The group financial controller of Venus plc, a company which manufactures electrical equipment for construction industry, is preparing its consolidated financial statements for the year ended 31 December 2020. There are a number of outstanding financial reporting issues which need to be resolved before the consolidated financial statements can be finalised. The profit for the year and non-current assets reported in the draft consolidated financial statements are 4,350,000 and 21,840,000 respectively, before taking into consideration the outstanding issues. Outstanding financial reporting issues: (1) On 1 January 2020, Venus issued bonds at par with gross cash proceeds of 9,000,000, which was recorded as a financial liability in its books. Venus also paid a transaction cost of 450,000 on 1 January 2020, which was charged to profit or loss. The bonds pay an annual interest of 400,000 in arrears over the next five (5) years, of which the first interest payment was made on 31 December 2020. Venus recorded the interest payment as an interest expense in profit or loss. On 1 January 2020, the effective interest rate after considering the transaction cost for the bonds was 7.7%. The bonds have a mandatory redemption of 10,000,000 on 31 December 2024. (2) On 1 January 2020, Venus acquired a wholly owned subsidiary, Triple Ltd, for a cash consideration of 6,500,000. Triple has operations in two regions and the allocation of the consideration transferred was as follows: Activities in Region 1 Region 2 Total E'000 '000 E'000 Allocation of purchase price 2,000 4,500 6,500 Fair value of identifiable PPE 1,500 2,500 4,000 Allocated goodwill 500 2,000 2,500 Venus uses a straight-line depreciation over a 10-year period for the identifiable PPE In Triple with an assumed scrap value of zero. On 31 December 2020, Venus estimated that the present value of projected future cash flow for regions 1 and 2 were 2,260,000 and 3,100,000 respectively. Venus also estimated that the fair value less cost to sell for the PPE in region 2 was 2,500,000 while the same value could not be estimated reliably for the PPE in region 1. (3) The draft financial statements of Venus ple Include research and development expenditure of 890,000 within intangible assets. The amount is related to the development of a new electrical device, which was assessed as being commercially viable on 30 April 2020. The development of the device was completed on 30 September 2020, and the first device product was delivered to customers on 1 October 2020. The amount capitalised is made up as follows: Research costs Development costs incurred prior to 30 April 2020 Development costs incurred from 1 May to 30 September 2020 Advertising and promotional costs Total E 280,000 145.000 420,000 45,000 890,000 5 The device is estimated to have a four-year product life cycle. No amortisation expense has been charged to the profit or loss account related to these amounts. (4) Venus plc and Pluto plc entered into a joint arrangement to produce and market a new product on 1 July 2020. Venus undertakes the manufacturing and Pluto undertakes the marketing activities of the new product, respectively. All agreed activities of the joint arrangement would be undertaken by the venturers using their own resources. Venus and Pluto agreed that each venturer would bear its own expenses, but income would be shared equally. Venus incurred total manufacturing costs of 1,463,000, which has been charged to the profit or loss account. The total revenue from selling the new product of 4,200,000 for the joint arrangement to 31 December 2020 was still kept by Pluto. Venus has not recorded its share of revenue from the joint arrangement. Requirements 2.1 Explain, with relevant calculations, the required IFRS financial reporting treatment of issues (1) to (4) above in the consolidated financial statements for the year ended 31 December 2020. (20 marks) 2.2 Calculate the revised profit for the year and carrying amount of non-current assets for Venus plc's consolidated financial statements for the year ended 31 December 2020. (6 marks) 2.3 Describe how the treatment of the research and development costs in Issue (3) above would differ if they were accounted for in accordance with UK GAAP. (2 marks) 2.4 Liabilities and equity are two of the five elements of the financial statements which are relevant to the statement of financial position. Explain how these are applied to Irredeemable Preference Shares with mandatory dividends in the application of the Conceptual Framework of Financial Reporting and IAS 32, Financial Instruments: Presentation. (5 marks) (Total 33 marks) The group financial controller of Venus plc, a company which manufactures electrical equipment for construction industry, is preparing its consolidated financial statements for the year ended 31 December 2020. There are a number of outstanding financial reporting issues which need to be resolved before the consolidated financial statements can be finalised. The profit for the year and non-current assets reported in the draft consolidated financial statements are 4,350,000 and 21,840,000 respectively, before taking into consideration the outstanding issues. Outstanding financial reporting issues: (1) On 1 January 2020, Venus issued bonds at par with gross cash proceeds of 9,000,000, which was recorded as a financial liability in its books. Venus also paid a transaction cost of 450,000 on 1 January 2020, which was charged to profit or loss. The bonds pay an annual interest of 400,000 in arrears over the next five (5) years, of which the first interest payment was made on 31 December 2020. Venus recorded the interest payment as an interest expense in profit or loss. On 1 January 2020, the effective interest rate after considering the transaction cost for the bonds was 7.7%. The bonds have a mandatory redemption of 10,000,000 on 31 December 2024. (2) On 1 January 2020, Venus acquired a wholly owned subsidiary, Triple Ltd, for a cash consideration of 6,500,000. Triple has operations in two regions and the allocation of the consideration transferred was as follows: Activities in Region 1 Region 2 Total E'000 '000 E'000 Allocation of purchase price 2,000 4,500 6,500 Fair value of identifiable PPE 1,500 2,500 4,000 Allocated goodwill 500 2,000 2,500 Venus uses a straight-line depreciation over a 10-year period for the identifiable PPE In Triple with an assumed scrap value of zero. On 31 December 2020, Venus estimated that the present value of projected future cash flow for regions 1 and 2 were 2,260,000 and 3,100,000 respectively. Venus also estimated that the fair value less cost to sell for the PPE in region 2 was 2,500,000 while the same value could not be estimated reliably for the PPE in region 1. (3) The draft financial statements of Venus ple Include research and development expenditure of 890,000 within intangible assets. The amount is related to the development of a new electrical device, which was assessed as being commercially viable on 30 April 2020. The development of the device was completed on 30 September 2020, and the first device product was delivered to customers on 1 October 2020. The amount capitalised is made up as follows: Research costs Development costs incurred prior to 30 April 2020 Development costs incurred from 1 May to 30 September 2020 Advertising and promotional costs Total E 280,000 145.000 420,000 45,000 890,000 5 The device is estimated to have a four-year product life cycle. No amortisation expense has been charged to the profit or loss account related to these amounts. (4) Venus plc and Pluto plc entered into a joint arrangement to produce and market a new product on 1 July 2020. Venus undertakes the manufacturing and Pluto undertakes the marketing activities of the new product, respectively. All agreed activities of the joint arrangement would be undertaken by the venturers using their own resources. Venus and Pluto agreed that each venturer would bear its own expenses, but income would be shared equally. Venus incurred total manufacturing costs of 1,463,000, which has been charged to the profit or loss account. The total revenue from selling the new product of 4,200,000 for the joint arrangement to 31 December 2020 was still kept by Pluto. Venus has not recorded its share of revenue from the joint arrangement. Requirements 2.1 Explain, with relevant calculations, the required IFRS financial reporting treatment of issues (1) to (4) above in the consolidated financial statements for the year ended 31 December 2020. (20 marks) 2.2 Calculate the revised profit for the year and carrying amount of non-current assets for Venus plc's consolidated financial statements for the year ended 31 December 2020. (6 marks) 2.3 Describe how the treatment of the research and development costs in Issue (3) above would differ if they were accounted for in accordance with UK GAAP. (2 marks) 2.4 Liabilities and equity are two of the five elements of the financial statements which are relevant to the statement of financial position. Explain how these are applied to Irredeemable Preference Shares with mandatory dividends in the application of the Conceptual Framework of Financial Reporting and IAS 32, Financial Instruments: Presentation. (5 marks) (Total 33 marks)