Norman pg 21

Hotel sale
An income from sale is recognised if substantially all risks
and rewards of the asset are transferred to the buyer.
The sale of hotels to Conquest does not transfer the risks and
rewards as :i) Norman continues to operate the business for the
rest of the useful life, and
ii) The residue business will be transferred back to
Norman, and
iii) Norman bears most of the risks as income of
Conquest is guaranteed.
The asset is not derecognised from the book of Norman and shall
be depreciated as normal. Proceeds of $200m is shown as a non
current liability. Payment to Conquest should be analysed into
finance cost paid and principal repayment.

Rooms and vouchers

Customers paid, and in return get a room to stay, and a discount
voucher for next booking. The sale transaction contains multiple
elements. As the use of room and use of voucher are not
depending on each other, it can be said that the sale has two
distinct performance obligations.
Revenue of $300m is allocated to each performance obligation
based on their own observable prices. If the said price is not
available, then other approaches such as normal market price, or
estimated cost plus margin, or residual approach is used.
Assuming the $20m is the selling value of the vouchers, Norman
will only recogise 1/5 = $4m as this is a reliable estimation.
The $300m sale is then allocated to room sale at
$300m x ($300m / ($300m + $4m)) = $296.1m.
Voucher revenue is then at $300m x ($4m / ($300m + $4m)) =
$3.9m
Room sales is recognised to profit or loss after the customer's

stay. Voucher sales will be deferred to current liability, and

reclassify to profit or loss if the customer comes back within
three months. If they never return, then the voucher value will
be reclassify to profit or loss after its expiry.

Grant
Cash grant receive can be income related or asset related.
Income related grant is recognised to profit or loss if the
condition for performance is met. Asset related grant can be
accounted for using any one of the following accounting
policies :i) Basis adjustment : the grant is offset to the cost
of asset
ii) Deferred income : grant is recognised to liability
and is amortised over the useful
life of the asset
Although the grant is used to generate jobs, the real condition
for Norman to keep the grant is on the cost of the building. This
is an asset related grant and Norman can account for it using the
principles set out above.
If the cost of building does not meet the condition later, Norman
may consider to recognise a provision for repayment of grant.

Practice 2

21 Sirus

b) i) There are two types of retirement plan in IFRS :a) Defined contribution plan (DCP) : the legal and constructive
obligation of the employer is restricted to contribution made,
b) Defined benefit plan (DBP) : plan other than DCP. The
benefit of the employee is usually guaranteed.
For the two plan of Sirus, the first plan could be a DBP as
the benefit of the directors is guaranteed even after the death of
the directors. That makes the second plan looks like a DCP.

Regardless the type of plan, all employee benefit costs are

recognised to profit or loss based on accrual basis over the length
of the director service, and not after the retirement of the
directors.
As the estimation is complicated which include mortality rate,
inflation, length of services, actuarial valuation is needed in
measuring the costs.

(c) The first matter to consider is to decide the share of profit

is a staff costs to directors, or as a consideration transferred
to previous owners of Marne.
As the offer is served as an incentive to accept the purchase offer,
it seems like the sharing is a consideration transferred.
Conditional payment is contingent consideration, and will be
recognised regardless the likelihood of the occurrence.
Sirus should measure the the consideration at the present value
of $5m + $6m which are discounted at the appropriate rate.
Any unwinding effect is recognised as finance cost.
(d) Financial liability by default is accounted for using
amortised cost at the effective interest rate of the liability.
To Sirus, the rate is 8% if the loan is repaid based on the
original repayment schedule. If the early repayment is chose,
the penalty will increase the rate to 9.1%.
However, Sirus is considering the third option which is to repay
by next year. There is no facts from bank for the moment whether
the proposal will be adopted and what the final penalty will be.
Sirus may still use 8% to account for the loan for the year
ended 30 April 2008, which gives a finance cost of $160,000.
A loan is presented as current liability if, as at year end,
the entity does not have unconditional rights to defer the liability
to more than 12 months. In this case, Sirus still have such rights.
The loan will then be classified as a non current liability.

Practice 3 pg 22 Johan

Inventory is to be carried at the lower of cost and net realisable

value (NRV). As the handset's NRV of $150 - $1 = $149 is lower
than its cost, any unsold inventory is to be measured at $149,
leaving a loss of $51 per handset in profit or loss.
Revenue from sale of handset is recognised immediately after the
handset is transferred, but the revenue from call credit is to be
recognised over the six months period as the customer consumes
the credit. This will be on average of $18. The unused credit of
$3 is recognised to profit or loss only after the expiry of the
credit.

The dealer seems to be an agent to Johan, as :i) Dealer has no inventory risks (goods are returnable), and
ii) Fulfillment of the promise lies with Johan (mobile services),
and
iii) The return to dealer is in the form of commission
Johan cannot recognise revenue from sale of handset at the
point the goods were transferred to the agent. Revenue can only
be recognised when the hanset is transferred to end customer.
Commission payable becomes cost of sales. Revenue from
services is the recognise over the 12 month period.

Practice 4 pg 23 Aron
An option can be embedded into a host bond contract. Such
option is to be separated and accounted for accordingly if its
economic characteristic is different from the host.
To this case, the option is equity in nature as the conversion
is for fixed units of shares. Such option must be separated by
the following calculation :Year
2007 to 2009
2009

Cash flow
$6m
$100m

Factor Present value

2.5313 $15.19m
0.7722 $77.22m

Liability
$92.41m
Equity (bal fig) $7.59m
$100m
The equity option is not remeasured subsequently. The issue
cost is capitalised to liability and equity on pro rata basis.
The liability will then be measured at amortised cost model
at 9.38%, where the carrying amount will be at $100m at the
end of year 3.
Upon conversion, the shares issued are recorded as follows :Dr Liability
Dr Equity option
Cr Share capital
25m x $1
Cr Share premium
(bal fig)

$100m
$7.59m
$25m
$82.59m

Practice 5 pg 23 Carpart
Revenue from sale of an asset is recognised when substantially
all risks and rewards of the asset are transferred to the customer.
To Carpart, risks and rewards are transferred, as :i) Customer enjoys the asset for 4 years out of 5 years
useful life, and
ii) fair value changes risks and responsibilities to keep
the car in good condition are with the customer
Carpart can derecognise the car and recognise the $20,000 as
revenue.

As to the second case, sunstantially all risks and rewards

were not transferred to customer as the repurchase option
is exercisable 2 years, being a non significant part of the total
useful life of 5 years.
The repurchase option is likely to be exercised. Carpart should
account for the transaction as an operating lease, and recognise
the 30% of the vehicle price as lease income over the two year

period.