INCOME

TAXES

GEMILANG BHD
A. Given below is the draft Statement of Financial Position of Gemilang Bhd as at 31
December 2015:
 RM RM RM
Non-Current Assets
Property, Plant and Equipment 120,000
Development costs 16,000
136,000
Current Assets
Accounts receivable 33,600
(-) Specific allowance for doubtful debt (200)
33,400
Bank 17,800 51,200
187,200
Issued and paid up capital
Share capital 90,000
Retained earnings 57,000

Non-Current Liabilities
Deferred tax liability (1 January 2015) 13,200

Current Liabilities
Provision for warranties 1,500
Account payables 25,500 27,000
187,200

Additional Information:
1. The property, plant and equipment was purchased for RM600,000 on 1 January
2012 and depreciated on a straight line basis over five years. The property, plant
and equipment qualify for an initial allowance of 10% and annual allowance of
20%.

2. The development costs were incurred during the year. The development costs
are allowed to be written off by Inland Revenue Board in the year it is incurred.

3. Inland Revenue Board allowed warranties to be deducted when it is incurred.

 4. For the year ended 31 December 2015, the company made a profit of
RM120,000, after deduction of specific allowance for doubtful debts and
provision for warranties.

5. The tax rate for the year is at 26%.

Required:

a. Calculate the taxable temporary difference (TTD) or deductible temporary

difference (DTD) for the year ended 31 December 2015.
(4 marks)
b. Compute the deferred tax for Gemilang Bhd as at 31 December 2015. (3 marks)

Taxable Deductible
Temporary Temporary
Accounting profit Taxation profit
Asset Difference (TTD) Difference (DTD)
(CA) (TB)
A = CA>TB A = CA<TB
L = CA<TB L = CA>TB
1. Plant, property 120,000 60,000 60,000 -
and equipment

At cost: 600,000
(-) acc dep: 48,000
(600,000/5 x 4years)
CA: 120,000

At cost: 600,000
(-) IA: 60,000
(10% x 600,000)
(-) AA: 480,000
(20% x 600,000 x 4)
QE: 60,000

2. Development cost 16,000 16,000 – 16,000 16,000 – 0 -

=0 =16,000
If there are penalties 3,000 3,000 (not Permanent
allowed s39) difference
3. Account 33,600 33,600 - -
receivables

LIABILITY
1. Provision for 1,500 1,500 – 1,500 1,500
warranties =0
2. Specific allowance 200 200 – 200 200
for doubtful debt =0
TOTAL a) 76,000 TTD 1,700 DTD
Tax rate 26% 26%
b) DTL = 19,760 DTA = 442
DTL = 19,760 – 442 off set
DTL = 19,318 (SOPL) bal c/d

c. Construct an extract of Statement of Profit or Loss for the year ended 31 December
2015. (6 marks)
(Total: 25 marks)
SOPL for year ended 31 December 2015

Profit before tax 120,000

(-) Taxation (26% x 120,000) = 31,200
- Current year tax expense 25,082
(31,200 – 6,118)
- Deferred tax expense 6,118
Profit after tax 88,800

Deferred tax account

Balance b/d (DTA) Balance b/d (DTL) 13,200

SOPL (revenue) SOPL (expense) 6,118
Balance c/d (DTL) 19,318 Balance c/d (DTA)
19,318 19,318
 VEEDA BHD
Veeda Beauty Bhd is a manufacturing company producing health care products. The following
information relates to the assets and liabilities of the company for the year ended 30 June 2017.

i. As at 1 July 2016, the net book value of a machinery was RM2 million. The
machinery was purchased on 1 January 2015 at a cost of RM2,500,000. The
machine is depreciated at 10% per annum on a straight line method yearly basis.
The Inland Revenue Boards allows a capital allowance on such machine at 15%
and initial allowance of 10%.

ii. The research and development expenditure of RM2.4 million was incurred
capitalized during the year. The tax authority allows all the research and
development costs to be written off immediately in computing taxable profit.

iii. Current tax rate is 25%.

Required:

a. Identify the amount of temporary differences for machinery and research and
development for the year 2017. (10 marks)

Taxable Deductible
Temporary Temporary
Accounting profit Taxation profit
Asset Difference (TTD) Difference (DTD)
(CA) (TB)
A = CA>TB A = CA<TB
L = CA<TB L = CA>TB
1. Machine 1,750,000 1,125,000 1,750,000 –
1,125,000 =
Net book value: 625,000
2,000,000
(-) Depreciation: 250,000
(10% x 2,500,000)
CA = 1,750,000

Cost: 2,500,000
(-) IA: 250,000
(10% x 2,500,000)
(-) AA: 1,125,000
(15% x 2,500,000 x
3years)
QE = 1,125,000

2. Research & 2,400,000 2,400,000 – 2,400,000

development 2,400,000
=0
TOTAL a) 3,025,000 TTD
b. Analyze the calculated temporary difference in (a) above in order to determine the future tax
consequences for Veeda Beauty Bhd as at 30 June 2017. (3 marks)

 Since the carrying amount of both assets > tax base of assets, hence both classified as
taxable temporary difference (TTD). TTD will give rise to deferred tax liability.
c. Construct an extract statement of profit or loss for the year ended 30 June 2017. Given below
is additional information that is useful in the preparation of the above statement. Show suitable
computations where necessary.

i. The company made a profit of RM16.4 million for the financial year
ii. Deferred tax liability as at 1 July 2016 was RM500,000
iii. Current tax expense is RM3,843,750
(7 marks)
(Total: 20 marks)

Suitable computations

DTL – balance b/d as at 1/7/16 500,000

DTE 256,250
Balance c/d 756,250
25% x (625,000 + 2,400,000)

Deferred tax account

Balance b/d (DTA) Balance b/d (DTL) 500,000

SOPL (revenue) SOPL (expense) 256,250
Balance c/d (DTL) 756,250 Balance c/d (DTA)
756,250 756,250

Extract SOPL and OIC for year ended 30 June 2017

Profit before tax 16,400,000

(-) Taxation (25% x16,400,000)
= 4,100,000
- Current year tax expense 3,843,750
(4,100,000 – 256,250)
- Deferred tax expense 256,250
Profit after tax 12,300,000
NORHA BHD
Norha Bhd, a manufacturing company commenced business since 2013. The company acquired
a piece of land for RM1,000,000. The land was subsequently revalued to RM1,500,000 on 31
December 2016. The entity has no intention to sell the land. The land does not qualify for capital
allowances because the land is not a depreciable asset.
A machine costing RM450,000 was acquired on 20 January 2014. The useful life of the machine
is 5 years. Depreciation is provided on a yearly basis based on the straight-line method. The
machine qualifies for initial allowance of 10% and an annual allowance of 20%. The machine has
been revalued to RM230,000 on 31 December 2016.
During the year ended 31 December 2016, the following transactions took place:

 The trade receivable is RM540,000 before deducting bad debts of RM20,000. The tax rule
allows for bad debts.

 The company provides for warranties on goods sold of RM20,000 but the tax rule only
allows when actual payments are made.

 Research cost of RM50,000 was written off as an expense, however tax rule only allows for it
to be deductible in later period.

 The company has not paid penalties of RM500. Penalties payable are not allowable for
deduction of taxable profit.

Deferred tax liability as at 31 December 2015 was RM300. The tax rate is 26%.
Required:

a) Briefly explain “temporary difference” based on MFRS 112 Income Taxes. (2 marks)

Based on MFRS 112, a temporary difference are differences between the tax base of an asset or
liability and its carrying amount in the statement of financial position. Temporary differences
may be either:
(a) taxable temporary differences, which are temporary differences that will result in
taxable amounts in determining taxable profit (tax loss) of future periods when the
carrying amount of the asset or liability is recovered or settled; or
(b) deductible temporary differences, which are temporary differences that will result in
amounts that are deductible in determining taxable profit (tax loss) of future periods
when the carrying amount of the asset or liability is recovered or settled.
 b) Calculate the taxable temporary difference or deductible temporary difference for each of
the items based on the additional information above. (12 marks)

Taxable Deductible
Temporary Temporary
Accounting profit Taxation profit
Asset Difference (TTD) Difference (DTD)
(CA) (TB)
A = CA>TB A = CA<TB
L = CA<TB L = CA>TB
1. Land 1,500,000 - 1,500,000 -

Cost : 1,000,000
Surplus : 500,000
CA = 1,500,000

2. Machine 180,000 135,000 45,000 -

Cost : 450,000
(-) acc dep : 270,000
(450,000/5 x 3)
CA = 180,000

Cost : 450,000
(-) IA: 45,000
(10% x 450,000)
(-) AA: 270,000
(20% x 450,000 x
3years)
QE = 135,000

3. Surplus on 50,000 - 50,000

revaluation of
machine

Surplus : 50,000
(230,000 – 180,000)
4. Trade receivables 540,000 – 20,000 540,000 – 20,000 -
= 520,000 = 520,000
5. Research cost 50,000 50,000
6. Penalties 500 500 (not allowed Permanent
s39) difference

LIABILITY
7. Warranties on 20,000 20,000 – 20,000 20,000
goods sold =0
TOTAL b) 95,000 TTD 70,000 DTD

Tax rate 26% 26%

c) DTL = 24,700 DTA = 18,200
 DTL = 24,700 – 18,200 off set
DTL = 6,500 (SOPL) bal c/d

c) Compute the deferred tax expense or income to be shown in the statement of profit or loss
for the year ended 31 December 2016. Assume no changes in the tax rate. (3 marks)

Deferred tax liability

SOPL 6,800 Bal b/d 300

Bal c/d 6,500 OCI (50,000 x 26%) 13,000
13,000 13,000

d) Assume the government announced that the tax rate for companies would be reduced by 1%
beginning on 1 January 2016. Explain how the company should account for the change in the tax
rate in accordance with MFRS 112 Income Taxes. (3 marks)
(Total: 20 marks)

TTD DTD
95,000 70,000
25% 25%
DTL = 23,750 17,500
DTL = 23,750 – 17,500
DTL = 6,250

Deferred tax account

Change in tax rate (300/26) 12 Balance b/d (DTL) 300

SOPL (revenue) 6,538 OCI (50,000 x 25%) 12,500
(300 / 26%) x (26 – 25%)
Balance c/d (DTL) 6,250 Balance c/d (DTA)
12,800 12,800

 The company should restate the tax rate to 25%. The balance brought forward will be
restated by RM12. This would result in DTL in the SOFP to be reduced to RM6,250 and
the amount of deferred tax income transferred to SOPL to RM6,538.
FAME BHD
Given below is the extract of Statement of Financial Position of Fame Bhd as at 31 December
2017.
 RM
Assets
Motor vehicle (note 1) 800,000
Office furniture (note 2) 300,000
Development expenditures (note 3) 300,000

Liabilities
Deferred tax liability at 1 January 2017 70,000
Provision for warranties (note 4) 50,000
Provision for penalties (note 5) 10,000

Additional information:

1. The qualifying expenditure for motor vehicle was restricted to 10% initial allowance and
20% annual allowance. The motor vehicle was acquired on 1 January 2016 at the cost of
RM1,200,000. The motor vehicle was depreciated using a straight line method over the
useful life of 6 years. The motor vehicle was revalued on 31 December 2017 resulting in a
surplus of RM50,000.

2. The office furniture was bought on 31 December 2017 with total capital allowance of
RM30,000.

3. Development expenditure capitalised for the year is calculated after deducting an

accumulated amortization of RM450,000. Development expenditures are claimed for
income tax purposes when it is incurred.

4. Tax rule allows when cash is spent on actual repairs and refunds on warranties are given.

5. Penalties are not allowable for deduction of taxable profit.

6. For the year ended 31 December 2017, Fame Bhd made a profit before tax of RM500,000.
The tax rate is 24%.

Required:

a. Explain the effect of deferred tax based on MFRS 112 Income Taxes for:

I. Non-depreciable asset adopting the Revaluation Model.

  If a deferred tax liability or deferred tax asset from a non-depreciable asset measured
using revaluation model in MFRS 116, the measurement of the deferred tax liability or
deferred tax asset shall reflect the tax consequences of receiving the carrying amount of
the non-depreciable asset through sale, regardless of the basis of measuring the carrying
amount of the asset.

II. Investment property adopting the Fair Value Model.

 If deferred tax liability or asset arises from investment property, that is measured using
FV model MFRS 140, there is a reputable presumption that the carrying amount of the IP
will be recovered through sale.
(5 marks)

b. Calculate the deferred tax assets or liabilities as at 31 December 2017.

(10 marks)

Taxable Deductible
Temporary Temporary
Accounting profit Taxation profit
Asset Difference (TTD) Difference (DTD)
(CA) (TB)
A = CA>TB A = CA<TB
L = CA<TB L = CA>TB
1. Motor vehicle 800,000 600,000 200,000

At cost: 1,200,000
(-) acc dep: 400,000
(1,200,000/6 x
2years)
CA: 800,000

At cost: 1,200,000
(-) IA: 120,000
(10% x 1,200,000)
(-) AA: 480,000
(20% x 1,200,000 x 2)
QE: 600,000

Surplus on 50,000 - 50,000

revaluation of motor
vehicle

2. Office furniture 300,000 300,000 – 30,000 30,000

 = 270,000
3. Development 300,000 300,000 – 300,000 300,000 – 0 =
expenditure =0 300,000

LIABILITY
4. Provision for 50,000 50,000 – 50,000 50,000
warranties =0
5. Provision for 10,000 10,000 (not Permanent
penalties allowed differences
deduction)

TOTAL 580,000 DIL 50,000 DTA

Tax rate 24% 24%
b) DTL = 139,200 DTA = 12,000
DTL = 139,200 – 12,000 off set
DTL = 127,200 (SOPL) bal c/d

c) Construct an extract of Statement of Profit or Loss for the year ended 31 December 2017
(assuming previous year tax rate was 25%).
(5 marks)
Total: 20 marks

SOPL for year ended 31 December 2015

Profit before tax 500,000

(-) Tax expense (24% x RM500,000)
- Current year tax expense (72,000)
- Deferred tax expense (48,000)
- Changes in tax rate 2,800
(117,200)
Net profit after tax 382,800
Other comprehensive income
- Surplus on motor vehicle 50,000
Less: Deferred tax (12,000) 38,000
Total comprehensive income 420,800

Deferred tax account

Changes in tax rate SOPL 2,800 Balance b/d (DTL) 70,000

(1% x 70,000 / 25%)
OCI (surplues 50,000 x 24%) 12,000
Balance c/d (580,000 – 127,200 SOPL 48,000
50,000) x 24%
130,000 130,000
MUTIARA BHD
Mutiara Production Bhd is a company producing variety of plastic products and has been in
operation since July 2000. To meet the demand for mass production, the company bought two
plastic molding machines: Injection Molding and Blow Molding machines. The details of the
machines are as follows:

o Injection Molding Machine

 The machine is used to melt resin pellets with a heated barrel during the injection
molding process. It was purchased on 1 October 2013 at a cost of RM650,000. The
machine qualifies for an initial allowance of 10% and an annual allowance of 15%. The
machine has been revalued to RM200,000 on 30 June 2017.

o Blow Molding Machine

 The machine is employed in various stages of blow molding process to make variety of
plastic ware products such as containers and bottles. As at 30 June 2017, the machine
which has a carrying amount of RM280,000 has been revalued at a surplus of RM40,000.
The tax base is RM120,000.

Depreciation is charged on a yearly basis for both machines based on a straight-line method at
10% per annum.

During the year ended 30 June 2017, the following transactions took place:

 The company acquired a piece of land for RM300,000 for construction of a new production
plant at a later period. The land was subsequently revalued to RM250,000 on 30 June 2017.
The land does not qualify for capital allowances because the land is not a depreciable asset.
The company has no intention to sell the land.

 The development cost of RM300,000 was incurred, but only RM90,000 has met the criteria
for capitalisation and recognised as an asset in the Statement of Financial Position. The
remaining amount is written off in the Statement of Profit or Loss. The tax rule allows all
development cost to be deductible at a later period.

 The company has gross trade receivables of RM50,000 and an allowance for doubtful debts
of RM10,000. The tax rule only allows for bad debts.

 The provision for warranties of RM13,000 has been provided to its customers, however the
tax rule only allows when actual payments are made.

 The company has accrued fines and penalties of RM1,500. This is not allowable for tax
purposes.

 Deferred tax liability as at 30 June 2016 amounted to RM115,000.

 The company made a profit of RM1,200,000 and the applicable tax rate is 30%.

Required:

a) Prepare a schedule to determine the taxable temporary difference and deductible

temporary difference as at 30 June 2017.
 (12 marks)

Item Carrying Tax Base TTD DTD

amount
RM RM RM RM
Land
Cost 300,000 Nil
deficit (50,000) Nil
Carrying amount 250,000√ Nil√ Nil√

Injection Molding
1/10/2013 Cost 650,000 650,000
Accumulated depreciation
(10% x 4 yrs) (260,000) √
Initial allowance (10%) (65,000) √
Annual allowance (15% x 4 yrs) (390,000) √
Carrying amount 390,000
Tax base 195,000 195,000√
Deficit (190,000) √ -√ 190,000√

Blow Molding
Carrying amount 280,000 120,000√ 160,000√
Surplus 40,000√ - 40,000√

320,000 120,000

Development cost (written off) -√ 210,000 √ 210,000 √

Development cost (capitalized) 90,000√ 90,000√ Nil
Account receivable 50,000 50,000
Provision for doubtful debt (10,000) 0
40,000√ 50,000√ 10,000 √
Provision for warranties 13,000 0 13,000√
Penalties & Fines 1,500 Nil or 1,500 Permanent Difference
500 or Nil√
TOTAL 395,000 423,000
(24√ x ½ = 12 marks)

b) Prepare an extract of Statement of Profit or Loss for the year ended 30 June 2017 to
show the deferred tax expense/income and current tax expense/income. (Assume no
change in the tax rate)
(3 marks)

Working
 Alternative answer 1
TTD (Net differences) 28,000
Deferred Tax Asset 28,000 x 30 % 8,400

Alternative answer 2
DTL 395,000 x 30% 118,500
DTA 423,000 x 30% 126,900
Deferred Tax Asset 8,400

Deferred tax liability

Balance b/d 115,000√

Deferred tax income (SOPL) 135,400 Balance c/d 8,400√

OCI (40,000*30%) 12,000√

135,400 135,400

Statement of Profit or Loss for the year ended 30 June 2017 (extract)
Taxation expense (1,200,000 x 30%) (360,000) √
Deferred tax income √135,400
Current tax expense √(495,400)

c) Explain how deferred tax will affect the surplus on revaluation.

(2 marks)

 Deferred tax will affect surplus or revaluation of depreciable asset√ and need to be
deducted from surplus√ on revaluation in OCI.
d) If the deferred tax liability as at 30 June 2016 is based on a tax rate of 28%, explain the
effect of the change in the tax rate to the amount of deferred tax expense/income
transferred to Statement of Profit or Loss.
(3 marks)

 Since there is a change in the tax rate, the balance b/d will be restated to 30%.√ The
amount restated will be (2/28% * 115,000) RM 8,214. √ Then the deferred tax income to
be transferred to SOPL will increase to RM143,614 (115,000+8214+8,400+12,000) √.

Workings:
Deferred tax liability
Balance b/d (28%) 115,000
Restate (30-28/28)*115,000 8,214
OCI – Surplus on revaluation 12,000
SOPL 143,614 Balance c/d (30%) 8,400
143,614 143,614

(Total: 20 marks)
CACTUS BHD
The financial year end of Cactus Bhd is on 30 June each year. During the year ended 30 June
2013, Cactus Bhd bought a new machine costing RM180,000. The machine is to be depreciated
at 20% per annum on cost based on yearly basis. The machine qualifies for an initial allowance
of 40% and an annual allowance of 20%. The machine was revalued to RM90,000 on 30 June
2015.

During the year ended 30 June 2015, Cactus Bhd has the following assets and liabilities:

i. The freehold land with a carrying amount of RM1,000,000 was revalued to

RM1,200,000. The freehold land will not be depreciated and are not subject to any
capital allowance.

Cactus Bhd has no intention of disposing the property, plant and equipment.

ii. The development cost of RM10,000 was incurred during the year and need to be
written off immediately as expenses in computing taxable profit. The development
cost meets the criteria for capitalisation as an intangible asset.

iii. Cactus Bhd made a provision for warranty on goods sold amounting to RM5,000. For
taxation purposes, the warranties are deductible in the year it is incurred.

iv. Entertainment allowance of RM500 was accrued at the end of the year.

v. As at 30 June 2015, the carrying value of accounts receivable is RM10,000 before

deducting bad debts of RM1,000. The tax rule allows for bad debts in arriving at
taxable profit.

Deferred tax liability as at 30 June 2014 was RM10,400. Tax rate for 2015 is 25%.

Required:
a. Determine the taxable temporary difference or deductible temporary difference for each
relevant item above. (12 marks)

Items Carrying Tax Base TTD DTD

Value
Freehold land 1,000,000 √ 1,000,000 √ - -
Surplus on revaluation 200,000 √ - Subject -
1,200,000 to rpgt- √

Option 1 -
Machinery 72,000
Accounting rules:
Cost =180,000 √
Less: acc depn
180,000 x 20% x 3yr =108,000 √√

Surplus on revaluation 18,000 √

90,000 Nil 90,000√
 Tax rules:
Cost 180,000
- IA(180,000 x 40%) √
-AA(180,000 x 20% x 3 yrs) √√

Option 2 90000 Nil 90000

Machinery AT FAIR VALUE

Development cost 10,000√ Nil√ 10,000√

Provision for warranties 5,000√ Nil √ 5,000√
Entertainment allowance 500 √ 500 or Nil √ -√ -
Accounts receivable 9,000√ 9,000√ -√ -
(10,000-1,000)
100,000 5,000
*Entertainment allowance are not allowed for taxation – permanent difference
(24 x1/2=12 marks)

TTD DTD
100,000 5,000
Tax rate 25% 25%
DT Liability 25,000
DT Asset 1,250
DTL DTA

b. Determine the deferred tax expense that will be recognised in the statement of profit or
loss for the year ended 30 June 2015.
Assume a tax rate of 26% in 2014. (3 marks)

Balance of deferred tax liability at 30 June 2014 (b/f) 10,400 √

Adjustment to opening deferred tax liability [(26-25)/26 x 10,400] (400) √√
Deferred tax attributable to revaluation surplus of machine (18,000 x 25%) 4,500 √
Deferred tax expense transferred to profit or loss 9,250 √
Balance of deferred tax liability c/f (25,000- 1,250) 23,750 √
(6 x ½ = 3 marks)
OR:
Deferred tax liability
RM RM
Restate (26-25)/26x10400 400 Bal b/d 10,400
OCI-Machine (18000x25%) 4,500
Bal c/d 23,750 SOPL (DTE)*** 9,250
24,150 24,150
c. Explain the difference between temporary difference and permanent difference, including
its effects on deferred tax.
(5 marks)
Temporary differences are the differences between the carrying amount of an asset or liability
in the statement of financial position and its tax base √, whereas permanent differences are
differences between taxable profit and accounting profit which will not be reversible in the
future periods. √

Only temporary difference will lead to deferred tax asset and deferred tax liability, √ √ whereas
permanent difference will have no effect on deferred tax √

(Total: 20 marks)
FEBRUARY 2021
QUESTION 2
A. The difference between tax rules and accounting rules contributes to the difference in
taxable income. Tax rules is governed by the fiscal policy that affect the computation on
certain income and expense. Meanwhile, accounting method uses accounting standards
and generally accepted accounting principles that provides its own measurement on
income and expense in measuring its accounting profits.

Required:

Briefly explain the effect of accrued interest expense towards the determination of
accounting profit and taxable income in relation to MFRS112 Income Taxes that leads to
temporary difference. (6 marks)

Accrued interest expense will have different treatment under accounting rules and tax rules:
 Under accounting rules, accrued interest will be recognized when it is incurred.
 Therefore, accrued interest expense will be included in the calculation of accounting
profit.
 Under tax rules, it only allows expenses that have been paid.
 Therefore, the taxable income will be more than accounting profit.
 This will lead to the entity paying more tax for the current period.
 Since the entity pay more tax during the current period, there will be future tax
consequences of paying lesser in future period. Therefore, for the current period it can
be classify as a deductible temporary difference.

B. Kelola Bhd commenced a furniture manufacturing business three years ago which has a
financial year ends on 30 June annually. The company bought a Machine A on 1 July
2017 which cost RM200,000 that has a useful life of 20 years. Due to the high demand
from the market, Kelola Bhd acquired a Machine B on 1 August 2018 costing RM150,000
to increase its production. The life span of the Machine B is 15 years. It is the policy of the
company to depreciate all its machinery using straight line method on yearly basis. Both
machineries qualify for 20% initial allowances and 14% annual allowances.

Kelola Bhd applied for a bank loan of RM20,000 with 6% interest and the loan was
approved on 1 January 2020, The interest charge on the loan is accrued as at 30 June
2020 and will be paid by the following year. The interest expense is allowed for tax
purpose on cash basis.

On 1 September 2019, a sum of RM20,000 was received from Mercury Enterprise for
rental expenses. Mercury Enterprise is obligated to pay RM1,500 per month for renting a
building from Kelola Bhd.

As at 30 June 2019, the taxable temporary difference was RM20,000 with income tax
rate of 30%. Profit before tax recorded for financial year ended 30 June 2020 is
RM250,000.

Required:
 a. Construct the schedule of temporary difference for the year ended 30 June 2020. (7
marks)

Item Carrying Tax Base (TTD) (DTD)

amount
RM RM RM RM
Machine A
01/07/2017 200,000 200,000
Accumulated depreciation
(200,000/20 x 3) (30,000)
Initial allowance (20%) (40,000)
Annual allowance (14% x 3) (84,000)
30/06/2020 170,000 76,000 94,000

Machine B
01/08/2018 150,000 150,000
Accumulated depreciation
(150,000/15 x 2) (20,000)
Initial allowance (20%) (30,000)
Annual allowance (14% x 2) (42,000)
30/06/2020 130,000 78,000 52,000

Bank Loan 20,000 20,000 - -

Interest on loan 600 - 600

Unearned rental income (20,000- 2,000 - 2,000

18,000)
or or
5,000 5,000
-
TOTAL 146,000 2,600
 b. Compute the deferred tax liability (or deferred tax asset) as at 30 June 2020. (2 marks)

Option 1 Option 2
Net temporary differences Net temporary differences
=146,000 – 2,600 =146,000 – 5,600
=RM143,400 =RM140,400

Deferred tax liability Deferred tax liability

=143,400 x 30% =140,400 x 30%
=RM43,020 =RM42,120

c. Prepare the journal entry to record the tax expense and deferred tax liability (or
deferred tax asset) as at 30 June 2020. (2 marks)

Particulars Dr Cr
Dr SOPL – Tax expense 75000
(250,000 x 30%)
Cr Tax payable (current tax liability) 37,980
Cr Deferred tax liability 37,020*

DTL*
b/d 6000
20,000x30%
c/d 43,020 SOPL 37,020
43,020 43,020

Or
Particulars Dr Cr
Dr SOPL – Tax expense 75000
(250,000 x 30%)
Cr Tax payable (current tax liability) 38,880
Cr Deferred tax liability 36,120*

DTL*
b/d 6000
20,000x30%
c/d 42,120 SOPL 36,120
42,120 42,120
 d. Assume that on June 2020, the government has announced a new tax law that will
cause the 2021 tax rate to change from 30% to 25%. Demonstrate (with calculation)
the accounting treatment to record the changes in tax rate for the year ended 30 June
2020. (3 marks)
 The amount deferred tax liability brought forward will be adjusted to RM5,000
(6,000-1,000) to due to reduction of 5% tax rate.
 The reduction of RM1,000 is credited to the SOPL of the year 2020.
 It is a change in accounting estimate and the retained profit is not adjusted.

DTL*
SOPL 1,000 b/d 6000
(30%-25%) x 20,000 20,000x30%
c/d 35,850 SOPL 30,850
143,400 x 25%
36,850 36,850

Restatement
= 5%/30% x 6,000
= 1,000

(Total: 20 marks)
 SHARE
BASED
PAYMENT
CAGAYAN BHD
A. a. Explain with example the equity-settled share-based payment transactions and
cash-settled share-based payment transactions. (5 marks)

 Equity-settled shared based payment transactions

- Transaction where the entity receives goods or services as consideration for equity
instruments of the entity (including shares or share options) or receives goods or
services but has no obligation to settle the transaction with the supplier.
- Example: call options given to employees to purchase an entity’s shares in exchange for
services.
 Cash settled shared based payment transactions.
- The entity acquires goods or services by incurring a liability to transfer cash or other
assets to the supplier of those goods or services for amounts that are based on the
price (or value) or equity instruments (including shares or share options) of the entity
or another group entity.
- Example: Payments made to external consultants that are calculated based on entity’s
share price.

a. On 30 August 2014, Cagayan Bhd entered into share-based payment transaction to

purchase a processing machine and a cutting machine for the purpose of
manufacturing. Both machines were received by Cagayan Bhd on 30 November
2014.

The following information is relevant to the above transaction:

 The fair value of Cagayan Bhd’s equity share on 30 August 2014 was RM3.50
and on 30 November 2014, the fair value was RM3.60.

 The fair value of the processing machine on 30 November 2014 was

RM300,000. It is agreed that the equity share granted to purchase this
machine was 100,000 units.

 The fair value of the cutting machine on the date of purchase however, was
not determinable due to the various competitive cutting machine models in
the market. It is agreed that the equity share granted to purchase this machine
was 150,000 units.

Required:
 i. Determine the recognition date (with justification) for both machines and; (1
mark)
 The recognition date for both machine is on 30 November 2014. This is because on this
date, Cagayan Bhd has received both machine. Therefore, the recognition date for both
machines are on the date goods received or service rendered.

i. Calculate the fair value of both machines at the initial recognition. Give
justification for your answers. (3 marks)

 Processing machine
Working: RM300,000
FV of the machines can be obtained directly, therefore do not apply FV
of equity instrument granted

Dt Processing machines 300,000

Ct SBPR 300,000

 Cutting machine
Working: RM3.60 x 150,000 units = RM540,000
FV of the machines cannot be determined directly. However it can be
obtained directly from FV of equity instrument granted.

Dt Cutting machines 540,000

Ct SBPR 540,000

b. On 1 January 2012, NAR Bhd which accounting year ends on 31 December, granted
its 50 employees in the production unit options to buy 100 shares each based on
the following conditions:

If production increased by minimum 10%, the options granted would increase by

10% and if the production increased by 15% or more the options granted would
increase by 15%. The options would vest at the end of the third year.

In the year 2012, the company estimated that production would not increase and
that 5 employees would leave before the end of year 2014.

In the year 2013, three (3) employees left and the company estimated that
production would increase by 12%. Only 35 employees would remain in service
until end of year 2014.
 In the year 2014, production rose by 20% and another four employees left.

The information on the fair value of the option is as follows:

Date RM

1 January 2012 12.00

1 January 2013 13.00

1 January 2014 14.00

31 December 2014 13.50

Required:

i. From the information given above, identify the type of vesting conditions
stated in the share option scheme. (2
marks)

Type of vesting conditions stated:

 The vesting condition are service condition and performance condition which
classified under non-market condition.
 These conditions do not affect estimate of FV of equity instrument granted

ii. Calculate the employees benefit expense and equity (share-based payment
reserve) for years 2012, 2013 and 2014. (5 marks)

Employee benefit expense and equity (share-based payment reserve):

Year Workings: Expense (RM) Equity (RM)

31/12/2012 100 shares x 45 employees x RM12 x 1/3 18,000 18,000
(100 shares x 110%) x 35 employees x RM12
31/12/2013 12,800 30,800
x 2/3 – 18,000
(100 shares x 115%) x 43 employees x RM12
31/12/2014 x 3/3 – 30,800 28,540 59,340
Employees: 50-3-4=43
KAYANGAN BHD
A. Kayangan Bhd granted 1,000 shares to each of its 400 employees on 1 January 2014.
The shares would be issued on 1 January 2017 provided that the employees would
serve the company until the end of the third year. The exercise price was RM6.50 and
on the grant date the average market price of shares was RM9.50.

The par value of one (1) ordinary share of Kayangan Bhd is RM1. The share prices of
the entity were RM8.60, RM9.20 and RM10.10 for the year ended 31 December 2014,
2015 and 2016 respectively. Nevertheless, the entity was not able to estimates reliably
the fair value of the share options granted.

By August 2014, twenty-two (22) employees left their employment and the company
estimated that another eight (8) would leave in 2014. In 2015, twenty-eight (28)
employees left and it is estimated that only three hundred and fifty (350) employees
would remain in service until end of year 2015. As at 31 December 2016, fifteen (15)
employees left the service.

Required:

a. Define the term share-based payment transaction. (2 marks)

 Share-based payment transaction is a transaction where the payment for the goods or
services rendered is to be made by the issue of the shares of the purchasing entity√ or
in terms of cash equivalent to the market value of a specified number of shares of the
purchasing entity.

b. Discuss briefly the recognition of equity settled share-based payment

transaction of Kayangan Bhd.
(3 marks)

 The employees share option scheme is a transaction with the employees of the
company. therefore, under MFRS 2, the scheme should be recognized at the grant date
and measured using the fair value of the option on the grant date.
 However, in this case, the option has a vesting condition. Hence, it should be
recognized at each reporting date throughout the vesting period. There will be no
recognition on the grant date.
 c. Explain how Kayangan Bhd determine the fair value of the equity instruments
granted when the fair value of equity instrument cannot be estimated reliably.
(4 marks)

 The entity shall measure the equity measurements at their intrinsic value, initially at
the date the goods are obtained or the counterparty renders service. These equity
instruments are subsequently remeasured at intrinsic value at each reporting date and
the date of final settlement, with any change in intrinsic value recognized in profit or
loss.

d. Determine the employee benefit expense for the three years ended 31
December 2014, 2015 and 2016.
(7 marks)

Year Workings: Expense (RM) Equity (RM)

1,000 shares x (400 – 30 = 370 employees) x
31/12/2014 (RM8.60 – RM6.50) x 1/3 259,000 259,000
Employees: 400-22-8=370
1,000 shares x 350 employees x (RM9.20 –
31/12/2015 RM6.50) x 2/3 – 259,000 630,000 371,000
Employees: 370+8-28=350
1,000 shares x 335 employees x (RM10.10 –
31/12/2016 RM6.50) x 3/3 – 630,000 1,206,000 576,000
Employees: 400-22-28-15=335
MEGA BHD
A. Mega Bhd granted 200 share options to each of its 10 top executives on 1 January
2013. Each option has a fair value of RM15 at the grant date. The employee share
options will vest only if the executive works for the company until 31 December 2015.

Mega Bhd estimated 600 share options to vest in 2013 and 1,000 share options to vest
in 2014.

In March 2015, the company hired two new executive to replace those that have left
the entity. No new share option schemes were introduced in 2015. On 31 December
2015, only 6 employees who eligible for the share options continue to work with Mega
Bhd throughout the three-year period from the grant date.

Required:

a. Identify the TWO (2) types of vesting conditions practiced in employee share
options scheme. (2 marks)

 Service condition
 Performance condition

b. Describe how to determine the fair value of the equity instrument granted
under equity settled according to MFRS 2 Share-based Payment. (3 marks)

 An entity shall measure the FV of equity instruments granted at the measurement

date, based on market prices if available.
 If market prices are not available, the entity shall estimate the FV of the equity
instruments granted using a valuation technique.
c. Explain to the entity the measurement and recognition of the share option
scheme given above. (4
marks)

 It is a transaction with employees. Therefore, must be measured at FV of equity

measurement granted at the grant date. Since it has vesting period, no recognition is to
be made at the grant date, but it has to be recognized at each reporting date as an
expense over the three-year period.
 d. Calculate the amount to be recognized in the statement of profit or loss and
other comprehensive income and the statement of financial position for the
three years.
(7 marks)

Year Workings: Expense (RM) Equity (RM)

31/12/2013 600 shares x RM15 x 1/3 3,000 3,000
31/12/2014 1,000 shares x RM15 x 2/3 – 3,000 7,000 10,000
31/12/2015 (6 x 200 shares) x RM15 x 3/3 – 10,000 8,000 18,000
 MEWAH BHD
A. On 1 January 2012, Mewah Bhd granted its 50 administrative staffs 1,000 share options
each. The exercise price was RM10. In order to be eligible for the share options, the
staffs were required to remain in the service for three years from the grant date. The
share option price was RM6.

By the end of year 2012, five employees left the service and the entity estimated that
only 35 of these staff would be entitled to the share option at the end of the vesting
period.

By the end of year 2013, another five left the service and the entity estimated that
another three would leave the service.

During year 2014, two employees left the entity.

Required:

a. Calculate the employee benefit expense for each year. (8 marks)

Year Workings: Expense (RM) SOPL EQUITY (SOFP)

31/12/2012 1,000 shares x 35 employees x RM6 x 1/3 70,000 70,000

1,000 shares x 42 employees x RM6 x 2/3

31/12/2013 – 70,000 98,000 168,000
Employees: 50-5-3=42
1,000 shares x 38 employees x RM6 x 3/3
31/12/2014 – 70,000 – 98,000 60,000 228,000
Employees: 50-5-5-2=38
 b. Prepare the extract of statement of financial position as at the end of 2012,
2013 and 2014. (4
marks)

Equity 2012 (RM) 2013 (RM) 2014 (RM)

Share beased payment reserve 70,000 168,000 228,000

c. Define the following terms:

i. Equity-settled share-based payment transactions. (2 marks)

 Transaction where the entity receives goods or services as consideration for equity
instruments of the entity (including shares or share options) or receives goods or
services but has no obligation to settle the transaction with the supplier.
 Example: call options given to employees to purchase an entity’s shares in exchange for
services.

ii. Cash-settled share-based payment transactions. (2 marks)

 The entity acquires goods or services by incurring a liability to transfer cash or other
assets to the supplier of those goods or services for amounts that are based on the
price (or value) or equity instruments (including shares or share options) of the entity
or another group entity.
 Example: Payments made to external consultants that are calculated based on entity’s
share price.
MILITON BERHAD
A. On 1 January 2016, Militon Berhad (MB) grants 1,000 share options to each of its
200 employees, conditional upon the employees remaining in the entity’s employ
during the vesting period. The options have a life of 2 years. At grant date, the fair
value of the option is estimated at RM15.00.

It was initially estimated that fifty employees would leave the entity before the end
of the vesting period. Ten employees left the entity at the end of year 2016. It is
expected that twenty employees will leave in year 2017. However, no other people
left until the end of the vesting period.

The fair value of each right was as follows:

Year Share Price

RM
31 December 2016 18
31 December 2017 16

Required:

a. State the two (2) types of share based payment transactions. (2 marks)

 Equity-settled
 Cash-settled

b. Explain briefly the measurement mechanism for “equity-settled” share

 based payment transactions. (3 marks)

 Para 10: For equity-settled share-based payment transactions, the entity shall
measure the goods or services received, and the corresponding increase in equity,
directly, at the fair value of the goods or services received, unless that fair value
cannot be estimated reliably. If the entity cannot estimate reliably the fair value of
the goods or services received, the entity shall measure their value, and the
corresponding increase in equity, indirectly, by reference to the fair value of the
equity instruments granted.

c. Calculate the amount recognised as an expense and amount disclosed as

equity in the statement of financial position for year ended 31st December
2016 and 2017. (4 marks)
Year Workings: Expense (RM) Equity (RM)
1,000 shares x 150 employees x RM15 x 1/2
31/12/2016 1,125,000 1,125,000
Employees: 200-50=150
1,000 shares x 190 employees x RM15 x 2/2
31/12/2017 1,725,000 2,850,000
Employees: 200-10=190

a. Assume that Militon Berhad bought a piece of heavy machinery from Klaus
Heavy Machineries Sdn Bhd (KHMSB). On 15 January 2017, MiIiton Berhad
negotiated with KHMSB on the specification of the heavy machineries. Both
 parties signed a memorandum of understanding on 1 February 2017. On 15
March 2017, both Militon Berhad and KHMSB agreed to a share based
payment of 250,000 shares for the settlement of the heavy machinery. The
fair value of Militon Berhad’s shares on that date was RM5.00.

The heavy machinery was shipped to Militon Berhad on 1 May 2017 and
received on 15 June 2017 with Militon Berhad’s share value being RM7.50
and RM8.00 each respectively.

Required:

Prepare the journal entries to record the purchase and payment of the
machinery. (7 marks)

Working: RM8 x 250,000 shares = RM2,000,000

2017 Machinery RM2,000,000

June 15 Share-based payment reserve (SBPR) RM2,000,000

Share-based payment reserve (SBPR) RM2,000,000

Share capital RM2,000,000

MYTON ELETRICAL BHD

A. On 1 January 2014, Myton Electrical Bhd (MEB) granted 1,000 share options to each of
its 50 employees on the condition that the employees remain in the entity’s
employment during the vesting period. The options have a vesting period of 3 years. At
the grant date, both the company’s share price and the exercise price are set at RM8.

By the end of year 2014, three employees leave the entity. The entity then estimates
that only 90% of the share option will vest. By the end of year 2015, another three
employees leave the company. The company revises its estimates to 84%. By the end of
year 2016, another employee leaves the company

Required:

a. State the differences between equity-settled and cash-settled share-based

payment transactions in accordance to MFRS 2 Share-based Payment.
(2 marks)

Equity-settled Cash-settled
An entity acquires goods or services by
An entity receives goods or services as
incurring liabilities to the supplier of those
consideration for equity instruments (or
goods or services for amounts that are
rights to equity instruments) of the entity
based on the price (or value) of the entity’s
(including shares or share options).
shares or other equity instruments.

b. Explain briefly the measurement mechanism for cash-settled share-based

payment transactions. (3 marks)

 Para 30: For cash-settled share-based payment transactions, the entity shall measure
the goods or services acquired and the liability incurred at the fair value, of the liability
until the liability is settled the entity shall remeasure the fair value of the liability at the
end of each reporting period and at the date of settlement, with any changes in fair
value recognized in profit or loss for the period.

c. Explain the measurement of a share-based payment transaction if the fair value

cannot be estimated reliably. (4 marks)
  Para 24: The entity shall measure the equity instruments at their intrinsic value, initially
at the date the entity obtains the goods or the counterparty renders service and
subsequently at the end of each reporting period and at the date of final settlement,
with any change in intrinsic value recognized in profit or loss.

d. Calculate the amount recognized as an expense for each of the relevant years.
(7 marks)

Year Workings: Expense (RM)

31/12/2014 1,000 shares x (90% x 50 employees) x RM8 x 1/3 120,000
1,000 shares x (84% x 50 employees) x RM8 x 2/3 –
31/12/2015 104,000
120,000
1,000 shares x 43 employees x RM8 x 3/3 – 104,000 –
31/12/2016 120,000 120,000
Employees: 50-3-3-1=43

JULY 2020 SESSION 1

QUESTION 1
 a. Platinum Construction Bhd is a construction company which financial year ends on 31
December each year. Due to its expanding operation, Platinum Construction Bhd acquired a 2
million square foot freehold land in Pendang, Kedah on 15 January 2019 under a share-based
payment scheme. On that date, the land was valued at RM35,000,000. The terms of the
agreement allow for the acquisition to be settled on 1 May 2019 through issuance of
10,000,000 units ordinary shares. The fair value of the company’s ordinary shares on 15
January 2019 and 1 May 2019 was RM3.75 and RM3.90 respectively.
Required:
i. Discuss how the acquisition of the land should be treated in accordance with MFRS 2 Share
Based Payment. (Support your answer with the relevant journal entries to record the initial
recognition and settlement of the acquisition of the land). (9 marks)

 This is an equity settled transactions with non-employees where Platinum Construction

Bhd issues its own equity instruments to acquire a land √. MFRS 2 requires an entity to
measure the goods or services received, and the corresponding increase in equity,
directly, at the fair value of the goods or services received√, unless that fair value
cannot be estimated reliably.
 Base on the above situation, at initial recognition, the value of the land is
RM35,000,000 because the fair value of the land can be obtained directly √, thus do
not apply the fair value of the equity instrument granted. Journal entries for:
 Initial recognition (15 January 2020):
Dt Land √ RM35,000,000 √
Ct Share Based Payment Reserve√ RM35,000,000
 Settlement (1 May 2020):
Dt Share Based Payment Reserve √ RM35,000,000√
Ct Share Capital √ RM35,000,000 (9√ x 1marks=9 marks)
ii. Advice Platinum Construction Bhd on the accounting treatment on the acquisition of the
land if its fair value cannot be determined reliably (Support your answer with the relevant
journal entries). (6 marks)

 According to MFRS 2, if the entity cannot estimate reliably the fair value of the goods
or services received, the entity is required to measure their value, and the
corresponding increase in equity, indirectly, by reference to the fair value of the equity
instruments granted √. Therefore, the value of the land is calculated based on the fair
value of shares on the measurement date: RM 3.75 x 10 million shares = RM 37.5
million√.
 Journal entries to record the acquisition of the land if the fair value of the land cannot
be determined reliably:
 Initial recognition (15 January 2020)
Dt Land RM37,500,000 √
 Ct Share Based Payment Reserve RM37,500,000 √
 Settlement (1 May 2020):
Dt Share Based Payment Reserve RM37,500,000 √
Ct Share Capital RM37,500,000 √
b. Zass Bhd enters into a share-based payment transaction to purchase a piece of machinery.
The agreement allows for the acquisition to be settled either by equity settled or cash and Zass
Bhd has the option to choose the choice of settlement.
Required:
Explain the vesting conditions that have to be met if Zass Bhd decides to settle the obligation
by cash in accordance with MFRS 2 Share-based payment. (5 marks)
(Total: 20 marks)

 According to MFRS 2, where an entity has the choice of settlement method for the
share-based payment transaction, the entity shall determine whether it has a present
obligation to settle in cash or to settle in equity√. The entity has a present obligation to
settle in cash if:
a. The choice of settlement in equity instruments has no commercial substance√;
b. The entity has a past practice or policy of settling in cash √; or
c. The entity generally settles in cash whenever the counterparty asks for cash settlement
√.

 Therefore, if one of these conditions exists, Zass Bhd could settle the obligations by
cash-settled. Otherwise, it should treat the acquisition as equity settled √.

FEBRUARY 2021
QUESTION 3
Dani Pharma Bhd is a leading pharmaceutical company that has obtained a contract to
produce vaccine for COVID19. To ensure the future demand for its products can be met, on
1 January 2020, Dani Pharma Bhd had negotiated the specifications of more efficient
production machine with A-One Machineries Bhd. On 15 January 2020, Dani Pharma Bhd
signed the sale and purchase agreement and the machinery was received by Dani Pharma
Bhd on 1 February 2020.

The market value of similar machine is RM2,000,000. However, the term of the agreement
stated that Dani Pharma Bhd shall settle the acquisition with cash equivalent to the market
value of 200,000 ordinary shares of its own. The acquisition was settled on 1 April 2020.
The market values of the company’s ordinary shares for the related dates 2020 were as
follows:
2020 Share Price (RM)
1 January 8.00
15 January 7.50
1 February 8.50
1 April 9.50

Earlier, on 1 January 2018 to appreciate the hard work of its employees Dani Pharma Bhd
agreed to a plan to grant 100 shares to each of its 250 employees. However, the employees
need to remain in the entity’s employment for a vesting period of 3 years. The shares would
be issued on 1 January 2020. At the grant date, both the exercise price and the company’s
share price are set at RM8.50.

The company estimates that 4% and 2% of the total employees will leave the company in
year 2018 and 2019 respectively. By the end of year 2018, two employees leave Dani
Pharma Bhd and another three (3) and one (1) employees leaves the company in 2019 and
2020 respectively.

Dani Pharma Bhd accounting year ends on 31 December each year.

Required:

a. Discuss briefly the difference between the acquisition of machinery and the 100 shares
that would be granted by Dani Pharma to its employees in accordance to MFRS 2 Share-
based Payment. (2 marks)

 The machinery is a cash settled transactions since the Dani Pharma acquires goods or
services by incurring liabilities to the supplier of those goods or services for amounts
that are based on the price (or value) of the entity’s shares or other equity
instruments
 The 100 shares that would be granted by Dani Pharma is an equity-settled share-
 based payment whereby the entity (Dani Pharma) receives goods and services as
consideration for equity instruments (or right to equity instruments) of the entity.

b. Prepare the journal entries for the recognition and settlement of the acquisition of the
machine. (6 marks)

DATE PARTICULARS RM RM
2020
Feb 1 Dt Machinery [200,000 x RM8.50] 1,700,000
Cr Liability: A-One Machinery 1,700,000
(to record the purchase of the machine)

Apr 1 Dt Liability: A-One Machinery 1,700,000

Dt SOPL : change in FV 200,000
[ 200,000 x (9.50 – 8.50) ]
Cr Bank/Cash 1,900,000
[200,000 x RM9.50]
(to record the change in fair value of the
liability and its settlement)

c. Calculate the employees benefit expense for the three years ended 31 December
2018, 2019 and 2020 to be recognised by Dani Pharma Bhd. (8 marks)

Year Expense
RM
2017 Dec 31 100 shares x (250 x 96%) x RM8.50 x 1/3 68,000

2018 Dec 31 100 shares x (250 x 98%) x RM8.50 x 2/3

Less: 68,000of 70,833
2019 Dec 31 100 shares x (250 – 6 ) x RM8.50 x 3/3
Less: (68,000 + 70,833) of 68,567
= 207,400 – 138,833

d. Discuss the accounting treatments with journal entries to record the unexercised
 employee’s share scheme after the vesting period. (4 marks)

 If the employee share scheme is unexercised after the vesting period, the entity
cannot reverse the charges it expensed off in the previous period. However, it can
reverse the share option reserve to another component of equity such as retained
earnings. Journal Entries:
Dt Share option reserve
Cr Retained Earnings

(Total: 20 marks)
EARNING
PER
SHARE
QUESTION 1

On 1 January 2019, Nano Edge Bhd has RM15 million issued and fully paid ordinary shares
at RM1 per share. The financial year end of the entity is on 31 December each year and the
following events took place throughout the year of 2019:

1. The entity has made a rights issue of 1 for every 4 shares on 1 March 2019. The
rights issue was given to the existing shareholders at RM1.75 per share when the
market value was RM2.50 The market price prior to the rights issue was RM2 per
share.
2. On 1 September 2019, the entity issued RM1 million 8% convertible preferences
shares. The convertible preference shares are convertible into ordinary shares based
on 175 shares per RM100 convertible preference shares.
3. On 1 November 2019, 20% of the 8% convertible preference shares were converted
into ordinary shares.
4. Net profit after tax for the year ended 31 December 2019 was RM3 million.
5. The earnings per share (EPS) for 2018 was 1.5 sen per share.
6. Tax rate for 2019 is 24%.

Required:

a. Briefly discuss the impact of dilution of earnings per share on firm’s earning
performance. (6 marks)
 EPS measures the contribution of earnings/income of one unit of issued
ordinary shares. However, whenever the firm issued potential ordinary shares,
these potential ordinary shares may have a potential dilutive effect towards
EPS.
 Diluted EPS will remeasure the basic EPS by taking into consideration the
number of potential ordinary shares converted into ordinary shares and in
some cases, readjust the amounts of earnings such as interest saved on
converting the convertible debentures.
 This will result a reduction in EPS or an increase in loss per share. DEPS portray
a true shareholder value as it represents the shareholders worst case scenario.
 The DEPS also may affect measures such as a firm price to earnings(P/E) ratio
 and even decreases the firm’s stock price.

b. Compute the basic earnings per share for the year ended 31 December 2019 and
the 2018 comparative earnings per share. (8 marks)
Right issue:
Market value before RI 4 shares x RM2.00 RM8.00
Proceeds from RI 1 shares x RM1.75 RM1.75
5 shares RM9.75
TERP = RM9.75/5 shares
= RM1.95 for 1 share

Fraction for RI = RM2.00/RM1.95

= 200/195

WANOS:

1/1/2019 Balance b/d 15,000,000 x 2/12 x 2,564,103

200/195
1/3/2019 Right issue 15,000,000/4
=3,750,000
18,750,000 x 8/12 12,500,000
1/11/201 Conversion 20% 1,000,000 x 175/100
9 =350,000
19,100,000 x 2/12 3,183,333.33
For basic EPS 18,247,436.33

Basic EPS = RM3,000,000

18,247,436.33

= 0.1644 cents

Restated EPS (2014) = 1.5 cents x 1.95/2.00

= 1.46 cents

c. Ascertain whether the 8% convertible preference shares issued by Nano Edge Bhd

have a potential dilutive effect on earnings per share. (Support your answer with
workings). (6 marks)
NUMERATOR

Profit after tax RM3,000,000

(+) Interest on convertible preference shares

(8% x RM1,000,000) x 2/12 x 76% RM10,133

(8% x RM1,000,000 x 80%) x 2/12 x 76% RM8,107

RM3,018,240

WANOS:

Date Transactions No. of shares Time factors Bonus fraction WANOS

For basic EPS 18,247,436.33

Potential OS

1/9/2019 – 31/10/2019 291,667

8% convertible preference shares

(RM1,000,000 x 175/100) x 2/12

1/11/2019 – 31/12/2019 233,333

8% convertible preference shares

(RM1,000,000 x 175/100 x 80%) x 2/12

For diluted EPS 18,772,436.33

Diluted EPS = RM3,018,240

18,772,436.33

= 0.1608 cents

The 8% loan stock give the potential dilutive effect on EPS since diluted EPS lesser than
basic EPS.
QUESTION 1

Alam Suria Bhd is a listed company operated in Selangor. The entity’s financial year ends on 31
December each year. The following data was extracted from the entity’s books.

1. On 1 January 2015, the issued share capital consisted of 30,000,000 ordinary shares of
RM0.50 each and 500,000 preference shares of RM1 each.

2. RM500,000 10% convertible debentures were issued on 1 January 2015 and are
convertible into ordinary shares on the basis of 75 shares per RM50 debentures.

3. A right issue of one ordinary share for every three held was made on 1 April 2015 at
RM0.90. The market price of each share prior to the issue was RM1.10.

4. 20% of the debentures were converted on 30 June 2015.

5. Profit after tax for the year amounted to RM36,250,000.

6. The entity declared preference dividend amounted to RM500,000.

7. Tax rate for 2015 is at 25%.

8. Basic earnings per share for the year ended 31 December 2014 was 0.89 sen.

Required:

a. Calculate the basic earnings per share (EPS) for the year ended 31 December 2015.
Restate previous year’s EPS where necessary. (5 marks)
Right issue:
Market value before RI 3 shares x RM1.10 RM3.30
Proceeds from RI 1 shares x RM0.90 RM0.90
4 shares RM4.20
TERP = RM4.20/4 shares
= RM1.05 for 1 share

Fraction for RI = RM1.10/RM1.05

= 110/105

NUMERATOR

Profit after tax RM36,250,000

(-) Preference dividend RM500,000

RM35,750,000
WANOS:

1/1/2015 Balance b/d 30,000,000 x 3/12 x 110/105 7,857,142.857

1/4/2015 Right issue 30,000,000/3
=10,000,000
40,000,000 x 9/12 30,000,000
For basic EPS 37,857,142.857
Basic EPS = RM35,750,000

37,857,142.857

= 0.944 cents

Restated EPS (2014) = 0.89 cents x 1.05/1.10

= 0.849 cents

b. Calculate the diluted earnings per share (DEPS) for the year ended 31 December 2015.
(6 marks)

NUMERATOR

Profit after tax RM36,250,000

(-) Preference dividend RM500,000

(+) Interest on convertible debentures

(RM500,000 x 75/50) x 6/12 x 75% RM281,250

(RM500,000 x 75/50 x 80%) x 6/12 x 75% RM225,000

RM36,256,250

WANOS:

Date Transactions No. of shares Time factors Bonus fraction WANOS

For basic EPS 37,932,141

Potential OS

1/1/2015 – 30/6/2015 375,000

10% convertible debentures
 (RM500,000 x 75/50) x 6/12

1/7/2015 – 31/12/2015 300,000

10% convertible debentures

(RM500,000 x 75/50 x 80%) x 6/12

For diluted EPS 38,607,141

Diluted EPS = RM36,256,250

38,607,141

= 0.939 cents
c. Advice Alam Suria Bhd on the presentation of basic and diluted earnings per share in
the statement of profit or loss and other comprehensive income. (4 marks)
An entity should present both basic and diluted earnings per share on the face of the
statement of profit or loss and other comprehensive income:
1) For each class of ordinary shares that has a different like to share in the profit for
the period.
2) Both basic and diluted EPS shall be presented even if the amounts are negative.
3) Both basic and diluted EPS with equal prominence for all the period’s presented.

(Total: 15 marks)
QUESTION 1

Brain Bhd (Brain) is a listed company that was incorporated in 2010. On 1 January 2014, the
following information was available:

 Brain has 3 million ordinary shares in issue.

 Brain has issued RM200,000 6% convertible loan stocks. The loan stocks are convertible
to ordinary shares at a rate of 2.5 ordinary shares for every RM1 of the loan stock. They
qualify for conversion in the year 2015.

 Options were issued to the key management personnel to acquire 50 million shares at
RM3 per share (the average price of an ordinary share for the year was RM5). None of
the options has been exercised.

Extract from Brain’s Statement of Profit or Loss for the year ended 31 December 2014:

RM’000
Operating profit 1,380
Finance cost (400)
Profit before tax 980
Income tax expense (255)
Profit after tax 725

Additional information:

1. On 1 February 2014, the company made a rights issue of one (1) for every four (4) at
RM6.50 per share. The share price before rights issue was RM7.50. The issue was
completely taken up by the shareholders.

2. Tax rate is 25%.

3. Basic earnings per share for 2013 was 15 sen.

Required:

a. Calculate the basic earnings per share (EPS) for Brain for the year ended 31 December
2014 and restate the EPS for 2013. (7 marks)
Right issue:
Market value before RI 4 shares x RM7.50 RM30.00
Proceeds from RI 1 shares x RM6.50 RM 6.50
5 shares RM36.50
TERP = RM36.50/5 shares
= RM7.30 for 1 share

Fraction for RI = RM7.50/RM7.30

= 750/730

WANOS:

1/1/2014 Balance b/d 3,000,000 x 1/12 x 750/730 256,849

1/2/2014 Right issue 3,000,000/4
=750,000
3,750,000 x 11/12 3,437,500
For basic EPS 3,694,349

Basic EPS = 725,000

3,694,349

= 19.6 cents

Restated EPS (2013) = 15 cents x 7.30/7.50

= 14.6 cents

b. Calculate the diluted earnings per share for Brain for the year ended 31 December 2014.
(5 marks)

NUMERATOR

Profit after tax RM725,000

(+) Interest on convertible loan stocks

(6% x RM200,000 x 75%) RM9,000

RM734,000

WANOS:

Date Transactions No. of shares Time factors Bonus fraction WANOS

 For basic EPS 3,694,349

Potential OS

Increase in no of OS 20,000,000

50,000,000/(RM5-RM3)

RM5

6% convertible loan stocks 500,000

RM200,000 x 2.5

For diluted EPS 24,194,349

Diluted EPS = RM734,000

24,194,349

= 3.03 cents

c. Advise Brain on the main reason that companies have to take into consideration on
presenting the diluted earnings per share in the financial statements. (3 marks)

The main reason is because the dilution involves changes due to the inclusion of potential
ordinary shares which may result in a decrease in the basic earnings per share or increase loss
per share from continuing operations.

(Total: 15 marks)
QUESTION 1

Kayaman Bhd has RM20 million issued and fully paid ordinary shares at RM1 per share as at 1
January 2016. The financial year end of the entity is on 31 December each year. The following
information was available:

1. On 1 April 2016, the entity made a rights issue of 1 for every 4 shares. The rights issue
was given to existing shareholders at RM1 per share when the market value was RM2.
The market price prior to the rights issue was RM1.20 per share.

2. Immediately 3 months after the rights issue, the entity made a bonus issue of 1 for
every 4 shares held.

3. On 1 September 2016, the entity issued RM2.5 million 10% debentures. The
debentures are convertible into ordinary shares on the basis of 200 shares per RM100
debentures. None of the convertible debentures were converted as at 31 December
2016.

4. Net profit after tax for the year ended 31 December 2016 was RM5 million.

5. Assume the tax rate for 2016 is 25%.

Required:

a. Compute the basic earnings per share for Kayaman Bhd for the year ended 31
December 2016.
Restatement of comparative figures is not required.
(5 marks)
Right issue:
Market value before RI 4 shares x RM1.20 RM4.80
Proceeds from RI 1 shares x RM1.00 RM1.00
5 shares RM5.80
TERP = RM5.80/5 shares
= RM1.16 for 1 share

Fraction for RI = RM1.20/RM1.16

= 120/116

WANOS:

1/1/2016 Balance b/d 20,000,000 x 3/12 x 120/116 x 6,465,517

5/4
 1/4/2016 Right issue 20,000,000/4
=5,000,000
25,000,000 x 3/12 x 5/4 7,812,500
1/7/2016 Bonus issue 25,000,000/4
=6,250,000
31,250,000 X 6/12 15,625,000
For basic EPS 29,903,017

Basic EPS = RM5,000,000

29,903,017

= 16.72 cents

b. Compute the diluted earnings per share for the year ended 31 December 2016. (6
marks)
NUMERATOR

Profit after tax RM5,000,000

(+) Interest on debentures

(10% x RM2,500,000 x 75% x 4/12) RM62,500

RM5,062,500

WANOS:

Date Transactions No. of shares Time factors Bonus fraction WANOS

For basic EPS 29,903,017

Potential OS

10% convertible debentures 1,666,667

(RM2,500,000 x 200/100) x 4/12

For diluted EPS 31,569,684

Diluted EPS = RM5,062,500

31,569,684

= 16.04 cents
c. Evaluate the effect on the diluted EPS for 2016 if on 1 November 2016 the entity has
also offered a share options to the executives’ personnel to acquire 5 million shares at
RM1.50 per share where the average price of an ordinary shares for the year was RM2.
(4 marks)
EVALUATION:

Earnings WANOS EPS

For basic EPS 5,000,000 29,903,017 16.72

Potential OS
Increase in no of OS 208,333
5,000,000/(RM2-RM1.50)
RM2
5,000,000 30,111,350 16.60

10% convertible debentures 62,500 1,666,667

(RM2,500,000 x 200/100) x 4/12
5,062,500 31,778,017 15,93

Diluted EPS will reduce from 16.60 cents to 15.93 cents.

(Total: 15 marks)
QUESTION 1
Given below is an extract from the Statement of Profit or Loss of Maya Bhd, for the year ended
31 December 2014.

RM
Profit before tax 170,000
Taxation (25%) (42,500)
Profit after tax 127,500

Dividend paid for the year:

Preference dividend 80,000
Ordinary dividend 20,000

EPS for 2013 4 sen

Additional information:

1. Issued share capital as at 1 January 2014:

RM
1,000,000 Ordinary shares of RM1 each 1,000,000
400,000 10% Cumulative Preference shares of RM1 each 400,000
1,400,000

2. On 1 January 2014, the entity has splitted the existing ordinary shares into shares of
RM0.50 each.

3. On 1 May 2014, the entity made a bonus issue of 1 for every 5 shares.

4. On 1 October 2014, the entity bought back 500,000 ordinary shares and also issued
RM1 million 10% convertible debentures at par. These debentures are convertible into
ordinary shares at a rate of 150 shares for every RM100 debentures. However, none of
the debentures has been converted.
5. As of 31 December 2014, the entity declared and paid the current year’s preference
dividends, the previous year’s preference dividends in arrears and 2% dividends for the
ordinary shares.

Required:

a. Compute the entity’s basic earnings per share (EPS) for the year ended 31 December
2014. Restate previous year’s EPS where necessary. (6 marks)

Fraction for bonus issue = 5 old shares + 1 new shares

5 old shares

= 6/5

NUMERATOR

Profit after tax RM127,500

(-) Cumulative preference share

(10% x 400,000 x RM1) RM40,000

RM87,500

WANOS:

1/1/2014 Balance b/d 1,000,000

Share split 1,000,000
2,000,000 x 4/12 x 6/5 800,000
1/5/2014 Bonus issue 2,000,000 x 6/5
= 400,000
2,400,000 x 5/12 1,000,000
1/10/2014 Share buyback (500,000)
1,900,000 x 3/12 475,000
For basic EPS 2,275,000

Basic EPS = RM87,500

2,275,000

= 3.8 cents

Restated EPS (2013) = 4 cents x 5/6

 = 3.33 cents

b. Compute the entity’s diluted EPS for the year ended 31 December 2014. (5 marks)

NUMERATOR

Profit after tax RM87,500

(+) 10% convertible debentures

(10% x RM1,000,000 x 75% x 3/12) RM18,750

RM106,250

WANOS:

Date Transactions No. of shares Time factors Bonus fraction WANOS

For basic EPS 2,275,000

Potential OS

10% convertible debentures 375,000

(RM1,000,000 x 150/100 x 3/12)

For diluted EPS 2,650,000

Diluted EPS = RM106,250

2,650,000

= 4 cents

c. i. Explain the effect of rights issue on the basic EPS of an entity.

(2 marks)

A right issue is an issue to existing shareholders made at a price below current market price.
Therefore, some of the shares issued are similar to bonus share such as increase in issue
shares without any cash inflow. The calculation of the basic EPS denominator will have to
reflect the bonus element of the right issue by taking into account the bonus fraction.

Right issue exist > No ordinary shares increase > WANOS increase > BEPS decrease
 ii. The following are the rates of conversion for every RM1,000 of 8% convertible
loan stock:

31 December 2013 300 ordinary shares

31 December 2014 400 ordinary shares

Advise the entity as to which rate of conversion that may be used to calculate
the basic EPS for the year ended 31 December 2014 in accordance with MFRS
133 Earnings Per Share.

(1 marks)
Assumption of conversion date:

- If issued earlier than current period, assume conversion on the first day of period
- If issued earlier during current period, assume conversion on date of issue

With reference to MFRS 133, if there is a choice of rates for conversion, the calculation will be
based on the most advantageous conversion rate from the standpoint of the holder of the
potential ordinary shares which is 400 ordinary shares for every RM1,000 convertible
debentures.

(Total: 15 marks)
QUESTION 1

Mayabella Berhad (MB), a local manufacturing entity, was established in January 2015. It
made up its first set of accounts to 31 December 2015 and continues to prepare its accounts
to 31 December every year. On 1 January 2017, the issued share capital of MB comprises 10
million ordinary shares of RM1.00 each and 2 million 5% preference shares of RM1.00 each.

The following transactions occurred during the year of assessment 2017:

i. On 1 January, MB issued 5 million 10% convertible debentures. The debentures can be

converted into ordinary shares in the ratio of 150 ordinary shares for every RM100
debentures.

ii. On 1 July, a rights issue of 1 for every 10 ordinary shares was made at RM2.00 each.
The market value of the entity’s ordinary shares immediately before the right’s offer
was RM3.00.

iii. 1 million ordinary shares of RM1 each were issued on 1 October. The shares were fully
subscribed and paid upon its issuance.

Additional information:

a. Profit after tax for the year ended 31 December 2017 was RM12,000,000.

b. Mayabella Berhad paid preference dividend for half year only.

c. Tax rate is 24%.

d. Basic EPS and diluted EPS for year 2016 were RM1.25 and RM0.64 respectively.

Required:

a. Calculate the basic earnings per share to be reported in the financial statements of
Mayabella Berhad for the year ended 31 December 2017, in accordance with the
requirements of MFRS 133 Earnings Per Share. Restatement of Basic EPS is not
required.
(1 marks)
Right issue:
Market value before RI 10 shares x RM3.00 RM30.00
Proceeds from RI 1 shares x RM2.00 RM 2.00
11 shares RM32.00
TERP = RM32.00/11 shares
= RM2.91 for 1 share

Fraction for RI = RM3.00/RM2,91

= 300/291

NUMERATOR

Profit after tax RM12,000,000

(-) Cumulative preference shares

(5% x RM2,000,000) RM100,000

RM11,900,000

WANOS:

1/1/2017 Balance b/d 10,000,000 x 6/12 x 300/291 5,154,639

1/7/2017 Right issue 10,000,000/10
=1,000,000
11,000,000 x 3/12 2,750,000
1/10/201 Issuance shares 1,000,000
7
12,000,000 x 3/12 3,000,000
For basic EPS 10,904,639

Basic EPS = RM11,900,000

10,904,639

= RM1.09

b. Calculate the diluted earnings per share for the year ended 31 December 2017, in
accordance with the requirements of MFRS 133 Earnings Per Share. Show all workings.
(6 marks)
NUMERATOR
Profit after tax RM11,900,000
(+) Interest on debentures
(10% x RM5,000,000 x 76%) RM380,000
RM12,280,000
WANOS:

Date Transactions No. of shares Time factors Bonus fraction WANOS

For basic EPS 10,904,639

Potential OS

10% convertible debentures 7,500,000

(RM5,000,000 x 150/100)

For diluted EPS 18,404,639

Diluted EPS = RM12,280,000

18,404,639
= 66.72 cents

c. Advise Mayabella Berhad on the steps needed to be taken in order to calculate the
DEPS if it has more than one potential ordinary share.
(2 marks)
Steps:
1) Each issue or series of potential ordinary shares is considered in sequence from the
most dilutive to the least dilutive.
2) Options and warrants are generally included first because they do not affect the
numerator of the calculation.
3) Exclude the anti-dilutive in calculating DEPS.
EMPLOYEE
BENEFITS
HIJAU LEBAT BHD – FEB 2021

Hijau Lebat Berhad operates a defined benefit plan for its employees. The following
balances appeared in the books of the company as at 30 June:

2019 2020
RM’000 RM’000
Present value of defined benefit obligations 10,500 18,375
Fair value of plan assets 11,025 19,687

Past service costs 1,200

Current service cost 6,300
Benefits paid to employees 2,450
Contributions paid to the plan assets 8,300

The actuary has provided the following information for 30 June 2020:

Expected rate of return on plan assets 12%

Discount rate 10%

Required:

a. Calculate the actuarial gains or losses on defined benefit obligations and plan assets as
at 30 June 2020.
(5 marks)
Actuarial gain/losses as at 30 June 2020
RM’000
PV of obligation
FV at 1 July 2019 10,500
Interest (10,500 x 10%) 1,050
Current service cost 6,300
Past service cost 1,200
Benefits paid (2,450)
16,600
Actuarial loss 1,775
FV at 30 June 2020 18,375

FV of plan assets
FV at 1 July 2019 11,025
Expected returns (11,025 x 12%) 1,323
Contribution 8,300
Benefits paid (2,450)
18,198
Actuarial gain 1,489
FV at 30 June 2020 19,687
b. Determine the defined benefit costs that shall be recognized in the Statement of Profit
or Loss for the year ended 30 June 2020.
(3 marks)

RM’000 RM’000
Current service cost 6,300
Past service cost 1,200
Net interest on defined benefit liability:
Interest expense on PVO 1,050
Interest income from plan assets
at discount rate (11,025 x 10%) 1,102.5 52.5
Interest on effect of asset ceiling -
Defined benefit cost to profit or loss 7,447.5

c. Discuss the difference in recognition of bonus plans and paid absences with regards to
short-term employee benefits.
(6 marks)

bonus payments paid absences

a) the entity has a present legal or a) in the case of accumulating paid
constructive obligation to make such absences, when the employees render
payments as a result of past events; service that increases their entitlement
and to future paid absences.
b) a reliable estimate of the obligation can b) in the case of non-accumulating paid
be made. absences, when the absences occur.
A present obligation exists when, and
only when, the entity has no realistic
alternative but to make the payments. 6 x 1 = 6 marks

d. MFRS119 Employee Benefits deals with termination benefits separately from other
employee benefits because the event that gives rise to an obligation is the termination
of employment rather than employee service. Discuss the measurement of termination
benefits if the termination benefits are not an enhancement to post-employment
benefits. (6 marks)
If the termination benefits are not an enhancement to post-employment benefits, the
entity shall apply the followings:

a) if the termination benefits are expected to be settled wholly before twelve months
after the end of the annual reporting period in which the termination benefit is
recognised, the entity shall apply the requirements for short-term employee
benefits.
b) if the termination benefits are not expected to be settled wholly before twelve
months after the end of the annual reporting period, the entity shall apply the
 requirements for other long-term employee benefits.

KENCHANA BHD – JULY 2020

Kenchana Bhd operates a defined benefit scheme for its employees. The information below
shows the details of the scheme for the year ended 31 December 2019.

1 January 2019 31 December 2019

(RM’000) (RM’000)
Fair Value of Plan Asset 55,000 63,000
Defined Benefit Obligation 58,000 69,000
Current Service Cost 7,000
Discount Rate 10%
Expected Return 12%

Due to the change in top management, starting from 1 January 2019, the company has
proposed some adjustments to improve the current scheme. The actuary has estimated
the past service cost to be RM9,000,000.
During the year, the company has paid benefits and contributions of RM9,500,000 to
retired employees.

Required:

a. Determine the defined benefit cost to be recognized in the Statement of Profit or

Loss for the year ended 31 December 2019.
(4 marks)
RM
Current service cost 7,000,000√
Past service cost 9,000,000√
Net interest on DB Liability/ 300,000√√
asset (58,000,000-55,000,000) x
10%
Defined Benefit cost recognized in P/L 16,300,000

b. Determine the actuarial gains or losses on defined benefit obligation.

(4 marks)
c. Discuss three (3) differences between defined benefit plan and defined
contribution plan with reference to MFRS 119 Employee Benefits.
(6 marks)

Defined Benefit Plan Defined Contribution Plan

The employer’s contribution is defined Only employer’s contribution is
(in advance) as well as the amount of defined while the amount of benefits
benefits that the retiring employees that the retiring employees will be
will received is
be received at the start of the plan. √ unknown at the start of the plan. √
The employer is legally bound by the The employer is responsible to simply
ultimate amount that will be payable to make contribution for each period
the retiring employees and will make based on the formula established
sure sufficient contribution made under the plan. √
periodically to meet its commitment
at
settlement date. √
The benefits of gains and risks of losses The benefits of gains and risks of
invested under the fund are borne by losses invested under the fund are
the employers until the payment made borne by the employees. (example
to EPF) √
retiring employees. √

d. Let say at the beginning of the year, the net pension liability recognized in the
statement of financial position excluded an unrecognized actuarial gain of RM10
million of which the entity wishes to spread over the gain based on the remaining
working life of the employees. Advice Kenchana Berhad on how to account for the
unrecognized actuarial gains of RM10 million.
(6 marks)
Recognition of actuarial gains and losses (remeasurements):
Actuarial gains and losses are renamed ‘remeasurements’ and will be recognized
immediately in ‘other comprehensive income’ (OCI)√. Actuarial gains and losses
cannot be deferred√ or recognized in profit or loss√; this is likely to increase volatility
in the statement of financial position and OCI√. Remeasurements recognized in OCI
cannot be recycled through profit or loss in subsequent periods√. Thus, the entity
will not be able to spread these gains and losses over the remaining working life of
the employees√.
KHALIFAH BHD – JULY 18

Khalifah Bhd introduced a defined benefit plan for its employees since 2001. The following are
the balances for the financial year ending 31 December 2016 and 31 December 2017.

31 December 2016 RM
Fair value of plan asset 1,350,000
Defined benefit obligation 2,750,000

31 December 2017
Fair value of plan asset 3,250,000
Defined benefit obligation 2,850,000

Additional information:

1. The current service cost for the financial year ending 31 December 2017 amounting to
RM720,000.

2. The entity incurred a past service cost due to plan amendment amounting to
RM1,200,000.

3. The expected rate of return on investment is 15% while the interest rate on the market
yield of corporate bonds is 10%.

4. The entity paid RM2,650,000 contribution to the plan asset while RM1,150,000 is paid
for retired employees during the year.

5. The asset ceiling is determined to be at RM300,000.

6. The entity has determined that the actuarial gain on defined benefit obligation is
RM945,000 while actuarial gain on plan asset is RM197,500.

Required:

a. Differentiate between Defined Benefit Plan and Defined Contribution Plan.

 (5 marks)

Defined Benefit Plan Defined Contribution Plan

The employer’s contribution is defined as Only employer’s contribution is defined
well as the amount of benefits that the while the amount of benefits that the
retiring employees will be received at the retiring employees will be received is
start of the plan. unknown at the start of the plan.

The employer is legally bound by the The employer is responsible to simply

ultimate amount that will be payable to make contribution for each period based
the retiring employees and will make sure on the formula established under the plan.
sufficient contribution made periodically to
meet its commitment at settlement date.
The benefits of gains and risks of losses The benefits of gains and risks of losses
invested under the fund are borne by the invested under the fund are borne by the
employers until the payment made to employees.
retiring employees.

b. Determine the defined benefit liability or asset that shall be disclosed in the Statement
of Financial Position as at 31 December 2017.
(3 marks)

RM

Fair value of plan asset (A) 3,250,000

Defined benefit obligation(L) 2,850,000

Defined benefit asset 400,000

Choose
Asset ceiling 300,000√ lower

Defined benefit asset to SOFP 31 Dec 2017 300,000

Effect of asset ceiling: RM400,000- RM300,000 = RM100,000 – to SOPL = RM10,000

– to OCI = RM 90,000

c. Compute the defined benefit costs that should be recognised in the Statement of Profit
or Loss and Other Comprehensive Income for the year ended 31 December 2017.
(6 marks)
 Defined Benefit Costs to SOPL RM

Current service cost 720,000

Past service cost 1,200,000

Net interest on defined benefit liability (asset)

Bal b/d DBO 2,750,000

Bal b/d PA 1,350,000

1,400,000

Interest rate 10% 140,000

Interest expense on effect of asset ceiling 10,000

(10% x 100,000)

Defined Benefit Costs to SOPL 2,070,000

Defined Benefit Costs to RM

OCI=remeasurement cost
=Actuarial gain on DBO 945,000

Return on plan asset (197,500+202,500- 265,000

135,000)
Effect of asset ceiling (balance from to SOPL) (90,000)
(100,000 – 10% x 100,000)

Defined Benefit Costs to OCI 1,120,000

d. Suggest an appropriate accounting treatment for the defined benefit asset as at 31

December 2017 should the asset ceiling is determined to be zero.
(3 marks)
 If the asset ceiling is zero, no future economic benefits is expected from the plan.
Therefore, no remeasurement and the defined benefit asset is to be recognized in the
SOFP.

(Total: 17 marks)

BINTANG BHD – JAN 18

QUESTION 3
Bintang Bhd operates a defined benefit scheme for its employees. Its financial year ends on
30 June each year.

As on 1 July 2015, the fair value of the plan asset was RM29,000,000 and the present value of
the defined benefit obligation was RM33,000,000.

The company uses a discount rate of 10% that reflects the market yields of corporate bonds
issued by AIN bank. The expected returns on the plan asset are 12% per annum.

On 1 July 2015, the company made an improvement in the current scheme. Due to this
improvement, the actuary had estimated the past service costs to be RM8,000,000.

The actuarial valuation also showed that Bintang Bhd would incur a current service cost of
RM4,000,000 for the year ended 30 June 2016.

During the year, the company paid benefits of RM5,000,000 to retired employees. As at 30
June 2016, the fair value of the plan asset of Bintang Bhd was RM33,000,000 and the present
value of the defined benefit obligation was RM36,000,000.
Required:

a. Explain briefly the short-term employee benefit under MFRS 119 Employee Benefits.
Give TWO (2) examples.
(5 marks)
Short-term employee benefits are employee benefits (other than termination benefits)
that are due to be settled within 12 months after the end of the period in which the
employees render the related service.

These are benefits received on an almost `immediate basis’. Examples

o Wages, salaries, employees provident fund (EPF) and SOCSO
o Short term compensated absences (eg. Paid annual and sick leave)
o Bonuses and profit sharing payable within 12 months
o Non-monetary benefits for current employees (e.g. medical benefits
, housing car, subsidized goods or services)

b. Calculate the defined benefit costs to be recognized in the statement of profit or loss
for the year ended 30 June 2016.
(3 marks)
 RM
Current service cost 4,000,000

Past service cost 8,000,000

Net interest on defined benefit liability (asset) 400,000
(33m -29m) x 10%

Defined benefit costs recognized in profit or loss 12,400,000

c. Calculate the actuarial gain or loss on defined benefit obligation.

(6 marks)

Defined benefit obligation account RM

Present value as at 1/7/2015 33,000,000

Past service cost 8,000,000

Current service cost 4,000,000

Interest cost (33,000,000x10%) 3,300,000

48,300,000

Less: benefit paid (5,000,000)

43,300,000
Actuarial gain 7,300,000
Present value as at 30 June 2016 36,000,000

d. Explain current service cost with reference to MFRS 119 Employment Benefits.

(3 marks)
Current service cost is the increase in the present value of the defined benefit
obligation resulting from employee service in the current period. It is treated as an
amount of expense, determined on an accrual basis that is assigned to each period in
the retirement benefit plan for current service rendered by the employee. It is
normally determined by a professional actuary.

(Total: 17 marks)
MIMI BHD – JULY 2017

Mimi Berhad operates a defined benefit scheme for its employees. As at 1 January 2016, the
entity’s statement of financial position shows a net defined benefit liability of RM1,000,000
(The present value of the defined benefit obligation and the fair value of the plan assets are
RM18,000,000 and RM17,000,000 respectively).

The scheme was revised on 1 June 2016 where some benefits are being changed to reflect the
current economic situation. This resulted in the past service cost to be incurred amounting to
RM500,000. Based on the actuarial valuation, the current service cost for 2016 is
RM2,000,000. Contributions paid to the fund and benefits paid to retired employees for the
current year 2016 were RM1,200,000 and RM2,000,000 respectively.

For the year ended 31 December 2016, the discount rate that reflected yields of high quality
bonds is 5% and the expected return on the plan assets for the year 2016 is 6%. As at 31
December 2016, the present value of the defined benefit obligation is RM20,500,000 and the
fair value of the plan assets on this date is RM20,950,000. The present value of future
economic benefits of this plan is RM400,000.

Required:

a. Briefly explain defined benefit plans under MFRS 126 Accounting and Reporting by
Retirement Benefit Plans.
(5 marks)
Define benefit plan are post-employment benefits. A retirement benefit plan, under
MFRS 126, paragraph 8, is classified as a defined benefit plan when the amounts to be
paid as retirement benefits are determined by reference to a formula usually based on
employees’ earnings and/or years of service. It is the employer’s obligation to provide
the benefits to current and former employees who participate in the [Link] benefits
are defined in advance and the employer contributes to the plan over the period of
employment to meet the defined benefits in future(at retirement).
b. Determine the amount defined benefit assets or liabilities to be disclosed on the face
of the statement of financial position as at 31 December 2016.
(3 marks)
Assets/Liability in the Statement of Financial Position as at 31 December 2016

RM’000
PV of defined obligation 20,500,000

(-) FV of plan assets (20,950,000)

Retirement Benefit Assets 450,000
 Since RBA is higher than the asset ceiling, only RM400,000 will be recognised.

c. Compute the amount of actuarial gain or loss on the present value obligations and fair
value of plan assets for the year ended 31 December 2016.
(6 marks)
Computation of actuarial gain or loss

PLAN ASSET : RM

Fair Value of Plan Assets (1/1/2016) 17,000,000

Add : Expected return (17,000,000 x 6%) 1,020,000

Contribution 1,200,000

Less : Benefits (2,000,000)

17,220,000

Actuarial Gain 3,730,000

Fair Value of Plan Assets (31/12/2016) 20,950,000

PV OBLIGATION RM
Present Value of Obligation (1/1/2016) 18,000,000

Add : Interest cost (18,000,000 x 5%) 900,000

Service Costs:

Current costs 2,000,000

Past costs 500,000 2,500,000

Less : Benefits paid (2,000,000)

19,400,000

Actuarial Loss √ 1,100,000

Present Value of Obligation (31/12/2016) 20,500,000
d. Explain THREE (3) disclosure requirements of defined benefits plan in the books of
account of Mimi Berhad with reference to MFRS 119 Employee Benefits.
(3 marks)
An entity shall disclose information that:
a) explains the characteristics of its defined benefit plans and risks associated with
them;
b) identifies and explains the amounts in its financial statements arising from its
defined benefit plans; and
c) describes how its defined benefit plans may affect the amount, timing and
uncertainty of the entity’s future cash flows
(Total: 17 marks)
SEPAKAT BHD – DEC 16
Sepakat Bhd operates a funded defined benefit plan for its employees. For the year ended 31
December 2015, the discount rate that reflected yields of high quality corporate bonds and
the expected return on plan assets was 10% and 12% respectively.

Based on actuarial valuation, the following balances were disclosed.

1 January 2015 31 December 2015

RM million RM million
Present value of the defined benefit obligation 60 65.64
Fair value of the plan assets 58 63.68

The following amounts were determined for the year ended 31 December 2015.

RM million
Current service cost 5.2
Past service cost -
Contribution paid to the plan 3.6
Benefit paid to retired employees 6

Required:

a. Describe short term employee benefit with FOUR (4) examples.

(5 marks)
Employee benefits (other than termination benefit) that are due to be settled within 12
months after the end of the period in which the employee render the related
[Link] are benefit received on an almost ‘immediate basis’. They include:
1. Wages, salaries, employer’s contribution of EPF and SOCSO.
2. Short term compensated absences (paid annual and sick leave).
3. Bonuses and profit sharing payable within 12 months.
4. Non-monetary benefits for current employees (medical benefit, housing, car,
subsidised goods or services)

b. Explain the term ‘past service cost’ in a defined benefit plan.

(3 marks)
Past service cost is the change in the present value of the defined benefit obligation
resulting from a plan amendment or curtailment√ and losses or gains on non-routine
settlement
c. Calculate the actuarial gain or losses on defined benefit obligations and plan assets for
the year ended 31 December 2015. (6 marks)
Actuarial gain or losses

RM million
DBO
FV of obligation 1/1/2015 60
+ Current service 5.2
+ Imputed interest cost 6
(60 x 10%)
- Benefit paid (6)
65.2
FV of obligation 31/12/2015 65.64
Actuarial loss 0.44

RM million
Actuarial plan assets
FV of plant assets 1/1 58
+ Expected return 6.96
(58 x 12%)
+ Contribution paid 3.6
- Benefit paid (6)
62.56
FV of plan assets 31/12 63.68
Actuarial gain 1.12

d. Advice the entity on the presentation of defined benefit plans in the financial
statements in accordance with MFRS 119. (3 marks)

In accordance to MFRS 119, the entity is advice to disclose the following in the financial
statements.
1. Defined benefit liability/asset – Statement of financial position
2. Defined benefit cost – Statement of profit or loss and other comprehensive income.
3. Other disclosures – Notes to financial statements.
(Total: 17 marks)
GREEN HIJJAZ BHD – JUNE 15

Green Hijjaz Bhd is a construction company and it operates a defined benefit plan for its
employees. The following balances appeared in the books of Green Hijjaz Bhd as at 31
December:
2013 2014
RM’000 RM’000
Present value of defined benefit obligations 3,500 7,350
Fair value of plan assets 3,675 7,875

2014
RM’000
Current service cost 3,150
Past service cost 700
Contributions paid to the plan assets 3,325
Benefits paid to employees 980

The actuary has provided the following information:

2014
Expected rate of return on plan assets 12%
Discount rate 10%

Required:

a. Explain briefly the two (2) categories of post-employment benefits as stated in MFRS 119
Employee Benefits. (3 marks)
1) Defined contribution plan
Post-employment benefit plans under which an enterprise pays fixed contributions into
a separate entity (fund). It will have no legal or constructive obligation to pay further
contributions if the fund does not hold sufficient assets to pay all employee benefits
relating to employee service in the current and prior periods.
2) Defined benefit plans
Post-employment benefits other than defined contribution plans and the amounts to
be paid as retirement benefits are determined by reference to a formula usually based
on employee’s earnings and/or years of service.
b. Explain briefly on defined benefit asset. (2 marks)
The fair value of the plan asset may exceed the present value of the projected defined
benefit obligation. In this case, it is to be disclosed as a defined benefit asset and to be
compared to the asset ceiling.

c. Compute the actuarial gain or losses on defined benefit obligations and plan assets as at
31 December 2014.
(6 marks)
Actuarial gain/loss as at 31 December 2014

On obligation: RM’000
PV of obligation at 1/1 3,500

Interest (10%x3,500) 350

Current service cost 3,150

Past service cost 700

Benefits paid (980)

6,720
Actuarial loss 630

PV of obligation at 31/12 7,350

On Plan assets

FV of Plan assets 3,675

Expected returns (12%x3675) 441

Contribution 3,325
Benefits paid (980)

6,461
Actuarial gain 1,414

FV of plan asset at 31/12 7,875

d. Compute the defined benefit costs that shall be recognised in the Statement of Profit or
Loss for the year ended 31 December 2014.
(3 marks)

DB cost to profit or loss RM’000 RM’000

Current service cost 3150
Past service cost 700
Net interest on defined -
benefit liability

Interest on effect asset -

ceiling
Defined Benefit cost to 3850
profit or loss

a. Entities are allowed to offset the defined benefit liability of one plan against a defined
benefit asset of another plan as stated in MFRS 119 Employee Benefits.

Explain the off-setting criteria.

(3 marks)
Offsetting the defined benefit liability of one plan against a defined benefit asset of
another plan as stated in MFRS119 Employee Benefits:

i. It has legally enforceable right to use a surplus in one plan to settle obligations under
the other plan
ii. It intends either to settle the obligations on a net basis or to realize the surplus in one
plan and settle the obligations in the other plan simultaneously.

(Total: 17 marks)
SABARIAH BHD – TAKDE JAWAPAN
Sabariah Gleanegles Bhd has a funded defined benefit plan for its employees. On 1 January
2014, the fair value of the plan assets was RM289,000 and the present value of the obligation
was RM220,000. It was recorded that the past service cost of RM975 was the results of
changes introduced during the year ended 31 December 2014.
During the year of 2014, the entity had contributed RM50,000 to the scheme. The payment to
its retired employees during the year amounted to RM25,900 and the current service cost was
RM20,000.
On 31 December 2014, the present value of defined benefit obligation and the fair value of
plan assets were RM275,570 and RM270,490 respectively. The actuarial loss calculated from
the present value of obligation was RM58,495.
The entity uses a discount rate of 10% and expects its return on the plan assets to be 12%.
Required:
a. Explain the current service costs and past services costs that need to be accounted for
post-employment benefit plans as per MFRS 119 Employment Benefits.
(5 marks)

b. Compute the defined benefit costs that should be recognised in the statement of profit
or loss for the year ended 31 December 2014.
(3 marks)

a. Calculate the remeasurement cost to be recognised for the year ended 31 December
2014.
(6 marks)

a. Determine the net retirement benefits for the year ended 31 December 2014.
(3 marks)
(Total: 17 marks)
 FINANCIAL
INSTRUMENTS
ZICO BHD – FEB 2021
A. As at December 2020, Zilco Bhd acquired an investment of 500,000 ordinary shares in
Hollow Bhd amounted at RM1,000,000. The transaction cost incurred for the
acquisition was RM150,000. At the same time, Zilco Bhd also issued additional
RM5,000,000 8% Redeemable Preference Shares to the public. The brokerage fees
incurred was RM200,000.

Required:

a. Briefly explain the term of Financial Instrument in accordance with MFRS 132
Financial Instruments
(4 marks)

According to MFRS 132, financial instrument is any contract that gives rise to
both a financial asset of one entity and a financial liability or equity instrument of
another entity.

b. Demonstrate the journal entries of the financial assets and financial liabilities, if
Zilco Bhd wish to measure the acquisition of financial asset and financial liability
as fair value through profit or loss (FVTPL). (6 marks)

Financial assets at FVTPL

Dr. FA (Investment in Hollow Bhd) RM1,000,000

Dr. Transaction cost -SOPL RM 150,000
Cr. Bank RM1,150,000

Financial liability at FVTPL

Dr. Bank RM5,000,000

Cr. FL ( 8% RPS) RM5,000,000

Dr. Transaction cost-SOPL RM200,000

Cr. Bank RM200,000
B. On 1 January 2017 Brilliant Bhd issued convertible bonds with a total proceed of
RM3 million. The bond has a coupon interest rate of 6% which are payable annually
at 31 December each year. The bond is convertible at any time up to maturity into
200,000 ordinary shares. The prevailing market interest rate for similar debts
without conversion option at the time of bond issued was 9%. At the issuance date,
the market price of one ordinary share was RM5.00. The present value of RM1
interest at 6% and 9% related to the bond is as follow:

Year 6% 9%
2017 0.943 0.917
2018 0.890 0.842
2018 0.840 0.772
2020 0.792 0.708
 Required:
a. Calculate the equity component of the convertible bonds at its initial recognition.
(8 marks)

Initial recognition

Year Payment of Principal Discount Present value

end Interest 6% factor (9%) (RM)
(3,000,000 x 6%)
2016 180,000 - 0.917 165,060
2017 180,000 - 0.842 151,560
2018 180,000 - 0.772 138,960
2019 180,000 3,000,000 0.708 2,251,440
NPV 2,707,020
Face value 3,000,000
EQUITY 292,980

b. On 1 January 2020, Brilliant Bhd ordered goods for sale amounting to

RM500,000 from Outreach Bhd. The goods were delivered and received by
Brilliant Bhd on 1 February 2020. This amount is to be settled within 60 days.
Discuss whether there is a contract that create financial instruments between
Brilliant Bhd and Outreach Bhd as at 1 January 2020
(2 marks)
Yes, there is a contract between the companies. However, the contract entered
on 1 January 2020 does not create a financial instrument because settlement is
not a financial asset since Brilliant Bhd is to only has right to receive goods and
Outreach Bhd has the obligation to deliver goods.

(Total: 20 marks)
CUMIL BHD - JULY 2020

B. Cumil Bhd acquired 1,500,000 ordinary shares of Brave Bhd from the open market at
a price of RM5 per share on 1 July 2019. The company incurred a transaction cost of
RM650,000. On 1 October 2019, the company purchased 500,000 bonds of Ace Bhd
amounting RM1,000,000 involving a commission cost of RM10,000.

Cumil Bhd plans to trade these investments and sell them when their market price
increases more than 15%. At the end of the year, the quoted market price of Brave
Bhd’s ordinary shares has increased by RM0.10 per share and the market price of Ace
Bhd’s bonds was RM1.95 per unit.

Cumil Bhd’s financial year ends at 31 December each year.

Required:

a. Discuss the accounting treatment of the transaction cost for the above
transactions in accordance with MFRS 9 Financial Instruments. (Support your
answer with journal entries)
(4 marks)

The standard defines transaction costs as ‘incremental costs that are directly
attributable to the acquisition, issue or disposal of a financial asset or financial liability.
Since both of the investment are classified at FVTPOL√, Cumil Bhd should record the
initial investment excluding transaction cost√. The transaction cost is recognized as an
expense in profit or loss√.
Journal Entries:

Date Particulars RM RM
2019 July 1 Dr Investment in Brave Bhd ordinary shares 7,500,000√
(1,500,000 x RM5)
Dr Expenses/SOPL√– transaction cost 650,000√
5√ Cr Bank/cash 8,150,000
Or 7,500,000
Dr FA -Investment in Brave
Cr Bank/cash 7,500,000
Dr SOPL – transaction cost 650,000
Cr Bank/cash 650,000
2019 Oct 1 Dr Investment in Ace Bhd’s bonds 1,000,000√
Dr Expenses/SOPL – commission 10,000√
5√ Cr Bank/cash 1,010,000
Or
Dr FA -Investment in Brave 1,000,000
Cr Bank/cash 1,000,000
Dr SOPL – transaction cost 10,000
Cr Bank/cash 10,000

(8√ x ½ = 4 marks)
 b. Determine the fair value gains or losses and the value of both investments as at
31 December 2019.
(6 marks)
FV Gains √ from Investment in Brave Bhd’s Ordinary Shares
1,500,000 x RM0.10 = RM150,000 √√
Or
Investment in Brave Bhd’s ordinary shares as at 1 July 2019
= 1,500,000 x RM5 = RM7,500,000
Investment in Brave Bhd’s ordinary shares as at 31 Dec 2019:
= 1,500,000 x RM 5.10 = RM7,650,000
Therefore
= RM7,650,000-RM7,500,000 = RM RM150,000 (gain)

FV Loss √for Investment in Ace Bhd’s bond

= 500,000 x RM0.05(RM2-RM1.95) = RM25,000√√
Or
Investment in Ace Bhd’s bond as at 1 July 2019
= RM1 million
Investment in Ace Bhd’s bond as at 31 December 2019:
= 500,000 x RM1.95 = RM975,000
Therefore
= RM1,000,000 – RM975,000=RM25,000 (loss)

c. On 1 October 2019, Cumil Bhd issued a bond to be held for trading at a fair
value of RM1 million and incurred a transaction cost of RM10,000. Advise Cumil
Bhd on the accounting treatment for the issuance of bond under MFRS 9
Financial Instruments.
(4 marks)
 The issued bond is a financial liability√
 Be categorized as Fair Value Through Profit or Loss√ since it will be held for trading.
 At initial recognition√ - Dr cash RM1 million Cr FL – Bond RM1 million
 Transaction cost paid for financial liability categories under FVTPL will be charged in
SOPL√-Dr SOPL (transaction cost) RM10,000 Cr Cash RM10,000

C. Sinar decided to raised cash by issuing a four-year convertible bond worth RM600,000
on 1 January 2019. The bonds have a coupon interest rate of 5% which are payable
annually on 31 December each year. The bonds can be converted at any time up to
maturity into 180,000 ordinary shares. On 1 January 2019, the prevailing market
interest rate of a non-convertible bond was 9%. The present value of RM1, interest at
5% and 9% related to the bond are listed below:
 5% 9%
Year 1 0.952 0.917
Year 2 0.907 0.842
Year 3 0.864 0.772
Year 4 0.823 0.708
Required:
Calculate the amount of liability and equity components of the convertible bonds at
initial recognition.
(6 marks)
Year End Payment of Principal Discount Present value
interest 5% factor (RM)
(RM) (9%)√
(600,000x5%)√
2019 30,000 0.917 27,510
2020 30,000 0.842 25,260
2021 30,000 0.772 23,160
2022 30,000 600,000√ 0.708 446,040

Liability 521,970√
Proceeds 600,000√
Equity 78,030√

(Total: 20 marks
BILLION BHD
A. Billion Bhd has the following amongst its assets and liabilities disclosed in its statement
of financial position as at 31 December 2015.

RM
Property, plant and equipment 57,000,000
Patents and trademark 12,500,000
Trade inventories 1,000,000
Trade and other receivables 12,000,000
Investments in quoted ordinary shares 20,000,000
Cash and bank balance 12,500,000
Deferred tax as at 1 January 2015 (1,000,000)
Trade payables (2,000,000)

On 1 January 2016, Billion Bhd ordered goods for sale amounting to RM50 million from
Juita Bhd. The goods were delivered and received by Billion Bhd two months later. This
amount is settled by ordinary shares of Ribuan Sdn Bhd. Ribuan Sdn Bhd is an
investment owned by Billion Bhd.

As at year end 31 December 2016, Billion Bhd has the following financial instruments:
RM
Trade receivable – Rubi Bhd 10,000,000
Trade payable – Rubi Bhd 10,000,000

Required:

a. Define financial instruments in accordance with MFRS 132, paragraph 11.

 (3 marks)
A contract that gives rise to both a financial asset of one entity of one entity and
a financial liability or equity instrument or another entity.

b. Identity THREE (3) items of assets that does not meet the definition of financial
assets in the statement of financial position of Billion Bhd as at 31 December
2015 in accordance with MFRS 132 Financial Instruments: Presentation.
(3 marks)
1) Property Plant and Equipment
2) Trade Inventories
3) Patents
4) Trademark

c. Based on your answer in (b) above, explain why the items are not classified as
financial asset.
(3 marks)
Control of these assets creates an opportunity to generate inflow of cash or
another financial assets but they do not give rise to a present contractual right to
receive cash or another financial asset.

d. Discuss whether there is a financial instrument for transaction dated 1 January

2016.
(3 marks)
It is a financial instrument. Billion Bhd has the contractual obligation to deliver
the equity instrument of another entity (a financial liability) and Juita Bhd has
the contractual right to receive the equity instrument of another entity (a
financial asset).

e. Explain how Rubi Bhd trade receivable and trade payable should be presented in
the statement of financial position of Billion Bhd.
(2 marks)
Rubi Bhd shall be presented net in the statement of financial position if Billion
Bhd has a legally enforceable right to set off and there is intention either to
settle on a net basis or realise the asset ad settle the related liability
simultaneously. Otherwise, Rubi Bhd is to be presented both as a financial asset
and a financial liability.
DELORA BHD

A. The following financial assets belong to Delora Bhd:

i. Trade accounts receivable.

ii. Investments in a portfolio of listed equity shares held for short-term gains.
iii. Investments in a debt instrument that is quoted in an active market and is not
held for trading but the entity intends to hold it to maturity.

Required:

a. Classify each of the above financial assets into any of its four categories in
accordance to MFRS 139 Financial Instruments: Recognition and measurement.
(3 marks)
(i) DEBTS INTRUMENT - Loans and receivables / (AC)
(ii) EQUITY INSTRUMENT - Fair value through profit or loss / (FVTPL or FVTOCI)
(iii) DEBTS INSTRUMENT - Held to maturity investment / (AC)

b. Identify how each of the assets will be subsequently measured.

(3 marks)
(i) at amortised cost /
(ii) at fair value /
(iii) at amortised cost/

B. Desira Bhd issues 2 million preference shares for RM1 each. Each preference
shareholder is entitled to a cumulative dividend of 4% annually. The preference shares
are redeemable for cash at the option of the holder. The entity has decided to present
this instrument as equity in its financial statements.

Required:
 a. Discuss whether you agree with the entity’s decision.
(3 marks)
I don't agree with the entity's decision /.
Desira has a contractual obligation to the preference shareholders, both in
respect of dividends and to return the cash. /
Therefore, the preference shares are to be presented as financial liabilities. /

b. Analyse the effect of presenting the instrument as equity.

(2 marks)
Tak jumpa jwpn ☹
C. On 29 December 2014, Paloma Bhd entered into a contract to buy equity shares for
RM10,000, which was its fair value on that date. On 31 December 2014, the fair value of
the shares was RM10,500. The fair value of the shares further increased by RM300 on 1
January 2015 (when the contract is being settled). The entity classifies this financial
asset as “available for sale”@ held for trading.

Required:
Prepare journal entries to record the above transactions if settlement date accounting is
used.
(3 marks)

date account titles dr (RM) cr (RM)

31/12/2014 Account receivable 500
Fair value reserve 500
1/1/2015 Investment in equity 10800
Bank 1000
Accounts receivable (price increase) 500
Fair value reserve (price increase) 3000
KENCHANA BHD

A. On 1 January 2014, Kenchana Bhd (Kenchana) acquired 2,000,000 ordinary shares of

Mawar Bhd (Mawar) with a quoted price of RM12,500,000. In addition, it incurred
commission fees of RM700,000. At the same time Kenchana Bhd issued bonds for a total
consideration of RM3,500,000 and incurred transaction cost of RM80,000. Kenchana Bhd
classified the shares as ‘available-for-sale’ and measured the bond at Fair value through
profit or loss.

Required:

i. Prepare journal entries to record the purchase of the financial instruments if the
shares of Mawar were classified as ‘available-for-sale’.

ii. Prepare journal entries to record the issue of the financial instruments if the bonds
issued are measured at ‘fair value through profit or loss’.

iii. Show the changes in the fair value of the investments if the quoted market price of
the shares were RM15,000,000 on 31 December 2014.
(6 marks)

account titles dr (RM) cr (RM)

To record purchase and sale of
FI RM12,500,000 + RM7000,000
i Investment in Mawar Bhd (AFS) 13,200,00
0
Bank 13,200,000
ii. Bank 3,500,000
Bond (FVTPL) 3,500,000
Finance cost (TRANSACTION COST) 80,000
Bank 80,000
To record changes in FV of investment
 RM15,000,000 – (RM12,5000,000 + TC RM700k)
iii Investment in Mawar Bhd 1,800,000
FV gain – SOPL (increase in FA for equity 1,800,000
instrument)

B. i. Explain any three (3) types of financial risks under MFRS 7 Financial Instruments:
Disclosures.
(6 marks)
1. Credit risk
- Risk that one party to a financial instrument will cause a financial loss for the other
party by failing to discharge an obligation

2. Liquidity risk
- Risk that an entity will encounter difficulty in meeting obligations associated with
financial | liabilities.

3. Market risk
- The risk that fair value or future cash flows of a financial instrument will fluctuate
because of changes in market prices.
i - Show the changes in the fair value of the investments if the quoted market price
of the shares were RM15,000,000 on 31 December 2014.

4. Currency risks
- The risk that the fair value or future cash flows of a financial instrument will
fluctuate because of changes in foreign exchange rates.

5. Interest rate risks

 - The risk that the fair value of future cash flow of a financial instrument will
fluctuate because of changes in market interest rates.

6. Other price risk

- The risk that the fair value of future cash flow of a financial instrument will
fluctuate because of changes in market prices (other than interest rate risk or
currency risk).

i. Megah Bhd purchased RM4,000,000 equity shares of Slimberger International (UK)

PLC on the London Stock Exchange.

Required:

Identify two (2) types of financial risks associated with the financial instruments.

(2 marks)
Type of risk include market risk, price risk and currency risk, INTEREST RATE RISK
MELISSA BHD

A. On 1 January 2016, Melisa Bhd issued 5 million convertible bonds. It was issued at
par with a face value of RM1,000 per bond, giving a total proceed of RM5 Million.
Interest is payable annually in arrears at a nominal annual interest rate of 4%. Each
bond is convertible at any time up to maturity into 200 ordinary shares.

When the bonds were issued, the prevailing market interest rate for similar debts
without conversion option was 9%. At the issuance date, the market price of one
ordinary share was RM5.00. The present value for RM1 interest at 4% and 9%
related to the bond is as follows:

Year 4% 9%

2016 0.962 0.917

2017 0.925 0.842

2018 0.890 0.772

Required:

a. Define the term “Financial Instruments”.

According to MFRS132, financial instrument is any contract that gives rise to

both a financial asset of one entity and a financial liability or equity
instrument of another entity.
(3 marks)

b. Discuss briefly disclosure requirements for any three (3) of financial assets
and financial liabilities as required by MFRS 7 Financial Instruments:
Disclosures.

POWERPOINT SLIDE NO 57-59

The carrying amounts of each of the following categories, as defined in MFRS
 139, shall be disclosed either in the statement of financial position or in the
notes:

FINANCIAL ASSETS:
o financial assets at fair value through profit or loss, showing separately
those designated as such upon initial recognition and (ii) those classified as
held for trading in accordance with MFRS 139;
o held-to-maturity investments;
o loans and receivables;
o available-for-sale financial assets;

FINANCIAL LIABILITIES:
o financial liabilities at fair value through profit or loss, showing separately (i)
those designated as such upon initial recognition and (i) those classified as
held for trading in accordance with MFRS 139; and
o financial liabilities measured at amortised cost.

(3 marks)

a. Determine the equity component of the convertible bonds at its initial

recognition.

Equity component of the bond at its initial recognition

Year Interest (4%) Principal Discount Present

RM5,000,000 X 4% RM factor (9%) value RM
1- 2016 200,000 - 0.917 183,400
2- 2017 200,000 - 0.842 168,400
3- 2018 200,000 5,000,000 0.772 4,014,400
NPV (FL) 4,366,200
 EQUITY 633,800
Face Value (WHOLE) 5,000,000
(3 marks)

a. Calculate the bond at amortised cost using the effective interest rate method
for the year ended 31 December 2016 and 2017.

Year Amortized cost at Effective Interest (4%) Amortized

beginning of the interest (500,000 x cost at year
year rate @9% 4%) end
RM RM RM RM
2016 4,366,200 392,958 (200,000) 4,559,158
2017 4,559,158 410,324 (200,000) 4,769,482
(3 marks)

a. Prepare the journal entry to record the transaction in (c) above.

dr (RM) cr (RM)
Cash / Bank 5,000,000
Liability 4,366,200
Equity 633,800
(2 marks)
RKE BHD

A. Remaja Klasik Entertainment Berhad acquired 10% of Guntua Klasik Entertainment’s

ordinary shares for RM10 million on 1 January 2016. The entity incurred RM15,000
transaction costs to finalised the agreement. These shares were classified as trading
securities.

On 1 April 2016, the entity acquired another investment in the form of 30% ordinary
shares in Sumandak Entertainment for RM35 million including RM25,000 transaction
costs. These shares were classified as available for sale securities.
Required:

a. Define the term financial assets in accordance to MFRS 132 Financial

Instruments: Presentation.
(3 marks)
Definition of Financial Assets

A financial asset is any asset that is:

i. cash;
ii. an equity instrument of another entity;
iii. a contractual right:
a) to receive cash or another financial asset from another entity; or
b) to exchange financial assets or financial liabilities with another entity
under conditions that are potentially favourable to the entity; or
iv. a contract that will or may be settled in the entity's own equity instruments

b. Discuss briefly the recognition and derecognition criterias of a financial asset.

(3 marks)
MFRS139 requires recognition of financial asset when, and only when, the entity
becomes a party to the contractual provisions of the instrument.
 An entity shall derecognize (SLIDE 37 POWER POINT) a financial asset when, and
only when:
a) the contractual rights to the cash flows from the financial asset expire; or
b) it transfers the financial asset under the following conditions:
i. transfers the contractual rights to receive the cash flows of the financial
asset; or
ii. retains the contractual rights to receive the cash flows of the financial
asset, but assumes a contractual obligation to pay the cash flows to one

c. Explain ONE (1) category of financial assets in the above transactions.

(3 marks)
Trading Securities
A financial asset/ liability is classified as held for trading if:
i. it is acquired or incurred principally for the purpose of selling or repurchasing it
in the near term;
ii. on initial recognition it is part of a portfolio of identified financial instruments
that are managed together and for which there is evidence of a recent actual
pattern of short-term profit-taking; or

Available For Sale

Available-for-sale financial assets are those non-derivative financial assets that
are designated as available for sale or are not classified as (a) loans and
receivables, (b) held-to-maturity investments or (c) financial assets at fair value
through profit or loss.
d. Prepare the journal entries to account the transactions on 1 January and 1 April
2016.
(3 marks)

YA Details dr (RM) cr (RM)

FVTPL; SEPARATE TRANSACTION ABOVE
1/1/16 Investment in Guntua Klasik 10,000,000
Entertainment
Transactional Cost 15,000
Bank/Accounts Payable 10,015,000
FA+TC (FVTOCI): INCLUDING TC
1/4/16 Investment in Sumandak Entertainment 35,000,000
Bank/Accounts Payable 35,000,000

e. Advise the entity on the subsequent measurement for the above investments.

(2 marks)
After initial recognition, an entity shall measure financial assets, including
derivatives that are assets, at their fair values, without any deduction for
transaction costs it may incur on sale or other disposal.
SERAMA BHD

A. Serama Bhd’s financial year ends on 31 December. In 2015, the entity entered into the
following transactions:

1. On 10 January, the entity issued 6,000 5% convertible bonds at par which will
mature on 31 December 2017. The proceeds from the issue is RM6,000,000.
Interest is payable annually in arrears. Each bond is convertible at any time up to
maturity into 600 ordinary shares of RM1 each. When the bonds were issued,
the prevailing market yield i.e. effective interest rate for similar debt without
conversion options is 9.5%.

The following table shows the present value of RM1 with interest at different
rates, compounded annually.

Years 5.0% 9.0% 9.5% 10.0%

1 0.9523 0.91743 0.91324 0.90909

2 0.9070 0.84168 0.83401 0.82644

3 0.8638 0.77218 0.76165 0.75131

2. On 1 January 2015, the entity entered into a contract with one of its customers,
Bayu Bhd worth RM3 million. The entity is willing to give three options to Bayu
Bhd to settle the contract.

Option 1
Bayu Bhd is to repay RM3 million in cash in December 2017.

Option 2
RM3 million will be settled by allowing Serama Bhd to use the machines in Bayu
Bhd’s factory for two years beginning January 2016.

Option 3
RM3 million will be settled by the transfer of three of Bayu Bhd’s trade
receivables valued at RM2.5 million in March 2016.
Required:

a. Define the term financial instruments in accordance with MFRS 132 Financial
Instruments: Presentation.
(3 marks)
A financial instrument is any contract v that gives rise to a financial asset of one
entity v and a financial liability or equity instrument of another entity.

b. Identify whether there is a financial instrument for each option given above to
settle the contract on 1 January 2015.
(3 marks)
Option 1: is financial instrument
Option 2: not a financial instrument
Option 3: is financial instrument

c. Calculate the value of the convertible bonds that is to be recognised as a liability

for the year ended 31 December 2015.
(3 marks)

Year end Period Discount Interest Principal Total Present

rate payments payment value
@9.5% 5%x 6m
RM RM RM RM
31/12/2015 1 0.91324 300,000 300,000 273,972
31/12/2016 2 0.83401 300,000 300,000 250,203
31/12/2017 3 0.76165 300,000 6,000,000 6,300,000 4,798,395
Liability component 5,322,570
d. Prepare an extract of statement of financial position as at 31 December
2015.

(3 marks)
Extract of Statement of Financial Position as at 31 December 2015

RM
Equity
Equity component of 5% convertible bond 677,430
(6 million -5,322,570)

Non-current liabilities
5% convertible bond 5,322,570

e. Assuming the contract will be settled in cash, advice Serama Bhd on the
disclosure of risks it may face in relation to its contract with Bayu Bhd in order to
comply with the requirement of MFRS 7 Financial Instruments: Disclosures.

(2 marks)
To comply with the requirements of MFRS 7 Financial Instruments: Disclosure,
the company should disclose the following risks:

Credit riskv since there is a possibility that Zee Bhd will not be able to pay the
RM3 million cash due in 2017 and that the trade receivable of Zee Bhd may also
have also problems facing the amount due to the company.