ACCA DipIFR question papers and answers on IAS 21 from June 2014

Many good answers were also provided to this part. However, not all candidates appreciated that the purchased machine, being a non-monetary asset that is measured under the cost model, would continue to be reported using the rate of exchange in force at the date of acquisition.

This question was generally well answered by the majority of candidates attempting it. However a significant minority of candidates made a careless error of multiplying the foreign currency (groat) figure to convert into $ rather than dividing it. A smaller minority of candidates seemed unaware of the distinction between monetary and non-monetary items in a ‘foreign currency context’. Therefore there were some examples of the ‘re-translation’ of PPE, which was not appropriate. Ar minority of candidates incorrectly stated that the exchange differences on re-translation should be recognised in other comprehensive income rather than profit or loss.

In part (b) most candidates were able to correctly quote relevant sections from IFRS 15 – Revenue regarding the recognition of revenue. However a significant number of candidates were unable to correctly compute the refund liability that should have been provided for. Common errors here included applying IAS 37 - Provisions, Contingent Assets and Contingent Liabilities rather than IFRS 15. This often led to the incorrect conclusion that the refund liability was contingent and should be disclosed, rather than recognised. Even where the need to compute a refund liability was recognised, many candidates incorrectly used 22% rather than 8%, on the (incorrect) basis that the estimate made on 15th October 2016 was a non-adjusting event after the reporting date. It was pleasing to note, though, that most candidates were able to gain some marks in this part by correctly applying the requirements of IAS 21 – Foreign Currency Transactions – to this scenario.

Delta is an entity which prepares financial statements to 31 March each year. The functional currency of Delta is the dollar ($). The following events have occurred which are relevant to the year ended 31 March 2018:

Relevant exchange rates are as follows:

• –  1 February 2018 – 6·0 dinars to $1.

• –  15 March 2018 – 6·3 dinars to $1.

• –  31 March 2018 – 6·4 dinars to $1.

Under the principles of IAS 21 – The Effects of Changes in Foreign Exchange Rates – the purchase of inventory on 1 February 2018 would be recorded using the spot rate of exchange on that date. Therefore Delta would recognise a purchase and an associated payable of $600,000 (3·6 million dinars/6).

Delta would recognise revenue of $480,000 in the statement of profit or loss because goods to the value of $480,000 were sold prior to 31 March 2018.

Delta would recognise $360,000 ($600,000 x 60%) in cost of sales because the revenue of $480,000 is recognised.

The closing inventory of goods purchased from the foreign supplier would be $240,000 ($600,000 – $360,000) and would be recognised as a current asset. This would not be re-translated since inventory is a non-monetary asset.

The payment of 1,260,000 dinars on 15 March 2018 would be recorded using the spot rate of exchange on that date, therefore the payment would be recorded at $200,000 (1,260,000 dinars/$6·3).

The closing payable of 2,340,000 dinars (3,600,000 dinars – 1,260,000 dinars) is a monetary item, therefore would be translated at the rate of exchange in force at the year end (6·4 dinars to $1). Therefore the closing payable (recorded in current liabilities) would be $365,625 (2,340,000 dinars/$6·4).

The difference between the initially recognised payable ($600,000) and the subsequently recognised payment ($200,000) is $400,000. Since the closing payable is $365,625 (see above), Delta has made an exchange gain of $34,375 ($400,000 – $365,625). This gain is recognised in the statement of profit or loss, either under other income category or as a reduction in cost of sales.

The question was satisfactorily answered by the majority of candidates attempting it.

Under the principles of IAS® 21 – The Effects of Changes in Foreign Exchange Rates – the property will initially be recorded using the rate of exchange in force at the date of purchase.

Therefore the property will be recorded at an initial carrying amount of $2·2 million (4·4 million crowns/2). A liability of $2·2 million will also be recorded.

When the liability is settled on 30 June 20X4, a payment of $2·5 million will be required (4·4 million crowns/1·76). This will create an exchange loss of $300,000 which will be debited to profit or loss.

Under the principles of IAS 16 – Property, Plant Equipment – the buildings element of the property will be deprecated over its useful life of 40 years. This means that depreciation of $33,000 ($2·2 million x 60% x 1/40) will be required for the year ended 31 March 20X5.

Since the property is measured using the revaluation model, the closing carrying amount will be its fair value in crowns translated into $ using the rate of exchange in force at the year end. In this case, the closing $ carrying amount will be $3 million (4·8 million crowns/1·60).

The valuation gain of $833,000 ($3 million – ($2·2 million – $33,000)) will be recognised in other comprehensive income under the principles of IAS 16.

The property will be presented as a non-current asset in the statement of financial position at its closing carrying amount of $3 million.

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