Contemporary Issues in Financial Accounting: Online Exam

This document is an online exam on contemporary issues in financial accounting. It includes sections on total comprehensive income, change in equity, financial position, revenue model, conceptual framework, accounting policy change, related party disclosures, and management commentary. The document provides detailed explanations and calculations for each section. It is a valuable resource for students studying financial accounting.

ONLINE EXAM
CONTEMPORARY ISSUES
IN FINANCIAL
ACCOUNTING

TABLE OF CONTENTS
Table of Contents
MAIN BODY..................................................................................................................................................3
SECTION- A ..................................................................................................................................................3
SECTION- B...................................................................................................................................................5
Question B1 ...........................................................................................................................................5
Question B2 ...........................................................................................................................................6
Question B3............................................................................................................................................6
Question B4 ...........................................................................................................................................7
Question B5............................................................................................................................................9
Question B6..........................................................................................................................................10
REFERENCES..............................................................................................................................................12

MAIN BODY
SECTION- A
a) Statement of total comprehensive income
Particulars Amount
Revenue 11600000
(-) Cost of sales 4000000
Gross Profit 7600000
(-) Distribution cost 2134050
(-) Administration expenses 3400000
(-) Interest paid 130000
(-) Finance charge 27500
(-) Depreciation 300000
1608450
(-) Tax 25 % 402112.5
Net Profit 1206337.5
b) Statement of change in equity
Share Capital 4000000
Premium 50000
Reserves 200000

Retained 460000
Profit 1206338
Total 5916338
c) Statement of financial position
Particulars Amount
Assets
Inventory 750000
Land 4000000
Buildings 2040000
Plant 2770000
Trade receivables 1250000
Bank 25000
Current loan 130000
Advance lease 65950
Advance contract 400000
Total 11430950
Liabilities
Trade payable 540000
Allowances for Receivables 50000

Bank loan 2000000
Contract 2000000
Deferred tax 924612
Share Capital 4000000
Premium 50000
Reserves 200000
Retained 460000
Profit 1206338
Total 11430950
d) The leased tested equipment that is occupied by the company for the period of 5 years is to be
accounted for in the financial statements. The leased equipment is not to be presented in the
balance sheet as the ownership of the asset is not transferred but the lease rentals that are paid by
the company shall be recorded as the operating expenses in the income statement. In the current
scenario since the lease rental is paid in advance that is the reason it shall be recorded in the asset
side of the balance sheet and the finance charge of 10% is to be ascertained in the income
statement.
SECTION- B
Question B1
a) Five step revenue model from IFRS 15:
Step 1 : Determine the customer and the contract that is undertaken with them
Step 2 : Recognize the performance obligation in the contract undertaken

Step 3 : Calculate the transaction price
Step 4 : Allocate the transaction price to the performance obligation in the contract
Step 5 : Identify the revenue at the time entity satisfies the performance obligation
b) Performance obligation
Ticket sales = 8000000
Allotment of points = 8000000 /100 * 10 = 800000
Total points = 800000
Total redemption value = 95 % of 800000 = 760000
c) Ticket sale = 2000
Allotment of points = 2000 / 100 * 10 = 200
Redemption value = 200 * 95 % = 190
Revenue recognized = 2000 – 190 = 1810
Question B2
a) The Conceptual framework for financial reporting states the consistent standards, fundamental
objectives in order to develop effective financial statements for the company. It defines a
constitution that is to be fulfilled in order to accumulate all the functions of the financial
accounting. It can be assessed that various stakeholder categories are benefited from this way of
financial reporting (Akhmedjanov, 2019). These stakeholders are the internal and the external
users of financial information that use the data to get the information regarding the position of
the company and to use it as reference for future decision-making process. These stakeholder
categories involve potential investors, lenders, creditors, suppliers, buyers, government etc. who
all are affected by the operations of the business. The potential investors shall be checking out
the earnings per share and the future growth prospects of the business in order to assess the
returns that it can secure from the investments. Further the creditors, lenders, suppliers will be
interested in the liquidity position and the credibility of the company to guarantee receiving its

debts in future. This is how the various stakeholder categories make decision through the
financial reporting.
b) It can be advised to the uncle and to Wong Brothers Ltd that the financial accounting and
recording of the transaction is done in respect of the recognition concept as specified by the
Conceptual Framework. The recognition concept says that the income and expenses of the
business are to be recorded in the books of accounts at the time it has been accrued irrespective
of whether they are paid or not. So the transaction related to purchase of goods worth 300000 has
to be recorded on the date of transactions even though a 6 months credit period is offered by the
supplier.
Question B3
a) The advise to the Gunther finance director in respect of translation of the foreign currency in
which the financial statements are represented for the purpose of consolidation, can be
undertaken in accordance with IAS 21 effect of changes in foreign exchange rates. This
accounting standard specifies that if the entity is to get consolidated then the representation of
the assets, liabilities, income and expenses is to be done in the affixed presentation currency by
the company. Firstly a functional currency is to be determined which is followed by the acquirer
which in this cases Gunther group who is preparing its financial statements in Euros. There are
various methods of translation that are specified to convert data of Smith Ltd from pound sterling
to euros. The foreign currency transactions on the date of such translation shall be made on spot
conversion rate. The exchange rate differences and the risks pertaining to such differences shall
be mitigated by entering into the forward contracts that shall hedge the risk.
b) Deferred tax is the notional asset and liability that can be generated due to the tax effect
because of the timing differences that arises in the books of accounts. The timing difference
refers to differences between the book value of profits and the taxable amount of profits. The
difference in the book value and taxable income is due to the allowances, deductions and
exemptions that are permissible under the Income Tax Act. Because of this timing difference
which can either be temporarily or permanent in nature the deferred tax asset and liability arise
for the business. The effect of deferred tax assets and liabilities can be felt on the financial
statements at the year end when the amount of tax to be paid is affected accordingly.

Question B4
a)
Peaky Blinders has changed its accounting policy in 2020 in order to accurately reflect
the usage of flow on inventories. Till 2019 it was applying the method of weighted average cost
which it changed to first in first out method in 2020. The revised amount of cost of sales for the
company is depicted by this table :-
Particulars 2018 2019 2020
Cost of Sales 80000 100000
Opening Inventory 10000 15000
Closing Inventory -10000 -15000 -20000
Revised Cost of Sales -10000 75000 95000
Income statement for the year ended 31st December 2020 :
Particulars 2020 2019
Revenue from operations 250000 200000
Less: Cost of Sales -95000 -75000
Gross profit 155000 125000
Less: Administration costs -60000 -50000
Less: Selling and distribution
costs
-25000 -15000
Net profit 70000 60000

The revised net profit for Peaky Blinders post the change of accounting policy from
weighted average cost to first in first out, its 70000 in 2020 and 60000 in 2019. This is due to the
revaluation of inventories that are possessed by the company.
b) Circumstances for change of accounting policy :-
 The change in accounting policy can be viable if it is in order to enhance the relevance
and reliability of the financial statement pertaining to the organization.
 It may be done as a result of change in the International Financial Reporting Standards
(Mongrut and Winkelried, 2019).
 The change in the accounting policies of the company can be a voluntary decision by the
management in order to achieve better representation of the financial data or to facilitate
comparison
As per the IAS 8 the changes in accounting policy proper accounting treatment has to be
done in respect of the accounting policy that has been changed by the company. All the
correction of errors that have taken place with the change in the accounting policy are to be
retrospectively accounted for in the financial statements and the disclosures are to be made in
respect of it. Apart from that the accounting estimates are generally accounted for on prospective
basis.
For the new policy that is not addressed by IASB the management needs to make a
judgment and for that it has to consider the similar and related issues that are provided for in the
IASB standards. Apart from that the definition, recognition criteria and the measurement
concepts can be referred from the framework.
Question B5
a) As per the applicability of the IFRS and the IAS 24 which is associated with the related party
disclosures it can be assessed that some of the key disclosures are to be made by the company in
the preparation of its financial statements as these shall be helping the users to ascertain the
actual position of the company and its future growth prospects:-

 The compensation and the remuneration that is paid to the chief executive officer is
considered to be the key management personnel and because of this reason the
disclosures in respect of annual salary, share based payments, contributions to the
retirement benefit plan and the reimbursements of his travel expenses.
 The information as to the subsidiary and the controlling authority is to be specified in the
financial statements of the company. Ted Inc information is to be disclosed (Kieso,
Weygandt and Warfield, 2020).
Footnote:-
A sum of £2 million is paid to the chief executive officer in the form of annual salary.
Also the sum of £1 million is paid in the form of share based payments. An amount of £1
million is in the form of contributions to the retirement plan.
b) The major disclosure requirements under the IAS 24 are:-
 The first and foremost disclosure is associated with the relationship of the parent and the
subsidiary company. It is mandatory for every entity to disclose the name of its parent
company or the controlling authority thereby indulged in producing the financial
statements to the public at large.
 The next major disclosure is related to the compensation that is provided to the key
management personnel’s in the form of short term, long term, termination = and shared
employee benefits. The key management personnel of the company are the directors or
the executives who are playing major role in the planning and controlling the activities of
the business.
 Lastly the disclosure in respect of the related party transactions of the entity, their
amounts, outstanding balances and the effect on the financial statements of the business.
This can be related to the debtors the amount of transactions in the particular financial
year, the sum pertaining to the bad and doubtful debts and the provisions made in respect
of bad and doubtful debts of the company.

Question B6
a) No, I do not agree with the following statement that IFRS Practice Statement- Management
commentary falls under the scope of International Financial Reporting Standards. Also, I
disagree that it is mandatory for the companies who have adopted the IFRS to comply with the
practice statement policy (HAMEEDI and et.al., 2021). As per what is prescribed by the
International Accounting Standards Board (IASB) and the IFRS foundation it can be assessed
that both the IFRS and the practice statements are separate which that the neither practice
statements can replace the IFRS nor the IFRS is equivalent to the practice statements of the
management. Entities have to mandatorily prepare its financial statements using IFRS but
consequently they are not necessarily required to comply with framing the practice statements
unless it is required by their own jurisdiction. The practice statement is just the historical
explanations that are provided by the management of the company to its stakeholders or users of
the financial information in relation to the elements that are included in the financial statement of
the organization.
b) Yes, I agree that there are similarities in the UK guidance on the strategic report and the
practice statements that are prepared for the management commentary. The major similarity is
that they are prepared for communicating the business performance in their perspective,
strategies, implementations, business model, profitability position and the developmental and
future growth prospects of the business. These both statements are not mandatorily framed but
are preferred by the management in order to facilitate the better communication to the users and
stakeholders who are interested in the financial statements. They are given the idea regarding the
financial health and well-being of the organization and on the basis of that the users shall be
formulating the investment decisions in respect of the organization under consideration.

REFERENCES
HAMEEDI, K. S. and et.al., 2021. Financial Performance Reporting, IFRS Implementation, and
Accounting Information: Evidence from Iraqi Banking Sector. The Journal of Asian
Finance, Economics and Business. 8(3). pp.1083-1094.

Kieso, D. E., Weygandt, J. J. and Warfield, T. D., 2020. Intermediate accounting IFRS. John
Wiley & Sons.
Mongrut, S. and Winkelried, D., 2019. Unintended effects of IFRS adoption on earnings
management: The case of Latin America. Emerging Markets Review. 38. pp.377-388.
Akhmedjanov, K., 2019. ACCOUNTANCY REFORM AND PREREQUISITES FOR THE
PREPARING OF FINANCIAL STATEMENTS UNDER IFRS IN THE REPUBLIC
OF UZBEKISTAN. Theoretical & Applied Science. (7). pp.86-92.