BE130 Coursework 1: Financial Reporting Analysis of Dynamics Co. Ltd

This case study solution addresses the financial reporting issues faced by Dynamics Co. Ltd, a manufacturer of premium security equipment, in accordance with IFRS. It primarily focuses on the application of IAS 16 (Property, Plant and Equipment) and IAS 37 (Provisions, Contingent Liabilities and Contingent Assets). The analysis covers the revaluation of a manufacturing property, accounting for a revaluation loss, and the appropriate accounting treatment for potential food poisoning claims from employees. The solution details the calculations and adjustments required in the financial statements, including the recognition of provisions, contingent liabilities, and the impact on the statement of profit or loss and other comprehensive income (SPLOCI) and the statement of financial position (SOFP). Furthermore, the solution discusses depreciation methods, impairment considerations, and derecognition of assets as per IAS 16, providing a comprehensive overview of the accounting principles involved.

Answer to Question 1(a)
Introduction
IAS 16 is constructed on the matter of Property, Plant and Equipment (PPE). PPEare the
intangible assets that are used for the producing products, or also related in official reason for
delivering services.For administrative purpose, PPE are likely to apply for additional than one
secretarial phase because of their non-current nature (Tsalavoutas and Dionysiou,2014).
Dynamics Co. Ltd has a manufacturing property.
Recognition:
As per ISA 16 Para 29, PPE are recognition at cost.
After Recognition:
The two permissible models for measuring the PPE as per Para 30and 31mentioned in IAS 16
are:
 Cost model
 Revaluation Model
At the end of reporting time, companies shall revalue their PPE with adequate regularity to
certify that the carrying amount does not differ in materiality from what they are determined
through their fair value. Revaluation is required when material difference exists between fair
value and carrying value. Annual revaluation of assets is not required though fluctuation in
value of asset prevails then the asset shall be revalued annually. In Para 35 of IAS16,
treatment of accumulated depreciation is discussed. (Guay, Samuels and Taylor 2016).

1AN ANALYSIS ON INTERNATIONAL ACCOUNTING STANDARD 16 AND 37
Accumulated depreciation is reaffirmed with the modification in the gross carrying volume of
the asset in regard to equate the revalue amount after the revaluation of asset. This is use by
applying an index to regulate its standby cost. It is abolished in contradiction of the unrefined
carrying amount of the asset and the net amount is restated to the asset’s revalued amount.
This technique is frequently used for buildings.( Harris et al. 2013).
Dynamics Co. is not able to opt for cost model as revaluation of the asset is frequently done
and the significant movement in the fair value as stated in the Para 34 of IAS 16. As per Para
36 in IAS 16, the revaluation model is used for the whole class of PPE to which that asset
belongs must be re-valued.
In this instance, as there is a significant movement in fair value, the manufacturing property
is to be re-valued to $70m. The relevant calculations and adjustments to the financial
statements are shown below:
Revaluation of Manufacturing Equipment at the 31st December 2017
PPE Working:
Particulars $million
Cost 82
Less: Depreciation 2
Carrying Value 80
The above Carrying value of $80million is compared to the revaluation amount of
$70million. Thus, a revaluation loss of $10 million is needed to be accounted for.
Revaluation Losses

2AN ANALYSIS ON INTERNATIONAL ACCOUNTING STANDARD 16 AND 37
As per Para 39 and 40, the decreased carrying amount is recorded in profit and loss and the
reduction is recorded in OCI which is not claimed in the revaluation arising out if excess
difference of asset. (Younis et al. 2013).
The adjusted entry is:
Dr. OCI (SOCI) $6 million
Dr. Profit or Loss (SOCI) $4 million
Cr. PPE – Non-Current Assets (SOFP) $10 million

3AN ANALYSIS ON INTERNATIONAL ACCOUNTING STANDARD 16 AND 37
Answer to Question 1(b)
Provisions
In Para 14 and 23 of IAS 37 discussed the conditions for the provision for its
recognition. Those conditions have to be met for its recognition. It laid that recognition of a
provision shall be only when:
 As result of past a company is having presently a legal or constructive obligation.
 There may be a possibility of settlement of an obligation through the financial profit
that outflows of possessions embodying.
 A reliable forecast of an amount can be made for an obligation. This is only possible
in the extreme unusual cases.
Probable outflow of resource (Para 23 and 24)
There must be not only a present obligation but also the probability of an outflow of
resource embodying economic benefits for the settlement of an obligation for recognition of a
liability. The outflow of resource or other event is dependent on the probability of
occurrence. When the probability does not exist regarding the existence of obligation, it is
stated as a contingent liability unless any economic benefit is embodied by the resource.
The number of similar obligations exists the probability of settlement is determined in
considering the period of obligation as a whole. A provision is recognized if it is found that
the probability of outflow of an item is small, it is obvious that resources shall be outflow for
its settlement under the class of obligation as a whole.

4AN ANALYSIS ON INTERNATIONAL ACCOUNTING STANDARD 16 AND 37
Measurement
In Para 36 of IAS 37, recognized amount for repair and maintenance shall be at the
best estimate of the expenses required for the settlement of the present obligation at the end
of the financial report. This is the amount paid by the company in a rational manner for the
settlement of the obligation that is transfer to a third part. This estimation is made by the
company`s management while maintaining all evidences including all requirements with an
evidence of an individual professional.
Contingent liabilities
IAS 37 states that a contingent liability is
 A probable obligation that have been arise from the events that was taken place in the
past and their survival would be established only based on the occurrence or non-
occurrence of one of the uncertain future events that is not as whole in control of the
company.
 A present obligation raised from the past events but was not recognized due to:
(i) It is not possible that an outpouring of resources embodying monetary
remuneration will be essential to reconcile the compulsion; or
(ii) The figure of obligation is not being able to measure through adequate reliability.
The above supervision is stating that if any of the three stated terms that are required for
the recognition of a provision is not being met and the item is a possible compulsion at the
date of reporting then the item is stated as contingent liability. Contingent liability shall be
disclose in the notes of financial statement and not in the balance sheet, until the possibility
of an outflow of resource embodying monetary advantage is remote, in such case it shall be
ignored.( Barbu et al. 2014).

5AN ANALYSIS ON INTERNATIONAL ACCOUNTING STANDARD 16 AND 37
Contingent Assets
A dependent asset is a probable asset that arises from precedent events whose survival
will be established only by the occurrence or non-occurrence of one or further uncertain
upcoming events not entirely within the charge of the company. (Younis et al. 2013).
IAS 37 Provisions, Contingent Liabilities and Contingent Assets cover the food
poisoning claims.
If there was a single claim, then the claims will be classified as a contingent liability, and
no provision should be recognized in the SFP. This is because the outcome is possible not
probable. However, because there are 500 claims and each one has a 40% chance of
succeeding, then overall Dynamics would expect to lose 200 claims.
Therefore, a provision should be recognized in the SFP because:
(i) There is an obligation at the end of the reporting period due to a past event
(ii) There is probable outflow of economic resources
(iii) A reliable estimate can be made (200 claims at $5000 each)
As the claims not expected is being settled for another two years, the provision should be
discounted using the risk related time value of money. (Tsalavoutas and Dionysiou 2014).
The provision should therefore be carried in the SFP at 31 December at:
500 ×5000 ×0.40 ×1 /(1.12)2 =$ 0.8 m
Dr SPLOCI (retained earnings) $0.8 million
Cr Provisions (NCL) $0.8 million

6AN ANALYSIS ON INTERNATIONAL ACCOUNTING STANDARD 16 AND 37
Answer to Question 2
Deprecation
As per Para 43 in IAS 16 the total cost of the item is depreciated separately that is
significant with a cost in relation to the total cost of each part of an item under PPE.
Para 50 of IAS 16 states the allocation of the depreciable amount of an asset. It is on a
systematic basis over the useful life of an asset. Para 51 of IAS 16 states the reviewing of
residual value and the useful life of an asset at least each financial year. Any change in the
figure is accounted as per IAS 8.As per Para 52 in IAS 16, recognition of depreciation is
applicable till the assets residual value is not more than its carrying amount.(Paula et al.
2014).
As per Para 56 in IAS 16 , process of depreciation take place when an asset is being in
its location and is put to use daily as per the requirement of the management. Ceasing of
depreciation should take place at an early stage being sale or scrapping or being put as held
for sale. Impermanent idle movement does not prevent depreciating the asset, as outlook
financial reimbursement is being consumed not simply through practice but also all the way
through deterioration and being out of date. Determination of useful life should be carefully
done based on legal limits, use, expected wear and tear, maintenance programs, expected
capacity, commercial innovations, expected outputs and technical. (Pacter 2014).
Depreciation Method
As per Para 60 to 62 in IAS 16 selected depreciation method needs to put light on the
pattern on which the asset’s upcoming financial advantage are need to be utilized by the
company. Company can choose the various methods of depreciation that is diminishing
balance method straight-line method and production of unit’s method.(Cutruneo et al.
2014).The method selected by the company shall be revised at the end of the financial year at

7AN ANALYSIS ON INTERNATIONAL ACCOUNTING STANDARD 16 AND 37
least. As suggested in ISA 8 any change in the pattern of asset’s utilization for this
depreciation method should be change and it shall be accounted. Depreciation is to be placed
under profit and loss until it is capitalized keen on carrying sum of an additional asset such as
one more item of PPE and stocks. A separate depreciation of an item of PPE is to be done
with a cost charged in relation to the total cost. Like, airplane companies charge depreciation
separately for the airplane cost and aircraft internal cost. (Marcus, Malen and Ellis 2013).
A depreciation method is also based on revenue generated from the activities, which
include that the use of asset was not used in an appropriate way. The revenue generated by a
movement that includes utilization of an asset normally reflects factors additional than the
utilization of the fiscal reimbursement of the asset. Revenue can be affected due to the
activities in selling, fluctuations in sales quantity and rate and through processes and inputs.
Price of the revenue might be affected due to inflation that has no comportment ahead the
method at which consumption of assets is done (Barbuet al.,2014.)
Impairment
As per Para 60 and 65 of IAS 16 for determination of an item of PPE a company
follows IAS 36 Impairment of Assets. The standard throw light that how an entity revise it
carrying amount, determines the recoverable amount of the asset at time of its reorganization
or reserving the reorganization for an loss of impairment. At the time of receiving
compensation, the result shall be placed under profit and loss these are done for
compensation that are received from the third parties (Amiraslani, Iatridis and Pope, 2013.)
De-recognition
The carrying amount of an article of PPE shall be de-recognized as on discarding; or
when no potential monetary reimbursement expected from it is utilize or discarding

8AN ANALYSIS ON INTERNATIONAL ACCOUNTING STANDARD 16 AND 37
Profit and loss is determined from the difference raised the net discard proceeds if
persists or the carrying amount of the PPE. In accordance to IFRS 15, the mount earned by
selling of assets is named as revenue.(Daske et al. 2013).
Presentation and disclosure:
Firstly, class PPE is presented then the method of depreciation, base of measurement of the
gross carrying charge, rate of depreciation, useful life of PPE and at last accumulated
depreciation for the period at the time of beginning and end. (Ball and Shivakumar 2013).
The revalued figure shall be disclosed additionally to the discloser that is required by
IFRS 13. Measurement of fair value is done on the basis of date of revaluation which is
effective, involvement of independent valued is there or not, temporarily idle PPE’s carrying
amount, for every revalued class of PPE, and recognition of the carrying amount is being
carried under the cost model and fair value of PPE is considerably distinct from carrying
amount as cost model is used. (Capkun, Collins and Jeanjean2016).

9AN ANALYSIS ON INTERNATIONAL ACCOUNTING STANDARD 16 AND 37
Reference:
Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013. Accounting for asset impairment: a
test for IFRS compliance across Europe. Centre for Financial Analysis and Reporting
Research (CeFARR).
Ball, R., Li, X. and Shivakumar, L., 2013. Mandatory IFRS adoption, fair value
accounting and accounting information in debt contracts. Fair Value Accounting and
Accounting Information in Debt Contracts (September 11, 2013).
Barbu, E.M., Dumontier, P., Feleaga, N. and Feleaga, L., 2014. A proposal of an
international environmental reporting grid: What interest for policymakers, regulatory
bodies, companies, and researchers?: Reply to discussion of “mandatory environmental
disclosures by companies complying with IAS/IFRS: The Case of France, Germany and
the UK”. The International Journal of Accounting, 49(2), pp.253-262.
Barbu, E.M., Dumontier, P., Feleagă, N. and Feleagă, L., 2014. Mandatory environmental
disclosures by companies complying with IASs/IFRSs: The cases of France, Germany,
and the UK. The International Journal of Accounting, 49(2), pp.231-247.
Bertoni, M. and De Rosa, B., 2013. Comprehensive income, fair value, and conservatism:
A conceptual framework for reporting financial performance.
Capkun, V., Collins, D. and Jeanjean, T., 2016. The effect of IAS/IFRS adoption on
earnings management (smoothing): A closer look at competing explanations. Journal of
Accounting and Public Policy, 35(4), pp.352-394.
Cutruneo, C.M., Oliveira, M.L., Ward, C.R., Hower, J.C., de Brum, I.A., Sampaio, C.H.,
Kautzmann, R.M., Taffarel, S.R., Teixeira, E.C. and Silva, L.F., 2014. A mineralogical

10AN ANALYSIS ON INTERNATIONAL ACCOUNTING STANDARD 16 AND 37
and geochemical study of three Brazilian coal cleaning rejects: demonstration of electron
beam applications. International Journal of Coal Geology, 130, pp.33-52.
Daske, H., Hail, L., Leuz, C. and Verdi, R., 2013. Adopting a label: Heterogeneity in the
economic consequences around IAS/IFRS adoptions. Journal of Accounting
Research, 51(3), pp.495-547.
Guay, W., Samuels, D. and Taylor, D., 2016. Guiding through the fog: Financial
statement complexity and voluntary disclosure. Journal of Accounting and
Economics, 62(2-3), pp.234-269.
Harris, P., Stahlin, W., Arnold, L.W. and Kinkela, K., 2013. A COMPREHENSIVE
CASE STUDY: US GAAP CONVERSION TO IFRS. ISSN 2168-0612 FLASH DRIVE
ISSN 1941-9589 ONLINE, p.121.
Marcus, A., Malen, J. and Ellis, S., 2013. The promise and pitfalls of venture capital as an
asset class for clean energy investment: Research questions for organization and natural
environment scholars. Organization & Environment, 26(1), pp.31-60.
Pacter, P., 2014. Global accounting standards-From Vision to reality. The CPA
Journal, 84(1), p.6.
Paula, C.S., Bordin, I.A., Mari, J.J., Velasque, L., Rohde, L.A. and Coutinho, E.S., 2014.
The mental health care gap among children and adolescents: data from an
epidemiological survey from four Brazilian regions. PLoS One, 9(2), p.e88241.
Younis, M.Z., Jaber, S., Mawson, A.R. and Hartmann, M., 2013, I.A., Khatkar, M.S.,
Thomson, P.C. and Raadsma, H.W., 2016. A meta-assembly of selection signatures in
cattle. PLoS One, 11(4), p.e0153013.

11AN ANALYSIS ON INTERNATIONAL ACCOUNTING STANDARD 16 AND 37
Tsalavoutas, I. and Dionysius, D., 2014. Value relevance of IFRS mandatory disclosure
requirements. Journal of Applied Accounting Research, 15(1), pp.22-42.
Younis, M.Z., Jaber, S., Mawson, A.R. and Hartmann, M., 2013. Estimating the unit costs
of public hospitals and primary healthcare centers. The International journal of health
planning and management, 28(4), pp.320-332.