Index of Activities: Chartered Accountants Program Financial Accounting & Reporting

Chartered Accountants Program
Financial Accounting & Reporting
Index of activities
Unit 1: Financial reporting 1-1

Activity 1.1 (Australia): Applying the regulatory framework 1-1
Activity 1.1 (New Zealand): Applying the regulatory framework 1-5
Unit 2: Presentation of financial statements 2-1

Activity 2.1: Preparing a statement of cash flows 2-1
Activity 2.2: Preparing key financial statements (SPLOCI and SOCE) 2-3
Activity 2.3: Accounting for changes in accounting policies and estimates 2-7
Activity 2.4: Identifying related parties 2-9
Activity 2.5: Accounting for events after the reporting period 2-11
Unit 3: Revenue 3-1

Activity 3.1: Measuring revenue for the sale of goods 3-1
Activity 3.2 Identifying the potential impact of IFRS 15 3-3
Unit 4: Income taxes 4-1

Activity 4.1: Accounting for income taxes 4-1
Unit 5: Foreign exchange 5-1

Activity 5.1: Determining the functional currency of a foreign operation 5-1
Activity 5.2: Translating from the functional currency to the presentation currency 5-3
Activity 5.3: Integrated activity 1 5-5
Unit 6: Fair value measurement 6-1

Activity 6.1: Measuring fair value of non-financial assets 6-1
Unit 7: Property, plant and equipment 7-1

Activity 7.1: Accounting for property, plant and equipment 7-1
Unit 8: Intangible assets 8-1

Activity 8.1: Accounting for intangible assets 8-1
Unit 9: Financial instruments 9-1

Activity 9.1: Classification of financial instruments 9-1
Activity 9.2: Basic accounting comparing FVTPL and FVTOCI 9-3
Activity 9.3: Basic accounting under amortised cost 9-5
Activity 9.4: Integrated financial instruments activity 9-7
Unit 10: Impairment of assets 10-1

Activity 10.1: Accounting for impairment and subsequent reversal for a CGU 10-1
Unit 11: Provisions (including employee benefit entitlements),

contingent liabilities and contingent assets 11-1
Activity 11.1: Calculating employee benefit liabilities 11-1
Activity 11.2: Provisions, contingent liabilities and contingent assets 11-3
Unit 12: Leases 12-1

Activity 12.1: Accounting for a lease by a lessee and lessor 12-1
Activities index Page i

Financial Accounting & Reporting Chartered Accountants Program
Unit 13: Earnings per share (EPS) 13-1

Activity 13.1: Calculating basic EPS 13-1
Activity 13.2: Calculating diluted EPS 13-3
Unit 14: Share-based payments 14-1

Activity 14.1: Accounting for a cash-settled share-based payment transaction 14-1
Unit 15: Business combinations 15-1

Activity 15.1: Accounting for a business combination 15-1
Unit 16: Accounting for subsidiaries 16-1

Unit 17: Equity accounting 17-1

Activity 17.1: Accounting for an investment in an associate under the equity method of
accounting 17-1
Page ii Activities index

Chartered Accountants Program Financial Accounting & Reporting
ACT
Unit 1: Financial reporting AU
Activity 1.1 (Australia)

Applying the regulatory framework
Introduction
It is important to understand the complexities of the financial reporting regulatory framework
to fulfil your professional and ethical duties as a Chartered Accountant. The interaction between
local and international Accounting Standards, and the effect of local legislation on financial
reporting are important parts of financial reporting in practice. The following short scenarios aim
to help Candidates understand key aspects from this unit.
This activity links to learning outcomes:
1. Describe the purpose of financial reporting.
2. Analyse the reporting requirements of an entity based on the national regulatory framework.
3. Explain the interaction between national and international financial reporting regulatory
frameworks including the relationship with their respective accounting standards.
4. Explain a Chartered Accountant’s ethical requirements relating to financial reporting.
It will take you approximately 60 minutes to complete.
This activity exceeds 45 minutes, which is the designated set time for an exam question (exams
have four questions to be completed over three hours). It has been developed to bring together
a number of important examinable concepts and will assist you with your understanding of
the topic areas covered, each of which could be examined individually or together in a smaller
question. Alternatively, only part of the required may be used in an exam.
The estimated time for completion of the activity includes time to review the stepped-through
recommended approach provided. This level of detail is provided to aid your understanding of
the concepts covered, and similar preparation would not be required in answering individual
exam questions. The activity is designed to assist you in achieving the specified learning
outcome(s), and the exam is designed to test whether or not you have achieved the learning
outcomes.
fin31701_activities
Unit 1 – Activities Page 1-1

ACT
AU Scenario A
You are the financial controller of Alpha Limited (Alpha), a company that manufactures dental
hygiene products. Two separate issues have arisen during the year ending 30 June 20X5 on which
Alpha’s directors require your advice:
1. Alpha received an offer from a competitor to acquire all of the 1.5 million shares in Alpha.
The offer was for $5 per share, with a total offer price of $7.5 million. The directors estimated
that the fair value of the identifiable net assets was $6 million; therefore, the offer included
a value for goodwill of $1.5 million.
Alpha declined the offer, but the directors are keen to include the $1.5 million of internally
generated goodwill on the statement of financial position as an intangible asset.
2. On 30 May 20X5, Alpha received a legal claim for $50,000 from a customer, alleging that glass
fragments were found in a children’s toothpaste, which caused cuts to the mouth and throat.
The customer’s toothpaste and other samples from the same batch have been analysed and
no fragments have been found. At the year-end Alpha’s lawyers have estimated that there
is a 20% chance of Alpha being held liable for this claim and the full amount of the claim
requiring payment.
The directors do not want to record a liability in relation to the legal claim as they do not
want to draw attention to the incident.
Task A
For this activity you are required to discuss whether each of the items should be recognised in
the statement of financial position of Alpha, considering only the definitions of an asset and a
liability, and the recognition criteria from the Conceptual Framework.
Note: You should ignore the requirements of specific Accounting Standards relating to
these items.
Scenario B
Jack Bridges, a Chartered Accountant, is the chief financial officer (CFO) of Beta Limited (Beta),
he holds 30% of the ordinary shares in Beta.
On 1 February 20X5 Jack borrowed $1 million from Beta to purchase a new house. Jack sold his
old house on 1 May 20X5 and repaid the full $1 million plus interest on 15 May 20X5. Details
of the nature of the relationship between Jack and Beta, together with details of the transaction
should be disclosed in the financial statements for the year ending 30 June 20X5 in accordance
with IAS 24 Related Party Disclosures (IAS 24); however, there is no mention of either in the
financial statements.
Jack believes that the loan does not require disclosure as it was not outstanding at the year-end;
however, he is not familiar with the detail of IAS 24. Jack is also keen to keep the details of the
loan from the other shareholders as authorisation for the loan was denied when it was raised
with them.
Task B
For this activity you are required to identify and explain the key fundamental ethical principle at
risk as a result of not making the required disclosures.
Note: You are not required to comment on the required accounting treatment under IAS 24.
Page 1-2 Activities – Unit 1

ACT
Scenario C AU
Rosie Adams works for a small accounting practice. She has asked you to assist her in
establishing the annual reporting requirements for two new clients, Gamma Pty Limited
(Gamma) and Kappa Pty Limited (Kappa).
The following details are relevant:
•• Gamma is a large proprietary company that produces springs for use in the automotive
industry. It does not publicly trade any debt or equity instruments. There are a significant
number of investors in Gamma, many of whom are not involved in the day-to-day running
of the company.
•• Kappa is a large proprietary company that provides an online tuition service for primary
school children to improve their skills in spelling and basic maths. It is a wholly owned
subsidiary of Lambda Pty Limited (Lambda), a large proprietary company that is required
to prepare and lodge an annual financial report with the Australian Securities Investments
Commission (ASIC). Kappa is a non-reporting entity.
Task C
For this activity you are required to determine the annual reporting requirements of both
Gamma and Kappa. You should justify your determination.
Scenario D
Rosie Adams works for a small accounting practice. She has been approached by three different
proprietary limited companies to assist with their annual reporting requirements. Details of the
companies are set out in the following table:
Company details for reporting requirements
Delta Pty Limited (Delta) Eta Pty Limited Theta Pty Limited
(ETA) (Theta)
Consolidated revenue $19.8 million $26.2 million $83.5 million
Consolidated gross assets $11.1 million $12.8 million $10.3 million

at 30 June 20X5
Consolidated net assets $5.2 million $8.7 million $7.2 million

at 30 June 20X5
Number of full time 51 37 47

equivalent employees
at 30 June 20X5
Average number of full 47 36 51

time equivalent employees
during the year to 30 June
20X5
Other relevant information Bob Black holds 207,600 of Controlled by Lota N/A
the 4,325,000 equity shares. inc. (Lota), a foreign
Following a dispute between company. Lota
Bob and one of the directors, prepares consolidated
Bob has notified the company financial statements
in writing that he requires a but they are not
financial report to be prepared lodged with ASIC
Task D
For this activity you are required to determine whether each of the above companies is required
to lodge a financial report with ASIC. Justify your determination.

ACT
AU Scenario E
Eta Pty Limited (Eta) is a large proprietary company that prepares a general purpose financial
report (GPFR) under Tier 2 of the reduced disclosure regime (RDR).
Polly Kibble is the finance manager at Eta. She recently joined Eta, having emigrated from the
United Kingdom. Polly’s previous role in the United Kingdom was as a financial controller for an
entity that prepares financial statements under International Financial Reporting Standards
(IFRS).
You are one of the advisors to Eta and Polly has asked you the following questions:
1. What is AASB 1053 Application of Tiers of Australian Accounting Standards? I thought that all
Australian Standards had a corresponding International Standard but I am not familiar with
this one.
2. Where can I find the RDR? Under IFRS there is IFRS for SMEs, which is a single
pronouncement, I assume the RDR is set up in the same way.
3. I have reviewed the financial report for the last financial year. I am a little confused as it
doesn’t say that the financial statements comply with IFRS.
Task E
Prepare a response to each of Polly’s three (3) questions.

ACT
Activity 1.1 (New Zealand) NZ

Applying the regulatory framework
Introduction
It is important to understand the complexities of the financial reporting regulatory framework
to fulfil your professional and ethical duties as a Chartered Accountant. The interaction between
local and international Accounting Standards, and the effect of local legislation on financial
reporting are important parts of financial reporting in practice. The following short scenarios aim
to help Candidates understand key aspects from this unit.
1. Describe the purpose of financial reporting.
2. Analyse the reporting requirements of an entity based on the national regulatory framework.
3. Explain the interaction between national and international financial reporting regulatory
frameworks including the relationship with their respective accounting standards.
4. Explain a Chartered Accountant’s ethical requirements relating to financial reporting.
recommended approach provided. This level of detail is provided to aid your understanding of
the concepts covered, and similar preparation would not be required in answering individual
exam questions. The activity is designed to assist you in achieving the specified learning
outcome(s), and the exam is designed to test whether or not you have achieved the learning
outcomes.

ACT
NZ Scenario A
You are the financial controller of Alpha Limited (Alpha), a company that manufactures dental
hygiene products. Two separate issues have arisen during the year ending 30 June 20X5 on which
Alpha’s directors require your advice:
1. Alpha received an offer from a competitor to acquire all of the 1.5 million shares in Alpha.
The offer was for $5 per share, with a total offer price of $7.5 million. The directors estimated
that the fair value of the identifiable net assets was $6 million; therefore, the offer included
a value for goodwill of $1.5 million.
Alpha declined the offer, but the directors are keen to include the $1.5 million of internally
generated goodwill on the statement of financial position as an intangible asset.
2. On 30 May 20X5, Alpha received a legal claim for $50,000 from a customer, alleging that glass
fragments were found in a children’s toothpaste, which caused cuts to the mouth and throat.
The customer’s toothpaste and other samples from the same batch have been analysed and
no fragments have been found. At the year-end Alpha’s lawyers have estimated that there
is a 20% chance of Alpha being held liable for this claim and the full amount of the claim
requiring payment.
The directors do not want to record a liability in relation to the legal claim as they do not
want to draw attention to the incident.
Task A
For this activity you are required to discuss whether each of the items should be recognised in
the statement of financial position of Alpha, considering only the definitions of an asset and a
liability, and the recognition criteria from the Conceptual Framework.
Note: You should ignore the requirements of specific Accounting Standards relating to
these items.
Scenario B
Jack Bridges, a Chartered Accountant, is the chief financial officer (CFO) of Beta Limited (Beta),
he holds 30% of the ordinary shares in Beta.
On 1 February 20X5 Jack borrowed $1 million from Beta to purchase a new house. Jack sold his
old house on 1 May 20X5 and repaid the full $1 million plus interest on 15 May 20X5. Details
of the nature of the relationship between Jack and Beta, together with details of the transaction
should be disclosed in the financial statements for the year ending 30 June 20X5 in accordance
with IAS 24 Related Party Disclosures (IAS 24); however, there is no mention of either in the
financial statements.
Jack believes that the loan does not require disclosure as it was not outstanding at the year-end;
however, he is not familiar with the detail of IAS 24. Jack is also keen to keep the details of the
loan from the other shareholders as authorisation for the loan was denied when it was raised
with them.
Task B
For this activity you are required to identify and explain the key fundamental ethical principle at
risk as a result of not making the required disclosures.
Note: You are not required to comment on the required accounting treatment under IAS 24.

ACT
Scenario C NZ
Rosie Adams works for a small accounting practice. She has asked you to assist her in
establishing the annual reporting requirements for two new clients, Gamma Limited (Gamma)
and Kappa Limited (Kappa).
The following details are relevant:
•• Gamma is a New Zealand registered for-profit private company that produces springs for
use in the automotive industry. While Gamma has not previously issued any publicly listed
debt or equity instruments, Gamma did issue shares under a regulated offer under the
Securities Act 1978 several years ago. Gamma has approximately 2,000 investors, who are not
involved in the day-to-day running of the company. It has average revenue of $35 million per
annum and assets of $80 million for the last two years.
•• Kappa is a New Zealand registered for-profit private company that provides an online
tuition service for primary school children to improve their skills in spelling and basic
maths. Kappa is owned by husband and wife team John and Kushla Jones who are the sole
shareholders. Kappa earns average revenue of $10 million per annum year-on-year and
assets have totalled approximately $15 million for the last two years.
Task C
For this activity you are required to determine the annual reporting requirements of both
Gamma and Kappa under the Financial Reporting Act 2013 (FRA 2013) and/or the Financial
Markets Conduct Act 2013 (FMCA 2013). Justify your determination.
Scenario D
Rosie Adams works for a small accounting practice. She has been approached by three different
New Zealand registered companies to assist with their annual reporting requirements. Details of
the companies are set out in the following table:
Company details for reporting requirements
Company Delta Limited (Delta) Pi Limited (Pi) Theta Limited (Theta)
Consolidated revenue $19.8 million $26.2 million $29.5 million
Consolidated expenses $16.4 million $19.8 million $20.8 million
Consolidated total assets $11.1 million $22.8 million $10.3 million
Consolidated net assets $5.2 million $18.7 million $7.2 million
Number of shareholders 8 2 – Lota and one other 8

entity
Other relevant Bob Black holds 300,600 Pi is a for-profit entity. It Theta is a for-profit
information of the 4,325,000 equity is controlled by Lota Inc. entity and is not an FMC
shares. Following a (Lota), a foreign company reporting entity. Theta is
dispute between Bob and defined as large under the not a registered charity
one of the Directors, Bob FRA 2013. Lota prepares
has notified the company consolidated financial
in writing that he requires statements in its home
a financial report to jurisdiction
be prepared and to be
audited
Note that for each company, the levels of revenue, expenses, total assets and net assets have been the same for the past
two accounting periods.

ACT
NZ Task D
For this activity you are required to determine whether each of the above companies is required
to prepare, audit or file financial statements with the Registrar of Companies. Justify your
determination.
Scenario E
Nickel Limited (Nickel) is company defined as large under the FRA 2013 and that prepares a
general purpose financial report (GPFR) under Tier 2 of the financial reporting framework.
Polly Kibble is the finance manager at Nickel. She recently joined Nickel having emigrated
from the United Kingdom. Polly’s previous role in the United Kingdom was as a financial
controller for an entity that prepares financial statements under International Financial Reporting
Standards (IFRS).
You are one of the advisors to Nickel and Polly has asked you the following questions:
1. What is FRS-44 New Zealand Additional Disclosures (FRS-44)? I thought that all New Zealand
Standards had a corresponding International Standard but I am not familiar with this one.
2. Where can I find the RDR? Under IFRS there is IFRS for SMEs, which is a single
pronouncement, I assume the RDR is set up in the same way.
3. I have reviewed the financial report for last financial year, I am a little confused as it doesn’t
say that the financial statements comply with IFRS.
Task E
Prepare a response to each of Polly’s three (3) questions.

ACT
Unit 2: Presentation of financial

statements
Activity 2.1
Preparing a statement of cash flows
Introduction
The statement of cash flows provides important information to readers about an entity’s sources
and use of cash during a given period. Preparing the statement of cash flows is often a more
complicated exercise than preparing other statements because the cash flows presented must
be derived from the accrual-based accounting records. It also requires an understanding of the
nature of the accounts in the accounting records and the entity’s non-cash activities.
This activity links to learning outcome:
•• Advise on the requirement for financial statements.
At the end of this activity you will be able to prepare a statement of cash flows in accordance
with IAS 7 Statement of Cash Flows (IAS 7).
recommended approach provided. This level of detail is provided to aid your understanding of the
concepts covered, and similar preparation would not be required in answering individual exam
questions. The activity is designed to assist you in achieving the specified learning outcome(s),
and the exam is designed to test whether or not you have achieved the learning outcomes.
Scenario
Stanhope Services Limited (Stanhope Services) provides consultancy services. The following is
an extract from Stanhope Services’ financial statements:
Account 30 June 20X6 30 June 20X5

$ $
Cash 2,590,000 380,000
Trade receivables 750,000 1,000,000
Allowance for impairment loss – trade receivables (50,000) (60,000)
Equipment at cost 2,500,000 2,000,000

fin31702_activities

ACT
Account 30 June 20X6 30 June 20X5

$ $
Accumulated depreciation of equipment (1,250,000) (800,000)
Bank overdraft 0 (140,000)
Trade payables (590,000) (680,000)
Dividend payable (150,000) (120,000)
Current tax liability (426,000) (300,000)
Share capital (2,500,000) (1,200,000)
Revenue 5,500,000
Impairment loss – trade receivables (70,000)
Bad debts expense (10,000)
Other expenses (including depreciation and interest (4,000,000)

expense)
Income tax expense (426,000)
Dividends declared (200,000)
Additional information
•• All revenue is made on credit.
•• Included in other expenses is $10,000 in interest paid.
•• There has been no disposal of equipment during the year.
•• Equipment was acquired for cash during the year.
•• The company undertook a share issue during the year.
•• An interim dividend of $50,000 was paid in November 20X5.
•• There are no temporary differences for tax purposes.
Ignore the impact for GST.
Tasks
A. Prepare the statement of cash flows, using the direct method, for the year ended 30 June
20X6.
B. Prepare the reconciliation of cash flows from operating activities to profit for the year,
in accordance with AASB 1054 or FRS-44, for the year ended 30 June 20X6.
Note: Sufficient information has been provided in the extract from the Financial Statements for
the profit to be calculated.

ACT
Activity 2.2
Preparing key financial statements (SPLOCI
and SOCE)
Introduction
The statement of profit or loss and other comprehensive income (SPLOCI) is possibly the most
read document within the financial statements, as readers are interested in how the entity
performed over the financial period. The statement of changes in equity might be of less interest
to readers than the SPLOCI; however, it helps to tie SPLOCI into the equity section of the
statement of financial position.
•• Advise on the requirement for financial statements.
•• Prepare, analyse and explain a complete set of financial statements.
At the end of this activity you will be able to prepare a statement of profit or loss and other
comprehensive income and a statement of changes in equity in accordance with IAS 1
Presentation of Financial Statements (IAS 1).

ACT
Scenario
Fur-Mates Limited (Fur-Mates) is a distributor of pet food. The following is an extract from its
trial balance as at 30 June 20X6:
Fur-Mates Limited
Extract from trial balance as at 30 June 20X6
Item Note $ $
Income
Sales revenue relating to:
Dog food 5,000,000
Cat food 2,000,000
Total sales revenue 7,000,000
Other revenue 1 510,000
Revaluation of land 2 300,000
Adjustment relating to dividend income 3 800,000
Expenses
Cost of sales relating to:
Dog food (3,000,000)
Cat food (700,000)
Total cost of sales (3,700,000)
Distribution expenses relating to:
Dog food (200,000)
Cat food (80,000)
Total distribution expenses (280,000)
Marketing expenses relating to:
Storefront sales (400,000)
Online distribution (100,000)
New product launches (140,000)
Total marketing expenses (640,000)
Occupancy expenses 4 (800,000)
Administrative expenses (400,000)
Other expenses 5 (140,000)
Income tax relating to:
Items recognised in profit or loss 6 (735,000)
Revaluation of land 2 (90,000)
(825,000)
Equity
Share capital 7 10,000,000
Opening retained earnings – 1 July 20X5 2,000,000

ACT
Fur-Mates Limited
Extract from trial balance as at 30 June 20X6
Item Note $ $
Dividend declared 8 (600,000)
Notes
1. Other revenue includes:
•• $500,000 in damages awarded to Fur-Mates arising from a legal suit with a competitor
•• $10,000 in interest revenue on cash balance.
2. The revaluation of land to fair value was recognised on 1 March 20X6. The land had previously been
recognised at cost. A net credit of $210,000 was recognised in the revaluation surplus account within equity
($300,000 revaluation – $90,000 tax effect). This is the first revaluation the company has recognised since
adopting the revaluation basis for this class of assets. No other company assets are measured at fair value.
3. In August 20X5, a material error relating to the year ended 30 June 20X5 was discovered; that is, dividend
income relating to shares that were sold on 1 June 20X5 was understated by $800,000. The related income
tax expense was $240,000.
4. On 19 June 20X6 the company prepaid $100,000 in insurance costs for the period July–September 20X6. This
amount has been included within occupancy expenses.
5. Included within other expenses is $50,000 in interest expense.
6. The $735,000 includes:
•• $240,000 in income tax expense relating to the dividend income outlined in Note 3.
•• $495,000 in income tax expense relating to other items recognised in profit or loss.
7. A share issue in December 20X5 raised $3 million in additional capital to enable Fur-Mates to expand into
exporting products.
8. The dividend was declared and paid in November 20X5.
1. Fur-Mates chooses the one statement approach under IAS 1 Presentation of Financial
Statements para. 10A to prepare its statement of profit or loss and other comprehensive
income.
2. Fur-Mates classifies items by function when presenting its financial statements.
3. The company presents its financial statements to meet the minimum disclosure requirements
specified in the Accounting Standards, as it believes disclosing further information may
provide information that could benefit its competitors.
Please note
•• Some information within the extract from the trial balance may not be in the correct part of
the financial statements; however, sufficient information has been provided for the profit to
be calculated.
•• No adjustments for income tax is required for the information presented. (The unit on
income taxes will refresh and extend your knowledge of the accounting for income taxes).
•• Reporting of segment information under IFRS 8 Operating Segments is presented in
Fur‑Mates’ notes to the financial statements.

ACT
Tasks
A. Prepare the statement of profit or loss and other comprehensive income for the year ended
30 June 20X6.
B. Prepare the statement of changes in equity for the year ended 30 June 20X6.

ACT
Activity 2.3
Accounting for changes in accounting
policies and estimates
Introduction
Identifying whether a change relates to an accounting policy, an accounting estimate or a prior
period error will drive whether that change is accounted for retrospectively or prospectively, in
accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8). As
a Chartered Accountant you may need to apply IAS 8 to establish the nature of a change and the
resulting accounting treatment.
•• Explain and account for changes in accounting policies, revision of accounting estimates and
errors.
At the end of this activity you will be able to explain and account for changes in accounting
policies and revisions of accounting estimates, in accordance with IAS 8.
Scenario
You are a Chartered Accountant employed by Heavy Industries Limited (Heavy Industries),
and are currently involved with the preparation of the 30 June 20X6 financial statements.
The following three issues have been identified during the process of preparing the financial
statements:
1. Heavy Industries owns heavy machinery that it uses in its road construction business. On
1 January 20X6 the useful life of its asphalt laying machines was reassessed. Originally the
useful life was estimated to be 10 years but was revised to 13 years, based on how these
assets are being used in the business. The differential in the residual value of a machine at the
end of 10 and 13 years is insignificant. Heavy Industries owns eight of these machines, the
oldest of which is seven years old and the newest one was purchased 12 months ago.
2. The company has been presenting its statement of cash flows using the indirect method.
However, at the previous annual general meeting, the finance team received a number of
complaints from shareholders claiming they found the statement difficult to understand
compared to other companies’ statement of cash flows (which they said were far easier to
read and interpret). As such, Heavy Industries will present its statement of cash flows this
year using the direct method under IAS 7 Statement of Cash Flows (IAS 7).
3. Heavy Industries signed a new industrial agreement with its employees on 30 June 20X6.
This resulted in an improved workers’ entitlements, which entitle the employees to long
service leave after only seven years of employment, instead of ten years.

ACT
Task
You have been asked by your manager to prepare a summary explaining the impact of IAS 8 on
each issue and the related impact on the financial statements for the year ending 30 June 20X6.
Ignore the impact of tax.

ACT
Activity 2.4
Identifying related parties
Introduction
To ensure that users of financial statements can assess the financial performance and position
of the entity, it is important that any related party transactions are disclosed in accordance with
IAS 24 Related Party Disclosures (IAS 24). As a Chartered Accountant you may be required to
identify related parties in order to establish whether there have been any transactions with these
parties that require disclosure.
•• Identify and analyse related parties.
At the end of this activity you will be able to identify related parties in accordance with IAS 24.
Scenario
You are a Chartered Accountant working for Renovation Limited (Renovation), a company
involved in the construction industry. Renovation has a number of investments in companies
that provide complementary services within the construction industry as follows:
•• 80% of the equity capital of Building Limited (Building), resulting in control.
•• 20% of the equity capital of Plumbing Limited (Plumbing), resulting in significant influence.
•• 1% of the equity capital of Plasterer Limited (Plasterer).
In addition, Building and Plumbing jointly own and jointly control Electrician Limited
(Electrician), with each owning 50% of the equity capital, and they are classified as a joint venture
under IFRS 11 Joint Arrangements.

ACT
Renovation’s investments
RENOVATION
80% 20% 1%
BUILDING PLUMBING PLASTERER
50% 50%
ELECTRICIAN
Key management personnel (in addition to directors)
Company Personnel details
Renovation Chief executive officer (CEO) – Mike Hammer

Mike is married to Sue Hammer and they have a two-year-old daughter, Eloise
Plasterer Chief engineer – Mandy Saw

Mandy is the daughter of Tran Saw. Mandy is 32 years old
Plumbing CEO – John Pipe
Electrician CEO – John Pipe

Chief Operating Officer – Tran Saw
Building CEO – Tran Saw
Task
You are required to identify whether or not each entity and individual are related parties of
Renovation, with reference to IAS 24. Justify your answer.

ACT
Activity 2.5
Accounting for events after the reporting
period
Introduction
Identifying the nature of events after the reporting period, and determining whether an entity
should adjust its existing financial statements or provide new disclosures regarding those events,
requires an understanding of IAS 10 Events after the Reporting Period (IAS 10). As a Chartered
Accountant, you may have to decide if a particular event is an adjusting or non‑adjusting event,
and the appropriate treatment in the financial statements of an entity.
•• Explain and account for events after the reporting period.
At the end of this activity you will be able to identify the nature of, and account for, events after
the reporting period, in accordance with IAS 10.
Scenario
You are a Chartered Accountant employed by ABC Limited (ABC) and are involved with the
preparation of the 30 June 20X6 financial statements.
ABC manufactures brakes for motor vehicles, which it sells with a one-year warranty. In its
financial statements, ABC does not recognise a provision for warranties, as warranty claims in
the past 10 years have been immaterial. For the financial year ending 30 June 20X6, ABC showed
a profit of $4 million before any final amendments to the financial statements were made.
Prior to the financial statements being finalised, two events were identified:
1. In August 20X6, a warranty claim was made regarding a wholesale order of faulty brakes,
which were sold in January 20X6. An investigation revealed that the fault could not be
repaired, and the cost of replacing all the brakes totalled $250,000. ABC suspected the fault
related to a number of batches sold in January and February 20X6, and consequently all
the suspected affected batches were recalled on 16 August 20X6. The cost of the recall is
estimated to be $1,000,000. This information was disclosed in a note to the draft financial
statements. The inventory on hand at 30 June 20X6, relating to brakes from the suspected
batches identified as faulty, was included in the draft financial statements at $450,000.
2. In September 20X6, a lawsuit for negligence was brought against ABC for damages sustained
in a car crash that injured one of its sales managers (the driver of the car) on 31 July 20X6.
The resulting investigation into the crash claims that the driver may have fallen asleep while
driving.
Since May 20X6, ABC’s sales team has been under intense pressure to lift revenue. The
lawsuit alleges that pressure from ABC’s senior management contributed to, or caused, the
crash. The damages claim is estimated to be $2 million. This amount has not been recognised
in ABC’s financial statements because ABC does not expect the claim to be successful.
For the purpose of this activity, assume that all amounts are material.

ACT
Task
You are required to explain the impact of the two events on ABC’s financial statements for the
year ended 30 June 20X6.

ACT
Unit 3: Revenue
Activity 3.1
Measuring revenue for the sale of goods
Introduction
Determining when to recognise revenue from contracts with customers, and how much revenue
to recognise, is a core skill for all Chartered Accountants. All entities must record revenue.
IFRS 15 Revenue from Contracts with Customers (IFRS 15) is mandatory for annual reporting
periods commencing on or after 1 January 2018. The five-step model under IFRS 15 can seem
simple at first glance, but contains a number of principles which can be tricky to apply in
practice. Many aspects of this Standard require the use of professional judgement.
•• Identify, measure and recognise revenue from contracts with customers
Scenario
You are a financial accountant at Build-and-Drive Limited. Build-and-Drive manufactures and
sells heavy haulage trucks, as well as medium and small delivery vehicles. Build-and-Drive only
sells its vehicles to customers who have passed a thorough credit worthiness process.
During the week 12–17 December 20X6, Build-and-Drive enters into the following three sales
contracts with All-Your-Delivery Needs and its two subsidiaries, Deliver-a-Lot and Deliver-a-Bit:
•• Contract to sell 20 heavy haulage trucks to Deliver-a-Lot. The contract price is $100,000 per
truck (normal selling price is only $95,000 per truck), and the delivery date is 1 January 20X7.

Deliver-a-Lot will pay the total contract price of $2,000,000 on 15 January 20X7, two weeks
after the delivery of the trucks.
•• Contract to sell 10 small delivery vehicles to Deliver-a-Bit. The contract price is $15,000 per
delivery vehicle, which is well below the normal selling price of $40,000 per vehicle. Build-
and-Drive agreed to this low selling price due to the large contract entered into with Deliver-
a-Lot.

These vehicles will be delivered on 1 January 20X7. Deliver-a-Bit will pay the total contract
price of $150,000 on 15 January 20X7, two weeks after the delivery of the vehicles.
•• A $100,000 contract to perform services on all vehicles purchased and provide ongoing
maintenance for the first 12 months after delivery.

This contract was entered into with All-Your-Delivery-Needs, the parent entity of Deliver-a-
Lot and Deliver-a-Bit. The $100,000 contract fee will be paid to Build-and-Drive on 30 June
20X7. The normal price of a first-year service agreement for a heavy haulage truck is $2,000,
and $800 for a small delivery vehicle.
fin31703_activities

ACT
Build-and-Drive’s reporting date is 31 March 20X7. Revenue recognised over time is taken up on
a quarterly basis.
Ignore tax.
Required
Applying the requirements of IFRS 15, analyse the three contracts above against each step in the
five-step revenue model.
Prepare the journal entries for the life of the three sales contracts in the records of Build-and-Drive.

ACT
Activity 3.2
Identifying the potential impact of IFRS 15
Introduction
Contracts with multiple performance obligations are now a common feature of many entities’
product offerings. IFRS 15 Revenue from Contracts with Customers (IFRS 15) requires that a
transaction price is allocated to each performance obligation based on the relative stand-alone
selling price. In addition, many contracts will involve some revenue being recognised at a point-
in-time, and other revenue being recognised over time. This distinction is important and has the
potential for material effects on the entity’s bottom line.
As IFRS 15 is mandatory for periods beginning on or after 1 January 2018, and comparatives
must be presented, the system changes around the new Standard, as well as the re-drafting of
some contract terms are occurring now. These skills of identifying performance obligations and
allocating the transaction price, as well as understanding when revenue can be recognised, are
vital for all Chartered Accountants.
Scenario
You are a financial accountant at Buildicoat Limited (Buildicoat). Buildicoat offers powder
coating of metal in any colour or design. It creates decorative paint finishes for the outside
of modern buildings. Buildicoat is considered the leader in its field and has been operating
profitably for the past 20 years.
Buildicoat does the powder coating in its factory in Sydney’s west, then delivers the coated metal
to the customer’s building site as the work progresses.
On 1 June 20X7, Buildicoat signed a large new contract for the development at Garamboo,
Sydney. Under the contract, Buildicoat will powder coat pieces of metal fit out to pre-approved
specifications. Under the terms of the contract, Buildicoat has an enforceable right to payment for
work completed to date. If building work were to be discontinued, the coated metal is tailored to
the customer specifications, so it cannot be onsold to other customers and has no alternative use
to Buildicoat.
The contract price is $120,000.
The contract includes:
•• Powder coat external metal fittings as specified in the contract.
•• Subsequent cleaning – a free, specialised cleaning service for eight months after Buildicoat’s
powder coating service is completed, to protect the powder-coated metal from corrosion due
to sea spray. This service is expected to commence on 1 November 20X7.
The payment terms outlined in the contract are as follows:

•• 1 June 20X7 – signing of the contract and payment of a $20,000 deposit.
•• Two instalments of $50,000 each due on 30 June 20X7 and 31 October 20X7.
The powder coating is expected to commence on 1 June 20X7 and finish on 31 October 20X7. The
after-sales cleaning service will commence on 1 November 20X7 and continue for eight months
until 30 June 20X8.

ACT
The stand-alone selling price for a similar amount of powder coating is $90,000. Buildicoat has
never provided a specialised cleaning service as a stand-alone product before and Buildicoat’s
engineers cannot provide an expected cost estimate for the future cleaning costs.
Based on surveys of work done, Buildicoat estimates the stage of completion for the coating
services at 25% at 30 June 20X7. No work has commenced on the cleaning service.
Buildicoat’s reporting date is 30 June.
Ignore tax.
Required
Discuss the accounting treatment of the contract in the records of Buildicoat under the IFRS 15,
and prepare the journal entries in the records of Buildicoat.

ACT
Unit 4: Income taxes
Activity 4.1
Accounting for income taxes
Introduction
At the end of each reporting period, the income tax position of an entity needs to be determined
so that the financial statements accurately reflect the entity’s tax liability resulting from past
transactions and events, and records the potential future impact shown as deferred tax balances.
This activity links to learning outcomes
•• Calculate and account for current tax.
•• Calculate and account for deferred tax.
At the end of this activity you will be able to:

•• Calculate the current tax liability for an entity.
•• Calculate the tax base of assets and liabilities.
•• Calculate and record deferred tax assets and liabilities arising from temporary differences.
•• Account for the utilisation of a of a tax loss from a prior period.
•• Prepare the journal entries in accordance with IAS 12 Income Taxes to reflect transactions
and events.
It will take you approximately 60 minutes to complete this activity.
fin31704_activities

ACT
Scenario
You are a Chartered Accountant working for Kunapipi Limited (Kunapipi) and are responsible
for preparing tax effect accounting journal entries in accordance with IAS 12.
An extract from Kunapipi’s financial statements for the year ended 30 June 20X3, together with
additional information, is shown below.
Kunapipi Limited
Internal statement of profit or loss for the year ended 30 June 20X3
Year ended 30 June 20X3 Note 20X3

$
Revenue 617,000
Profit on sale of investment 1 8,000
Total revenue and other income 625,000
Expenses
Depreciation – buildings 2 100,000
Development amortisation 3 20,000
Annual leave expense 4,000
Allowance for impairment loss – trade receivables expense 25,000
Entertainment expenses 12,000
Other expenses 349,000
Total expenses 510,000
Accounting profit before tax 115,000
Statement of financial position as at 30 June 20X3 20X3 20X2

$ $
Current assets
Cash 367,000 32,000
Trade receivables 185,000 130,000
Allowance for impairment loss – trade receivables (40,000) (20,000)
Total current assets 512,000 142,000
Non-current assets
Buildings – cost 1,000,000 1,000,000
Buildings – accumulated depreciation 2 (300,000) (200,000)
Capitalised development costs 3 140,000 90,000
Capitalised development costs – accumulated amortisation 3 (60,000) (40,000)

ACT
Kunapipi Limited
Internal statement of financial position as at 30 June 20X3
Note 20X3 20X2

$ $
Investments at cost 430,000 130,000
Deferred tax asset 4 72,000 72,000
Total non-current assets 1,282,000 1,052,000
Total assets 1,794,000 1,194,000
Liabilities
Trade payables 61,200 48,200
Annual leave liability 22,000 30,000
Total current liabilities 83,200 78,200
Non-current liabilities
Borrowing 350,000 350,000
Deferred tax liability 15,000 15,000
Total non-current liabilities 365,000 365,000
Total liabilities 448,200 443,200
Net assets 1,345,800 750,800
Equity
Share capital 5 580,000 100,000
Retained earnings 765,800 650,800
Total equity 1,345,800 750,800
Notes
1. The profit on sale of the investment is not assessable for tax purposes.
2. Accumulated depreciation on buildings at 30 June 20X2, for tax purposes, was $100,000. Tax depreciation for the year
ended 30 June 20X3 is $50,000. There have been no disposals or additions during the year.
3. All development expenditure incurred is capitalised by Kunapipi, in accordance with IAS 38 Intangible Assets. All
development expenditure incurred is deducted in full for tax purposes in the year in which it is incurred, giving rise
to a tax deduction equal to the costs incurred.
4. The $72,000 deferred tax asset (DTA) balance at 30 June 20X2 comprises:
•• DTAs relating to temporary differences: $45,000.
•• DTAs relating to carried forward tax losses: $27,000. This relates to $90,000 in tax losses that may be utilised in the
year ended 30 June 20X3. The tax losses utilised are treated under the tax law as a tax deduction, thus reducing
the taxable income.
5. An additional $500,000 in share capital was issued on 1 July 20X2. Share issue costs of $20,000 were incurred and
have been correctly debited against the share capital account. These costs are deductible for tax purposes, with
$4,000 being deductible in the year ended 30 June 20X3, and the $16,000 costs being tax deductible in future years.
•• Employee entitlements are deductible for tax purposes when paid.
•• The entertainment expenses are not deductible for tax purposes.
•• A bad debt deduction is only allowed when previously brought to account as income and specifically written
off as bad.
•• The accounting treatment of accounts or transactions is assumed to be the same as the taxation treatment,
unless otherwise indicated.
•• Kunapipi’s tax rate is 30%.

ACT
Task
You are required to prepare the tax effect journal entries that should be included in Kunapipi’s
financial statements for the year ended 30 June 20X3.

ACT
Unit 5: Foreign exchange
Activity 5.1
Determining the functional currency
of a foreign operation
Introduction
As companies grow there is an increasing tendency to develop overseas operations to expand
markets, to achieve cost savings and/or to access additional skills and resources often not
available in the country in which the business was originally established. As the business
environment becomes more global, there is an increasing need for Chartered Accountants to
determine the functional currency of these foreign operations.
•• Determine the functional currency.
At the end of this activity you will be able to apply the indicative factors from IAS 21 to
determine the functional currency of foreign branches of a New Zealand company and be able to
explain your determination.
Scenario
You are the financial controller for a New Zealand company, Climbing Limited (Climbing New
Zealand) and report to the chief financial officer (CFO).
Climbing New Zealand has two overseas branches, as shown in the table.
Overseas branch information
Branch Details
Swiss branch – This branch sells and distributes Climbing New Zealand’s patented climbing equipment
Climbing Switzerland in Europe
All products are sourced from Climbing New Zealand, with the cost to the branch for
their purchases denominated in New Zealand dollars
Sales prices charged to customers are determined based on a margin over the
acquisition costs
As the equipment is quite specialised, its pricing is not subject to competition in the
local market
All European sales are handled by the Swiss branch and pricing is standard throughout
the European distribution network
All profits generated by the Swiss branch are retained to fund the European operations
fin31705_activities

ACT
Overseas branch information
Branch Details
Japanese branch – This branch was established to research future improvements in Climbing New
Climbing Japan Zealand’s equipment
The Japanese branch distributes Climbing New Zealand’s current lines, but is principally
focused on future products
All pricing is based on margin over acquisition costs
All funds generated by the branch are retained in Japan, and regular funding is provided
to it by Climbing New Zealand to continue its operations
There is a possibility that Climbing Japan could become the major manufacturing plant
for all of Climbing New Zealand’s products in the future; in which case, it would then
supply to the New Zealand, European and Japanese markets
Task
For this activity you are required to:
•• Determine the functional currency for each of the overseas branches, documenting your
reasoning in a table that shows the relevant IAS 21 reference, the indicative factors and their
application to each branch.
•• Outline the circumstances that may lead to a change in the functional currency of Climbing
Switzerland.

ACT
Activity 5.2
Translating from the functional currency
to the presentation currency
Introduction
Many entities operate overseas via foreign branches and/or subsidiaries. Alternatively, they may
operate as branches or subsidiaries of a foreign entity. It is common that these foreign operations
will have a different functional currency to the parent, and therefore the financial statements of
the foreign operation will need to be translated into the presentation currency. As a Chartered
Accountant, you will be involved in translating financial statements from the functional currency
to the presentation currency.
•• Explain and account for the translation of financial statements of an entity from its functional
currency to its presentation currency.
At the end of this activity you will be able to translate financial statements from the functional
currency to the presentation currency.
Scenario
Shafiq Limited (Shafiq) is an Australian company. It uses the Australian dollar as its functional
and presentation currency.
Shafiq has established a branch in central Auckland, New Zeland, which opened on 1 July
20X3. Its initial investment of NZ$1,000,000, was contributed on 1 March 20X3. The branch is
operationally independent from Shafiq.
You are the financial accountant in Shafiq’s New Zealand branch, and Jane Jones is the
operations manager.
Jane emails you with additional information:
To: You
From: Jane Jones
Subject: Translating functional currency to presentation currency
Attachment: New Zealand branch financial statement working papers
Please find attached the New Zealand branch financial statement working
papers in Excel.
As we discussed on the phone, it has already been determined that the
functional currency of the New Zealand branch is NZ dollars.
The following points might also be relevant:
• The branch remitted NZ$400,000 to Shafiq on 1 June 20X4. No other
amounts were paid to Shafiq during the year.

ACT
• The branch acquired a property asset on 1 June 20X4 for NZ$1,500,000.
Depreciation expense of $25,000 was recognised for the month of June
20X4.
• All other revenues/expenses have been earned/incurred evenly throughout
the year.
Please email me the two completed statements as soon as possible.
Note: The email attachment (an Excel spreadsheet [Activity 5.2.xlsx]) contains additional
information required to complete the task. Please access myLearning to view the spreadsheet.
Task
For this activity you are required to prepare the following financial statements in the
presentation currency of Shafiq as at 30 June 20X4:
•• Statement of profit or loss.
•• Statement of financial position.

ACT
Activity 5.3
Integrated activity 1
Integration of different topics into one scenario is an important skill for CA program
exams and professional practice. At this point in the activities, you are ready to attempt
Integrated Activity 1.
Please download this activity from MyLearning > Integrated Activities.

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Page 5-6
ACT
Unit 6: Fair value measurement
Activity 6.1
Measuring fair value of non-financial assets
Introduction
Fair value measurement is required by various Accounting Standards, either at each reporting
date or at particular points in time – all known as the measurement date.
•• Explain and identify the key principles of fair value measurement, along with the related
disclosure requirements.
At the end of this activity you will be able to determine the basis for measuring the fair value of a
non-financial asset, in accordance with IFRS 13 Fair Value Measurement (IFRS 13).
Scenario
You are a financial accountant at Multinational Enterprises Limited (MEL), a New Zealand
company that has businesses operating in a range of industries. MEL has a functional currency of
New Zealand dollars (NZ$) and an annual reporting date of 31 December.
MEL presents its financial statements in accordance with International Financial Reporting
Standards (IFRS).
MEL’s financial controller, Darius, provides you with the following information concerning two
assets required to be measured at fair value at the reporting date:
Assets to be measured at fair value
Item Details
Vacant land MEL is holding the land to allow for expansion of its manufacturing
capability in future years. At this stage, construction of a factory is not
likely to commence for at least three years
The land is currently zoned for industrial use
Average prices per square metre of land can be obtained for recent sales
of nearby industrial-zoned vacant land
Due to significant population growth, the land could be rezoned for high
density residential use and would sell for a significantly higher price than
as vacant industrial land. MEL anticipates that the cost of performing this
rezoning would be $50,000 based on a discussion with a representative
from the local planning department
fin31706_activities

ACT
Assets to be measured at fair value
Item Details
Average prices per square metre of land can be obtained for recent sales
of nearby residential-zoned land
MEL does not intend to sell the land in the coming two years, given the
land’s proximity to rail and shipping distribution points in the event of a
factory being constructed
A specialised asset1 Identical assets are sold in two different active markets at different prices.
MEL transacts in the New Zealand market but could access the Australian
market
Details of the trading that occurs in each market and MEL’s estimated
transport and transaction costs are as follows:
New Zealand market Australian market
Annual sales volume 300 1,000
Average number of transactions 15 45

per month
Sales price per unit NZ$385,000 NZ$380,000
MEL’s quoted transport costs NZ$3,000 NZ$5,000
MEL’s estimated transaction costs NZ$500 NZ$1,000
Note
1. Adapted from: KPMG June 2011, First Impressions: Fair value measurement, p. 8, accessed 4 May 2016,
www.kpmg.com, search for ‘fair value measurement’.
Task
Task A
Determine the basis for measuring the fair value of the land by applying Steps 1–7 in the process
for measuring fair value. Note that there is insufficient information available to complete Step 8.
Task B
Calculate the fair value of the specialised asset by applying Step 8 in the process for measuring
fair value. Justify your calculation with three (3) references to IFRS 13.

ACT
Unit 7: Property, plant and equipment
Activity 7.1
Accounting for property, plant and
equipment
Introduction
As a Chartered Accountant you may be required to account for fixed assets that are utilised over
a number of years under changing circumstances.
•• Describe the nature of property, plant and equipment.
•• Explain and account for property, plant and equipment during its useful life.
•• Explain and account for borrowing costs in relation to a qualifying asset.
At the end of this activity you will be able to account for a fixed asset using the criteria set out in
IAS 16 and IAS 23.
This activity exceeds 45 minutes, which is the designated set time for an exam question
(exams have four questions to be completed over three hours). It has been developed to
bring together a number of important examinable concepts and will assist you with your
understanding of the topic areas covered, each of which could be examined individually
or together in a smaller question. Alternatively, only part of the required may be used in
an exam.
The estimated time for completion of the activity includes time to review the stepped-
through recommended approach provided. This level of detail is provided to aid your
understanding of the concepts covered, and similar preparation would not be required in
answering individual exam questions. The activity is designed to assist you in achieving the
specified learning outcome(s), and the exam is designed to test whether or not you have
achieved the learning outcomes.
fin31707_activities

ACT
Scenario
You are a Chartered Accountant working for Avenga Limited (Avenga). Avenga manufactures
corrugated metal for roofing and fences. Its current manufacturing plant is nearing the end
of its useful life and needs to be replaced. After much consideration Avenga signed a contract
on 1 November 20X2 to purchase a new machine that will fold metal sheeting into the
desired profiles.
The value of the contract is $12,000,000, payable in instalments:
•• 10% on signing of the contract.
•• 40% in six months.
•• 40% on delivery (31 January 20X4).
•• 10% two months after delivery.
As the machine is crucial to the ongoing success of Avenga, management decided to fund the
purchase of the new machine through a bank loan. The contract for the bank loan was also
signed on 1 November 20X2.
The terms of the bank loan are:
•• Amount borrowed $12,000,000.
•• Term five years.
•• Fixed interest rate at 7.5% per annum and paid annually.
As the funds from the bank loan are not all required immediately, Avenga established an
investment account with the same bank for the surplus funds. This investment account pays
interest at 5% per annum.
•• Avenga has a 30 June year end.
•• Avenga uses the revaluation method to account for all of its property, plant and equipment,
and depreciates using the straight-line method.
•• The useful life of the machine is 10 years and it is expected to have a residual value of
$500,000.
•• Formal revaluations are undertaken every three years, with the next one due for the year
ended 30 June 20X5. In addition, a review is undertaken each year to ensure carrying value is
not materially different to fair value.
•• When assets are revalued, the accumulated depreciation is offset against the value of
the asset.
•• The procurement manager’s time to successfully negotiate both contracts was costed at
$30,000.
•• An additional $125,000 was expended to ready the site for installation of the new machine.
•• Five employees had to undergo training so that they could operate the machine safely and
correctly. The training course cost $55,000 in total.
•• The machine was delivered in accordance with the contract, and was operational on
1 February 20X4.
•• There was a delivery charge of $250,000.
Tasks
There are three tasks: A, B and C.

ACT
It is recommended that you complete Task A and check your answer against the solution before
moving on to Tasks B and C.
Task A
You are required to determine the carrying value of the machine as at 30 June 20X4.
Task B
It is now 30 June 20X5, and the machine has been operating successfully since it was first
operational on 1 February 20X4. Annual reviews have determined there has been no change
to the residual value or the useful life of the machine, and it has been revalued as part of the
revaluation of all property, plant and equipment that occurs as part of Avenga’s policy of regular
revaluations.
At 30 June 20X5 the valuer determined the fair value of the machine at $11,500,000; its remaining
useful life at eight years and seven months, and that there was no change to the residual value.
Tax treatment often depends on the specific factors in particular transactions. For the purposes of
this transaction assume:
•• The tax base of the machine at 1 February 20X4 is the same as the accounting cost.
•• The asset has a zero residual for tax purposes.
•• For tax purposes the machine is being depreciated over 10 years using the straight-line
method.
•• The tax rate is 30%.
You are required to prepare the journal entries in relation to the machine for the year ended
30 June 20X5.
Task C
You are required to determine the depreciation expense for the machine for the year ended
30 June 20X6.

Page 7-4
ACT
Unit 8: Intangible assets
Activity 8.1
Accounting for intangible assets
Introduction
As a Chartered Accountant, you may be called upon to identify and explain the key
characteristics of, and account for, intangible assets in financial statements in accordance with
IAS 38 Intangible Assets (IAS 38).
•• Identify and explain the key characteristics of an intangible asset, including whether it can be
recognised for financial reporting purposes.
•• Explain and account for an intangible asset.
At the end of this activity you will be able to identify and explain the key characteristics of, and
account for, intangible assets in financial statements.
Scenario
You are a Chartered Accountant working for Alpha Limited (Alpha). Alpha’s principal business
activities include the distribution of imported electrical components to the local building
industry.
The chief financial officer has advised you of expenditure on intangible assets for the year ended
30 June 20X3.
Expenditure on intangible assets during the year ended

30 June 20X3
Account description $
Distribution licence costs 6,000,000
Computer software costs 3,000,000
Additional information about each of these intangible assets follows:
Distribution licence costs

A distribution licence agreement was entered into and commenced from 1 July 20X2. It entitles
Alpha to the non-transferable, sole distribution rights in Australia for specific product lines of
Beta Limited (Beta). It is for a non-renewable period of three years.
fin31708_activities

ACT
On 1 December 20X3 Beta went into liquidation and their product lines were withdrawn from
the Australian market. Alpha is not entitled to, nor is it expecting to receive, any compensation
for this event.
Computer software costs

Computer software costs were incurred on 1 July 20X2 when Alpha acquired new application
software specifically designed for its operations from an external supplier. The IT steering
committee advised that the expected useful life of the software is five years.
In June 20X4 Alpha commenced discussions with MBI, an external computer software developer,
to design and install new application software with an anticipated installation date of 1 July
20X6. The proposed software would replace the existing software. On 1 July 20X4 the remaining
useful life of the existing computer software was reviewed and revised to two years.
Task
For this activity, which is in two parts, you are required to:
A. Explain whether Alpha’s classification of the distribution licence and computer software
as intangible assets is appropriate at 1 July 20X2.
B. Assuming the distribution licence and computer software assets are correctly classified as
intangible assets, and are accounted for using the cost model after initial recognition, prepare
relevant journal entries for the different stages of the intangible asset life cycle (i.e. for the
years ended 30 June 20X3–20X6). Ignore tax entries and ensure your journal entries cover
acquisition, amortisation and derecognition.

ACT
Unit 9: Financial instruments
Adaptive Learning Lesson: Financial Instrument Basics

Attempt the adaptive learning lesson online now. Access via MyLearning in the Unit 9 landing page.
Activity 9.1
Classification of financial instruments
Introduction
An entity may have a variety of different financial instruments that are not all necessarily
accounted for in the same manner. While some types of financial instruments are generally
classified in the same category by most entities, the classification of others will vary between
entities based on the nature of the entity’s operations and the purpose of entering into
the instrument.
•• Explain and identify financial instruments and the principles for classifying them as financial
assets, financial liabilities or equity instruments of the issuer.
At the end of this activity, you will be able to appropriately classify financial instruments in
accordance with IAS 32 Financial Instruments: Presentation (IAS 32), and further classify financial
assets and financial liabilities in accordance with IFRS 9 Financial Instruments (IFRS 9).
Scenario
You have recently joined Sorrenti Limited (Sorrenti) as its new financial accountant. Sorrenti is
an importer and wholesaler of authentic Italian produce and fine food. It supplies to most large
supermarkets and delicatessens in Melbourne, Victoria.
You are currently working on the financial statements for the year ended 30 June 20X7. Sorrenti
is planning on early adopting IFRS 9, although the previous financial accountant left rather
abruptly and the company’s financial instruments are yet to be incorporated into the financial
statements in accordance with IFRS 9.
fin31709_activities

ACT
You have found a document the previous financial accountant had prepared, which contains
details of various financial instruments that are yet to be accounted for in the year ended 30 June
20X7. These instruments are listed in the following table:
Financial instruments yet to be accounted for in the year ended 30 June 20X7
Financial instrument Details
Cash at bank Working bank account held with Primary Bank, Sorrenti’s primary banker, on
which no interest is payable. Primary Bank is an Australian bank rated AA– by
Standard & Poor’s, a credit rating agency
Trade receivables This represents amounts due from Sorrenti’s customers. Payment on trade
receivables is due within 30 days of invoice date. Sorrenti has no intention of
factoring its trade receivables
Trade payables This represents amounts due to suppliers of goods to Sorrenti. Invoices are
usually payable within 45 days of receipt of the goods
Foreign exchange (FX) Sorrenti hedges its euro-denominated purchases from Italy by entering into
forward contracts foreign exchange (FX) forward contracts
Secured bank loan Sorrenti has a 7-year bank loan secured over its warehouse in Melbourne. The
loan carries interest at a floating rate of bank bill swap rate (BBSW) plus 2%
Equity investment in Sorrenti holds shares in a number of suppliers in order to establish more
unlisted companies strategic alliances with them. The shareholdings are less than 10% of the
relevant company’s shares
Portfolio of short-term Sorrenti invests surplus cash in short-term debt securities – primarily bank
debt securities bills and corporate bonds. It holds this portfolio to receive interest and
principal repayments on the securities to fund the cash flow needs of the
business. Sorrenti may sell some of the securities in the portfolio to meet
larger cash flow needs (e.g. acquisitions). Historically, this has occurred quite
regularly and may be a significant percentage of the portfolio
Investment in convertible notes Sorrenti has made a long-term investment in some convertible notes issued
by a number of banks. The notes pay interest coupons every six months.
On maturity, Sorrenti has the option to receive the principal as cash or as
shares in the relevant banks. The number of shares it receives is fixed, and so
whether Sorrenti exercises this option will depend on the share price of the
relevant bank at the maturity date of the notes
Interest rate swaps Sorrenti has hedged a portion of the secured bank loan using an interest rate
swap with a term of 7 years
Ordinary shares Sorrenti has issued 2 million ordinary shares at $1 each to its shareholders
Convertible preference shares Sorrenti has issued 100,000 preference shares at $5 each, which will convert
to $500,000 worth of ordinary shares in 10 years’ time (i.e. a variable number
of shares with a value of $500,000 depending on the market price on the day
of conversion). Sorrenti has a contractual obligation to pay a 5% dividend
each year. If a dividend is missed due to insufficient profit, the payment must
be added to future dividends
Task
In order to ensure these financial instruments are correctly recognised in the 30 June 20X7
financial statements, you are required to determine and document how each of the instruments
should be classified under IAS 32 and IFRS 9, giving reasons for your choice of category.

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Activity 9.2
Basic accounting comparing FVTPL and
FVTOCI
Introduction
How an entity classifies a financial instrument will impact on how that instrument is accounted
for. Once the classification has been determined, accounting for the instrument follows the
requirements for that particular category.
•• Account for financial assets, financial liabilities and equity instruments of the issuer
(including derivatives)
At the end of this activity, you will be able to account for an investment in an equity instrument
under different categories of financial instruments in accordance with IFRS 9 Financial
Instruments (IFRS 9).
Scenario
You are the financial accountant for Giant Limited (Giant), a company based in Adelaide, South
Australia. Giant manufactures wind turbines for use in local wind farms. A significant supplier
to Giant is Tiny Blades Limited (Tiny Blades), a company that is a leader in the manufacture
of rotor blades and regularly invests in new technology to improve the quality of its product.
Recently, as part of a strategic initiative to create closer relationships with its suppliers, Giant
made a fixed rate $3 million loan to Tiny Blades, to assist in funding their future technological
developments. Giant used a bank to assist with arranging the loan, and incurred $30,000 in
transaction costs.
The group treasurer of Giant, Lyn Towers, realises that the loan should probably be classified
as measured at amortised cost, but is uncertain as to what circumstances would permit its
classification as measured at fair value through other comprehensive income (FVTOCI) or
fair value through profit or loss (FVTPL) and the difference this would make in the financial
statements. She seeks your advice about accounting for the loan in the year ended 31 December
20X7. She provides the following details of the loan transaction:
•• The $3 million loan was made on 1 January 20X7and is repayable on 31 December 20X9.
•• Transaction costs incurred were $30,000.
•• Interest rate on the loan is 5.5% per annum, payable on 30 June and 31 December each year.
•• Fair value of the loan at 30 June 20X7 is $3,017,000, and at 31 December 20X7 is $3,005,000.
•• Effective interest rate of the loan is 5.1361%.
Lyn is concerned about the impact of changes in the fair value of the loan on the profit or loss for
the year, and wants to reduce this impact if possible; particularly since Giant has recently issued
a $5 million fixed rate medium term note (MTN), which is classified as measured at FVTPL.

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Task
Lyn has asked you to:
•• advise her on the circumstances that would permit classification of the loan to Tiny Blades as
FVTOCI or FVTPL
•• prepare the journal entries required under each option for the year ended 31 December 20X7,
and
•• recommend which option would minimise volatility in the profit or loss for the year.

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Activity 9.3
Basic accounting under amortised cost
Introduction
How an entity classifies a financial instrument will impact on how that instrument is accounted
for. Once the classification has been determined, accounting for it follows the requirements for
that particular category.
(including derivatives).
At the end of this activity, you will be able to account for a debt security issued by an entity (i.e. a
financial liability) in accordance with IFRS 9 Financial Instruments (IFRS 9).
Scenario
You are a trainee accountant for Giant Limited (Giant), a company based in Adelaide, South
Australia. Giant manufactures wind turbines for use in local wind farms. You have recently been
engaged by Giant’s financial accountant, Cindy Song, who is coaching you in how to account for
financial instruments.
Giant issued a three-year corporate bond on 1 January 20X6 for $4,010,000. The bond has a face
value of $4 million and fixed annual interest payments of 5.5%, which are paid on 1 January of
each year. The bond was issued at a price higher than the face value because the coupon rate was
above the prevailing market interest rates. Transaction costs on arranging the issue of the bond
were $75,000. Based on these terms, the effective interest rate on the bond is 6.109%.
Giant has not elected to initially designate the bond at fair value through profit or loss (FVTPL).
Task
While the bond has already been recorded by Giant, as a learning exercise Cindy asks you to
prepare the journal entries (excluding any tax effect entries) necessary to account for the bond
from inception until the next balance date of 30 June 20X7.

Page 9-6
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Activity 9.4
Integrated financial instruments activity
Introduction
This integrated activity is designed to allow candidates to practise their technical skills across a
number of concepts within the financial instruments unit. Being able to apply this knowledge to
a comprehensive practical scenario is central to professional practice and the FIN module exam.
This activity links to the following learning outcomes:
•• Explain and identify financial instruments and the principles for classifying them as financial
assets, financial liabilities or equity instruments of the issuer.
(including derivatives).
•• Explain and account for basic cash flow and fair value hedges.
•• Explain and account for impairment of financial assets.
This activity is longer than candidates would normally expect an exam question to be. Some
parts of the activity follow on from each other. It is recommended that candidates check their
answers to each part before moving on to the next part.
Background
You are a financial accountant working in the treasury team at Generous Bank (Generous).
Generous provides the full suite of banking products to its predominantly retail customers, and
prides itself on its quick approval processes and friendly customer service.
The treasury team is responsible for managing the bank’s asset and liability portfolio. Generous
has decided to early adopt IFRS 9 Financial Instruments (IFRS 9) and you are currently preparing
for the 30 June 20X7 year end.
Scenario – Part A
You start by reviewing the asset portfolio to determine how it should be classified and accounted
for at year end. You collect the following information about the portfolio:
•• The portfolio consists of a range of debt securities with varying maturities. Historically,
the portfolio has been split into two parts based on the average maturity of the securities.
•• The longer term part of the portfolio contains predominantly high-grade corporate and
government bonds. Generous’ credit department has assessed these securities as having
low credit risk. Generous manages this portfolio with the objective of earning in excess of a
benchmark return within a predefined risk and maturity profile. Accordingly, Generous will
hold the securities to receive the coupons and principal repayments, but will also buy and
sell these securities as opportunities arise to improve the return of the portfolio. The return

ACT
earned on the portfolio incorporates the interest earned, gains and losses on sale and changes
in fair value of the securities.
•• The shorter term part of the portfolio is managed in order to provide liquidity for the bank.
Accordingly, it contains short-term ‘vanilla’ debt securities, as well as bank bill futures that
will be bought and sold as the bank’s day-to-day liquidity needs fluctuate. This portfolio’s
performance is managed in the same way as the longer term part of the portfolio.
Task – Part A
To ensure the asset portfolio is correctly recognised in the 30 June 20X7 financial statements, you
are required to determine and document how the portfolio should be classified under IFRS 9,
giving reasons for your choice of category.
Scenario – Part B
You then investigate one particular debt security within Generous’ longer term portfolio to
ensure you understand how the accounting for this security works. The debt security is a
$10 million government bond that was acquired on 1 July 20X6 for $10.15 million and matures
on 30 June 20X8. The interest rate is 3.5% per annum and interest is paid on 30 June and
31 December each year. You have calculated its effective interest rate as 2.7243%. The debt
security had a fair value of $10.119 million on 31 December 20X6 and $10.070 million on 30 June
20X7. Both fair values include interest accruals and coupon payments up to those dates.
Task – Part B
Prepare the journal entries to account for the debt security for the year ended 30 June 20X7.
Scenario – Part C
Generous’ treasurer, Jonny Fudge, knows you are working on the implementation of IFRS 9 and
reminds you that the longer term part of the portfolio includes some Australian government
bonds that have been hedged with swaps that convert the fixed coupon receipts into variable
receipts. Johnny would like to understand how these should be accounted for under IFRS 9.
He has also heard that the effectiveness requirements under IFRS 9 are different from those
under IAS 39 Financial Instruments: Recognition and Measurement (IAS 39), and wants to know
more about how this works.

ACT
You use the government bond you investigated in Part B to explain the accounting treatment to
Jonny. Details of the bond and the relevant hedge are as follows:
Date Fair value Change in fair value Change in fair

of government of the bond value of the swap
bond since inception since inception
$ $ $
31.12.X6 10,119,000 (31,000) (7,000)
30.06.X7 10,070,000 (80,000) 5,000
Task – Part C
Prepare a memorandum to Johnny Fudge advising him on how the hedge will be classified, and
showing the journal entries required to account for the bond and the hedge for the six months
ended 30 June 20X7. In the memorandum, include details of how effectiveness will be assessed
during the life of the hedge.
Scenario – Part D
Johnny is concerned about how impairment of the portfolio will be accounted for under IFRS 9.
Previously, impairment would not have been recognised unless there was a default on a security.
Johnny is worried about how its recognition will impact on the reported performance of the
portfolio. Given the high credit quality of the portfolio, he thinks the risk of default within 12
months is 2% and lifetime is 5%.
Task – Part D
Advise Johnny on the impact that recognising impairment of the portfolio under IFRS 9 will have
on the financial statements and the portfolio’s performance.

Page 9-10
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Unit 10: Impairment of assets
Activity 10.1
Accounting for impairment and subsequent
reversal for a CGU
Introduction
As a Chartered Accountant, you may be called on to identify, explain and account for an
impairment loss for a cash-generating unit (CGU), including the impairment of goodwill.
Over the years, circumstances may change and you may be required to account for the reversal
of an impairment loss for the CGU that was recognised in previous years. This requires you to
understand the application of IAS 36 Impairment of Assets (IAS 36).
For this activity, you are required to explain and account for an impairment loss for a CGU, and
to account for the reversal of an impairment loss, in accordance with the requirements of IAS 36.
•• Identify, explain and account for an impairment loss for a cash-generating unit (CGU)
including impairment of goodwill.
•• Explain and account for reversals of impairment losses.
At the end of this activity, you will be able to explain and account for an impairment loss for a
CGU, including the impairment of goodwill. You should also be able to explain and account for
reversals of impairment losses.
Scenario
You are a financial accountant working for Taurus Limited (Taurus) and report to James Smart,
the company’s chief financial officer. You are in charge of the accounting for the Dorado division
(Dorado), a CGU of Taurus. Your accounting responsibilities include the annual impairment
testing of Dorado, as the CGU contains goodwill.
Information for the year ended 30 June 20X2

At 30 June 20X2, the carrying amount of the Dorado CGU’s assets was as follows:
Carrying amount of the Dorado CGU assets $
Land 500,000
Plant 2,500,000
Accumulated depreciation (500,000)
Goodwill* 200,000
Total 2,700,000
*This asset arose from the acquisition of a business.
fin31710_activities

ACT
All assets are measured using the cost model. Plant is depreciated at 10% per annum on a
straight-line basis, resulting in a depreciation expense of $250,000 per annum. At 30 June 20X2,
the remaining useful life of the plant was eight years. The fair value less costs of disposal
(FVLCOD) of Dorado’s land was $480,000. The recoverable amount of the plant was not able to
be determined.
At 30 June 20X2, the recoverable amount of the CGU was $2,350,000 based on a value in
use (VIU) measurement.
Information for the year ended 30 June 20X3

Since 30 June 20X2, there have been significant improvements in Dorado’s business operations.
As part of your investigations you specifically considered IAS 36 para. 110:
An entity shall assess at the end of each reporting period whether there is any indication that an
impairment loss recognised in prior periods for an asset other than goodwill may no longer exist or may
have decreased. If any such indication exists, the entity shall estimate the recoverable amount of that
asset.
In performing this assessment, you considered both external and internal sources of information
in accordance with IAS 36 para. 111. You are now satisfied that the requirements to reverse the 30
June 20X2 impairment loss under IAS 36 have been satisfied.
At 30 June 20X3, the carrying amount of the Dorado CGU’s assets was as follows:
Carrying amount of the Dorado CGU assets $
Land 480,000
Plant (net of accumulated depreciation) 1,636,250
Total 2,116,250
No acquisition or disposal of land or plant has occurred since 30 June 20X2.

At 30 June 20X3, the recoverable amount of the Dorado CGU was measured at $2,400,000 based
on VIU. The FVLCOD of Dorado’s land is $490,000. The recoverable amount for the plant was
not able to be determined.
Task
For this activity, you are required to:
A. Calculate the impairment loss for the Dorado CGU at 30 June 20X2 and allocate it to the
relevant assets.
B. Calculate the maximum impairment loss reversal that can be recognised at 30 June 20X3, and
explain how it is allocated to the Dorado CGU’s assets.

ACT
Unit 11: Provisions (including employee

benefit entitlements), contingent liabilities
and contingent assets
Activity 11.1
Calculating employee benefit liabilities
Introduction
Deciding when to account for an employee benefit liability requires a sound knowledge of
IAS 19. As a Chartered Accountant you may be required to demonstrate that knowledge in order
to account for employee entitlements in accordance with IAS 19.
•• Explain and account for a provision.
At the end of the activity you will be able to distinguish and account for short-term and other
long-term benefits, in accordance with IAS 19.
Scenario
You are a Chartered Accountant working for Bruxus Limited (Bruxus) and you report to Jack
Brown, the finance manager.
You have gathered the following information to allow you to calculate the employee benefit
liabilities as at 30 June 20X3:
Staff details for employee benefit liabilities at 30 June 20X3
Department
Description CEO Marketing Finance
Number of staff 1 4 3
Average annual salary $230,000 $63,000 $54,000
Average annual leave accrued at 30 June 20X3 6.5 days 10.5 days 20 days
Probability of actually taking LSL 30% 55% 95%
Average years of service 3 5 8
Anticipated salary increase per year 15% 8% 3%

fin31711_activities

ACT
All employees are expected to take their annual leave accrued in the next financial year and their
LSL as soon as they are entitled. All employees have an LSL employee benefit of eight weeks for
every 10 years of service.
Interest rate as at 30 June 20X3
Years to maturity %
10 5.10
9 5.04
8 4.97
7 4.90
6 4.79
5 4.69
4 4.61
3 4.44
2 4.44
1 4.45
On-costs of 10% will be incurred on any leave entitlements incurred.

The 30 June 20X2 statement of financial position included the following employee benefit
liabilities:
Balances in statement of financial position at 30 June 20X2
Leave type $
Annual 30,298
Long service 31,474
Annual leave taken during the year for these departments was $58,000 and was debited to the
liability account.
Assume that there are 260 working days per year when calculating the short‑term employee
benefit liability. Annual leave and LSL are allowable deductions for tax purposes when the leave
is taken (paid). Bruxus only calculates leave provisions at year end.
The tax rate is 30%.
Task
For this activity, which is in two parts, you are required to:
A. Calculate Bruxus’ employee benefit liabilities at 30 June 20X3.
B. Prepare the journal entries to record the short‑term and long-term employee benefit liabilities
at 30 June 20X3 and restate the related deferred tax balance at the reporting date.

ACT
Activity 11.2
Provisions, contingent liabilities and
contingent assets
Introduction
Deciding whether to account for a provision or disclose a contingent liability or contingent
asset in a set of financial statements requires a sound knowledge of IAS 37 together with the
use of judgement in applying the Standard to the specific facts of the particular situation. As a
Chartered Accountant you may be required to demonstrate such knowledge and judgement in
order to explain the impact of provisions, contingent liabilities and contingent assets in financial
statements, in accordance with IAS 37.
•• Explain and account for a provision.
•• Identify and explain a contingent liability.
•• Identify and explain a contingent asset.
At the end of the activity you will be able to distinguish and account for provisions, contingent
liabilities and contingent assets, in accordance with IAS 37.
Scenario
You are a Chartered Accountant working for Pinpoint PLC (Pinpoint) and you report to Sue
Bryan, the finance manager.
Pinpoint is facing the following legal claims which may affect its financial statements:
1. A claim against Pinpoint for patent infringement.
2. A claim by Pinpoint for defamation.
Part A: Impact of legal claims on Pinpoint’s 30 June 20X3 financial

statements
Information available for 30 June 20X3 financial statements
1. Claim against Pinpoint for patent infringement
In May 20X3, Simpatico Limited (Simpatico) an international fashion label based in Milan, took
legal action against Pinpoint for patent infringement.
Simpatico is seeking damages equal to $2 million. It asserts that Pinpoint’s new handbag
collection contains a number of bags bearing logos that closely resemble its patented signature
monogram.
Pinpoint is defending the claim and the company’s lawyers have indicated there is a 40%
probability of Pinpoint successfully defending the claim.

ACT
Pinpoint’s insurer, Towers Insurance Limited (Towers), has confirmed that although there is an
excess of $100,000 on Pinpoint’s policy, the policy does cover claims of this nature.
2. Claim by Pinpoint for defamation
In January 20X3, a top-rating national television current affairs program, the National Enquirer,
ran a story on Pinpoint claiming that it was a ‘dodgy’ fashion label that regularly ‘ripped off’
designs from top international designers.
Since the story aired, Pinpoint’s sales have declined sharply. On advice from its lawyers,
Pinpoint is now suing the producers of the National Enquirer for defamation in the amount of
$10 million. Pinpoint’s lawyers believe there is a 75% chance of the claim being successful.
Part B: Impact of legal claims on Pinpoint’s 30 June 20X4 financial

statements
Information available for 30 June 20X4 financial statements
1. Claim against Pinpoint for patent infringement
As at 30 June 20X4, Simpatico’s case against Pinpoint for patent infringement continues.
Pinpoint’s lawyers have advised that they estimate there is now a 55% chance of Pinpoint
successfully defending the claim.
2. Claim by Pinpoint for defamation
In May 20X4, Pinpoint won the case against the National Enquirer and was awarded damages of
$600,000. This amount was received during June 20X4.
Task
For this activity, which is in two parts, you are required to explain the impact of the legal claims
on Pinpoint’s financial statements, in accordance with IAS 37, for:
•• 30 June 20X3 (Part A)
•• 30 June 20X4 (Part B).
Assume all amounts are material. Ignore any tax impact.
Tip
In the ‘Guidance on implementing IAS 37 Provisions, Contingent Liabilities and Contingent Assets’,
Section B, there is a decision tree summarising the Standard’s main recognition requirements for
provisions and contingent liabilities. This may assist you with this activity.

ACT
Unit 12: Leases
Activity 12.1
Accounting for a lease by a lessee and lessor
Introduction
In your working career as a Chartered Accountant you will most likely encounter leasing
transactions. It is important that you understand how these should be accounted for under the
new leasing standard, IFRS 16 Leases (IFRS 16) as they are a common way for businesses to gain
the use of an asset.
•• Explain and account for lease transactions (for lessees).
•• Explain and account for lease transactions (for lessors).
At the end of this activity you will be able to account for a lease from the perspective of both a
lessee and a lessor.
Scenario
You are a Chartered Accountant working for Brightwell Limited (Brightwell). You report to
Lauren McGee, the financial controller.
Brightwell has entered into a lease agreement for a piece of equipment from Lease-Right Limited
(Lease-Right). The lease contract gives Brightwell the right to use the equipment for the period
of the lease. The equipment is an identified asset and the contract is a lease for the purposes of
IFRS 16.
Lease-Right operates a finance business. It does not manufacture or trade in physical assets.
Terms of the lease

The lease commences on 30 June 20X3 and ends on 30 June 20X7. It includes the following key
terms:
Lease payments Four equal, upfront annual payments of $60,000 with the first payment to be made on
30 June 20X3
Purchase option Brightwell has the option to pay $40,000 on 30 June 20X7, which will result in the
transfer of legal ownership of the equipment. Brightwell is reasonably certain of paying
this amount as it intends to use the equipment for a further two years beyond the end of
the lease
Interest rate The interest rate implicit in the lease is 9%

fin31712_activities

ACT
Brightwell
•• Calculates the lease liability at the commencement date as follows:
Calculation of lease liability at the commencement date
Year Date Payment PV factor PV cash

$ flow
$
0 30 June 20X3 60,000 1.0000 60,000
1 30 June 20X4 60,000 0.9174 55,046
2 30 June 20X5 60,000 0.8417 50,501
3 30 June 20X6 60,000 0.7722 46,331
4 30 June 20X7 40,000 0.7084 28,337
Lease 240,215
liability
•• Estimates the useful life of the equipment to be six years for accounting purposes.
•• Uses the straight-line depreciation method.
•• Incurs $4,000 in legal costs for arranging the lease.
•• Is subject to the following tax treatment for the lease:
–– can claim income tax deductions for lease payments and legal costs paid.
–– interest expense calculated for accounting purposes and accounting depreciation do not
give rise to a tax deduction.
•• Is subject to a 30% tax rate.
Lease-Right
•• Pays the fair value of the equipment amount of $240,215 to the third party manufacturer on
30 June 20X3.
•• Lease-Right correctly classifies the lease as a finance lease.
Tasks
For this activity you are required to perform the following tasks in relation to the lease:
1. Prepare the journal entries for Brightwell for the years ending 30 June 20X3 and 30 June 20X4.
Ignore any tax effect entries required by IAS 12 Income Taxes (IAS 12).
2. Calculate the deferred tax balance to be recognised by Brightwell under IAS 12 at 30 June
20X4.
3. Prepare the journal entries for Lease-Right at 30 June 20X3. Ignore any tax effect entries
required by IAS 12.

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Activity 12.2

Page 12-4
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Unit 13: Earnings per share (EPS)
Activity 13.1
Calculating basic EPS
Introduction
An entity whose ordinary shares or potential ordinary shares are traded in a public market, or
that files, or is in the process of filing, its financial statements with a securities commission or
other regulatory organisation for the purpose of issuing ordinary shares in a public market, will
calculate and disclose earnings per share (EPS) in accordance with IAS 33.
In your role as a Chartered Accountant, it is likely you will be required to calculate EPS
and present EPS information as part of preparing financial statements, and/or use your
understanding of EPS to analyse and interpret an entity’s performance.
•• Calculate basic and diluted EPS for continuing and discontinued operations.
At the end of this activity you will be able to calculate basic EPS, taking into account the impact
of preference shares on issue and of changes in the number of shares outstanding during the
period, including partly paid ordinary shares and share buy-backs, in accordance with IAS 33.
Scenario
You are a Chartered Accountant working for Wohtle Limited (Wohtle), a publicly listed
company. You report to the group chief financial officer (CFO), James Clean.
James has provided you with a summary of information from the draft financial statements for
the year ended 30 June 20X2.
Extract from the Statement of profit or loss for Wohtle for the year ended 30 June 20X2
Description $’000
Revenue 255,500
Expenses (237,400)
Profit before income tax expense 18,100
Income tax expense (5,700)
Profit after tax 12,400

fin31713_activities

ACT
At 30 June 20X1, Wohtle had the following share capital:
Share capital at 30 June 20X1
Class of shares on issue Number of shares Amount

’000 $’000
Ordinary 10,000 25,000
Preference 1,000 3,500
Total share capital 11,000 28,500
The following movements occurred in share capital during the year ended 30 June 20X2:
Movements in share capital during the year ended 30 June 20X2
Date Class Details
20.10.20X1 Ordinary Public issue of 750,000 partly paid ordinary shares for $6 each, which was the
current share price at the time of issue. An amount of $4 was paid on allotment,
with the balance due in one year’s time. The partly paid ordinary shares were
entitled to participate in dividends from 1 January 20X2. Holders of partly paid
ordinary shares received 2⁄3 of the dividends received by fully paid ordinary
shareholders
16.12.20X1 Ordinary Buy-back of 250,000 fully paid ordinary shares for $6.50, which was the current
share price at the time of buy-back
11.04.20X2 Ordinary Private placement of 500,000 fully paid ordinary shares for $6.75, which was the
current share price at the time of issue
Preference shares are classified as equity, and dividends are paid half-yearly on 31 December
and 30 June at a rate of 10% per annum.
Task
For this activity you are required to calculate the basic EPS for Wohtle for the year ended
30 June 20X2.

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Activity 13.2
Calculating diluted EPS
Introduction
An entity whose ordinary shares or potential ordinary shares are traded in a public market, or
that files, or is in the process of filing its financial statements with a securities commission or
other regulatory organisation for the purpose of issuing ordinary shares in a public market, will
calculate and disclose earnings per share (EPS), in accordance with IAS 33.
In your role as a Chartered Accountant, it is likely you will be required to calculate EPS
and present EPS information as part of preparing financial statements, and/or use your
understanding of EPS to analyse and interpret an entity’s performance.
•• Calculate basic and diluted EPS for continuing and discontinued operations.
At the end of this activity you will be able to calculate diluted EPS, taking into account the impact
of dilutive potential ordinary shares on earnings and the weighted average number of shares, in
accordance with IAS 33.
Scenario
You are a Chartered Accountant working for Best Limited (Best), a listed company. You report to
the financial controller, Raj Patel.
Raj has provided you with a summary of other equity instruments (other than ordinary equity
shares) that Best has on issue at 30 June 20X2:
Summary of other equity instruments on issue
Instrument Number on issue Terms
Convertible notes 2,000,000 7% interest, convertible to one ordinary share per $1 of

debt if not repaid in cash
Convertible preference shares 1,000,000 $1 each, 12% dividend per annum, 25 preference shares
convertible to one ordinary share at any time
Options 500,000 Convertible to one ordinary share per option, with an

exercise price of $5
Raj also advises you that interest on the convertible notes is deductible for income tax purposes;
however, dividends on the convertible preference shares are not deductible.
On 1 September 20X1 Best acquired the business of a smaller competitor, Mandle. Part of the
acquisition price comprised 200,000 ordinary shares, contingent on Mandle earning a profit
before tax of $600,000 for the year to 31 August 20X2. For the 10 months to 30 June 20X2, Mandle
earned a profit before tax of $650,000.

ACT
Raj has also provided you with the basic EPS calculation for the year ended 30 June 20X2.
Basic earnings ÷ Weighted average number of shares = Basic EPS
$14,364,000 ÷ 11,400,000 = $1.26
The average share price of Best shares for the year ended 30 June 20X2 was $6.60. Best’s tax rate
is 30%.
Task
For this activity you are required to calculate the diluted EPS for Best for the year ended
30 June 20X2.

ACT
Unit 14: Share-based payments
Activity 14.1
Accounting for a cash-settled share-based
payment transaction
Introduction
In a cash-settled SBP transaction a liability arises based on the price of the entity’s equity
instruments. As a Chartered Accountant you may be required to account for a cash-settled SBP
transaction, in accordance with IFRS 2 Share-based Payment (IFRS 2).
•• Identify and account for share-based payments.
At the end of this activity you will be able to account for a cash-settled SBP transaction,
in accordance with IFRS 2.
Scenario
You are the financial controller at Heath Engineering Products Limited (HEP). HEP has
introduced a new SBP scheme to align management’s incentives to shareholder value.
On 1 July 20X3 HEP granted 200 cash-settled share appreciation rights (SARs) to each of its
50 managers on the condition that the managers remain in its employ until 30 June 20X6.
The SARs will automatically vest on 30 June 20X6 for all managers still employed by HEP.
The SARs can be exercised up to two years after they vest (i.e. to 30 June 20X8).
Details of the number of managers leaving the scheme and exercising their SARs are shown
in the following table.
Manager numbers relevant to SARs
Year ending Number of managers Number of managers expected Number of managers who
who departed to depart in future years exercised SARs
30.06.X4 4 6 n/a
30.06.X5 3 2 n/a
30.06.X6 2 n/a 15
30.06.X7 n/a n/a 14
30.06.X8 n/a n/a 12

fin31714_activities

ACT
The cash paid out equals the intrinsic value of the SARs at the date of exercise. The fair value and
the intrinsic value of the SARs for each year of the scheme are shown in the following table.
Value of SARs
Year ending Fair value Intrinsic value

$ $
30.06.X4 12.00 –
30.06.X5 16.10 –
30.06.X6 19.60 15.00
30.06.X7 22.75 20.00
30.06.X8 – 25.00
Task
For this activity you are required to prepare the journal entries to record the SARs over the
five‑year period from grant date, 1 July 20X3, to the end of the exercise period, 30 June 20X8.
Ignore the impact of tax and assume that all managers exercised their SARs on the last day of the
relevant reporting period.

ACT
Unit 15: Business combinations
Activity 15.1
Accounting for a business combination
Introduction
While some entities’ growth strategies may involve organic growth through expanding their
customer base and product offerings, other entities may pursue a growth strategy that focuses
on business acquisitions. Under IFRS, business acquisitions are termed ‘business combinations’.
Accounting for a business combination is prescribed by IFRS 3 Business Combinations (IFRS 3).
•• Identify a business combination.
•• Explain and account for a business combination in the books of the acquirer.
•• Account for subsequent adjustments to the initial accounting for a business combination.
At the end of this activity you will be able to account for a business combination in accordance
with IFRS 3.
Scenario
You are a recently qualified Chartered Accountant working at Starc Industries Limited (Starc).
Peter Cartus, the chief financial officer of Starc, has recently been heavily involved in
negotiations over the acquisition of an Australian-based company. In seeking to achieve cost
savings and improvements in its supply chain, Starc acquired a controlling interest in To Be Sure
Limited (TBS), a company that manufactures zips and buttons. TBS has a patented zip design
and it guarantees that its zips will never catch or run off the track. Starc acquired an 80% interest
on 1 April 20X2, with the founding shareholders retaining a 20% interest and a seat on the board.
fin31715_activities

ACT
Acquisition information
At the acquisition date:
•• the recorded net assets of TBS were represented as follows:
TBS net assets at 1 April 20X2
Description $
Share capital (1,000,000 shares) 1,000,000
Retained earnings 3,740,000
Total equity 4,740,000
•• the identifiable assets and liabilities of TBS were recorded at fair value except for:
–– Plant and equipment, which had a fair value of $1,200,000 while the carrying amount
was $920,000 (cost $1,000,000 and accumulated depreciation of $80,000). At 1 April 20X2,
it was estimated the remaining useful life was five years. TBS did not record an asset
revaluation.
•• TBS was a defendant in an ongoing lawsuit. The plaintiff is seeking $380,000 in damages.
This information was disclosed in the notes to TBS’s most recent financial report, but
no amount was recognised as a liability. At 1 April 20X2:
–– The legal counsel for TBS estimates that there is a 30% chance of the plaintiff being
successful.
–– TBS would have needed to pay $150,000 (which would be tax deductible to TBS) for
a third party to assume responsibility in respect of this claim.
Starc has chosen to measure any goodwill using the full goodwill method for this business
combination. The fair value of the NCI at acquisition was measured as $980,000.
Purchase consideration
The purchase consideration comprised cash and shares, as follows:
•• $1,100,000 cash payable at the acquisition date.
•• $400,000 cash due 12 months after the acquisition date.
•• The issue of one share in Starc in exchange for two shares acquired in TBS. At the date the
acquisition was announced to the market, Starc’s shares were trading at $6.90 and at the
acquisition date were trading at $7.10. Share issue costs of $20,000 were incurred.
•• Starc’s incremental borrowing rate is 12%.
•• Starc’s financial statements for the year ended 30 June 20X2 were approved on 16 September
20X2.
•• On 1 October 20X2 the law suit was settled out of court by TBS, paying the plaintiff $140,000.
Assume that the fair value of the NCI measured at 1 April 20X2 does not change as a result of
the settlement.
Assume
All amounts are material.
The tax rate of both TBS and Starc is 30%.

ACT
Tasks
For this activity you are required to perform a number of tasks in relation to the business
combination to assist Peter Cartus in preparing for a board presentation:
A. Prepare the journal entries to be recorded by Starc as a result of the acquisition of TBS
at 1 April 20X2.
B. Calculate the value of goodwill as at 30 June 20X2 and 30 June 20X3.
C. Prepare the journal entries to be recorded by Starc in the 12 months to 1 April 20X3, ignoring
any entries that may be required by IAS 12 Income Taxes.

Page 15-4
ACT
Unit 16: Accounting for subsidiaries
Activity 16.1
fin31716_activities

Page 16-2
ACT
Unit 17: Equity accounting
Activity 17.1
Accounting for an investment in an associate
under the equity method of accounting
Introduction
An investor may have significant influence over an entity which could give it a strategic
advantage while generating strong returns and appreciation in the investment’s value.
Accounting for an investment in an associate is prescribed by IAS 28 Investments in Associates and
Joint Ventures (IAS 28) and involves the application of the equity method of accounting. IAS 28
also specifies the recognition and measurement rules for investments in associates.
•• Explain and account for an investment using the equity method.
At the end of this activity you will be able to account for an investment in an associate in
accordance with IAS 28.
Scenario
You are a Chartered Accountant working for Benaud Limited (Benaud). You are currently
involved in preparing Benaud’s consolidated financial statements for the year ended 30 June
20X3.
On 1 July 20X1 Benaud acquired a 40% interest in the ordinary issued capital of Touch of Bling
Accessories (TOBA) for $2.5 million. In so doing, it achieved significant influence over TOBA.
Further information about TOBA is given below:
fin31717_activities

ACT
Acquisition of TOBA
Identifiable net assets of TOBA at the date of
acquisition – 1 July 20X1
Item $
Share capital 1,500,000
Revaluation surplus 1,800,000
General reserve 1,550,000
Retained earnings 950,000
Total 5,800,000
All assets and liabilities were stated at fair value except for an item of machinery which had a fair
value of $300,000 in excess of its book value. The depreciation rate on the machinery is 20% on a
straight‑line basis.
Profits earned and dividends paid by TOBA

Profits earned and dividends paid by TOBA for the years ending 30 June 20X2
and 20X3
Item 20X2 20X3

$ $
Profit before income tax 750,000 460,000
Income tax expense (190,000) (120,000)
Profit for the period 560,000 340,000
Dividends paid (400,000) (300,000)
Reserve balances
Reserve balances in the books of TOBA at 30 June
20X2 and 30 June 20X3
Reserve $
Revaluation surplus 2,000,000
General reserve 1,550,000
During the 20X2 financial year, TOBA sold inventory to Benaud on the basis of cost plus 25%.
The total value of sales for the year was $4 million. Of this total, $400,000 remained on hand as at
30 June 20X2 and was sold to external parties in the 20X3 reporting period.
The tax rate for both Benaud and TOBA is 30%.
Task
For this activity you are required to prepare the journal entries as at 30 June 20X3 to apply the
equity method of accounting in the consolidated financial statements of Benaud, reflecting the
two years since the acquisition of TOBA occurred.

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Chartered Accountants Program

Financial Accounting & Reporting

Unit 1: Financial reporting 1-1

Unit 2: Presentation of financial statements 2-1

Unit 3: Revenue 3-1

Unit 4: Income taxes 4-1

Unit 5: Foreign exchange 5-1

Unit 6: Fair value measurement 6-1

Unit 7: Property, plant and equipment 7-1

Unit 8: Intangible assets 8-1

Unit 9: Financial instruments 9-1

Unit 10: Impairment of assets 10-1

Unit 11: Provisions (including employee benefit entitlements),

Unit 12: Leases 12-1

Activities index Page i

Unit 13: Earnings per share (EPS) 13-1

Unit 14: Share-based payments 14-1

Unit 15: Business combinations 15-1

Unit 16: Accounting for subsidiaries 16-1

Unit 17: Equity accounting 17-1

Page ii Activities index

Unit 1: Financial reporting AU

Activity 1.1 (Australia)

Unit 1 – Activities Page 1-1

Page 1-2 Activities – Unit 1

Company details for reporting requirements

Consolidated revenue $19.8 million $26.2 million $83.5 million

Consolidated gross assets $11.1 million $12.8 million $10.3 million

Consolidated net assets $5.2 million $8.7 million $7.2 million

Number of full time 51 37 47

Average number of full 47 36 51

Unit 1 – Activities Page 1-3

Page 1-4 Activities – Unit 1

Activity 1.1 (New Zealand) NZ

Unit 1 – Activities Page 1-5

Page 1-6 Activities – Unit 1

Company details for reporting requirements

Company Delta Limited (Delta) Pi Limited (Pi) Theta Limited (Theta)

Consolidated revenue $19.8 million $26.2 million $29.5 million

Consolidated expenses $16.4 million $19.8 million $20.8 million

Consolidated total assets $11.1 million $22.8 million $10.3 million

Consolidated net assets $5.2 million $18.7 million $7.2 million

Number of shareholders 8 2 – Lota and one other 8

Unit 1 – Activities Page 1-7

Page 1-8 Activities – Unit 1

Unit 2: Presentation of financial

Account 30 June 20X6 30 June 20X5

Cash 2,590,000 380,000

Trade receivables 750,000 1,000,000

Allowance for impairment loss – trade receivables (50,000) (60,000)

Equipment at cost 2,500,000 2,000,000

Unit 2 – Activities Page 2-1

Account 30 June 20X6 30 June 20X5

Accumulated depreciation of equipment (1,250,000) (800,000)

Bank overdraft 0 (140,000)

Trade payables (590,000) (680,000)

Dividend payable (150,000) (120,000)

Current tax liability (426,000) (300,000)

Share capital (2,500,000) (1,200,000)