Required

At what value should the equity element of the hybrid financial instrument be recognised in the
financial statements at EFG at the date of issue? (4 marks)
(Total = 10 marks)

19 Alpha 49 mins
In producing the Conceptual Framework for Financial Reporting and some of the current IFRSs, the IASB
has had to address the potential problem that the management of some companies may choose to adopt
inappropriate accounting policies. These could have the effect of portraying an entity's financial position in
a favourable manner. In some countries this is referred to as 'creative accounting'
Required
(a) Describe in broad terms common ways in which management can manipulate financial statements
to indulge in 'creative accounting' and why they would wish to do so. (7 marks)
(b) Explain with examples how IFRS seeks to limit creative accounting in each of the following areas of
accounting.
(i) Group accounting
(ii) Financing non-current assets
(iii) Measurement and disclosure of current assets (8 marks)
(c) Alpha, a public listed corporation, is considering how it should raise $10m of finance which is
required for a major and vital non-current asset renewal scheme that will be undertaken during the
current year to 31 December 20X6. Alpha is particularly concerned about how analysts are likely to
react to its financial statements for the year to 31 December 20X6. Present forecasts suggest that
Alpha's earnings per share and its financial gearing ratios may be worse than market expectations.
Mr Wong, Alpha's Finance Director, is in favour of raising the finance by issuing a convertible loan.
He has suggested that the coupon (interest) rate on the loan should be 5%; this is below the current
market rate of 9% for this type of loan. In order to make the stock attractive to investors the terms of
conversion into equity would be very favourable to compensate for the low interest rate.
Required
(i) Explain why the Finance Director believes the above scheme may favourably improve
Alpha's earnings per share and gearing.
(ii) Describe how the requirements of IAS 33 Earnings per share and IAS 32 Financial
instruments: presentation are intended to prevent the above effects. (10 marks)
(Total = 25 marks)

20 Jenson 35 mins
The timing of revenue (income) recognition has long been an area of debate and inconsistency in
accounting. It has now become the subject of a new standard, IFRS 15 Revenue from contracts with
customers.
The IASB in the Conceptual Framework has defined the 'elements' of financial statements, and it uses
these to determine when a gain or loss occurs.
Required
(a) Explain what is meant by a performance obligation in relation to revenue recognition and discuss
the criteria used in the Conceptual Framework for determining when a gain or loss arises.
(5 marks)
(b) Jenson has entered into the following transactions/agreements in the year to 31 March 20X5.
(i) Goods, which had a cost of $20,000, were sold to Wholesaler for $35,000 on 1 July 20X4.
Jenson has an option to repurchase the goods from Wholesaler at any time within the next
two years. The repurchase price will be $35,000 plus interest charged at 12% per annum
from the date of sale to the date of repurchase. It is expected that Jenson will repurchase
the goods.

434 Practice question bank

 (ii) Jenson owns the rights to a fast food franchise. On 1 April 20X4 it sold the right to open a new
outlet to Mr Cody. The franchise is for five years. Jenson received an initial fee of $50,000 for
the first year and will receive $5,000 per annum thereafter. Jenson has continuing service
obligations on its franchise for advertising and product development that amount to
approximately $8,000 per annum for each franchised outlet. A reasonable profit margin on the
provision of the continuing services is deemed to be 20% of revenues received.
(iii) On 1 September 20X4 Jenson received subscriptions in advance of $240,000. The
subscriptions are for 24 monthly publications of a magazine produced by Jenson. At the
year end Jenson had produced and despatched six of the 24 publications.
Required
Describe how Jenson should treat each of the above examples in its financial statements in the
year to 31 March 20X5. (13 marks)
(Total = 18 marks)

21 Trontacc 20 mins
Trontacc is a company whose activities are in the field of major construction projects. During the year
ended 30 September 20X7, it enters into three separate contracts, each with a fixed contract price of
$1,000,000. These are contracts where performance obligations are satisfied over time and Trontacc has
an enforceable right to payment for performance completed to date. The following information relates to
these contracts at 30 September 20X7.
Contract
A B C
$'000 $'000 $'000
Amounts invoiced and paid up to 30.9.X7 540 475 400
Costs incurred to date 500 550 320
Estimate costs to complete the contract 300 550 580
Estimated percentage of obligations satisfied 60% 50% 35%
Required
(a) Show how each contract would be reflected in the statement of financial position of Trontacc at
30 September 20X7 under IFRS 15 Revenue from contracts with customers.
(b) Show how each contract would be reflected in the statement of profit or loss of Trontacc for the
year ended 30 September 20X7 under IFRS 15. (10 marks)

22 C Co 20 mins
C Co is a civil engineering company. It started work on two construction projects during the year ended
31 December 20X0. The nature of both contracts is that the customer controls the asset as the project
goes forward. Work is certified by a surveyor as performance obligations are completed. The following
figures relate to those projects at the end of the reporting period.
Maryhill bypass Rottenrow Centre
$'000 $'000
Contract price 9,000 8,000
Costs incurred to date 1,400 2,900
Estimated costs to completion 5,600 5,200
Value of work certified to date 2,800 3,000
Progress billings 2,600 3,400
An old mineshaft has been discovered under the site for the Rottenrow Centre and the costs of dealing
with this have been taken into account in the calculation of estimated costs to completion. C Co's lawyers
are reasonably confident that the customer will have to bear the additional costs which will be incurred in
stabilising the land. If negotiations are successful then the contract price will increase to $10m.

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