Instructions to Candidates: This paper is divided into two sections and you are required to answer THREE (3) questions as follows: Section A: This ONE (1) question is compulsory and must be attempted. (50 marks) Section B: Answer all TWO (2) questions. (50 marks) All workings that support the answers must be shown. Marks will be awarded for clarity in presentation and logical arguments. You are required to continue with a fresh page when answering new questions or parts of the question. (A) Stargazer Bhd. (Star) a diversified holding company is listed on Bursa Malaysia. Star's financial year end is 31 August 2020. The following information is applicable to Star. 1. On 1 September 2019, Star obtained control of Cruiseliner Sdn. Bhd. (Cruise) by acquiring 70% of its equity interest. The finance director of Star had failed to take into account of the non-controlling interest while calculating and recording a negative goodwill of RM575 million on the acquisition of Cruise. The negative goodwill is as a result of the purchase consideration of RM1,425 million cash less the fair value of identifiable net assets of Cruise as at 1 September 2019 were RM2,000 million. In accordance with the policy of the Star holding company, noncontrolling interest is to be measured at fair value. The fair value of non-controlling interest in Cruise on 1 September 2019 was RM606 million. 2. On 1 September 2018, Star had acquired 40% of the equity interests of Glitzlux Sdn. Bhd. (Glitz) for cash consideration of RM525 million. At the acquisition date the carrying amount and fair value of the identifiable net assets of Glitz were the same at RM1,290 million. Star had correctly treated Glitz as an associate and accounted for the equity interest in Glitz up to 31 August 2019. On 1 September 2019, Star had obtained control over Glitz by acquiring a further 45% interest. On 1 September 2019, the retained earnings and other components of equity of Glitz were RM366 million and RM74 million respectively. The finance director of Star has recorded a negative goodwill on acquisition for the amount of RM703 million, being the cash consideration of RM625 million less the fair value of the identifiable net assets of RM1,328 million. The share prices of Star and Glitz were RM6.25 and RM2.00 respectively on 1 September 2019. The fair value of the original 40% holding and the fair value of the non-controlling interest should both be measured using the market value of the shares. Star had 1,650,000 RM1 shares in issue and Glitz had 700,000 RM1 shares in issue at 1 September 2019. 3. Star operates a defined benefit pension scheme. On 31 August 2020, the company announced that it will close down a business division and has agreed to pay each of its 150 staff a cash payment of RM62,500 to compensate them for loss of pension as a result of the closure. It is estimated that the closure will reduce the present value of the pension obligation by RM7.25 million. The finance director of Star is unsure of how to deal with the settlement and curtailment and has not yet recorded anything relating to the closure in its financial statements for the year ended 31 August 2020. 4. On 1 September 2019, Star had acquired a manufacturing unit under an eight-year lease agreement. The lease asset and obligation have been accounted for correctly in the financial statements of Star. However, Star could not operate from the unit until it had made structural alterations at a cost of RM8.25 million. The manufacturing unit was ready for use on 31 August 2020. The alterations costs of RM8.25 million were charged to administration expenses. The lease agreement requires Star to restore the unit to its original condition at the end of the lease term. Star estimates that this will cost a further RM6.25 million. Market interest rates are currently 6%. The following discount factors may be relevant: Required: (a) Explain to the finance director of Stargazer Bhd., with appropriate workings, how goodwill should have been calculated on the acquisition of Cruiseliner Sdn. Bhd. and Glitzlux Sdn. Bhd. Explain whether any adjustments are needed to correct any errors made by the finance director of Stargazer Bhd. (15 Marks) (b) Discuss, with suitable workings, how the settlement and curtailment of Stargazer Bhd.'s defined benefit pension scheme should be accounted for in the consolidated financial statements for the year ended 31 August 2020. (5 marks) (c) Advise the financial director of Stargazer Bhd. on how the manufacturing unit alterations costs should have been accounted for in the consolidated financial statements for the year ended 31 August 2020. (5 marks) (B) CarSecondhand Bhd. (Carsec) is a company that retails motor vehicles. Carsec leases motor vehicles to customers under operating leases and often sells the cars to third parties when the lease ends. Net cash generated from operating activities for the year ended 31 August 2020 for the Carsec is as follows: Net cash flows generated from investing activities included interest received of RM12.5 million and net capital expenditure of RM57.5 million excluding the business acquisition in note 3 as below. There were also some errors in the presentation of the statement of cash flows which could have an impact on the calculations of the net cash generated from the operating activities. The directors have provided the following information as regards any potential errors: 1. Cars are treated as property, plant and equipment when held under operating leases and when they become available for sale, they are transferred to inventories at their carrying amounts. In its statement of cash flows for the year ended 31 August 2020, cash flows from investing activities included cash inflows relating to the disposal of cars for the amount of RM37.5 million. Question 1 (Continued) 2. On 1 September 2019, Carsec had purchased a 25% interest in an associate for cash. The associate reported a profit after tax of RM20 million and paid a dividend of RM5 million out of these profits in the year ended 31 August 2020. The directors had incorrectly included a figure of RM15 million in cash generated from operating activities as the cash generated from the investment in the associate. The associate was correctly recorded at RM29 million in the statement of financial position at 31 August 2020 and profit for the year of RM5 million was included in the statement of profit or loss. 3. Carsec had also acquired a digital mapping business during the year ended 31 August 2020. The statement of cash flows showed a loss of RM35 million in net cash flows generated from operating activities as the effect of changes in foreign exchange rates arising on the retranslation of this overseas subsidiary. The assets and liabilities of the acquired subsidiary had been correctly included in the calculations of the cash movement during the year. 4. During the year to 31 August 2020, Carscc made exceptional contributions to the pension plan assets of RM41 million but the statement of cash flows had not recorded the cash tax benefit of RM7.5 million. 5. Carsec had capitalised the interest paid totalling RM31 million comprising interest for property, plant and equipment and inventories of RM22 million and RM9 million respectively. 6. Carsec has defined operating free cash flows as net cash generated by operating activities as adjusted for net capital expenditure, purchase of associate and dividends received, interest received and paid. Any exceptional items should also be excluded from the calculations of free cash flows. Required: (a) Prepare a statement of net cash generated from operating activities adjusted to correct any errors if appropriate from the above notes. (9 marks) (b) Prepare a reconciliation of the net cash generated by operating activities to the operating free cash flow as described in note 6 . (8 marks) (c) Explain the adjustments made in the answers for part (a) and (b). (8 marks) [Total: 50 marks] Question 2 (a) Discuss the recognition and measurement of provisions in accordance with the guidance in IAS 37 Provisions, Contingent liabilities and Contingent Assets. Discuss whether there are any inconsistencies with the criteria for the recognition of liability in the Conceptual Framework for Financial Reporting and the criteria in IAS 37. (11 marks) (b) Mayan Bhd. (Mayan), a public listed company in Malaysia is in the oil and gas business. In compliance with the regulations of the Malaysian government for the extraction of oil from its natural environment. Mayan has an obligation to dismantle the oil platform at the end of the platform's life, which is ten years. This obligation is neither irrevocable nor transferable. Mayan intends to carry out the dismantling work and estimated the cost of the work to be RM300 million in ten years' time. The present value of the work is RM210 million. A market exists for the dismantling of an oil platform and Mayan could hire an independent contractor to carry out the work. Mayan is of opinion that if there is no risk or probability adjustment required, then the cost of the external independent contractor would be RM360 million in ten years' time. The present value of this cost is RM258 million. However if risk and probability are taken into account, then there is a 40% probability that the present value will be RM258 million and a 60% probability that it would be RM280 million, and there is a risk that the costs may increase by RM10 million. Despite being aware of the requirements of IAS 37 Provisions, Contingent liabilities and Contingent Assets, the directors of Mayan had suggested that the costs to dismantle the oil platform to be expensed off as incurred, at the end of the platform's life, with no entries being made in the latest financial statements. The directors' reasoning was based on the premise that the application of IFRS involves judgement, and although prudence is mentioned in the Conceptual Framework for Financial Reporting, it is one of the ways of achieving faithful representation. Required: On 1 September 2014, Preston Sdn. Bhd., (Preston) had opened a tuition centre at a cost of RM10 million. The estimated useful life of the tuition centre was 25 years. On 31 August 2020, the tuition centre was closed down because the number of students using the tuition centre had declined unexpectedly due to the Covid 19 pandemic. The tuition centre is to be converted for use as a museum, and there is no expectation that the building will reopen as a tuition centre. The current replacement cost for a museum of equivalent size to the tuition centre is RM4.2 million. Because of the nature of the non-current assets, value-in-use and net selling price are unrealistic estimates of the value of the tuition centre. The change in use would have no effect on the estimated life of the building. Required: Discuss how the above events should be accounted for in the financial statements of Preston Sdn. Bhd. (6 marks) (B) On 1 September 2016, Senawang Bhd., (Sena) granted 500 share appreciation rights (SARs) to its 300 managers. All of the rights vested on 31 August 2018 but they can only be exercised from 1 September 2018 up to 31 August 2020. At the grant date, the value of each SAR was RM12 and it was estimated that 5% of the managers would leave during the vesting period. The fair value of the SARs is as follows: Fair value of SAR All the managers who were expected to leave employment did leave the company as expected before 31 August 2018. On 31 August 2019, 60 managers exercised their options when the intrinsic value of the rights was RM12.50 and were paid in cash. Required: Show how the share appreciation rights should have been accounted for from the grant date to 31 August 2019. (6 marks) (C) IAS 24 Related Parties Disclosures aims to improve the quality of information provided by published financial statements and also to strengthen management's stewardship. This underpins one of the requirements of the Conceptual Framework for Financial Reporting which is to provide useful information about the reporting entity. Question 3 (Continued) (a) Discuss the fundamental and enhancing qualitative characteristics of useful information about the reporting entity and explain the need for information on management's stewardship. (6 marks) (b) Explain the purpose of identifying related parties and the importance of disclosing related party transactions in accordance with IAS 24 Related Parties Disclosures. (7 marks) [Total: 25 marks]