Unit – 1: Chapter 1

Test your understanding 1 – Bottle

Bottle operates in the publishing industry. The Bottle brand is highly respected and, as a result,
the books published by Bottle receive extensive coverage online and in national and international
press. The brand is internally generated and, in accordance with IAS 38 Intangible Assets, is not
recognised in Bottle’s financial statements.

Required: Discuss the extent to which the accounting treatment of the Bottle brand is consistent
with the Conceptual Framework.
Test your understanding 2 – Cryptocurrencies
Cryptocurrencies are digital currencies that operate independently of a central bank. Some
businesses now accept cryptocurrencies in place of traditional currencies. The market price of
cryptocurrency is highly volatile. Investors can earn large returns by buying cryptocurrency on an
exchange when the quoted price is low and selling on an exchange when the quoted price rises.
Cryptocurrencies have proved problematic with regards to financial reporting because they do not
seem to fall within the scope of an issued IFRS or IAS Standard. As such, preparers of financial
statements must use the Conceptual Framework to devise an accounting treatment that provides
useful information to financial statement users.

Required: Using the Conceptual Framework, discuss how an entity might account for an
investment in cryptocurrency that it holds to trade.
Chapter 2
Test your understanding 1 – Cookie
Cookie is a design company. In recent years the company has shifted to a virtual working
environment, with all employees now working remotely, typically from their home location. The
directors are concerned about the company’s most recent financial results, which show a drop in
profits compared to the previous 3 years. The finance director, Sophia, has suggested that the
deteriorating performance may be, in part, due to the shift to remote working and consequently a
drop in productivity. The directors are considering the use of artificial intelligence (AI) software to
monitor the level of activity of its employees and identify areas of the business that may be under-
resourced or where further training may be required. This software includes the ability to track the
number of emails sent, the number of words typed and the amount of inactive time in a given
period. Sophia, who is ACCA qualified, is keen to introduce the software as quickly as possible,
with a view that it should improve productivity and therefore the results. Sophia has no experience
with this software, but has assured the other directors that it should be straightforward to
implement. Cookie operate in a country where there are strict data and privacy laws, which have
recently been updated.

Required: Discuss the ethical issues raised by the treatment of the warranty provision.
Test your understanding 2 – Totorus
Totorus has a number of investments in listed shares that are designated to be measured at fair
value through other comprehensive income (FVOCI). The finance director, Hana, recruited an
ACCA student accountant, Yassin, during the year on a temporary contract. Hana has asked
Yassin to perform the year-end valuation of the FVOCI investments and has instructed Yassin to
measure their fair value using the present value of the expected future dividend receipts. Yassin
performed the valuation and realised that this calculation gives a higher fair value than the quoted
share price, so raised this with Hana. Hana instructed Yassin to ignore the quoted share price and
has justified using this measurement on the grounds that Totorus does not trade shares in the
short-term, and so using quoted share prices will understate the value that Totorus will realise
over the lifetime of these investments. Totorus is seeking new finance. Hana has been under
significant pressure from the board of directors to strengthen the company’s financial position to
ensure the company is able to raise the level of finance required.

Required: Discuss why the finance director’s fair value measurement is not in line with IFRS
Standards, and discuss the ethical issues that arise.
Chapter 15
Chapter 4
Test your understanding 7 – Evans
On 1 January 20X1, Evans enters into a contract with a customer to provide monthly payroll
services. Evans charges $120,000 per year.

Required: What is the accounting treatment of the above in the financial statements of Evans for
the year ended 30 June 20X1?
Test your understanding 11 - Gazebo
Gazebo is a company that sells furniture to garden centres. Gazebo retains legal title until the
garden centre sells the furniture to the end customer, at which point the garden centre has an
obligation to pay Gazebo. The garden centre can return unsold products to Gazebo and Gazebo
can recall unsold products at any point.

Required: Discuss when Gazebo should recognise revenue from the above transactions?
Test your understanding 12 – Lentil
Lentil is a property developer. On 1 January 20X3, Lentil sold an apartment block that had a
carrying amount of $2.5 million, to Bran for $4 million. Included in the sale contract is a clause that
means Lentil has an obligation to repurchase the asset, at Bran’s request, for $5 million on 31
December 20X4. The estimated market value at this date is $4.5 million.

Required: Discuss how Lentil should account for the sale of the apartment block in the year ended
31 December 20X3.
Test your understanding 13 – Salty
Salty enters into a contract to supply 1,000 products to Sweet for $60 each. The products are
transferred over an eight-month period, and control passes on delivery. After Salty has transferred
700 products the contract is modified to require an additional 200 products to be transferred (i.e.
1,200 in total). The price for the additional 200 products is $57, which is the stand-alone selling
price at the date of the contract modification. By the reporting date, Salty has transferred 900
products in total to Sweet.
Required:
(a) Discuss, with calculations, how much revenue should be recognised in relation to the above by
the reporting date.

(b) Discuss, with calculations, how much revenue should be recognised in relation to the above by
the reporting date if the contract specified a price of $40 for the additional 200 products. Assume
the normal stand-alone selling price at the modification date is $57.
Chapter 5
Chapter 13
Test your understanding 6 – Bittern
Bittern has a reporting date of 31 December 20X1. On the reporting date, it enters into a lease
agreement to hire a machine. The present value of the lease payments to be made is $10 million. In
Bittern’s tax jurisdiction, tax relief on leases is given in respect of the lease liability as payments
are made. The tax rate is 30%.

Required: Discuss the deferred tax implications of the above in the year ended 31 December 20X1.
Test your understanding 7 – Justine
Justine has a reporting date of 31 December 20X1. On the reporting date, it enters into a lease
agreement to hire a machine. On 31 December 20X1 Justine paid initial direct costs of $0.2 million
and made an advanced lease payment of $1 million. The present value of the lease payments still
to be made is $8 million. In Justine’s tax jurisdiction, tax relief is given when lease payments and
costs are incurred in cash. It has been ascertained that the tax relief granted is in relation to the
lease liability. The tax rate is 20%.

Required: Discuss the deferred tax implications of the above in the year ended 31 December 20X1.
Test your understanding 8 – Red
As at 31 December 20X1, Red has tax adjusted losses of $4 million which arose from a one-off
restructuring exercise. Under tax law, these losses may be carried forward to relieve taxable
profits in the future. Red has produced forecasts that predict total future taxable profits over the
next three years of $2.5 million. However, the accountant of Red is not able to reliably forecast
profits beyond that date.

The tax rate for profits earned during the year ended 31 December 20X1 is 30%. However, the
government passed legislation during the reporting period that lowered the tax rate to 28% from 1
January 20X2.

Required: Explain the deferred tax implications of the above.

Test your understanding 9 – Tom
On 30 June 20X1 Tom acquired 100% of the shares of Jones for $300,000. At this date, the carrying
amount of the net assets of Jones was $250,000. Included in this net asset figure is inventory which
cost $50,000 but which had a replacement cost of $55,000. The applicable tax rate is 30%.

Required: Explain the deferred tax implications of the above in the consolidated financial
statements of the Tom group.
Test your understanding 10 – Mug
Mug has owned 80% of the ordinary shares of Glass for many years. During the current year, Mug
sold inventory to Glass for $250,000 making a gross profit margin of 40%. One quarter of this
inventory remains unsold by Glass at the reporting date. The tax rate is 20%.

Required: Discuss the deferred tax implications of the above transaction.

 Chapter 11
Test your understanding 1 – Adjusting events
The following material events have occurred after the reporting period and prior to the date of
approval of the financial statements by the directors.

(i) The insolvency of a major credit customer

(ii) The uninsured loss of inventory in a fire
(iii) The proposal of a final equity dividend
(iv) A change in foreign exchange rates.
Required: State whether the above are adjusting or non-adjusting events.
Test your understanding 2 – Warranty
Clean sells domestic appliances such as washing machines. On 31 December 20X1, Clean decides
to start selling washing machines with a warranty. Under the terms of the warranty, Clean will
repair washing machines at no charge to the customer if the machines break within the warranty
period. The entity estimates, based on pastcorrespondence with customers, that 20% of the
washing machines sold will require repair within the warranty period at an average cost to Clean
of $50 per machine. Clean sold 200 washing machines on 31 December 20X1. The time value of
money should be ignored.

Required: Calculate the warranty provision required.

Test your understanding 3 – Danboy
Danboy, a company that owns several shops, has a year end of 31 December 20X1. One of the
shops is loss-making. At 31 December 20X1, Danboy forecasts that this shop will make a loss of
$50,000 in the year ended 31 December 20X2.

As at 31 December 20X1, one of the shop buildings requires repair. The cost has been estimated at
the reporting date at $10,000. The repair is made in the following accounting period at a cost of
$12,000.

Required: Discuss the accounting treatment of the above in the financial statements for the year
ended 31 December 20X1.
Test your understanding 4 – Smoke filters
Under new legislation, an entity is required to fit smoke filters to its factories by 31 December
20X7. At the reporting date of 30 June 20X7, the entity has not fitted the smoke filters.

Required: Should a provision be made at the reporting date for the estimated cost of fitting the
filters?
Test your understanding 5 – Environmental provisions
(a) An entity has a policy of only carrying out work to rectify damage caused to the environment
when it is required to do so by local law. For several years the entity has been operating an
overseas oil rig which causes environmental damage. The country in which the oil rig is located
has not had legislation in place that required this damage to be rectified. A new government has
recently been elected in the country. At the reporting date, it is virtually certain that legislation
will be enacted that will require damage rectification. This legislation will have retrospective
effect.

(b) Under a licence granted by a local government, an entity has constructed a rock-crushing plant
to process material mined from the surrounding area. Mining activities have already started.
Under the terms of the licence, the entity must remove the rock-crushing plant when mining
activities have been completed and must landscape the mined area, so as to create a national park.

Required: For each of the situations, explain whether a provision should be recognised.
Test your understanding 6 – Scrubber
On 1 January 20X6, Scrubber spent $5m on erecting infrastructure and machinery near to an area
of natural beauty. These assets will be used over the next three years. Scrubber is well-known for
its environmentally friendly behaviour and is therefore expected to restore the site after its use.
The estimated cost of removing these assets and cleaning up the area on 1 January 20X9 is $3m.
The pre-tax, risk-specific discount rate is 10%. Scrubber has a reporting date of 31 December.

Required: Explain how the above should be treated in the financial statements of Scrubber.
 Chapter 10
Test your understanding 1 – Liminal
On 1 January 20X8 Liminal purchased a patent. The fair value of the patent was reliably estimated
to be $3 million. The consideration transferred was 1 million of Liminal’s own $1 ordinary shares.
On the purchase date, the patent had a remaining useful life of three years. The fair value of one of
Liminal’s ordinary shares was $3.50 on 1 January 20X8 and $3.20 on 30 June 20X8.

Required: Discuss the correct accounting treatment of the above in the year ended 30 June 20X8.
Test your understanding 2 – Equity-settled share-based payment
An entity has a reporting date of 31 December. On 1 January 20X1 it grants 100 share options to
each of its 500 employees. Each grant is conditional upon the employee working for the entity
until 31 December 20X3. At the grant date the fair value of each share option is $15.

During 20X1, 20 employees leave and the entity estimates that a total of 20% of the 500 employees
will leave during the three-year period.

During 20X2, a further 20 employees leave and the entity now estimates that only 15% of the
original 500 employees will leave during the three-year period.

During 20X3, a further 10 employees leave.

Required: Calculate the remuneration expense that will be recognised in each of the three years of
the share-based payment scheme.
Test your understanding 3 – Market based conditions
On 1 January 20X1, one hundred employees were given 50 share options each. These will vest if
the employees still work for the entity on 31 December 20X2 and if the share price on that date is
more than $5.

On 1 January 20X1, the fair value of the options was $1. The share price on 31 December 20X1 was
$3 and it was considered unlikely that the share price would rise to $5 by 31 December 20X2. Ten
employees left during the year ended 31 December 20X1 and a further ten are expected to leave in
the following year.

Required: How should the above transaction be accounted for in the year ended 31 December
20X1?
Test your understanding 4 – Blueberry
On 1 January 20X4 an entity, Blueberry, granted share options to each of its 200 employees, subject
to a three-year vesting period, provided that the volume of sales increases by a minimum of 5%
per annum throughout the vesting period. A maximum of 300 share options per employee will
vest, dependent upon the increase in the volume of sales throughout each year of the vesting
period as follows:

• If the volume of sales increases by an average of between 5% and 10% per year, each eligible
employee will receive 100 share options.

• If the volume of sales increases by an average of between 10% and 15% per year, each eligible
employee will receive 200 share options.

• If the volume of sales increases by an average of over 15% per year, each eligible employee will
receive 300 share options.

At the grant date, Blueberry estimated that the fair value of each option was $10 and that the increase
in the volume of sales each year would be between 10% and 15%. It was also estimated that a total
of 22% of employees would leave prior to the end of the vesting period. At each reporting date
within the vesting period, the situation was as follows:
Required: Calculate the impact of the above share-based payment scheme on Blueberry's financial
statements in each reporting period.
Test your understanding 5 – Beginner
Beginner offered directors an option scheme conditional on a three-year period of service. The
number of options granted to each of the ten directors at the inception of the scheme was 1 million.
The options were exercisable shortly after the end of the third year. Upon exercise of the share
options, those directors eligible would be required to pay $2 for each share of $1 nominal value.

The fair value of the options and the estimates of the number of options expected to vest at
various points in time were as follows:

Required:
(a) Show how the option scheme will affect the financial statements for each of the three years of
the vesting period.
(b) Show the accounting treatment at the vesting date for each of the following situations:
(i) The fair value of a share was $5 and all eligible directors exercised their share options
immediately.
(ii) The fair value of a share was $1.50 and all eligible directors allowed their share options to lapse.
Test your understanding 6 – Growler
On 1 January 20X4 Growler granted 200 share appreciation rights (SARs) to each of its 500
employees on the condition that they continue to work for the entity for two years. At 1 January
20X4, the entity expects that 25 of those employees will leave each year.

During 20X4, 20 employees leave Growler. The entity expects that the same number will leave in
the second year.

During 20X5, 24 employees leave.

The SARs vest on 31 December 20X5 and can be exercised during 20X6 and 20X7. On 31 December
20X6, 257 of the eligible employees exercised their SARs in full. The remaining eligible employees
exercised their SARs in full on 31 December 20X7. The fair value and intrinsic value of each SAR
was as follows:
Reporting date FV per SAR Intrinsic value per SAR
31 Dec 20X4 $5
31 Dec 20X5 $7
31 Dec 20X6 $8 $7
31 Dec 20X7 $10 $10
Required:
(a) Calculate the amount to be recognised as a remuneration expense in the statement of profit or
loss, together with the liability to be recognised in the statement of financial position, for each of the
two years to the vesting date.

(b) Calculate the amount to be recognised as a remuneration expense and reported as a liability in
the financial statements for each of the two years ended 31 December 20X6 and 20X7.
Test your understanding 7 – Choice of settlement
On 1 January 20X4 an entity grants rights to 20 employees. If still employed on 31 December 20X6,
the employees can elect to receive either 800 options or cash to the value, on that date, of 700 shares.
The fair value of the options is $19 at the grant date. The reporting date is 31 December. The
following information is available:
Share price ($) Expected vestors
1 Jan 20X4 21 20
31 Dec 20X4 27 20
31 Dec 20X5 33 18
31 Dec 20X6 42 17
Required: Calculate and explain the impact of the share-based payment on the financial statements
for each of the three years.
 Chapter 1
Test your understanding 3 – Baklava
Baklava has an investment property that is measured at fair value. This property is rented out on
short-term leases. The directors wish to fair value the property by estimating the present value of
the net cash flows that the property will generate for Baklava. They argue that this best reflects the
way in which the building will generate economic benefits for Baklava. The building is unique,
although there have been many sales of similar buildings in the local area.

Required: Discuss whether the valuation technique suggested by the directors complies with
International Financial Reporting Standards.
Test your understanding 4 – Markets
An asset is sold in two different active markets at different prices. An entity enters into transactions
in both markets and can access the price in those markets for the asset at the measurement date as
follows:

What is the fair value of the asset if:

(a) market 1 is the principal market for the asset?
(b) no principal market can be determined?
Test your understanding 5 – Five Quarters
Five Quarters has purchased 100% of the ordinary shares of Three Halves and is trying to determine
the fair value of the net assets at the acquisition date.

Three Halves owns land that is currently developed for industrial use. The fair value of the land if
used in a manufacturing operation is $5 million.

Many nearby plots of land have been developed for residential use (as high-rise apartment
buildings). The land owned by Three Halves does not have planning permission for residential use,
although permission has been granted for similar plots of land. The fair value of Three Halves’ land
as a vacant site for residential development is $6 million. However, transformation costs of $0.3
million would need to be incurred to get the land into this condition.

Required: How should the fair value of the land be determined?

Test your understanding 6 – Conceptual Framework (Self study)
The Conceptual Framework says that the purpose of financial reporting is to provide useful
financial information to users of the financial statements.

Required: Discuss how the application of IFRS 13 enhances the usefulness of financial information.
Your answer should refer to the qualitative characteristics of useful financial information.
 Unit-3
Chapter 22
Test your understanding 2 – Coe
Coe, a public limited company, is preparing its consolidated financial statements for the year ended
31 December 20X1. Coe has owned 75% of the equity shares of Crace for a number of years. The
following accounting issues have yet to be finalised: 1 On 1 January 20X1, 1,000 of Coe’s managers
were granted 500 share options each. These options will vest on 31 December 20X3 if the managers
are still employed by Coe. The fair value of one share option at the grant date was $6. By 31
December 20X1, 50 of these managers had left the business and another 80 were expected to leave
by the vesting date. The exercise price of the options is $3. The average price of one of Coe’s equity
shares over the year is $10. No entries have been posted in relation to this share option scheme. 2
Freehold land is accounted for using the revaluation model in IAS 16 Property, Plant and
Equipment. A revaluation has taken place in the current year. However, one plot of land is still
carried in Coe’s financial statements at its purchase cost of $4 million. Similar plots of land have
sold for $5 million. 3 On 31 December 20X1, Crace made an interest-free loan of $3 million to a
charity and recognised this amount as a financial asset. The charity will repay the money on 31
December 20X4. Market rates of interest are 5%.
Required:
(i) Explain, with calculations, how the above events should be corrected in the consolidated
financial statements for the year ended 31 December 20X1.
(ii) Discuss the impact of these corrections on basic and diluted earnings per share. No
calculations are required.
Test your understanding 3 – Impact of policy choices
Entities A and B are identical in all respects, except for their application of IAS 16 Property, Plant
and Equipment. Entity A accounts for buildings using the cost model whereas Entity B uses the
revaluation model. Property prices have risen recently and so Entity B recorded a revaluation gain
at the beginning of the current reporting period. Extracts from the financial statements of both
entities are provided below:
Required:
Using ratio analysis, compare the financial statements of Entity A and Entity B and explain how
the differences may impact stakeholder perception.
Test your understanding 4 – Tuyet
Tuyet is a public limited company that prepares its financial statements in accordance with
International Financial Reporting Standards and has a year end of 31 December 20X1. It
manufactures furniture that is sold to a range of retail outlets. As at the year end, Tuyet has loans
outstanding, with repayments of $7 million due annually in each of the next four years. You are a
potential investor in Tuyet. You are analysing its statement of cash flows for the year ended 31
December 20X1, which is presented below:
Required:
From analysis of the statement of cash flows, what conclusions would you draw about Tuyet?
Test your understanding 5 – Hutton (& Refer Illustration 5&6)
Hutton discloses an additional performance measure (APM) called ‘underlying profit’ in its
financial statements. The following is an extract from one of Hutton’s financial statement
disclosure notes for the year ended 31 December 20X1:

Required: Discuss why this APM may not be useful to Hutton’s stakeholders.
Test your understanding 6 – Lorenzo
Lorenzo develops and manufactures desktop and laptop computers. Profit after tax for the year
ended 31 December 20X1 is 5% lower than the prior period. Lorenzo discloses the following non-
financial performance measures in its Integrated Report for the year ended 31 December 20X1.
Required:
Discuss how the above information might be interpreted by Lorenzo’s current and potential
investors.
Test your understanding 7 – Environmental impact
Entities are investing more time and money in implementing sustainable development practices. A
key sustainable development goal set by many entities is to minimise the impact of business
operations on the environment. Many entities now disclose considerable information about
environmental impacts in annual reports.

Required: Discuss the potential benefits that might arise when an entity discloses its impact on the
environment to its stakeholders.
Test your understanding 8 – AA
AA is a UK-based public limited company that purchases shoes directly from manufacturers and
then sells them through its own UK-based shops. AA has been profitable for many years and has
continued to expand, financing this through bank loans.

AA’s shoes sell particularly well amongst lower income families and AA has therefore specifically
targeted this demographic. AA offers a discount of 50% on school shoes if the child is entitled to
free school meals. This discount is partly subsidised by a government grant.

AA maximises its profits by buying its inventory from overseas. In the past year there have been
several press reports about poor working conditions and pay in factories where AA products are
manufactured. AA is conscious that it needs to monitor its supplier's employment conditions more
closely.

AA has also been criticised in the press for the quality of its products. Some customers have
complained that the shoes are not well-made and must be regularly replaced. A major consumer
magazine has strongly argued that AA products are a false economy and that customers would save
money in the long term if the customers bought slightly more expensive but better quality shoes.

Staff who work in AA's shops are paid the national minimum wage. Training is minimal and staff
turnover is extremely high.

AA does not fully engage with local or national recycling initiatives. The directors of the company
believe these initiatives would increase operating costs, thus reducing the affordability of its
products for its target demographic.

The success of the AA business model has led to an increased number of competitors. Although
these competitors do not yet have the same high street presence as AA, some of them have invested
more money into developing online stores. Although AA has a website, its products cannot be
purchased online.

Required: Why would an integrated report provide useful information about AA?
Test your understanding 9 – Management commentary
The directors of Carsoon are committed to producing high quality reports that enable its investors
to assess the performance and position of the business. The directors have heard that the IASB (the
Board) has published a Practice Statement on management commentary. However, the directors are
unsure what is meant by management commentary, and the extent to which it provides useful
information. Required: Discuss the nature of management commentary and the extent to which it
embodies the qualitative characteristics of useful financial information (as outlined in the
Conceptual Framework).
Unit 4
Chapter 16
Illustration 1 – First-time adoption
On 30 June 20X0, Entity A entered into a derivative contract. Under local GAAP, derivative contracts
are unrecognised. The fair value of the derivative was $1 million on 1 January 20X1.

When will Entity A will prepare its 1st financial statements under IFRS standards?
What is Entity A’s transition date?
How much will be recognised as on 1st January 20X1 and in the opening retained earnings?

Illustration 2 – First time adoption of IFRS

Nat is a company that used to prepare financial statements in accordance with local reporting
standards. The first financial statements produced in accordance with IFRS Standards are for the
year ended December 20X5 and they will include comparative information for the previous
financial year. Its previous GAAP financial statements are for the years ended 31 December 20X3
and 20X4. The directors are unsure about the following issues:

(i) Nat received $5 million in advance orders for a new product on 31 December 20X3. These
products were not dispatched until 20X4. In line with its previous GAAP, the $5m was
recognised as revenue.
(ii) A restructuring provision of $1 million relating to head office activities was recognised at
31 December 20X3 in accordance with previous GAAP. This does not qualify for
recognition as a liability in accordance with IAS 37.
(iii) Nat made estimates of accrued expenses and provisions at 31 December 20X3. Some of
these estimates turned out to be under-stated. Nat believes that the estimates were
reasonable and in line with the requirements of both its previous GAAP and IFRS
Standards.

Required: In accordance with IFRS 1, how should the above issues be dealt with?
Chapter 23
Test your understanding 1 – Middleshop
Middleshop operates in the fashion retail industry and has a year end of 31 December 20X1. It owns
fifteen stores all located in one country (and accounted for using the cost model in IAS 16 Property,
Plant and Equipment). Due to an international pandemic, the government of the country in which
Middleshop operates required all non-essential retail and hospitality outlets to close for several
months during 20X1. It is anticipated that further closures will be mandated throughout 20X2 until
an effective vaccine is developed and rolled out amongst the population.
The pandemic has had a negative impact on the fashion industry. Demand for new clothing has
declined due to national and localised lockdowns as well as limits on intra-household socialising
and the increased uptake of home-working. Moreover, the full economic impact of the pandemic
has yet to be realised with unemployment expected to rise significantly throughout 20X2.

Middleshop’s stores were open for trading during December 20X1, normally the busiest month of
the year. However, high street footfall was far lower than previous years with many consumers
reducing expenditure or choosing to shop online. Middleshop sells online through its website but
the functionality is poor and customer uptake is low. The website is recognised as an intangible
asset and is being amortised over a remaining life of five years.

The directors of Middleshop are considering closing some larger stores in 20X2 although, as at 31
December 20X1, no firm plans had been drawn up. A significant operating loss is expected in 20X2.
The directors wish to provide for potential redundancy costs and the future operating loss in the
financial statements for the year ended 31 December 20X1.

Middleshop has bank loans, some of which are repayable within 12 months of the reporting date.

Required: Discuss the financial reporting implications of the above in Middleshop’s financial
statements for the year ended 31 December 20X1.
Test your understanding 2 – Mineral
Mineral owns a machine that is central to its production process. At the reporting date, the
machine’s carrying amount exceeds its tax base. This difference is due to the revaluation of the asset
to fair value in the financial statements. Due to its importance, it is extremely unlikely that the
machine will be sold. At the year end, Mineral received $10 million from investors. In return,
Mineral must issue ordinary shares in 12 months' time. The number of shares to be issued will be
determined based on the quoted price of Mineral’s shares at the issue date.

Required: For each of the transactions above:

(i) Briefly explain how it should be accounted for in accordance with International Financial
Reporting Standards
(ii) Discuss why the accounting treatment could be argued to contradict the definition of the
elements given by the Conceptual Framework.