UKAF4034 Advanced Corporate Reporting

UNIVERSITI TUNKU ABDUL RAHMAN

FACULTY OF ACCOUNTANCY AND MANAGEMENT
BACHELOR OF ACCOUNTING (HONS)
YEAR 4
2020/21
TUTORIAL 2 –Related Party (Questions)

Please click to the following link for online self-revision quiz:

https://forms.gle/XZ27p8cordcqpdHq5
Password: 18192

Question 1

Bagus Co has a controlling interest in a number of entities. Group results have been
disappointing in recent years and the directors of Bagus Co have been discussing various
strategies to improve group performance. The current financial year end is 31 December 2020.

The following personnel are relevant to the scenario:

Mr Yap Head accountant of Bagus Co
Mrs David Chief executive of Bagus Co
Mike Starr Nephew of Mr Yap
Mrs Yap Wife of Mr Yap

Group restructure
Mr Yap, an ACCA member, is the head accountant of Bagus Co. He is not a member of the
board of directors. Mrs David, the chief executive of Bagus Co, is also an ACCA member.
During December 2020, Mrs David revealed plans to Mr Yap of a potential restructure of the
Bagus group which had been discussed at board meetings. The restructuring plans included a
general analysis of expected costs which would be incurred should the restructure take place.
These include legal fees, relocation costs for staff and also redundancy costs for a number of
employees. One such employee to be made redundant, Mike Starr, is the nephew of Mr Yap.

Mrs David is insistent that Mr Yap should include a restructuring provision for all of the
expenditure in the financial statements of Bagus Co for the year ended 31 December 2020. Mrs
David argues that, even if the restructure did not take place exactly as detailed, similar levels of
expenditure are likely to be incurred on alternative strategies. It would therefore be prudent to
include a restructuring provision for all expenditure. None of the staff other than Mr Yap have
been notified of the plans although Mrs David has informed Mr Yap that she expects a final
decision and public announcement to be made prior to the authorisation of the financial
statements.

Mrs Yap
Mrs Yap is the wife of Mr Yap, the head accountant of Bagus Co. She is not an employee of
Bagus Co and does not know about the proposed restructure. However, Mrs Yap recently
acquired 5% of the equity shares in Bagus Co. Mr Yap is considering informing his wife of the
proposed restructure so that she can make an informed decision as to whether to divest her
shareholding or not. Mr Yap is concerned that, in the short term at least, the inclusion of any

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restructuring costs would be harmful to the profitability of Bagus Co. It is also uncertain as to
how the market may react should the restructure take place. It is, however, anticipated that in the
long term, shareholder value would be enhanced.

Required:
i. Discuss briefly whether Mrs Yap’s acquisition of the equity shares in Bagus Co
should be disclosed as a related party transaction.
ii. Discuss the appropriate accounting treatment of the restructuring costs in the
financial statements of Bagus Co for the year ended 31 December 2020.

Question 2

(a) Based on the scenario below, state whether Entities A and B are related. Relate to the
correct paragraph(s) (including the subsection(s)) in MFRS 124 to justifyyouranswer.

Investor J

Entity A Entity B (jointlycontrolled by

(jointlycontrolled by Investor J) Investor J)

(b) Based on the scenario below, state whether Entities A, B, C and D are related. Relate to
the correct paragraph(s) (including the subsection(s)) in MFRS 124 to justify your
answer.

Entity X

Entity A (jointly controlled by X) Entity B (significantly influenced by

Entity X)

Entity C (controlled by Entity A) Entity D (controlled by Entity B)

(c) Based on the scenario below, state whether Entities A and B are related. Relate to the correct
paragraph(s) (including the subsection(s)) in MFRS 124 to justify your answer.

Investor K

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Entity A Entity B (jointly controlled by

(significantly influenced by Investor K) Investor J)

( d) Based on the scenario below, state whether Entities A and B are related. Relate to the correct
paragraph(s) (including the subsection(s)) in MFRS 124 to justify your answer.

Director or other member of key management

personnel in common

Entity A Entity B

( e) Based on the scenario below, state whether Entities C and D are related. Relate to the
correct paragraph(s) (including the subsection(s)) in MFRS 124 to justify your answer.

Entity C Entity D

Joint-venture E

Question 3 (ACR –September 2014 Final Exam.)

Jaya SB is a private manufacturing company making car parts. It is 90% owned by Cerdik, a
listed entity. Cerdik is a long-established company controlled by the Kaya family through an
agreement which pools their voting rights.

Jaya SB regularly provides parts at market price to another company in which Pandai has a
minority (23%) holding. Pandai is the wife of Putra, one of the key Kaya family shareholders
that control Cerdik.

Jaya SB advances interest-free loans to its employees in order for them to purchase annual
season tickets to get to work. The loan repayment is deducted in 12 instalments from the
employees' salaries.

Cerdik charges Jaya SB an annual management services fee of 20% of profit before tax (before
accounting for the fee).

30% of Jaya SB's revenue comes from transactions with a major car maker, Potong.

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Jaya SB provides a defined benefit pension plan for its employees based on 2% of final salary for
each year worked. The scheme is currently overfunded and so Jaya SB has not made any
contributions during the current year.

Required :

Explain whether disclosures are required for each of the above pieces of information by MFRS
124 Related Party Disclosures.

Question 4 (ACCA adapted, self -learning)

(i) Amanah has a two-tier board structure consisting of a management and a supervisory board.
Amanah remunerates its board members as follows:

 Annual base salary

 Variable annual compensation (bonus)
 Share options In the group financial statements,

within the related parties note under MFRS 124 Related Party Disclosures, Amanah disclosed
the total remuneration paid to directors and non-executive directors and a total for each of these
boards. No further breakdown of the remuneration was provided. The management board
comprises both the executive and non-executive directors. The remuneration of the non-
executive directors, however, was not included in the key management disclosures. Some
members of the supervisory and management boards are of a particular nationality. Amanah was
of the opinion that in that jurisdiction, it is not acceptable to provide information about
remuneration that could be traced back to individuals. Consequently, Amanah explained that it
had provided the related party information in the annual accounts in an ambiguous way to
prevent users of the financial statements from tracing remuneration information back to specific
individuals.

Required:

Discuss how the above transaction should be dealt with in the Financial Statement.

(ii) PutraJaya is a government-controlled bank. PutraJaya was taken over by the government
during the recent financial crisis. PutraJaya does not directly trade with other government-
controlled banks but has underwritten the development of the nationally owned railway and
postal service. The directors of PutraJaya are concerned about the volume and cost of disclosing
its related party interests because they extend theoretically to all other government-controlled
enterprises and banks. They wish for general advice on the nature and importance of the
disclosure of related party relationships and specific advice on the disclosure of the above
relationships in the financial statements.

Required:
Discuss the accounting treatment of the above transactions in the financial statements of
PutraJaya.

Question 5 (revision question mixed topics) Self-learning

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UKAF4034 Advanced Corporate Reporting

The draft financial statements of HRM plc are being prepared for the year ended 30 September
2020. Draft profit for the year ended 30 September 2020 is RM516,900.
You are the financial controller of HRM plc and Cik Nur, your assistant, has identified a number
of outstanding issues. HRM plc manufactures ink and prints fabric.

Outstanding issues:
(1) On 1 December 2019 HRM plc entered into a new lease for its head office building with an
unrelated investment company, Acacia Ltd. The lease is for six years and lease payments,
payable on the first day of each month, are normally RM1,400 per month. HRM plc has no right
to direct the use of head office building other than for office use. The building is estimated to
have a 30 year useful life. As an incentive to enter into the lease, a rent-free period was given
from 1 March to 30 November 2020. Lease payments were recognised by HRM plc as they were
paid.

(2) The sales director, Fern Danica is also a director of Acacia Ltd. Fern does not have any
equity investments in either HRM plc or Acacia Ltd. Fern has notified HRM plc of all her
directorships.

(3) New legislation came into force on 1 January 2020 requiring special filters to be fitted to
manufacturing units for all businesses which manufacture ink. At 30 September 2020 HRM plc
has yet to implement the new requirements and has made no definite plans to do so.

A trade press article recently reported that businesses who had failed to implement the new
legislation have been fined. HRM plc’s lawyers have advised that there is an 80% chance that
HRM plc will be fined for non-compliance. Their best estimate of the fine at 30 September 2020
is RM15,000, based on fines charged to other companies to date.

(4) A new machine was installed at one of HRM plc’s factories on 1 April 2020. The machine
cost RM72,000 (including cutters) and has an estimated useful life of 12 years. The machine has
cutters that need replacing every three years at a cost of RM12,000.
The machine has been added to property, plant and equipment at RM72,000 and depreciation has
been recognised at 30 September 2020 based on the full cost and a 12 year useful life
commencing on 1 April 2020.

(5) On 1 July 2020 HRM plc purchased a list of customer names and details for RM81,000 and
recognised it as an intangible asset at cost. The list has a useful life of three years. HRM plc has
subsequently been offered RM120,000 for the list and recognised the increase in value in its draft
financial statements. The only additional accounting entries made at 30 September 2020 in
respect of this list were to debit intangible assets and credit other income for the year with
RM39,000.

Required
i. Explain the required MFRS financial reporting treatment of issues (1) to (5) above in
HRM plc’s financial statements for the year ended 30 September 2020, preparing all
relevant calculations.
ii. Calculate HRM’s revised profit for the year ended 30 September 2020.

Question 6- Self-learning

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(a) Provide five examples of related party transactions that must be disclosed by a
related party disclosing entity

(b) The accountant has discovered that the finance director of Ace has purchased
goods from a company, Ventura, which the director jointly owns with his wife
and the accountant believes that this purchase should be disclosed. However, the
director refuses to disclose the transaction as in his opinion it is an ‘arm’s length’
transaction. At the same time, when preparing the financial statements for the
recent year end, the accountant noticed that Ventura has not paid an invoice for
several million dollars and it is significantly overdue for payment. The finance
director has refused to make disclosure.

Required:
Discuss the accounting treatment of the case above with accordance with MFRS
124.