IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Chapter 33/ First-Time Adoption of Int ernal Financial Reporting Standards (IFRS l)

371

Balance Sheet at May 31, 20X6

Assets Property, plant, and equipment Goodwill

1m. 45 in 55 12 8 1 24 1'l 1m. 20 10 11

Inventories Trade receivables Cash

Total assets

Equity and liabilities Share capital Other reserves Retained earnings Total equity Total liabilities Total equity and liabilities

~ ia 7.'l

Year elided May 3 l 20X5 20X6 Profit fo r period $1Il 10 8 The shares of the entity are owned equally by two directors who have decided to sell their shareholdings. At present the financia l statements are drawn up using generally accep ted accounting practice s. The directors wish to ascertain whether it would be adva ntageous to move to International Financial Re– porting Standards as a basis for the preparation of the financia l statements for the purpos e of valuing their shares. The directors have ascertained this information : (a) Certain property has been valued on an existing use basis at $ 10 million at March 31, 20X6. If the land was sold for building purposes, the entity would expect to receive $ IS million when planning permis sion was received . At present , planning approval had not been obtained. With – out planning permi ssion, the land could be sold for $ 12 million. (b) The entity acquired another entity on November 30, 20X4. Goodwill of $16 million arose on the acquisition. No impairment of goodwill had occurred since that date, and the entity was am– ortizi ng the goodwill over a four-year period. During 20X6 , an error was discovered whereby $4 million of plant and equipment had been omitted from the schedule of assets acquired. The plant and equipment had a rema ining useful life at acquisition of four years with a residual value of zero . A charge is made for amortization of goodwill, and depreciation of plant and equipment is on a time apportionment basis. (c) The entity has developed a new product. During 20XS the expenditure incurred on the develop– ment of the produc t was $S million. The entity could demon strate that the development expen– diture met the recognition criteri a as an intangib le asset on November 30, 20X4. at which point $3 million had been spent on the development. The recoverab le amo unt of the intangi ble asset was estimated at $2 million at May 31, 20XS, in terms of the "know-how" gained to date. Dur– ing 20X6 , the entity incurr ed further costs of $3 million and estimated the recoverable amount of the total expe nditure to be $2S million at May 31, 20X6 . The entity curren tly writes off all deve lopment expe nditure under local GAAP . If [FRS were to be utilized, the entity would opt for the cost model with amortization over four years on a time apportionment basis. (d) The entity curre ntly has classified its forests as land within property, plant, and equipment , at $6 million. It wishes to reclassify the forests as biological assets under [FRS. The fair value of the forests was May 3 l 1m. 20X5 10 20X6 I I (e) When paper machines sold by the entity are returned for repair, the entity provides a substitute unit until the machine is repaired . The value of the returned machi nes is included in inventory and in turnover. When the machine is repaired , the value of the machine is taken out of the fi – nancial records and the costs of the repair charged to the customer. This practice is known as pass-through business and has been accepted by the local auditors. At May 31, 20XS, and Profit before tax $1Il 14 II Tax 1m. 4 3