Tutorial 10

Jane Lazar and Huang (4th Edition)-

Chapter 6-MFRS 5
 Question 1
page 131
Grease Bhd leased out tangible non-current assets as
operating leases. At 1 January x5, the carrying amount of
such assets was RM20 million. These assets were recently
leased out on operating leases and have now expired. The
company is undecided as to whether to sell or lease it to
customers under finance leases. The fair value less selling
costs of the assets is RM18 million and the value in use is
estimated at RM24 million.

Required:
Discuss the accounting treatment of these assets for the
year ended 31 December x5.
The operating lease assets will not qualify as held
for sale at 31 December x5 as the company has not
made a decision as to whether they should be sold
or leased. They should, therefore, be shown as non-
current assets and depreciated. Held for sale assets
are not depreciated. The carrying amount of the
assets will be RM20 million.
Held for sale assets are valued at the lower of
carrying amount and fair value less selling costs
under MFRS 5. The assets are not impaired because
the value-in-use is above the carrying amount.
 Question 2
page 131
Zuko had a plant with a carrying amount of RM5
million at 31 March x6 which ceased to be used
because of a downturn in the economy. The
company had decided at 31 March x6 which was its
financial year-end, to maintain the plant in working
condition in case of a change in economic
conditions. Zuko subsequently sold the plant by
auction on 14 May x6 for RM3 million net of costs.

Required:
Discuss the accounting treatment of the plant.
The plant would not be classified as held for sale at
31 March x6 even though the plant was sold at
auction prior to the date that the financial
statements were signed. The held for sale criteria
Maintain in working condition
were not met at the balance sheet date and MFRS 5
prohibits the classification of non-current assets as
held for sale if the criteria are met after the balance
sheet date and before the financial statements are
signed. The company should disclose relevant
information in the financial statements for the year
ended 31 March x6. The plant is not classified as
abandoned and would be depreciated up to its sale.
 Question 4
page 132
Zumi Bhd acquired a property on 1 January x4 which it intended to sell.
The property was obtained as a result of a default on a loan agreement
by a third party and was valued at RM30 million on that date. It was
offset against the loan. The property was in a state of disrepair and
Zumi intended to complete the repairs before selling the property. The
repairs were completed on 31 January x5. The property was sold for
RM44 million on 10 March x5. As at December x4, the property was
classified as held for sale and shown at net of sale proceeds of RM44
million. Property was depreciated at 5% per annum on a straight-line
basis and no depreciation had been charged in the year.
Year-end is 31 December

Required:
Discuss the accounting treatment of the property.
To be classified as held for sale the asset must be
available for immediate sale in its present
condition, subject to the usual selling terms and the
sale must be highly probable. As 31.12.x4 the asset
was not available for sale.
MFRS 5 also requires the asset to be disclosed at
the lower of carrying amount and fair value less
cost to sell. The company used selling price which is
incorrect.
Proper accounting treatment: record at cost and
depreciate and reduce retained earning by the
profit recognised (RM14 million) by classifying the
asset at selling price. 44mil 30mil
 Question 5
page 132
Frenchy Bhd commited itself before its year-end of 31 March x5 to a plan of
action to sell a subsidiary, Fairy Bhd. The sale was expected to be completed
on 1 July x5 and the financial statements of the group were signed on 15 May
x5. The subsidiary, Fairy Bhd, had net assets as the year-end of RM5 million
and the carrying amount of related goodwill was RM1 million. Fairy Bhd made
a loss of RM500,000 from 1 April x5 to 15 May x5 and was expected to make a
further loss of RM600,000 up to the date of sale. Frenchy Bhd was at 15 May
x5 negotiating the consideration for the sale but no contract had been signed
or public announcement made as of that date.
Frenchy expected to receive RM4.5 million for the company net of selling
costs. The value-in-use of Frenchy at 15 May x5 was estimated at RM3.9
million.

Required:
Discuss the accounting treatment of Frenchy on the consolidated financial
statements.
Fairy is a cash generating unit and its carrying amount will be recovered principally through a
sale transaction rather than through continuing use. It should be classified as held for sale
because the following criteria have been met.
a commitment to a plan.
The asset is available for immediate sale.
Actively trying to find a buyer.
Sale is highly probable.
Asset is being actively marketed.
Unlikely to have significant changes to the plan.
Before classification of the item as held for sale, an impairment review will need to be
undertaken irrespective of any indication or otherwise of impairment. Any loss will be charged
to the income statements. Additionally, the loss will be offset first against the non-current
assets of the subsidiary. The figure of RM4.5 million will be used as fair value less costs to sell.
The net assets and goodwill will be written down to RM4.5 million with the write off going
against non-current assets in the first instance.
MFRS 5 requires items held for sale to be reported at the lower of carrying amount and fair
value less any costs to sell. The information regarding the subsidiary will be disclosed in the
income statement and in notes to accounts. The asset will be presented separately in the
balance sheet. Additional disclosures to be made concerning the facts and circumstances
leading to the disposal, and the segment in which the subsidiary is presented under MFRS 114
Segment Reporting.