1. Royal Docks, a public limited company operates in the entertainment industry. It recently agreed with a television company to make a film which will be broadcast on the television companys network. The fee agreed for the film was 5 million with a further 100,000 to be paid every time the film is shown on the television companys channels. Its hoped that it will be shown on four occasions. The film was completed at a cost of 4 million and delivered to the television company of 1 April 2020. The television company paid the fee of 5 million on 30 April 2020 but indicated that the quality of the film, whilst satisfactory, was not as good as expected. The directors of Royal Docks are unsure how much revenue should be recognised in the financial statements for the year ended 31 May 2020. {10 marks}

2. Royal Docks has a number of film studios and office buildings. The office buildings are in prestigious areas whereas the film studios are located out of town locations. At present, both types of buildings are valued using the revaluation model. The management of Royal Docks wish to apply the revaluation model to the office buildings and the cost model to the film studios in the ended 31 May 2020.

During the year, Royal Docks set up a theme park. In this case only, the land and buildings on the park are leased on a single lease from a third party. The lease term is for 30 years, which is the remaining useful economic life of the buildings. The directors are unsure whether the land element prevents the lease from being classified as a finance lease. {10 marks}

(c) At 1 June 2019, Royal Docks held a 25% shareholding in a film distribution company, Wireless, a public limited company. On 1 January 2020, Royal Docks sold a 15% holding in Wireless thus reducing its investment to a 10% holding. Royal Docks no longer exercises significant influence over Wireless. Immediately before that sale, the carrying value of the interest in Wireless in the group financial statements was 55 million. Royal Docks received 40 million for its sale of the 15% holding in Wireless. At 1 January 2020, the fair value of the remaining investment in Wireless was 23 million and 31 May 2020 the fair value was 26 million. {10 marks}

4. Additionally, Royal Docks purchased 60% of the ordinary shares of a radio Playtime, a public limited company, on 31 May 2020. The remaining 40% of the ordinary shares are owned by a competitor company who owns a substantial number of warrants issued by Playtime which are currently exercisable. If these warrants are exercised, they will result in Royal Docks only owning 35% of the voting shares of Playtime. {10 marks}

In your report, you are required:

Discuss how the above items ((a) to (d)) should be dealt with in the group financial statements of Royal Docks for the year ended 31 May 2020.

Guidelines:

Part A:

Part (a) is revenue recognition which continues to be a common topic that is regularly tested in the ACCA Exams. It is highly recommended that you engage with the standards, especially, provision of IFRS 15 Revenue from Contracts with Customers. You should follow the steps of Revenue Recognition (IFRS 15).

NOTE: Paragraph 863 of IFRS 15 explicitly says that revenue from usage fees should not be recognised until both the original performance obligation has been satisfied and the usage occurs.

Part B:

Office buildings and film studios You should apply the IAS 8 & 16 standard Provisions. IAS 16 Property, plant and equipment permits assets to be revalued on a class by class basis.

IAS 8 Changes in Accounting Policies. You should discuss when an entity can change its policies.

Theme park lease (IFRS 16) Discuss when an asset is a finance lease or operating lease. State whether the building or land (both) is finance lease. State the implication of classification under IFRS 16.

PartC:

Disposal of associate:

The investment in Wireless is currently accounted for using the equity method of accounting under IAS 28 (revised) Investments in associates and joint ventures.

Discuss how the residual holding of a 10% interest will be accounted for in accordance with IFRS 9.

Calculate the gains arising from the sale of the associate. Show all workings.

Part D:

IFRS 10 Consolidated financial statements, identifies three elements of determining whether one entity has control of another as follows:

1. power over the investee, and
2. exposure, or rights, to variable returns from its investments with the investee, and
3. ability to use its power over the investee to affect the amount of the investors returns

Discuss the issue of control and show whether Royal Docks has control or does not control Playtime and therefore should not consolidate it.