Q10.

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Q11.

Omega is a listed entity and you are the financial controller. The financial statements of Omega for the year ended 31 March 2005 are currently being prepared. One of Omega's directors has sent you three questions regarding the financial statements. Question 1 - Right-of- use asset When I looked at the note which gave details of our property, plant and equipment, a separate component appeared for the first time this year. This component was described as a right-of-use asset. Upon further investigation, I discovered that this related to a warehouse which we started to lease on 1 October 20X4 to provide us with more capacity. The warehouse is being leased on a five-year lease contract at an annual rental of $500,000, payable in arrears. There is no option to extend the lease at the end of the five-year period. Based on current annual interest rates (10%), these rentals have a total present value of $1,895,000. We incurred direct costs of $105,000 when arranging this lease with the owner. The carrying amount of the right-of-use asset which is shown in the financial statements is $1.8 million. I don't understand this at all. In particular, I have three questions about this that I would like you to answer: The warehouse would cost at least $10 million to purchase outright and has a useful life of around 25 years. How can it be presented as Omega's asset in these circumstances? Where does the figure of $1.8 million come from? Apart from the right-of-use asset, how else will this transaction affect our financial statements? | don't need detailed workings here, just explanations. (11 marks) Question 2 - Segment reporting I know that, because we're a listed entity, we are required to disclose details of the financial performance and financial position of different business segments in the notes to our financial statements. I thought it would be interesting to compare the segment report in our financial statements with that of a key competitor. When I did this, I found myself very confused. Our segment report was based on the performance and position by geographical area whereas our competitor's report was based on the performance and position by product type. How can this be correct when both of us are preparing our financial statements in accordance with International Financial Reporting Standards (IFRS Standards) is there not a definition of a 'segment that would be applied to all businesses? (8 marks) Question 3 - Immaterial transactions You may know that the contract for cleaning purchase outright and has a useful life of around 25 years. How can it be presented as Omega's asset in these circumstances? - Where does the figure of $1.8 million come from? Apart from the right-of-use asset, how else will this transaction affect our financial statements? | don't need detailed workings here, just explanations. (11 marks) Question 2 Segment reporting I know that, because we're a listed entity, we are required to disclose details of the financial performance and financial position of different business segments in the notes to our financial statements. I thought it would be interesting to compare the segment report in our financial statements with that of a key competitor. When I did this, I found myself very confused. Our segment report was based on the performance and position by geographical area whereas our competitor's report was based on the performance and position by product type. How can this be correct when both of us are preparing our financial statements in accordance with International Financial Reporting Standards (IFRS Standards) is there not a definition of a 'segment' that would be applied to all businesses? (8 marks) Question 3 - Immaterial transactions You may know that the contract for cleaning our Head Office has been given to a firm which is controlled by my brother. This contract was approved in the normal way and I was not involved in the approval process to avoid any perception of a conflict of interest as my brother and I are known to holiday and socialise together. The contract has normal commercial terms and is very insignificant in the context of Omega as an entity. I'm very surprised, therefore, to see details of this contract disclosed in our financial statements when many other much more financially significant contracts are not disclosed in the same detail. Surely this disclosure is unnecessary when the monetary amounts are so small and there is nothing 'out of the ordinary' about the contract? (6 marks) Required: Provide answers to the questions raised by one of Omega's directors relating to the financial statements for the year ended 31 March 20X5. consolidated financial statements of Gamma (excluding goodwill on acquisition) was $115 million. Subsidiary X is a single cash-generating unit for impairment purposes. On 31 March 20X5, the value in use of subsidiary X was $135 million and its fair value less costs of disposal was $130 million. (8 marks) Note 2 - Purchase of machine On 1 January 20X4, Gamma entered into a firm commitment to purchase a machine from a supplier whose functional currency is the kroner. This firm commitment was not an onerous contract. The cost of the machine was 14:4 million kroner and the agreed delivery date was 30 June 20X4. Gamma was due to pay 14.4 million kroner to the supplier on 31 July 20X4. On 1 January 20X4, Gamma entered into a forward exchange contract with a bank to purchase 14.4 million kroner for $1.44 million on 31 July 20X4. The forward exchange contract was entered into so as to provide a hedge against the currency risk associated with the firm commitment to purchase the machine. On 30 June 20X4, Gamma took delivery of the machine and immediately brought the machine into use. Gamma estimated that the machine would have a useful life of five years from 30 June 20X4, with no residual value. On 31 July 20X4, Gamma paid 14.4 million kroner to the supplier of the machine and received payment of $360,000 from the bank in settlement of the forward exchange contract (see below). Gamma designated the forward exchange contract as a hedge of the cash flows expected to arise on the purchase of the machine. This contract was a perfectly effective hedge of those cash flows. Gamma wishes to use hedge accounting to reflect the above transactions in its financial statements. Relevant exchange rates and fair values of the forward exchange contract are as follows: Date Exchange rate Fair value of forward contract (kroners to $1) (favourable to Gamma) $'000 1 January 20X4 10 Nil 31 March 20X4 9.6 60 30 June 20X4 9 160 31 July 20X48 360 (17 marks) Required: Using the information in notes 1 and 2, explain and show how the two events would be reported in the consolidated financial statements of Gamma for the year ended 31 March 20X5