Tauriel, Gandalf and Bilbo are firms involved in the production

IFRS Accounting Discussion Questions

Question one

Tauriel, Gandalf and Bilbo are firms involved in the production and sale of high quality spare parts for vehicles; the following are draft financial statements: Statement of financial position as at 31st December 2021.

	Tauriel	Gandalf	Bilbo
	£’000	£’000	£’000
Assets
Non-current assets
Property, Plant and Equipment  (note 2)	2,250,000	900,000	800,000
Investment in Gandalf (note 3)	600,000	–	–
Investment in Bilbo (note 4)	500,000	–	–
Current assets	750,000	300,000	200,000
Total assets	4,100,000	1,200,000	1,000,000
Equity and liabilities
Equity
Ordinary share capital (£1)	200,000	–	–
Ordinary share capital (£0.5)	–	300,000	–
Ordinary share capital (£1)	–	–	100,000
Retained earnings	3,300,000	660,000	700,000
Non-current liabilities	400,000	–	–
Current liabilities	200,000	240,000	200,000
Total equity and liabilities	4,100,000	1,200,000	1,000,000
	Tauriel	Gandalf	Bilbo
	£’000	£’000	£’000
Revenue	5,736,000	3,140,000	1,500,000
Cost of sales	(3,000,000)	(2,000,000)	(900,000)
Gross profit	2,736,000	1,140,000	600,000
Investment income	284,000	–	–
Administration costs	(200,000)	(140,000)	(80,000)
Profit before tax	2,820,000	1,000,000	520,000
Tax	(720,000)	(300,000)	(160,000)
Profit after tax	2,100,000	700,000	360,000

Notes to the accounts:

1. On 1st July 2021, Gandalf sold units with a total sales price of 250,000 units for £200 each to a single large customer. Included in the contract was a two-year service warranty covering all required repairs during this time. The normal selling price of the same merchandise would be £170 per unit without the warranty. As of 31st December 2021, Gandalf recognised £44,375,000 of revenue, included in the above accounts.
2. On 1st January 2021, Tauriel Ltd entered into a four-year lease contract for a new machine with a contract requiring the payment of £12,000,000 per annum in arrears. The interest rate implicit in the lease is 5% and Tauriel uses the actuarial method to allocate interest for finance leases. Tauriel’s depreciation policy for these assets requires the straight-line method over three years and there is not thought to be a residual value of the asset at the end of this period. Tauriel didn’t account for this transaction.
3. Tauriel Ltd acquired 600,000,000 of the ordinary shares of Gandalf Ltd on 1st January 2015 when the retained earnings of Gandalf Ltd were £176,000,000.
4. Tauriel Ltd acquired 80% of the ordinary shares of Bilbo Ltd on 1st January 2017 when the retained earnings of Bilbo Ltd were £460,000,000. Tauriel use the proportionate share (‘partial’) method of valuing the non-controlling interest in Bilbo.
5. During the year goods with an original cost of £187,500,000 were sold by Tauriel to Gandalf for £437,500,000. A quarter of these goods are in Gandalf’s inventory at the year end.
6. During the year, goodwill in both subsidiaries has suffered from an impairment of 20% of their values.
7. Dividend payments by Gandalf are £144,000,000 and by Bilbo are £40,000,000. These are included in investment income in the statement of profit and loss for the accounting period ending 31st December 2021. The rest of investment income is dividends received from nongroup companies.

 

Requirements:

1. The accountant who posted Gandalf’s sales in Note 1 is now worried that they treated this incorrectly. They come to you asking for help. Prepare a brief note for them showing the correct treatment and explaining why the correct treatment is consistent with International Financial Reporting Standards.

[20 marks, approximately 250 words]

1. The Financial Director of Tauriel would like a report on how the four-year lease should be accounted for. Prepare a note containing the full calculation and explanation of your proposed treatment with reference to International Financial Reporting Standards.

[20 marks, approximately 250 words]

1. Adjusting for the above (where necessary) prepare a consolidated statement of financial position and consolidated statement of profit and loss.

[30 marks]

Question two

A primary objective of international financial accounting standards is to equip a company with reporting a consistent, comparable, and fair view of its operations. However, no two companies (as reporting entities) are the same. The unique perspective of a company may pose different challenges for an accountant in applying the accounting standards. Therefore, the accounting regulator’s challenge is to identify and critically analyse those perspectives and incorporate standards for recording and reporting accounting information, primarily for investors and creditors. An accountant’s responsibility is not only limited to recording transactions in accordance with the accounting standards, but also to ensure the accounting statements present a true and fair view of the entity’s financial performance.

Critically evaluate the above statement from the context of any one or more of the following accounting standards-

1. 1. IFRS Accounting conceptual framework (ACF)
   2. Revenue recognition (IFRS 15)
   3. Lease (IFRS 16)

In your critical evaluation, you must clearly mention the IFRS(s) you chose to answer this question. You need to support your critical evaluation by drawing on evidence and arguments from credible, verifiable, and accessible sources e.g., peer-reviewed academic journals, professional publication, books etc.

[30 marks, approximately 1000 words]