382 / 488
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
Inventories
Trade receivables
Cash
Total assets
Equity and liabilities
Share capital
Other reserves
Retained earnings
Total equity
Total liabilities
Total equity and liabilities
1m.
45
in
55
12
8
1
24
1'l
1m.
20
10
11
~
ia
7.'l
Year elided May 3 l
20X5
20X6
Profit before tax
$1Il
14
II
Tax
1m.
4
3
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