SECTION A – CASE QUESTIONS (Total: 50 marks)

To: Ms. Janice Lam, Director of DBL

From: Raymond Wong, Accounting Manager, DBL
c.c.: Lucas Chong, Josiah Wong, Andrea Cheung (Directors)
Date: dd/mm/yyyy
Subject: Condensed consolidated financial statements of DBL for the six months ended
31 March 2012

I refer to your e-mail dated 7 May 2012 regarding your queries about the draft condensed
consolidated financial statements of DBL for the six months ended 31 March 2012.

Answer 1(a)

Compliance with HKFRS

HKAS 34.19 specifies that if an entity’s interim financial report is in compliance with
HKAS 34, that fact shall be disclosed.

However, an interim financial report shall not be described as complying with HKFRSs
unless it complies with all the requirements of HKFRSs.

Condensed financial statements do not comply with all the requirements of HKFRSs.

Therefore DBL’s interim financial report cannot be described as complying with HKFRSs.

Answer 1(b)

Segment information

In accordance with HKAS 34.16A(g), disclosure of segment information is required in an

entity's interim financial report only if HKFRS 8 Operating Segments requires that entity to
disclose segment information in its annual financial statements.

HKFRS 8 applies to the separate financial statements of an entity (HKFRS 8.2(a)(i)) and
the consolidated financial statements of a group with a parent (HKFRS 8.2(b)(i)) whose
equity instruments are traded in a public market. As DBL is listed on the Main Board of
the Stock Exchange of Hong Kong, segment information is required to be disclosed.

Therefore, DBL should disclose the relevant segment information under the
HKAS 34.16A(g) in its interim financial report since HKFRS 8 Operating Segments does
require DBL to disclose segment information in its annual financial statements.

Module A (June 2013 Session) Page 1 of 16

Answer 1(c)

Related party relationship

HKAS 24 (Revised) defines a related party as a person or entity that is related to the entity
that is preparing its financial statements.
A person is related to a reporting entity if that person is a member of the key management
personnel of the reporting entity or of a parent of the reporting entity (HKAS 24.9(a)(iii)).

Key management personnel are those persons having authority and responsibility for
planning, directing and controlling the activities of the entity, directly or indirectly, including
any director (whether executive or otherwise) of that entity.

As you (Janice) are the director of DBL, you are a related party of DBL (key management
personnel) and STF (key personnel of the parent of STF) pursuant to HKAS 24.9(a)).

DBL and STF are related parties to each other according to HKAS 24.9(b)(i) since they are
members of the same group. In addition, for financial statements of both DBL and STF,
BTV is a related party as BTV is controlled by you (Janice), who is a related party falling into
the scope of HKAS 24.9(a) (HKAS 24.9(b)(vi)).

For BTV’s financial statements, DBL and STF are related parties to BTV because BTV is
controlled by you and you are a key management personnel of DBL which is the parent of
STF (HKAS 24.9(b)(vii) and (a)(i)).

Answer 1(d)

Contract with FYL

The contract with FYL meets the definition of a derivative (HKFRS 9) because its value
changes in response to changes in an underlying variable (HIBOR), there is no initial net
investment, and settlements occur at future dates.

The contractual effect of the loans is the equivalent of an interest rate swap arrangement
with no initial net investment. Therefore, it should be accounted for as a derivative under
HKFRS 9.

Guidance on implementing HKFRS 9 Financial Instruments specifies that non-derivative

transactions should be aggregated and treated as a derivative when the transactions
result, in substance, in a derivative.

Indicators of this would include:

• they are entered into at the same time and in contemplation of one another.
• they have the same counterparty.
• they relate to the same risk.
• there is no apparent economic need or substantive business purpose for structuring the
transactions separately that could not also have been accomplished in a single
transaction.
Module A (June 2013 Session) Page 2 of 16
Under HKFRS 9, DBL should recognise the derivative as a financial asset or a financial
liability in its statement of financial position when, and only when, DBL becomes party to
the contractual provisions of the instrument.

The default assumption with regard to derivatives under HKFRS 9 is that they are to be
measured at fair value with changes in fair value taken to profit and loss.

I hope the above explanation has answered your questions. For the details, please refer to
the annex. Please feel free to contact me if you have further queries.

Best regards,
Raymond Wong

Module A (June 2013 Session) Page 3 of 16

Answer 1(e)
Annex

(i) Worksheet for the condensed consolidated statement of comprehensive

income for the six months ended 31 March 2012

DBL STF Eliminations Consolidated

$000 $000 Dr($000) working Cr($000) $000
Sales 2,400,000 1,152,000 144,000 W7 3,408,000
Cost of sales (1,536,000) (769,000) 16,800 W7 144,000 (2,165,800)
W6 12,000
Gross profit 864,000 383,000 1,242,200
Other income
(including dividend
income) 38,000 -- 33,600 W3 4,400
Distribution costs (90,000) (69,000) (159,000)
Administrative
expenses (150,000) (75,000) 5,000 W2 (230,000)
Finance costs (172,000) (34,000) (206,000)
Profit before tax 490,000 205,000 651,600
Income tax expense (106,000) (61,000) 1,980 W6/W7 2,772 (165,383)
W2 825
Profit for the period 384,000 144,000 486,217
Other
comprehensive
income: revaluation
surplus 180,000 36,000 216,000
Total comprehensive
income 564,000 180,000 702,217

Profit attributable to:

Owners of the parent 445,472
Non-controlling
interests 40,745 W4 40,745
486,217
Total comprehensive income attributable to:
Owners of the parent 650,672
Non-controlling
interests 51,545 W4&4a 51,545
702,217

Module A (June 2013 Session) Page 4 of 16

 (ii) Worksheet for the condensed consolidated statement of financial position as
at 31 March 2012

DBL STF Eliminations Consolidated

$000 $000 Dr($000) working Cr($000) $000
Property, plant and
equipment, net 1,824,000 788,000 2,612,000
Investment in STF, at
cost 768,000 -- W1 768,000 --
Goodwill -- -- 133,240 W1 133,240
Other intangible
assets, net -- 136,000 80,000 W1/W2 35,000 181,000
Deferred tax asset -- -- 2,772 W7 2,772
Inventory 1,536,000 648,000 W7 16,800 2,167,200
Trade and other
receivables 750,000 420,000 1,170,000
Cash and cash
equivalents 690,000 312,000 1,002,000
5,568,000 2,304,000 7,268,212

Share capital 960,000 480,000 480,000 W1 960,000

Retained earnings 1,380,000 750,000 1,629,723
Revaluation surplus 300,000 66,000 339,200
2,640,000 1,296,000 2,928,923
Non-controlling
interests -- -- W1 272,040 395,864
9,000 W2 1,485
14,400 W3/W4 40,745
W4a 10,800
W5 91,200
W5a 6,000
3,600 W6 594
Deferred tax liability 5,775 W2/W1 13,200 7,425
Trade and other
payables 1,428,000 408,000 1,836,000
Long term loan 1,500,000 600,000 2,100,000
5,568,000 2,304,000 7,268,212

Module A (June 2013 Session) Page 5 of 16

Working:
Reconciling consolidated retained earnings and consolidated revaluation surplus

DBL STF Eliminations Consolidated

$'000 $'000 Dr($'000) working Cr($'000) $'000
Retained earnings,
1 October 2011 1,092,000 654,000 21,000 W2 3,465 1,280,251
8,400 W6 1,386
350,000 W1
91,200 W5
Profit for the period
attributable to the
owners of the
parent 384,000 144,000 445,472
Dividends declared (96,000) (48,000) W3 48,000 (96,000)
Retained earnings,
31 March 2012 1,380,000 750,000 1,629,723

DBL STF Eliminations Consolidated

$'000 $'000 Dr($'000) working Cr($'000) $'000
Revaluation surplus,
1 October 2011 120,000 30,000 6,000 W5a 134,000
10.000 W1
Revaluation for the
period attributable
to the owners of the
parent (less 10,800
for NCI) 180,000 36,000 205,200
Revaluation surplus,
31 March 2012 300,000 66,000 339,200

Module A (June 2013 Session) Page 6 of 16

Note: The journal entries are for illustrative purpose only. They are not required by the
question.

W1 - Elimination of investment in subsidiary

$'000 $'000
Dr Share capital 480,000
Dr Retained earnings 350,000
Dr Revaluation reserve 10,000
Dr Goodwill 133,240
Dr Intangible assets 80,000
Cr Deferred tax liability ($80m x16.5%) 13,200
Cr Investment in STF 768,000
Non-controlling interests (BS)
Cr 272,040
(906.8m x 30%)

W2 - Past and current amortisation on revalued intangible assets

$'000 $'000
Dr Opening retained earnings ($80m/8*3*70%) 21,000
Dr Non-controlling interests (BS) ($80m/8*3*30%) 9,000
Dr Amortisation ($80m/8*0.5) 5,000
Cr Accumulated amortisation 35,000

Dr Deferred tax liability ($35m x 16.5%) 5,775

Cr Opening retained earnings ($21m x 16.5%) 3,465
Cr Non-controlling interests ($9m x 16.5%) 1,485
Cr Tax expense ($5m x 16.5%) 825

W3 - Eliminate dividend income

$'000 $'000
Dr Dividend income ($48m x 70%) 33,600
Dr Non-controlling interests (BS) ($48m x 30% NCI) 14,400
Cr Dividends declared 48,000

Module A (June 2013 Session) Page 7 of 16

W4 - Current income to Non-controlling interests
$'000 $'000
40,745
Dr Non-controlling interests (IS)
Cr Non-controlling interests (BS) 40,745

$'000 $'000
Profit of STF before adjustment 144,000
Add: previous period's unrealised
($36m-24m) 12,000
profit now realised
Tax effects on previous period's
($12m x 16.5%) (1,980) 10,020
unrealised profit
Less: current period's unrealised
(35%*(144m - 96m)) (16,800)
profit
Tax effects on current period
($16.8m x 16.5%) 2,772 (14,028)
unrealised profit
Less: amortisation on revalued intangible assets (5,000)
Tax effects on amortisation on
($5m x 16.5%) 825 (4,175)
revalued intangible assets
Adjusted profit 135,817
Non-controlling interests' share (30%) 40,745

W4a - Current revaluation surplus to Non-controlling interests

$'000 $'000
Dr Non-controlling interests (IS) ($36m x 30% NCI) 10,800
Cr Non-controlling interests (BS) 10,800

W5 - Assign post-acquisition Retained Earnings to Non-controlling interests

$'000 $'000
Dr Opening retained earnings [30% NCI x($654m -
(from 1 October 2008 to 350m)] 91,200
30 September 2011)
Cr Non-controlling interests (BS) 91,200

Module A (June 2013 Session) Page 8 of 16

W5a - Assign post-acquisition revaluation surplus to Non-controlling interests
$'000 $'000
Dr Opening revaluation surplus
(from 1 October 2008 to [30% NCI x($30m - 10m)] 6,000
30 September 2011)
Cr Non-controlling interests (BS) 6,000

W6 - Realisation of beginning unrealised profit in inventory

$'000 $'000
Dr Opening retained earnings 8,400
Non-controlling interests
Dr ($12m x 30%) 3,600
(BS)
Cr Cost of sales ($36m - $24m) 12,000

Dr Tax expense ($12m x 16.5%) 1,980

Opening retained
Cr ($8.4m x 16.5%) 1,386
earnings
Non-controlling
Cr ($3.6m x 16.5%) 594
interests (BS)

W7 - Elimination of intercompany sale of inventory

$'000 $'000
Dr Sales 144,000
Cr Cost of sales 144,000
Dr Cost of sales (48m x 35%) 16,800
Cr Inventory 16,800

Dr Deferred tax asset ($16.8m x 16.5%) 2,772

Cr Tax expense 2,772

Module A (June 2013 Session) Page 9 of 16

Reconciliation of Non-controlling interests (BS):
Shareholders' equity of STF at 31 March 2012 1,296,000
Fair value adjustment of intangible assets 80,000
Tax on fair value adjustment of (80m x 16.5%)
(13,200) 66,800
intangible assets
Accumulated amortisation on fair (80m/8x3.5)
value adjustment of intangible assets (35,000)
Tax on acc. amortisation on
5,775 (29,225)
fair value adjustment of intangible assets
Unrealised profit on upstream sale (16,800)
Tax on unrealised profit on upstream sale 2,772 (14,028)
Adjusted shareholders' equity of STF at 31 March 2012 1,319,547

NCI's share @ 30% 395,864

or
30% NCI
Shareholders' equity of STF at 31 March 2012 1,296,000 388,800
Fair value adjustment of intangible assets 80,000 24,000
Tax on fair value adjustment of (80m x 16.5%) (13,200) (3,960)
intangible assets
Accumulated amortisation on fair (80m/8x3.5) (35,000) (10,500)
value adjustment of intangible assets
Tax on acc. amortisation on fair value adjustment of 5,775 1,733
intangible assets
Unrealised profit on upstream sale (16,800) (5,040)
Tax on unrealised profit on upstream sale 2,772 831
Adjusted shareholders' equity of STF at 31 March 2012 1,319,547 395,864

* * * END OF SECTION A * * *

Module A (June 2013 Session) Page 10 of 16

SECTION B – ESSAY / SHORT QUESTIONS (Total: 50 marks)

Answer 2(a)

Amounts recognised in profit or loss for the year ended 30 September 2012:

Contract A Contract B Total

$'000 $'000 $'000
Revenue W1 9,800 26,000 35,800

Cost of services recognised W2 (8,400) (27,150) (35,550)

Profits (loss) recognised 1,400 (1,150) 250

Working:

1 Revenue:
Contract A Contract B
$'000 $'000
Contract sum certified and billed to date 28,000 26,000
Less: Revenue previously recognised up (18,200) ---
to 30 September 2011
9,800 26,000

Module A (June 2013 Session) Page 11 of 16

2 Cost of service recognised:

Contract A Contract B
$'000 $'000
Total agreed contract sum 42,000 65,000
% of completion 28,000 / 42,000 x 100% 26,000 / 65,000 x 10%
= 66.67% =40%

Revised estimated total 36,000 x 100% 63,000 x 105%

contract cost
= 36,000 = 66,150

Cost to recognised 36,000 x 66.67% 66,150 x 40%

= 24,000 = 26,460

Less: Cost recognised up to (15,600) --

30 September 2011

Sub-total [A] = 8,400 = 26,460

Foreseeable loss recognised for Contract B:

$'000
Estimated contract sum 65,000
Revised estimated total (66,150)
contract cost
Foreseeable loss (1,150)

Less: Loss recognised 460

(26,000 – 26,460)
Additional loss to recognise[B] (690)
Total cost of service
recognised [A]+[B] 8,400 27,150

Alternative for Contract B:

Contract B
$'000
Revised estimated total contract cost (63,000 x 105%) 66,150
Less: Total contract sum (65,000)
Total loss to be recognised, including foreseeable loss 1,150

Revenue recognised 26,000

Add: Total lost to be recognised 1,150
Total cost of service recognised 27,150

Module A (June 2013 Session) Page 12 of 16

Answer 2(b)

The amounts to be disclosed and presented under HKAS 11 at 30 September 2012:

Contract A Contract B Total

$'000 $'000 $'000
Costs incurred 25,600 30,000 55,600
Recognised profits (loss) W1 4,000 (1,150) 2,850
Progress billings (28,000) (26,000) (54,000)
Amount due from customers for contract works 1,600 2,850 4,450

Receivable W2 5,200 2,500 7,700

Working:

1. Recognised profits for contract A:

Alternative 1 = $28,000,000 x (42,000,000 – 36,000,000) /42,000,000 = $4,000,000
Alternative 2 = $18,200,000 – 15,600,000 + 1,400,000 = $4,000,000
Alternative 3 = (42,000,000 – 36,000,000 x 66.67% = 4,000,000

2. Receivable:
Contract A: ($28,000,000 – 22,800,000 = $5,200,000)
Contract B: ($26,000,000 – 23,500,000 = $2,500,000)

Answer 3(a)

Based on the information provided in the question, the significant deterioration of Run Pro’s
sales performance is an impairment indicator. When such an indication exists, the entity
shall estimate the recoverable amount of the asset of Run Pro.

The brand, being an intangible asset with indefinite useful life, and therefore no
amortisation is recognised, is required to be tested for impairment at least annually,
irrespective of whether there is any indication of impairment.

Accordingly, WSL is required to perform an asset impairment review in both Run Pro and
Jog Pro at 30 June 2012.

Answer 3(b)

An asset or cash generating unit (CGU) is considered to be impaired when its recoverable
amount declines below its carrying amount.

The recoverable amount of an asset or a CGU is the higher of its fair value less costs to
sell and its value in use.

The recoverable amount is determined for an individual asset, unless the asset does not
generate cash inflows that are largely independent of those from other assets or groups of
assets.

Module A (June 2013 Session) Page 13 of 16

If that is the case, the recoverable amount is determined for the CGU to which the asset
belongs, unless either:

 The asset’s fair value less costs to sell is higher than its carrying amount; or

 The asset’s value in use can be estimated to be close to its fair value less costs to sell
and fair value less costs to sell can be determined.

A CGU is the smallest group of assets that generates largely independent cash inflows.
This may be a single asset or group of assets.

Based on the information provided, each brand is considered as a cash generating unit.
The value in use of the group of assets (i.e. the intangible asset, plant and equipment,
developed cost capitalised and inventories) under individual brands and fair value less
costs to sell of each of the two brands and individual categories of assets are determinable.

HKAS 36 has a bottom-up approach to impairment testing.

It is incorrect to compare the aggregate value in use with the total net assets of both brands
to determine whether an individual brand or other asset is impaired.

Answer 3(c)

Run Pro Jog Pro

$'000 $'000
Net assets of the CGU, other than inventories (a) 71,000 33,000
Value in use of the CGU (b) 64,000 60,000
Fair value less cost to sell of the CGU (c) 60,000 58,000
The recoverable amount (d) (The higher of (b) and (c)) 64,000 60,000

Recoverable amount > Carrying amount of assets under the NO YES

CGU
Impairment issue YES NO
Excess of net assets over the recoverable amount (d) – (a) =
(e) (7,000)

According to the result above, the brand "Run Pro" is considered impaired and the
impairment loss, HK$7 million, should be first allocated pro-rata on the basis of the
carrying amount of each individual assets.

Allocation of impairment loss on pro-rata basis:

Carrying Impairment After
value Pro-rated allocation
$'000 $'000 $'000
Brand 25,000 (7,000 x 25/71) 2,465 22,535
Plant and equipment 40,000 (7,000 x 40/71) 3,944 36,056 (note 1)
Development cost 6,000 (7,000 x 6/71) 591 5,409 (note 2)
71,000 7,000 64,000

Module A (June 2013 Session) Page 14 of 16

When allocating an impairment loss to individual assets within a CGU, the carrying amount
of an individual asset should not be reduced below the highest of (i) its fair value less costs
to sell (if determinable); (ii) its value in use (if determinable); and (iii) zero.

If this results in an amount being allocated to an asset which is less than its pro rata share
of the impairment loss, the excess is allocated to the remaining assets within the CGU on a
pro rated basis.

Note 1: Plant and Equipment

Fair value less cost to sell (f) 36,000
Carrying amount (g) 40,000
(f) – (g) = (h) (4,000)

Note 2: Development cost

Capitalized without determinable fair value 6,000
less costs to sell nor value in use (i)

Both development cost and plant & equipment fulfilled the requirement above and no
excess impairment loss should reallocate to other assets.

Answer 4(a)

Bank loan A of $10,000,000 is classified as a current liability as it is due to be settled within

twelve months after 31 December 2012.

Bank loan B of $8,000,000 is classified as a current liability as there is a clause in the loan
agreement that gives the bank the unconditional right to call the loan at any time. CCL
does not have an unconditional right to defer settlement of the liability for at least twelve
months after 31 December 2012.

Answer 4(b)

Modification of the terms of a liability is accounted for as an extinguishment of the original

liability and recognition of a new liability where the modification is substantial.

The terms are deemed to be substantially different if the net present value of the cash
flows under the modified terms, including any fees paid and received, differs by at least 10
per cent from the net present value of the remaining cash flows of the existing liability, both
discounted at the original effective interest rate of the original liability.

The interest for the original loan of $408,333 ($10,000,000 x 7% x 7/12) should be settled
before the extension of the maturity date. Accordingly, the carrying amount of the bank
loan for modification assessment is $10,000,000.

Total amount to be repaid on 31 January 2015 = $10,000,000 x 1.08 x 1.08 = $11,664,000.

Present value calculated based on the original effective interest rate
= $11,664,000 / (1.07 x1.07) = $10,187,789.

($10,187,789 + $500,000 - $10,000,000) / $10,000,000 = 6.88%.

Module A (June 2013 Session) Page 15 of 16

Because the difference is within the “10 per cent test”, the existing bank loan A will not be
derecognised.

$500,000 transaction cost will be adjusted to the carrying amount of the bank loan and
amortised over two years up to 31 January 2015.

Answer 4(c)

Bank loan B is accounted for as an extinguishment of liability.

Carrying amount of principal at 1 April 2013 = $8,000,000

Interest accrual: $8,000,000 x 6.75% x 0.5 year = $270,000

Early repayment penalty: $6,000,000 x 1% = $60,000

Total amount to be paid for early settlement = $8,330,000

* * * END OF EXAMINATION PAPER * * *

Module A (June 2013 Session) Page 16 of 16