ACC701 Advanced Financial Reporting

• Although the Department encourages discussion about the case study amongst students the work they submit must be their own – this is not a ‘group’ assessment. See page 22 of the Course Outline for the Department’s plagiarism policy.
• Case studies will only be accepted if handed in on or before the due date unless there are special circumstances which are discussed with the course co-ordinator prior to the due date. See page 21 of the Course Outline for the Department’s late assignment policy.

Andrew has requested that you:

(a)write a memorandum to the board of directors of DGL explaining what bonds are, highlighting the advantages and risks of issuing bonds, and describe how they should be accounted for under NZ IFRS 9 Financial Instruments;

(b)prepare the journal entries, in accordance with NZ IAS 32 Financial Instruments: Presentation, to account for:

i.the issue of the above securities;

(c)Prepare the journal entries in the books of DGL for the years ended 31 December 2017 and 31 December 2018 (Hint: note that the executory costs are paid in advance).

(d)Determine how BLFCL should classify the lease. Note: give reasons for your answer, with reference to NZ IFRS 16 Leases.

Answer:

Amortization Schedule

ASX SPI 200 Index futures is a benchmark for measuring equity indexed future contracts which are available in Australia. ASX SPI 200 Index futures is listed among the top ten equity indexed future contracts (Hull et al., 2013). As per the provisions of IFRS 9, Hedge Accounting is optional and the same is applicable only when certain conditions and stipulations are met in the business. The standard also specifies the disclosure requirements regarding the hedging agreements which are undertaken by the business. In case of a discontinuation the same will be done prospectively depending on the hedging relationship meeting the qualifying criteria.

Classification of Leases

As per the IFRS 16, the leases of a business can be classified on the basis of operating leases and financial leases. As per the conditions which are stated in the business of BLFCL, the leases of the business should be classified as financial leases of the business (Weil, Schipper & Francis, 2013). Financial lease is a lease in which the risks are transferred to the lessee. In this type of leases, the risks are transferred from the lessor to lessee (Paik et al., 2015). The financial leases of the business can be shown appropriately in the financial statements of the business.

Journal Entries of BLFCL

• Reportable Revenue of the business from both external customers and intersegment sales is 10% or more than combined revenue of all operating activities of the business.
• The absolute value of profit or loss of the business is 10% or more than the combined profits or loss from the operating activities of the business.
• The assets of the business are 10% or more than combined assets of all operating segments.

Recognition of Operating Segments

Reference

Cereola, S. J., Nichols, N. B., & Street, D. L. (2017). Geographic segment disclosures under IFRS 8: Changes in materiality and fineness by European, Australian and New Zealand blue chip companies. Research in Accounting Regulation, 29(2), 119-128.

Chandra, P. (2017). Investment analysis and portfolio management. McGraw-Hill Education.

Ju, N., Leland, H., & Senbet, L. W. (2014). Options, option repricing in managerial compensation: Their effects on corporate investment risk. Journal of Corporate Finance, 29, 628-643.

Kallsen, J., & Muhle?Karbe, J. (2015). Option pricing and hedging with small transaction costs. Mathematical Finance, 25(4), 702-723.