. . The focus on exit values is not logical and contradicts the going
concern assumption. We are measuring as though we are going to sell
off all the assets which is not usually the case.
3. Market prices can be volatile and therefore sometimes may not be
indicative of the true value of an item. Short term fluctuations in fair
value may be irrelevant and cause confusion from a user perspective
4. However, it has drawbacks. If the good, service, or the asset does not
have an active market, then the fair value will involve estimations
which would be less reliable. Also fair value may fluctuate materially
even in short term, in such cases fair value at the balance sheet date
would be useless for an investor

REERENCE
https://www.coursehero.com/file/p4prt1/6-Explain-the-arguments-for-andagainst-using-fair-value-as-a-measurement-base/
http://www.accountingtools.com/questions-and-answers/how-do-i-accountfor-a-patent.html
http://www.ifrsanswer.com/180/what-arguments-against-the-fair-value-themea surement-basis
http://www.ifrsbox.com/ias-19-employee-benefits/
http://www.ifrsbox.com/ias-19-employee-benefits/
https://www.coursehero.com/file/p14rm21/There-are-a-number-of-stepsinvolved-in-accounting-for-a-defined-benefit-plan/
https://www.studeersnel.nl/nl/document/university-of-westernaustralia/corporate
accounting/antwoordenboeken/book-solution-companyaccounting-business-combinations/306331/view
www.pages.drexel.edu/.../Acctg%20321%20-%20Solutions%20-%20Ch...
https://au.answers.yahoo.com/question/index?
qid=20160829070845AARKkmw

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ACC 702 GROUP ASSIGNMENT