It is now January 2021. It is planned that the Westland subsidiary company will sell hybrid mattresses to the parent company in Eastland. The parent company will then sell the mattresses to customers in Eastland through its existing sales channels. All transactions will be in E$. You receive the following email from Una Volk, Finance Manager. From: Una Volk, Finance Manager To: Finance Officer Subject: Capitalization of equipment costs, international transfer pricing and working capital There are a few issues regarding the new hybrid mattress factory in Westland which would like your help with. Firstly, there will be a In large investment in the purpose-built factory and production machinery. The Senior Management Team (SMT) wants to understand how the construction costs, machinery and associated costs will be treated in the financial statements. 1) I would like you to prepare briefing notes, which I can discuss at the next SMT meeting, which include an explanation of the criteria for capitalization of costs under MFRS116 Property, Plant and Equipment. Please also provide separate justification for the treatment, as either capital or revenue expenditure, of each of the individual costs listed in Table 1 below based on the provisions of MFRS116. Cost item Notes ES 800,000 Construction costs of the factory Planning, design and architect fees (2) 50,000 Machinery purchase cost (3) 300,000 Machinery installation cost (4) 50,000 Training costs (5) 20,000 Notes: a) The factory is being purpose built for AmaZZZing Beds by Westland building contractor. b) Planning, design and architect fees are in respect of the purpose-built factory. c) The purchase price of the machinery includes the cost of delivery to the factory. d) The installation will be carried out by the company supplying the machinery. e) The training is in respect of the machinery and will be carried out by the company supplying the machinery. [36 marks] Secondly, we need to establish the transfer price for the intra-group sales of the mattresses by the Westland subsidiary to the Eastland parent company. Meena Patrick, Retail Director, has suggested that the mattresses should be sold to the parent company at cost so that the Eastland operation will continue to report a similar gross profit margin as previously. Ben De Luca, Chief Executive Officer, is concerned that Meena's suggestion might be construed as tax avoidance or tax evasion. Westland has a higher corporate tax rate than Eastland. 2) Please also include in your briefing notes an explanation of the impact of Meena's suggestion on the profit reported in each company and how international transfer pricing rules would be applied in this case. Also, please explain whether, if the international transfer pricing rules were not applied, this would be an example of tax evasion or tax avoidance. [32 marks] Finally, the new factory in Westland will also require a significant investment in working capital. It is obviously important that the investment is kept as low as possible, without affecting our ability to operate efficiently and effectively. In keeping with our sustainability ethos, we intend to source all our raw materials from suppliers in Westland. 3) Please also include in your briefing notes an explanation of the factors that will determine the level of investment required, in each element of working capital, for the new operation in Westland. [32 marks] Write the briefing notes for Una Volk, Finance Manager. It is now January 2021. It is planned that the Westland subsidiary company will sell hybrid mattresses to the parent company in Eastland. The parent company will then sell the mattresses to customers in Eastland through its existing sales channels. All transactions will be in E$. You receive the following email from Una Volk, Finance Manager. From: Una Volk, Finance Manager To: Finance Officer Subject: Capitalization of equipment costs, international transfer pricing and working capital There are a few issues regarding the new hybrid mattress factory in Westland which would like your help with. Firstly, there will be a In large investment in the purpose-built factory and production machinery. The Senior Management Team (SMT) wants to understand how the construction costs, machinery and associated costs will be treated in the financial statements. 1) I would like you to prepare briefing notes, which I can discuss at the next SMT meeting, which include an explanation of the criteria for capitalization of costs under MFRS116 Property, Plant and Equipment. Please also provide separate justification for the treatment, as either capital or revenue expenditure, of each of the individual costs listed in Table 1 below based on the provisions of MFRS116. Cost item Notes ES 800,000 Construction costs of the factory Planning, design and architect fees (2) 50,000 Machinery purchase cost (3) 300,000 Machinery installation cost (4) 50,000 Training costs (5) 20,000 Notes: a) The factory is being purpose built for AmaZZZing Beds by Westland building contractor. b) Planning, design and architect fees are in respect of the purpose-built factory. c) The purchase price of the machinery includes the cost of delivery to the factory. d) The installation will be carried out by the company supplying the machinery. e) The training is in respect of the machinery and will be carried out by the company supplying the machinery. [36 marks] Secondly, we need to establish the transfer price for the intra-group sales of the mattresses by the Westland subsidiary to the Eastland parent company. Meena Patrick, Retail Director, has suggested that the mattresses should be sold to the parent company at cost so that the Eastland operation will continue to report a similar gross profit margin as previously. Ben De Luca, Chief Executive Officer, is concerned that Meena's suggestion might be construed as tax avoidance or tax evasion. Westland has a higher corporate tax rate than Eastland. 2) Please also include in your briefing notes an explanation of the impact of Meena's suggestion on the profit reported in each company and how international transfer pricing rules would be applied in this case. Also, please explain whether, if the international transfer pricing rules were not applied, this would be an example of tax evasion or tax avoidance. [32 marks] Finally, the new factory in Westland will also require a significant investment in working capital. It is obviously important that the investment is kept as low as possible, without affecting our ability to operate efficiently and effectively. In keeping with our sustainability ethos, we intend to source all our raw materials from suppliers in Westland. 3) Please also include in your briefing notes an explanation of the factors that will determine the level of investment required, in each element of working capital, for the new operation in Westland. [32 marks] Write the briefing notes for Una Volk, Finance Manager