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Question 1Key, a public limited company, is concerned about the reduction in the general availability of credit andthe sudden tightening of the conditions required to obtain a loan from banks. There has been a reductionin credit availability and a rise in interest rates. It seems as though there has ceased to be a clearrelationship between interest rates and credit availability, and lenders and investors are seeking less riskyinvestments.The directors are trying to determine the practical implications for the financial statements particularlybecause of large write downs of assets in the banking sector, tightening of credit conditions, and fallingsales and asset prices.There are specific assets on which the company wishes to seek advice. The company holds certainnoncurrent assets, which are in a development area and carried at cost less depreciation. These assetscost $3 million on !une "#3 and are depreciated on the straight%line basis over their useful life of fiveyears. &n impairment review was carried out on 3 'ay "#( and the pro)ected cash flows relating tothese assets were as follows*

+ear to 31 May 20X5 31 May 20X6 31 May 20X7 31 May 20X8ash flows -$###/ "0# (1# 1## 11#

The company used a discount rate of 12. &t 3# ovember "#(, the directors used the same cash flowpro)ections and noticed that the resultant value in use was above the carrying amount of the assets and

wished to reverse any impairment loss calculated at 3 'ay "#(. The government has indicated that itmay compensate the company for any loss in value of the assets up to "#2 of the impairment loss.Key holds a non%current asset, which was purchased for $# million on 4ecember "# with ane5pected useful life of ten years. 6n 4ecember "#3, it was revalued to $0.0 million. &t 3# ovember"#(, the asset was reviewed for impairment and written down to its recoverable amount of $1.1 million.Key committed itself at the beginning of the financial year to selling a property that is being under%utilisedfollowing the economic downturn. &s a result of the economic downturn, the property was not sold by theend of the year. The asset was actively marketed but there were no reasonable offers to purchase theasset. Key is hoping that the economic downturn will change in the future and therefore has not reducedthe price.Required

4iscuss with suitable computations, how to account for any potential impairment of the above non%currentassets in the financial statements for the year ended 3# ovember "#(. (15 marks)

Note. The following 12 discount factors may be relevant.

+ear #.71"(+ear " #.7#8#+ear 3 #.0930+ear ( #.0""8

Question 2:rochain, a public limited company, operates in the fashion industry and has a financial year end of 3'ay "#9.The company sells its products in department stores throughout the world. :rochain insists on creating itsown selling areas within the department stores which are called model areas. :rochain is allocatedspace in the department store where it can display and market its fashion goods. The company feels that

this helps to promote its merchandise. :rochain pays for all the costs of the model areas includingdesign, decoration and construction costs. The areas are used for appro5imately two years after whichthe company has to dismantle the model areas.The costs of dismantling the model areas are normally "#2 of the original construction cost and theelements of the area are worthless when dismantled. The current accounting practice followed by:rochain is to charge the full cost of the model areas against profit or loss in the year when the area isdismantled. The accumulated cost of the model areas shown in the statement of financial position at 3'ay "#9 is $"# million. The company has estimated that the average age of the model areas is eightmonths at 3 'ay "#9. (7 marks)

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:rochain acquired ##2 of a sports goods and clothing manufacturer, ;ade5, a private limited company,on !une "#1. :rochain intends to develop its own brand of sports clothing which it will sell in thedepartment stores. The shareholders of ;ade5 valued the company at $"1 million based upon profitforecasts which assumed significant growth in the demand for the ;ade5 brand name. :rochain hadtaken a more conservative view of the value of the company and measured the fair value as being in theregion of $#0 million to $" million of which $"# million relates to the brand name ;ade5. :rochain isonly prepared to pay the full purchase price if profits from the sale of ;ade5 clothing and sports goodsreach the forecast levels. The agreed purchase price was $## million plus a further payment of $"1million in two years on 3 'ay "#8. This further payment will comprise a guaranteed payment of $#million with no performance conditions and a further payment of $1 million if the actual profits during thistwo year period from the sale of ;ade5 clothing and goods e5ceed the forecast profit. The forecast profiton ;ade5 goods and clothing over the two year period is $9 million and the actual profits in the year to3 'ay "#9 were $( million. :rochain did not feel at any time since acquisition that the actual profitswould meet the forecast profit levels. (8 marks)

&fter the acquisition of ;ade5, :rochain started developing its own sports clothing brand :ro. Thee5penditure in the period to 3 'ay "#9 was as follows*

Period from Expenditure type $m !une "#1 < 3 &ug "#1 =esearch as to the e5tent of the market 3 >ept "#1 < 3# ov "#1 :rototype clothing and goods design (

4ecember "#1 < 3 !an "#9 ?mployee costs in refinement of products " @eb "#9 < 3# &pril "#9 4evelopment work undertaken to finalise 1

design of product 'ay "#9 < 3 'ay "#9 :roduction and launch of products 9

"#

The costs of the production and launch of the products include the cost of upgrading the e5istingmachinery -$3 million/, market research costs -$" million/ and staff training costs -$ million/. urrently anintangible asset of $"# million is shown in the financial statements for the year ended 3 'ay "#9.(6marks)

:rochain owns a number of prestigious apartments which it leases to famous persons who are under a

contract of employment to promote its fashion clothing. The apartments are let at below the market rate.The lease terms are short and are normally for si5 months. The leases terminate when the contracts forpromoting the clothing terminate. :rochain wishes to account for the apartments as investment propertieswith the difference between the market rate and actual rental charged to be recognised as an employeebenefit e5pense. (4 marks)

&ssume a discount rate of 1.12 where necessary.Required

4iscuss how the above items should be dealt with in the financial statements of :rochain for the yearended 3 'ay "#9 under International @inancial =eporting >tandards.

(Total = 25 marks)

Question 3!ohan, a public limited company, operates in the telecommunications industry. The industry is capital

intensive with heavy investment in licences and network infrastructure. ompetition in the sector is fierceand technological advances are a characteristic of the industry. !ohan has responded to these factors byoffering incentives to customers and, in an attempt to acquire and retain them, !ohan purchased atelecom licence on 4ecember "#9 for $"# million. The licence has a term of si5 years and cannot beused until the network assets and infrastructure are ready for use. The related network assets andinfrastructure became ready for use on 4ecember "#8. !ohan could not operate in the country withoutthe licence and is not permitted to sell the licence. !ohan e5pects its subscriber base to grow over theperiod of the licence but is disappointed with its market share for the year to 3# ovember "#0. Thelicence agreement does not deal with the renewal of the licence but there is an e5pectation that theregulator will grant a single renewal for the same period of time as long as certain criteria regarding

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network build quality and service quality are met. !ohan has no e5perience of the charge that will bemade by the regulator for the renewal but other licences have been renewed at a nominal cost. Thelicence is currently stated at its original cost of $"# million in the statement of financial position undernon%current assets.!ohan is considering e5tending its network and has carried out a feasibility study during the year to 3#ovember "#0. The design and planning department of !ohan identified five possible geographicalareas for the e5tension of its network. The internal costs of this study were $1#,### and the e5ternalcosts were $##,### during the year to 3# ovember "#0. @ollowing the feasibility study, !ohan chose ageographical area where it was going to install a base station for the telephone network. The location ofthe base station was dependent upon getting planning permission. & further independent study has beencarried out by third party consultants in an attempt to provide a preferred location in the area, as there is aneed for the optimal operation of the network in terms of signal quality and coverage. !ohan proposes tobuild a base station on the recommended site on which planning permission has been obtained. The thirdparty consultants have charged $1#,### for the study. &dditionally !ohan has paid $3##,### as a singlepayment together with $9#,### a month to the government of the region for access to the land uponwhich the base station will be situated. The contract with the government is for a period of " years andcommenced on ovember "#0. There is no right of renewal of the contract and legal title to the landremains with the government.The chief operating officer, a non%accountant, has asked for an e5planation of the accounting principlesand practices which should be used to account for the above events.

Required4iscuss the principles and practices which should be used in the financial year to 3# ovember "#0 toaccount for*-a/ The licences (8 marks)-b/ The costs incurred in e5tending the network (7 marks)

Question 4>cramble, a public limited company, is a developer of online computer games.

a/ &t 3# ovember "#, 912 of >crambles total assets were mainly represented by internallydeveloped intangible assets comprising the capitalised costs of the development and productionof online computer games. These games generate all of >crambles revenue. The costs incurredin relation to maintaining the games at the same standard of performance are e5pensed to profitor loss for the year. The accounting policy note states that intangible assets are valued at

historical cost. >cramble considers the games to have an indefinite useful life, which isreconsidered annually when the intangible assets are tested for impairment. >crambledetermines value in use using the estimated future cash flows which include maintenancee5penses, capital e5penses incurred in developing different versions of the games and thee5pected increase in turnover resulting from the above mentioned cash outflows. >cramble doesnot conduct an analysis or investigation of differences between e5pected and actual cash f lows.Ta5 effects were also taken into account. (7 marks)

b/ >cramble wished to diversify its operations and purchased a professional football club, =ashing.In =ashings financial statements for the year ended 3# ovember "#, it was proposed toinclude significant intangible assets which related to acquired players registration rightscomprising registration and agents fees. The agents fees were paid by the club to playersagents either when a player is transferred to the club or when the contract of a player ise5tended. >cramble believes that the registration rights of the players are intangible assets but

that the agents fees do not meet the criteria to be recognised as intangible assets as they are notdirectly attributable to the costs of players contracts. &dditionally, =ashing has purchased therights to "12 of the revenue from ticket sales generated by another football club, >antash, in adifferent league. =ashing does not sell these tickets nor has any discretion over the pricing of thetickets. =ashing wishes to show these rights as intangible assets in its financial statements.

(9 marks)

RequiredDiscuss the validity of the accounting treatments proposed by Scramble in its nancialstatements for the year ended 30 November 20X1.