Assignment Brief

BA (Hons.) International Business & Finance

Academic Year 2018-19
Module Information:
Qualification: BA (Hons.) International Business & Finance

Module Code & Title: BAIBF 10020 Global Developments in Finance

Assignment Title: Individual Report

Component Weighting: 30%

Date of Issue:26 Oct 2018 Due date:02 Nov 2018, 5 PM

To be filled by the student:

Student ID: 4013BA17

Date of Submission:02 – NOV - 2018

*All work must be submitted on or before the due date. If an extension of time to submit work is required, a Mitigating
Circumstance Form must be submitted.

Has an extension been approved? Yes No

If yes, please provide the new submission date ….…/.…./……., and affix appropriate evidence.

First Marker: Second Marker:

Agreed Mark: Refer: Yes / No

General Guidelines
1. A Cover page or title page – You should always attach a title page to your assignment. Use
previous page as your cover sheet and be sure to fill the details correctly.
2. This entire brief should be attached in first before you start answering.
3. All the assignments should be prepared using word processing software.
4. All the assignments should print in A4 sized paper, and make sure to only use one side
printing.
5. Allow 1” margin on each side of the paper. But on the left side you will need to leave room for
binding.
6. Ensure that your assignment is stapled or secured together in a binder of some sort and send
the Softcopy of your final document to assignment.bahons2016@gmail.com
7. The submission of your work assessment should be organized and clearly structured.

Word Processing Rules

1. Use a font type that will make easy for your examiner to read. The font size should be 12
point, and should be in the style of Times New Roman.
2. Use 1.5-line word-processing. Left justify all paragraphs.
3. Ensure that all headings are consistent in terms of size and font style.
4. Use footer function on the word processor to insert Your Student ID, Name, Subject, Module
code, and Page Number on each page. This is useful if individual sheets become detached
for any reason.
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your entire assignment.

Important Points:
1. Check carefully the hand in date and the instructions given with the assignment. Late
submissions will not be accepted.
2. Ensure that you give yourself enough time to complete the assignment by the due date.
3. Don’t leave things such as printing to the last minute – excuses of this nature will not be
accepted for failure to hand in the work on time.
4. A printed version of the assignment needs to be submitted physically along with ansoft
copymailed to the email mentioned above on or before the stated deadline.
5. You must take responsibility for managing your own time effectively.
6. If you are unable to hand in your assignment on time and have valid reasons such as illness,
you may apply (in writing) for an extension.
7. Non-submission of work without valid reasons will lead to an automatic REFERRAL. You will
then be asked to complete an alternative assignment.
8. Take great care that if you use other people’s work or ideas in your assignment, you properly
reference them in your text and any bibliography, otherwise you may be guilty of plagiarism.

Statement of Originality and Student Declaration

DELINA DAVIS
4013BA17
BAIBF 10020
GLOBAL DEVELOPMENT IN FINANCE
Page 2
I hereby, declare that I know what plagiarism entails, namely to use another’s work and to present it
as my own without attributing the sources in the correct way. I further understand what it means to
copy another’s work.
1. I know that plagiarism is a punishable offence because it constitutes theft.
2. I understand the plagiarism and copying policy of the University of the West of Scotland.
3. I know what the consequences will be if I plagiaries or copy another’s work in any of the
assignments for this program.
4. I declare therefore that all work presented by me for every aspect of my program, will be my
own, and where I have made use of another’s work, I will attribute the source in the correct
way.
5. I acknowledge that the attachment of this document signed or not, constitutes my agreement
on it.
6. I understand that my assignment will not be considered as submitted if this document is not
attached to the attached.

Student’s Signature: Date: 02 – NOV -2018

DELINA DAVIS
4013BA17
BAIBF 10020
GLOBAL DEVELOPMENT IN FINANCE
Page 3
TASK

ABC is a publicly traded entity involved in the production and trading of natural gas and oil. ABC is
finalising its financial statements for the year ended 31 August 2015 and has the following issues:

(i) ABC purchased a major refinery on 1 January 2015 and the directors estimate that a
major overhaul is required every two years. The costs of the overhaul are approximately
$5 million which comprises $3 million for parts and equipment and $2 million for labour.
The directors proposed to accrue the cost of the overhaul over the two years of
operations up to that date and create a provision for the expenditure.

(ii) From October 2014, ABC had undertaken exploratory drilling to find gas and up to 31
August 2015 costs of $5 million had been incurred. At 31 August 2015, the results to date
indicated that it was probable that there were sufficient economic benefits to carry on
drilling and there were no indicators of impairment.
During September 2015, additional drilling costs of $2 million were incurred and there
was significant evidence that no commercial deposits existed and the drilling was
abandoned.

Required:
Discuss, with reference to International Financial Reporting Standards, how ABC should account
for the above issues raised by the directors.

DELINA DAVIS
4013BA17
BAIBF 10020
GLOBAL DEVELOPMENT IN FINANCE
Page 4
XYZ, a public limited company, operates in the fashion sector and had undertaken a group re-
organisation during the current financial year to 31 October 2007. As a result, the following event
occurred:

XYZ identified two manufacturing units, Cee and Gee, which it had decided to dispose of in a single
transaction. These units comprised non-current assets only. One of the units, Cee, had been impaired
prior to the financial year end on 30 September 2007 and it had been written down to its recoverable
amount of $35 million. The criteria in IFRS5, ‘Non-current Assets Held for Sale and Discontinued
Operations’, for classification as held for sale, had been met for Cee and Gee at 30 September 2007.
The following information related to the assets of the cash generating units at 30 September 2007:

The fair value less costs to sell had risen at the year end to $40 million for Cee and $95 million for
Gee. The increase in the fair value less costs to sell had not been taken into account by XYZ.

The directors are worried about the impact that the above changes will have on the value of its non-
current assets and its key performance indicator which is ‘Return on Capital Employed’ (ROCE).
ROCE is defined as operating profit before interest and tax divided by share capital, other reserves
and retained earnings. The directors have calculated ROCE as $30 million divided by $220 million, i.e.
13·6% before any adjustments required by the above.

Formation of opinion on impact on ROCE.

Required:
Discuss the accounting treatment of the above transactions and the impact that the resulting
adjustments to the financial statements would have on ROCE.

Total word Limit: 1500

DELINA DAVIS
4013BA17
BAIBF 10020
GLOBAL DEVELOPMENT IN FINANCE
Page 5
IAS -37 PROVISION, CONTINGENT LIABILTIES AND
CONTINGENT ASSETS
DEFINITION

IAS 37 Provisions, Contingent Liabilities and Contingent Assets outlines the accounting for
provisions (liabilities of uncertain timing or amount), together with contingent assets
(possible assets) and contingent liabilities (possible obligations and present obligations that
are not probable or not reliably measurable). Provisions are measured at the best estimate
(including risks and uncertainties) of the expenditure required to settle the present obligation,
and reflects the present value of expenditures required to settle the obligation where the time
value of money is material.

IAS 37 was issued in September 1998 and is operative for periods beginning on or after 1
July 1999.

CRITERIA’S

Provision is a liability of uncertain timing or amount. A provision can be created only if the
following 3 criteria’s are met.

1. OBLIGATION: Provision can be created only for unavoidable expenses. Obligation can
be legal (created by law) or constructive (created because of past practice.).

2. Probable outflow: The chance of outflow arising is more than 50%.

3. Reliable estimate: The outflow should be capable of measurement.

DELINA DAVIS
4013BA17
BAIBF 10020
GLOBAL DEVELOPMENT IN FINANCE
Page 6
OVERHAUL EXPENSES
Some assets need to be repaired or to have replaced every few years. Here in this case, ABC
has a major refinery, and the directors estimate that a major overhaul is required every 2
years.

SOLUTION
Provisions cannot normally be recognized for the cost of future repairs or replacement parts.
This is because there is no current obligation to incur the expense, even if the future
expenditure is required by law, the entity could avoid it by selling the asset.

IAS 37 states that no provision should be made for future operating losses. Therefore, no
provision should be made for the $5,000,000 forecast losses.

It is not acceptable to accrue the costs of the overhaul. The entity does not have a constructive
obligation to undertake the overhaul. Under IFRS , costs related to major inspection and
overhaul are recognized as part of the carrying amount of property, plant and equipment , if
they meet the asset be depreciated on straight line basis over its useful life and any remaining
carrying amount will be derecognized when the next overhaul is performed. Costs of the day-
to-day servicing of the asset are expensed as incurred. Therefore the costs of the overhaul
should have been identified as a separate component of the refinery at initial recognition and
depreciated over a period of two years. This will result in the same amount of expense being
recognized in profit or loss over the same period as the proposal to create a provision.

DELINA DAVIS
4013BA17
BAIBF 10020
GLOBAL DEVELOPMENT IN FINANCE
Page 7
IAS – 36 IMPAIRMENT OF ASSETS
DEFINITION

Impairment is a reduction in the recoverable amount of an asset or cash generating unit below
its carrying amount. IAS 36 impairment of assets says that an entity should carry out an
impairment review at least annually if:

 An intangible asset is not being amortised because it has an indefinite useful life
 Goodwill has arisen on a business combination.

Otherwise, an impairment review is required only where there is an indication that

impairment may have occurred. The recoverable amount of the following assets in the scope
of IAS 36 must be assessed each year: intangible assets with indefinite useful lives; intangible
assets not yet available for use; and goodwill acquired in a business combination. The
recoverable amount of other assets is assessed only when there is an indication that the asset
may be impaired. Recoverable amount is the higher of (a) fair value less costs to sell and (b)
value in use.

INDICATIONS OF IAS 36

IAS 36 lists the following indications that an asset is impaired.

EXTERNAL SOURCES OF INFORMATION:

 Unexpected decreases in an asset’s market value

 Significant adverse changes have taken place, or are about to take place, in the
technological, market, economic or legal environment.
 Increased interest rates have decreased an asset’s recoverable amount.
 The entity’s net assets are measured at more than its market capitalisation.

DELINA DAVIS
4013BA17
BAIBF 10020
GLOBAL DEVELOPMENT IN FINANCE
Page 8
INTERNAL SOURCES OF INFORMATION:

 Evidence of obsolescence or damaged

 There is, or about to be, a material reduction in usage of an asset
 Evidence that the economic performance of an asset has been or will be worse
than expected.

SOLUTION

Since there were no indicators of impairment at the period end, all costs incurred up to 31
august 20X5 amounting to $5,000,000 should remain capitalized by the entity in financial
statements for the year ended on that date. However if material, disclosure should be
provided in the financial statements of the additional activity during the subsequent period
which determines the exploratory drilling was unsuccessful. This represents a non- adjusting
event as defined by IAS10 Events after reporting period as an event which is indicative of a
condition which arose after the end of the reporting period. The asset of $5,000,000 and
additional drilling costs of $2,000,000 incurred subsequently would be expensed in the
following year’s financial statement

DELINA DAVIS
4013BA17
BAIBF 10020
GLOBAL DEVELOPMENT IN FINANCE
Page 9
 IFRS – 5 NON CURRENT ASSETS HELD FOR SALE
AND DISCONTIUED OPERATIONS
DEFINITION

IFRS 5 Non-current assets held for and discontinued operations says that a non-current asset
or disposal group should be classified as held for sale if it is carrying amount will be
recovered primarily through a sale transaction rather than through continuing use. IFRS 5
requires an entity to classify non-current assets as held for sale when the assets' carrying
amount will be recovered principally through a sale transaction rather than through
continuing use. The standard further sets out more detailed conditions that an entity has to
meet within the context of a typical sale transaction.

CLASSIFICATION AS HELD FOR SALE

IFRS 5 requires the following conditions to be met before an asset or disposal group can be
classified as held for sale:

 The item is available for immediate sale in present condition.

 The sale is highly probable
 Management is committed to a plan to sell the item.
 An active programme to locate a buyer has been initiated
 The item is being actively marketed at a reasonable price in relation to its current fair
value.
 The sale is expected to be completed within one year from the date of classification.
 It is unlikely that the plan will change significantly or be withdrawn.

Assets that are to be abandoned or wound down gradually cannot be classified as held for
sale because their carrying amounts will not be recovered principally through a sale
transaction.

SOLUTION

DELINA DAVIS
4013BA17
BAIBF 10020
GLOBAL DEVELOPMENT IN FINANCE
Page 10
The criteria in IFRS 5 have been net for the product. As the assets are to be disposed of in a
single transaction, products together are deemed to be a disposal group under IFRS 5.

The disposal group as a whole is measured on the basis required for non-current assets held
for sale. Once classified as held for sale, the impairment testing is done on a disposal group
basis. A subsequent increase in fair value less costs to sell may be recognized in profit or less
only to the extent of any impairment previously recognized. To summarize:

 Step 1
Calculate carrying amount under the individual standard, have given as
$105m.
 Step 2
Classified as held for sale. Compare the carrying amount ($105m) with fair
value less costs to sell ($125m). Measure the lower of carrying amount and
fair value less costs to sell, here $105m.
 Step 3
Determine the fair value less costs to sell at the year end and compare with
carrying amount
XYZ has taken account of increase in fair value less costs to sell, but only part
of this increase can be recognised, calculated as follows:
$M
Fair value less costs to sell: CEE 40
Fair value less costs to sell: GEE 95
___
135
Carrying value (105)
_____
Increase 30

Impairment previously recognized in CEE: $15m (50 -35)

 Step 4
The change in fair value less costs to sell is recognised but the gain
recognised cannot exceed any impairment losses to date. Here the gain
recognised is $50m- $35m = $15m

Carrying amount can increase by $15m to $120m as loss reversals are limited to impairment
losses previously recognized under IFRS 5 or IAS 36.

DELINA DAVIS
4013BA17
BAIBF 10020
GLOBAL DEVELOPMENT IN FINANCE
Page 11
REFERENCE

Kaplan publishing SBR text book Page no. 223

Kaplan publishing SBR text book page no. 226

Kaplan publishing SBR text book page no. 96,97

https://www.iasplus.com (01/11/2018, 9.45 pm)

DELINA DAVIS
4013BA17
BAIBF 10020
GLOBAL DEVELOPMENT IN FINANCE
Page 12