Question 5

On 31 December 2018, Sela Plc acquired Lomo Plc which had a separately identified brand, valued at 7,600,000. In addition to this, Sela Plc also estimated at the end of 2019 that their own internally generated brand is worth 12,000,000.

A director has suggested that both figures should be recorded in the statement of financial position as intangible assets, as brands would strengthen their financial position.

Sela Plc is currently working towards a target gearing ratio in order to secure external funds for expansion. Both brands described have an indefinite life.

Requirement:

i) With reference to the above scenario, explain how these brands would be accounted for in the financial statements of Sela Plc for year ending 31 December 2019. (maximum word count 140 words)

ii) How does the recognition and accounting treatment of goodwill differ from that used for brands? Explain any three differences.

(maximum word count 120 words)

iii) Explain any two justifications for reporting brands as assets. (maximum word count 40 words)

Question 6

Castle Plc, a leading printing company, has offered you a placement as a trainee accountant. Castle Plc holds Annual General Meetings (AGMs) six months following the reporting period.

The following information becomes available to you in the preparation of the financial reports for the year ended 30 September 2019.

The profit for the year amounted to 570,000.

1. A quarter of the reported inventory figure relates to diaries printed for the year 2019. Diaries outside the usual inventory cycle are sent for recycling at an insignificant cost to Fosse Ltd.
2. The revenue figure is inclusive of sales to a customer on 20 September 2019. 400 worth of these goods was returned on 29 September 2019 for defects but this was not adjusted in the accounts.
3. The chief accountant has suggested the financial reports would not be ready until May 2020 this year due to staff illness.
4. The financial report was shown to the new managing director who is a trained journalist. She felt the terminology used in the financial reports was not friendly to her and would surely not be clear to a large section of the shareholders.
5. Castle Plc was undergoing the implementation of a computerised filing system which was halted for the Christmas break. During the break a fire in a nearby facility caused a loss of approximately half of the paper records of invoices which were yet to be stored.

Requirement:

In each of the above scenarios, discuss any qualitative characteristics which have been compromised. Where there is no compromise, state this clearly. Make clear references to the scenario to justify your answer.

(maximum word count 200 words)

Question 7

The profit figure is an objective measure with some subjective estimates. It has been argued that it does not reflect current value. For example in a period of high inflation, Casi Plc decided to use replacement cost accounting. Closing inventory was purchased for 35 per unit. The general price increases during the period meant the purchase price had increased by 30% by the end of the period.

The Finance manager of Casi Plc is interested in how Positive accounting, Normative accounting, Public interest and Capture theories impact on the accounting theory.

Caspi Plc has implemented IAS 36 impairment of assets. All the assets were reviewed for impairment where appropriate and the impairment loss has been included within the financial statements.

Requirement:

1. Explain any two criticisms of the accountants measure of profit. (maximum word count 60)

2. What is the value per unit of closing inventory of Casi Plc at the end of the period?

iii) Explain the following in relation to accounting theory.

• Positive accounting theories
• Normative accounting theories
• Public interest theory
• Capture theory

(maximum word count 160)

iv) Describe what is meant by impairment and briefly explain the procedures that must be followed when performing an impairment review. (max words 220)