QUESTION 2

On 1 April 2019, Bahtiar acquired 80% of the equity interests of Masla, a privately owned entity, for a consideration of RM 57 million. The consideration comprised cash of RM 52 million and the transfer of non-depreciable land with a fair value of RM 5 million.

(a) When Bahtiar acquired the majority shareholding in Masla, there was an option on the remaining non-controlling interest (NCI), which could be exercised at any time up to 31 December 2020. On 30 April 2020, Bahtiar acquired the remaining NCI which related to the purchase of Masla. The payment for the NCI was structured so that it contained a fixed initial payment and a series of contingent amounts payable over the following two years. The contingent payments were to be based on the future profits of Masla up to a maximum amount. Bahtiar felt that the fixed initial payment was an equity transaction. Additionally, Bahtiar was unsure as to whether the contingent payments were equity, financial liabilities or contingent liabilities. After a board discussion which contained disagreement as to the accounting treatment, Bahtiar is preparing to disclose the contingent payments in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The disclosure will include the estimated timing of the payments and the directors' estimate of the amounts to be settled.

Required:

Advise Bahtiar on the difference between equity and liabilities and on the proposed accounting treatment of the contingent payments on acquisition of the NCI of Masla

(13 marks)

(b) The directors of Bahtiar are considering the purchase of a company in the USA. They have heard that the accounting standards in the USA are 'rules based' and that there are significant differences of opinion as to whether 'rules based' standards are superior to 'principles based' standards. It is said that this is due to established national approaches and contrasting regulatory philosophies. The directors feel that 'principles based' standards are a greater ethical challenge to an accountant than 'rules based' standards.

Required:

Discuss the philosophy behind 'rules based' and 'principles based' accounting standards, setting out the ethical challenges which may be faced by accountants if there were a switch in a jurisdiction from 'rules based' to 'principles based' accounting standards.

(12 marks)

[Total: 25 Marks]

QUESTION 3

(a) On 1 January 2020, Kayangan acquired 90% of the equity share capital of Gemai in a share exchange in which Kayangan issued two new shares for every three shares it acquired in Gemai. Additionally, on 31 December 2020, Kayangan will pay the shareholders of Gemai RM 1.76 per share acquired. Kayangan's cost of capital is 10% per annum. At the date of acquisition, shares in Kayangan and Gemai had a stock market value of RM 6.50 and RM 2.50 each, respectively.

Equity as at 1 October 2019 for Gemai is RM 10 million, while the retained earnings were RM 35 million. Earning for the year ended 30 September 2020 is RM 6.2 million (include post acquisition period).

At the date of acquisition, the fair values of Gemai's assets were equal to their carrying amounts with the exception of two items:

An item of plant had a fair value of RM 1.8 million above its carrying amount. The remaining life of the plant at the date of acquisition was three years. Depreciation is charged to cost of sales.

Gemai had a contingent liability which Kayangan estimated to have a fair value of RM 450,000. This has not changed as at 30 September 2020. Gemai has not incorporated these fair value changes into its financial statements.

Required:

Calculate the consolidated goodwill at the date of acquisition of Gemai.

(15 marks)

(b) The carrying amount of a subsidiary's leased property will be subject to review as part of the fair value exercise on acquisition and may be subject to review in subsequent periods

Required:

Explain how a fair value increase of a subsidiary's leased property on acquisition should be treated in the consolidated financial statements; and how any subsequent increase in the carrying amount of the leased property might be treated in the consolidated financial statements.

(10 marks)