Question
a) Sports Kenya owns a chain of health clubs and has entered into binding contracts with sports organizations, which earn income over given periods. The
a) Sports Kenya owns a chain of health clubs and has entered into binding contracts with sports organizations, which earn income over given periods. The services rendered in return for such income include access to their database of members, and admission to health clubs, including the provision of coaching and other benefits. These contracts are for periods of between 9 and 18 months. Sports Kenya feels that because it only assumes limited obligations under the contract mainly relating to the provision of coaching, this could not be seen as the rendering of services for accounting purposes. As a result, Sports Kenyas accounting policy for revenue recognition is to recognize the contract income in full at the date when the contract was signed.
Required:
Advise Sports Kenya on how the above transaction should be dealt with in its financial statements with reference to International Financial Reporting Standards where appropriate. (7 marks)
b) In May 2018, Sports Kenya decided to sell one of its local business divisions through a mixed asset and share deal. The decision to sell the division at a price of KShs 40 million was made public in November 2018 and gained shareholder approval in December 2018. It was decided that the payment of any agreed sale price could be deferred until 30 November 2018. The business division was presented as a disposal group in the statement of financial position as at 30 November 2018. At the initial classification of the division as held for sale, its net carrying amount was KShs 90 million. In writing down the disposal groups carrying amount, Sports Kenya accounted for an impairment loss of KShs 30 million which represented the difference between the carrying amount and value of the assets measured in accordance with applicable International Financial Reporting Standards (IFRS). In the financial statements at 30 November 2018, Sports Kenya showed the following costs as provisions relating to the continuing operations. These costs were related to the business division being sold and were as follows:
(i) A loss relating to a potential write-off of a trade receivable which had gone into liquidation. The trade receivable had sold the goods to a third party and the division had guaranteed the receipt of the sale proceeds;
(ii) An expense relating to the discounting of the long-term receivable on the fixed amount of the sale price of the disposal group; and
(iii) A provision was charged which related to the expected transaction costs of the sale including legal advice and lawyer fees.
Required:
The directors wish to know how to treat the above transactions with reference to International Financial Reporting Standards where appropriate. (9 marks)
c) Sports Kenya has decided to sell its main office building to a third party and lease it back on a 10-year lease. The lease has been classified as an operating lease. The current fair value of the property is KShs 5 million and the carrying value of the asset is KShs 4.2 million. The market for property is very difficult in the jurisdiction and Sports Kenya therefore requires guidance on the consequences of selling the office building at a range of prices. The following prices have been achieved in the market during the last few months for similar office buildings:
(i) KShs 5 million
(ii) KShs 6 million
(iii) KShs 4.8 million
(iv) KShs 4 million
Required:
Sports Kenya would like advice on how to account for the sale and leaseback, with an explanation of the effect which the different selling prices would have on the financial statements, assuming that the fair value of the property is KShs 5 million. Refer to International Financial Reporting Standards where appropriate. (8 marks)
(Total 24 marks)
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