Tutorial 10 Jane Lazar and Huang (4th Edition)Chapter 6-MFRS 5
Question 1 page 131 Grease Bhd leased out tangible non-current assets as operating leases. At 1 January x5, the carrying amount of such assets was RM20 million. These assets were recently leased out on operating operating leases and have have now expired. expired. The company is undecided as to whether to sell or lease it to customers under finance leases. The fair value less selling costs of the assets is RM18 million and the value in use is estimated estimated at RM24 million. Required: Discuss the accounting treatment of these assets for the year ended 31 December x5.
The operating lease assets will not qualify as held for sale at 31 December x5 as the company has not made a decision as to whether they should be sold or leased. They should, therefore, be shown as noncurrent assets and depreciated. Held for sale assets are not depreciated. The carrying amount of the assets will be RM20 million. Held for sale assets are valued at the lower of carrying amount and fair value less selling costs under MFRS 5. The assets are not impaired because the value-in-use is above the carrying amount.
Question 2 page 131 Zuko had a plant with a carrying amount of RM5 million at 31 March x6 which ceased to be used because of a downturn in the economy. The company had decided at 31 March x6 which was its financial year-end, to maintain the plant in working condition in case of a change in economic conditions. Zuko subsequently sold the plant by auction on 14 May x6 for RM3 million net of costs. Required: Discuss the accounting treatment of the plant.
The plant would not be classified as held for sale at 31 March x6 even though the plant was sold at auction prior to the date that the financial statements were signed. The held for sale criteria Maintain in working condition were not met at the balance sheet date and MFRS 5 prohibits the classification of non-current assets as held for sale if the criteria are met after the balance sheet date and before the financial statements are signed. The company should disclose relevant information in the financial statements for the year ended 31 March x6. The plant is not classified as abandoned and would be depreciated up to its sale.
Question 4 page 132 Zumi Bhd acquired a property on 1 January x4 which it intended to sell. The property was obtained as a result of a default on a loan agreement by a third party and was valued at RM30 million on that date. It was offset against the loan. The property was in a state of disrepair and Zumi intended to complete the repairs before selling the property. The repairs were completed on 31 January x5. The property was sold for RM44 million on 10 March x5. As at December x4, the property was classified as ‘held for sale’ and shown at net of sale proceeds of RM44 million. Property was depreciated at 5% per annum on a straight-line basis and no depreciation had been charged in the year. year. Year-end is 31 December Required: Discuss the accounting treatment of the property. property.
To be classified as ‘held for sale’ the asset must be available for immediate sale in its present condition, subject to the usual selling terms and the sale must be highly probable. As 31.12.x4 the asset was not available for sale. MFRS 5 also requires the asset to be disclosed at the lower of carrying amount and fair value less cost to sell. The company used selling price which is incorrect. Proper accounting treatment: record at cost and depreciate and reduce retained earning by the profit recognised (RM14 million) by classifying the 44mil – 30mil asset at selling price.
Question 5 page 132 Frenchy Bhd commited itself before its year-end of 31 March x5 to a plan of action to sell a subsidiary, Fairy Bhd. The sale was expected to be completed on 1 July x5 and the financial statements of the group were signed on 15 May x5. The subsidiary, Fairy Bhd, had net assets as the year-end of RM5 million and the carrying amount of related related goodwill was RM1 million. Fairy Bhd made a loss of RM500,000 from 1 April x5 to 15 May x5 and was expected to make a further loss of RM600,000 up to the date of sale. Frenchy Bhd was at 15 May x5 negotiating the consideration for the sale but no contract had been signed or public announcement made as of that date. Frenchy expected to receive RM4.5 million for the company net of selling costs. The value-in-use of Frenchy at 15 May x5 was estimated at RM3.9 million. Required: Discuss the accounting treatment of Frenchy on the consolidated financial statements.
Fairy is a cash generating unit and its carrying amount will be recovered principally through a sale transaction rather than through continuing use. It should be classified as held for sale because the following criteria have been met. •
a commitment to a plan.
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The asset is available for immediate immediate sale.
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Actively trying to find a buyer.
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Sale is highly probable. probable.
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Asset is being actively marketed. marketed.
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Unlikely Unlikely to have significant changes to the plan.
Before classification of the item as held for sale, an impairment review will need to be undertaken undertaken irrespective of any indication or otherwise of impairment. Any loss will be charged to the income statements. Additionally, the loss will be offset first against the non-current assets of the subsidiary. subsidiary. The figure of RM4.5 million will be used as fair value less costs to sell. The net assets and goodwill goodwill will be written written down to RM4.5 million with the write write off going against non-current assets in the first instance. MFRS 5 requires items held for sale to be reported at the lower of carrying amount and fair value less any costs to sell. The information regarding the subsidiary will be disclosed in the income statement and in notes to accounts. The asset will be presented separately in the balance sheet. Additional disclosures to be made concerning the facts and circumstances leading to the disposal, and the segment in which the subsidiary is presented under MFRS 114 Segment Reporting.
