Question

Fiter Plc is a pharmaceuticals company that is into the business of research and manufacture of new vaccines for rare and critical diseases. The company's financial year ended on 30 September 2019. The following information is provided to you and each case you are required to determine how the transactions would appear in Fiter's financial statements at the financial year end. You are required to prepare only one set of financial statements reflecting all the transactions. You are also required to provide necessary notes and disclosures referring to the specific reporting standards based on which you have reported the figures. a. Fiter. Plc reviewed its Property Plant and Equipment (PPE) on 31 March 2019 and found that one of its equipment was disoriented. As a result, the equipment is not able to function efficiently. The end of the year review shows that if the company continued using the equipment, it would generate future cash flows with present value of £20,000. However, selling the equipment would generate gross cash flow of £22,000. The company will have to spend £3,000 to sell this equipment. The equipment was historically purchased on 1 October 2016 for a price of £76,800. The company follows a standard policy of depreciating all its PPE at 30%, reducing balance method. Fiter's CFO has suggested that should the company replace this equipment, an equivalent of this will cost £112,000. The company's draft trial balance at 30 September 2019 shows a figure of £181,600 recorded at its net book value prior to any adjustment in respect of the disoriented equipment. Nor has company provided depreciation for the year 2018/19. The company records depreciation on plant and equipment under cost of goods sold. b. Fiter. Plc's draft trial balance had intangible assets worth £550,800 which was spent on Research & Development related activities as well as for Patents. Of the R&D costs, £52,000 was spent on research activities, while £373,000 was spent on development of two new products 'Alpha' and 'Beta'. Additionally, an amount of £19,200 was spent for pre-launch testing of Alpha and £11,800 on staff training. Both these costs were capitalised as Intangibles Out of the total development expenses, £236,000 was spent on product Alpha' which was declared commercially viable on 1 October 2018. The product was launched on 1 April 2019 and was considered to have a useful life of 2 years after which the product will become obsolete. The remaining of the development costs were incurred on product 'Beta', which the company is yet to launch. The Board feels that 'Beta' is not sufficiently ready generate future economic benefits. The patent acquired on 1 May 2018, costing £6,000 was sold just after holding it for one year, at its carrying amount. These patents had an estimated useful life of 2 years from the date of acquisition. Amount included in the intangibles of the draft trial balance is the carrying value of the patents worked out as cost (£118,000) reduced by accumulated amortisation (£23,200). The remaining patents are to be amortized at the rate of 50% on BUSI2150-1 3 BUSI2150-E1 cost. Neither the sale of the intangibles nor the amortisation for the year was recorded by the company. c. During the preparation of the financial statements for the year ended 30 September 2019, the chief accountant noticed that there was an error in the closing balance of the previous year receivables. The closing receivables figure at 30 September 2018 was recorded as £42,800 instead of £24,800 which had also overstated the revenues by £18,000 for the year ended 30 September 2018. The chief accountant believes that the figure is material. Explain with reference to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, how this error can be adjusted also providing the appropriate disclosures that may be required in this case.

Answer 1

Answer a
As per IAS 16, the carrying amount is the amount at which an asset is recognized after deducting any accumulated depreciation and accumulated impairment losses. An impairment loss is an amount by which the carrying amount of an asset exceeds its recoverable amount. However, the resulting carrying amount of such an asset and related assets is reviewed for impairment by IAS 36 Impairment of Assets.

IAS 36 requires that an entity to assess, at each reporting date, whether there are any indicators that assets may be impaired. To measure impairment, the asset’s carrying amount is compared with its recoverable amount. The recoverable amount of an asset is the greater of its ‘fair value fewer costs to sell’ and its ‘value in use’. An impairment loss is recognized to the extent the carrying amount of the asset exceeds its recoverable amount. For assets carried at historical cost, impairment losses are recognized as an expense immediately in profit or loss.

The carrying amount of the disoriented equipment as on 30 September 2019 is £ 26,068 (W.N. 1) while the recoverable amount is £ 20,000 (W.N. 2). Thus, the impairment loss is £ (26,068 – 20,000) = £ 6,068. The company should write off the impairment loss of £ 6,068 from the carrying amount of £ 26,068.

The carrying amount of the property, plant, and equipment after deducting depreciation for the year as on 30 September 2019 is £ 101,052 (W.N. 3) without including the book value of the disoriented equipment.

Therefore, the revised book value of property, plant and equipment including disoriented equipment =   £ 121,052 (£ 101,052 + £ 20,000)

The financial statements shall disclose, for each class of property, plant, and equipment a reconciliation of the carrying amount at the beginning and end of the period showing impairment losses recognized in profit or loss under IAS 36

W.N. 1

Calculation of book Value of disoriented equipment as on 30 September 2019

Particulars	Calculation	Amount (£)
Cost of equipment as on 1 October 2016		76,000
Less: Depreciation from 1 October 2016 to 30 September 2017	£ 76,000 *30%	22,800
Carrying amount as on 30 September 2017		53,200
Less: Depreciation from 1 October 2017 to 30 September 2018	£ 53,200 *30%	15,960
Carrying amount as on 30 September 2018		37,240
Less: Depreciation from 1 October 2018 to 30 September 2019	£ 37,240 *30%	11,172
Carrying amount as on 30 September 2019		26,068

W.N. 2

Calculation of the recoverable amount of the disoriented equipment:

Particulars	Calculation	Amount (£)
Value in use of equipment (A)		20,000
Equipment Fair value less Cost to sell (B)	£ 22,000 - £ 3,000	19,000
Recoverable Amount (A) or (B) whichever is higher		20,000

W.N. 3

Calculation of written down value of Property, Plant, and equipment of the company as on 30 September 2019:

Particulars	Calculation	Amount (£)
Book Value of all assets after deducting book value of disoriented PPE	£181,600 - £ 37,240	144,360
Less: Depreciation for the year 2018-2019	144,360 * 30%	43,308
Book Value of all other assets		101,052

Answer b

IAS 38 requires that no intangible asset arising from research (or from the research phase of an internal project) shall be recognized. Expenditure on research (or on the research phase of an internal project) shall be recognized as an expense when it is incurred. Thus, out of the R&D costs, £ 52,000 which is incurred on research activities should be expensed off. Also, expenses incurred on pre-launch testing of products and staff training are considered as research expenses and the same will not be recognized as an intangible asset and should be expensed off.

Further, an intangible asset arising from development is recognized if, and only if the technical feasibility of completing the asset and how the asset will generate future economic benefit can be demonstrated. Out of the total development expenses of £ 236,000 which was spent on “Alpha” which is declared commercially viable can be recognized as an intangible asset as per IAS 38. The expenditure incurred on “Alpha” should be amortized within its useful life, i.e., 2 years. The development expenditure incurred on “Beta”, i.e., £ 137,000 (£ 373,000- £ 236,000) which is not sufficiently ready to generate future economic benefits should be evaluated whether it is technically feasible to complete the asset if it is technically feasible, then only the company can recognize the expenditure as Intangible asset and if not the same should be expensed off. Since it is provided whether the company can complete the asset or not, assuming that it is not technically feasible to complete the asset, we will expense it off.

Particulars	Calculation	Amount (£)
Book value of patents after amortization	£ 118,000 - £ 23,200	94,800
Less: Book Value of the asset sold during the year	£ 6,000 * 50%	3,000
		91,800
Less: amortization for the year	£ 91,800* 50%	45,900
Book value of patents		45,900

Hence, Book Value of Intangible asset = £ 118,000 (£ 236,000 *50%) + £ 45,900 = £163,900

Expenditure to be expensed off = £ 52,000+ £ 19,200+ £ 11,800+ £ 137,000 = £ 220,000

Amortization for the year = £ 45,900

Answer c

As per IAS 8, “ Accounting Policies, Changes in Accounting Estimates and Errors”, prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information. Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud. Such an error should be corrected by retrospective restatement. The retrospective restatement is correcting the recognition, measurement, and disclosure of amounts of elements of financial statements as if a prior period error had never occurred.

Thus, the number of accounts receivable should be restated by correcting it from £ 42,800 to £ 24,800 in the financial statements for the year ended 30 September 2019 and in comparatives presented for the year ended 30 September 2018.

Subject to paragraph 43 of IAS 8, an entity shall correct material prior period errors retrospectively in the first set of financial statements authorized for issue after their discovery by:

(a) Restating the comparative amounts for the prior period(s) presented in which the error occurred; or

(b) If the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities, and equity for the earliest prior period presented.

                                                            

                                                                        Filter Inc

Statement of Profit or loss and other comprehensive Income (Extract)

Particulars	Amount (£)
Expenses
Impairment loss	6,068
Depreciation on Property, Plant, and Equipment (£ 11,172 + £ 43,308 )	54,480
Amortization of Intangible Assets	45,900
Expenses on research	220,000

                                                                        Filter Inc

             Statement of Financial Position (Extract)

Particulars	For the year ended 30 September 2019 (£)	For the year ended 30 September 2018 (£)
ASSETS
Property, Plant, and Equipment	121,052	181,600
Intangible Assets	118,000	-
Trade Receivables	(18,000)	(18,000)