Advanced Corporate Reporting: Consolidated Financial Statements, Share-Based Payment, Residual Income Valuation, Fair Value Accounting vs Historical Cost Accounting

This article covers topics such as consolidated financial statements, share-based payment, residual income valuation, fair value accounting vs historical cost accounting, and their importance in advanced corporate reporting.

Advanced Corporate
Reporting

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................3
QUESTION 3...................................................................................................................................5
A..................................................................................................................................................5
B..................................................................................................................................................5
C..................................................................................................................................................6
D..................................................................................................................................................6
QUESTION 4...................................................................................................................................7
A..................................................................................................................................................7
B..................................................................................................................................................8
REFERENCES................................................................................................................................9

QUESTION 1
Consolidated Statement of financial position of Camera Plc for the year ended 31st March
2021
Particulars Amount
Assets
Non – current assets
Property, plant and equipment [590000 + (290000 + 19800 - 1320)] 898480
Goodwill 66820
Current assets
Inventories (62700 +35400 - 2531) 95569
Trade receivables (42400 + 22700) 65100
Cash and cash equivalents [15300 + (11100 + 5000)] 31400
Total Assets 1157369
Equity and liabilities
Ordinary Shares 600000
Retained earnings 71984
Non – controlling interest 87585
Long term liabilities (145000 + 8000) 153000
Current liabilities
Trade payables (47200 + 28600) 75800
Other current liabilities (156400 + 12600) 169000
Total equity and liabilities 1157369
Working notes:

1. Calculation of net assets of Photo plc on the date of reporting
Particulars
At acquisition
on 1st April
2020 On reporting date as at 31st March 2021 Post-acquisition
Equity Shares 260000 260000 _
Retained earnings 17600 31000 13400
Property Plant
and Equipment:
Fair value
adjustment (less
depreciation) 19800 19800 – 1320 (19800/15) = 18480 -1320
Unrealized profit
in inventory - - -2531
Fair value of the
net assets 297400 309480 9549
2. Calculation of Goodwill
Goodwill = Consideration provided by Camera Plc. + Fair value of Non – controlling interest at
acquisition – net assets at acquisition of Photo Plc. = 290000 + 89220* - 297400 = 81820
 Fair value of non – controlling interest at acquisition through a proportionate method =
Fair value of net assets of Photo plc at acquisition * Share of Non – controlling interest
= 297400 * 30%= 89220
 Share of non – controlling interest = 100 - Share acquired by Camera plc
= (182,000,000 / 260,000,00 * 100) = 100 – 70 = 30% Goodwill to be shown in consolidated financial statement as at 31st March 2021 = 81820
– 15000 = 66820.
3. Calculation of non – controlling interest
= Non – Controlling interest at acquisition + 30% Share of post – Acquisition profit – 30% Share
of Impaired goodwill = 89220 + 2865 (30% of 9549) – 4500 (30% of 15000) = 87585
4. Calculation of retained earnings of Camera Plc.
Retained earnings on the date of acquisition + 70% of the post – acquisition profit – 70% of
goodwill impaired = 75800 + 6684 (70% of 9549) – 10500 (70% of 15000) = 71984

QUESTION 3
A
The IFRS 2 is based on share based payment on the basis of the financial reporting. The
company need to use the share based payment for evaluating the value of the shares. It is
necessary for the company to comply with the share based payment so that the shares are being
recorded in proper and effective manner. In case of Pulp plc, the transaction relating to shares
will be recorded on the basis of the IFRS 2 relating to the share based payment. In the case of
year 1, the record will be maintained and recorded with the 300 share to each employee that is
550 employees in total. but in the end of year 1, 25 employees have left and these will not be
provided with shares. Thus the total of 525 employees will be recorded and will be recorded at
15 % increased rate that is 13.8. But in the year 2 the record will again change as 34 more
employees will be leaving the company and due to this, in year 2 the number of employees will
be 491 and rate has increased by 14 % that is 15.801. Further in the year 3 there is not any of the
employee leaving the company. hence, in the last year that record within the company account
will be on basis of 491 employees and they will be provided with 300 shares each at rate of
18.80.
B
The IFRS 9 is the one which relates with ways in which the company classifies and
measures the financial asset and liabilities and contract relating to buying and selling of the non-
financial items. The use of IFRS 9 is very important for the reason that it recognizes the financial
asset and liabilities of the company at its fair value or not at fair value. Also the transaction cost
is being directly attributable to the acquisition of the asset or liability. For the recording of the
transaction within the financial statement according to IFRS 9 is as follows-
Bond issued = 1800000
Issue cost = 0
Net cash inflow = 1800000
Coupon rate @ 7 % = 75240
Interest rate @ 9 % = 162000
Bond obligation = 1886760
(1800000 +162000 – 75240)

Interest expense @ 9 % = 169808
Bond obligation = 2056568
Finance cost = 169808
Hence, with the above evaluation it is clear that within the balance sheet the bond obligation will
be recorded at 2056568 and in the profit and loss account will be recorded as 169808 as the
finance cost.
C
Yes, it is true that the residual income valuation is having clear link with other valuation
methods like dividend discount model. The major benefits and drawbacks of residual income
valuation is as follows-
Advantages
 The major benefit of using residual income valuation method is that this model
undertakes the use of readily available accounting data and this assist in providing better
evaluation. Thus, the readily available information will assist in less time taking.
 Along with this, another benefit of using the residual income method is that this method
is being used to value the non- dividend paying companies.
Disadvantages
 The major drawback of using the residual income method is that this method is based on
the accounting data and as a result of this the manipulation of the data can be taken place.
Hence, this can modify or manipulate the data and results of the company.
 Along with this another drawback of using this method is that this method assumes that
the cost of debt is equal to the interest expense which is not good.
D
It is true that the financial statements are very important for the equity investor for
evaluation of the position of the company. these financial statements are important for the
investors as it provides for correct and accurate information relating to the business and its
financial stability and performance. the equity investors are the one who invest within the
company and becomes the shareholder of the company (Nitani, Riding and He, 2019). hence, for
them, before investing within the company it is necessary that they evaluate the performance and
operational capability of the company. Hence, for this purpose the use of financial statement is
being done. This is particularly because of the reason that in case the financial statements will

not be providing better and effective view then this will affect the working and investment level
of the company.
Thus, for profession equity investors the financial statement is being used in order to
evaluate the financial performance of the company before doing the investment. Moreover, the
financial statement provides information relating to liquidity, efficiency, profitability, solvency
and other aspects of the business and its performance (Berisha and Asllanaj, 2017). Hence, this
will be requiring by the equity investors to analyse the performance of the company and then to
take proper decision relating to growth and development of the business. the equity investors are
also responsible for the effective decision making. Hence, for this, it is essential that the equity
investors analyse the financial statement in detailed manner and then take decision for the
betterment of the working of company.
QUESTION 4
A
For the company to operate in better and effective manner it is necessary that is comply
with all the working in accordance to IFRS. Hence, for the effective recording of the convertible
bonds the company will be recoding them on the basis of fair value only. This is pertaining to the
fact that in case of the five- year convertible bond the conversion of the bond into shares will be
raking place on the fair value only that is the rate prevailing at the time of conversion. Along
with this in the other case, of lease agreement, the recording of the transaction will be taking
place on basis of IFRS 16. This IFRS states that how the accounting for the lease will be done
and all the decision relating to the lease will be involved during the accounting period (Morales
Díaz and Zamora Ramírez, 2018). In the present case of Tent Plc, the lease agreement will have
made on the basis of five -year account. This is pertaining to the fact that the lease agreement is
for five years and no ownership is being transferred. In the case of Tent plc, the right to use the
asset will be recorded within the books of account. Hence, for this all the payment made to lessor
at, before and commencement date will be recorded. Along with this, all the initial direct cost
incurred by the lessee will also be recorded within the books of account along with depreciation.
B
The fair value accounting is being referred to as measuring the business assets and
liabilities at the current market value. On the other hand, the historical cost accounting is a

measure of value which involves the use of original cost for recording the asset of the company.
Both the methods have their own distinct benefits and drawback of being used (Georgiou, 2018).
The major benefit of using the fair value accounting is that it provides more accurate value for
the asset and liabilities of the company. the reason pertaining to the fact is that when the fair
value is used then the assets and liabilities are recorded on basis of market value and not at the
value on which it was acquired. So this provides for better and effective valuation of the asset
and provides for fair value. In addition to this another benefit of using fair value method is that it
provides the true income of the company. this is basically because of the reason that all the
elements are recorded at fair value so it provides accurate and true income.
On the other hand, the major drawback of using the fair value method is that this might
create much ups and down within the value of asset and liabilities (Yao, and et.al., 2018). This is
pertaining to the fact that fair value is based on market condition and there is no stability within
the market condition.
In against of this, the historical cost is beneficial for the company is
that it provides for consistency and comparability of the financial
statements. On the other hand, the major drawback of using the historical
accounting is that there are many different types of changes which can be
seen within the asset like usage, depreciation, machinery damages and
many other different aspects (Druzhilovskaya, 2018). In the case of historical
cost is the asset or liability is recorded at the original cost only which does
not provide actual working.

REFERENCES
Books and Journals
Georgiou, O., 2018. The worth of fair value accounting: dissonance between users and standard
setters. Contemporary Accounting Research. 35(3). pp.1297-1331.
Yao, D., and et.al., 2018. Fair value accounting and earnings persistence: evidence from
international banks. Journal of International Accounting Research. 17(1). pp.47-68.
Druzhilovskaya, T.Y., 2018. The use of fair value to measure accounting items: Practical
issues. Mezhdunarodnyi bukhgalterskii uchet= International Accounting. 21(9). pp.1086-
1099.
Yusuf, Y. and Idris, S., 2021. An Analysis of the Strengths and Weaknesses of Fair Value
Accounting and Historical Cost Accounting Measures. Asian Journal of Economics,
Finance and Management, pp.73-79.
Berisha, V. and Asllanaj, R., 2017. Literature Review on Historical Development of
Accounting. Acta Universitatis Danubius. Œconomica. 13(6).
Morales Díaz, J. and Zamora Ramírez, C., 2018. IFRS 16 (leases) implementation: Impact of
entities’ decisions on financial statements. Aestimatio: The IEB International Journal of
Finance. 17. 60-97.
Nitani, M., Riding, A. and He, B., 2019. On equity crowdfunding: investor rationality and
success factors. Venture Capital. 21(2-3). pp.243-272.