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ACCY 308 Advanced Financial AccountingSolutions to Questions for Tutorial 1 – Trimester One2018Question 1: Hines (1988) In our second lecture in Week 1, we had a discussion about the article by Hines (there is a copy on Blackboard/Talis Aspire if you do not already have it). The first part of this t...

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ACCY 308 Advanced Financial Accounting Solutions to Questions for Tutorial 1 – Trimester One 2018 Question 1: Hines (1988) In our second lecture in Week 1, we had a discussion about the article by Hines (there is a copy on Blackboard/Talis Aspire if you do not already have it). The first part of this tutorial will provide an opportunity for a discussion with your tutors about the article. Required Prepare for the discussion by: a) Reading the article again carefully (make sure you bring a copy to the tutorial). b) Identifying two or three passages or even sentences (that you will be able to share with your tutorial group) which particularly struck you. You will be asked to identify the passage/sentence, read it and explain what struck you about it. You are encouraged to specifically consider passages/sentences which are relevant to our course themes of: the reporting entity, relevance, faithful representation and harmonization. c) Specifically, also discuss how expectations of others may affect how a reporting entity is defined (as either a legal entity, something that users are interested in, etc.). SUGGESTED ANSWER:

Note: students will have different passages in Hines (1988) that they will be interested in and will be relevant to the reporting entity, relevance, faithful representation and harmonization. In respect of c) I would expect that students will bring out different ways that reporting entities could be construed (as a legal entity, as something that carries on economic activity, as something that users want to know about). Hines raises the query of whether we can ever adequately define it. Week 2’s lectures also considered control – how does this fit into Hines (1988)? Question 2: Profit-oriented Entities vs Public Benefit Entities (PBEs) In the second lecture, Week 1, we discussed NZ’s move away from a ‘sector-neutral’ approach to standard setting and financial reporting. That is, in March 2012 the External Reporting Board (XRB) decided to implement a multi-standards approach – with one set of financial reporting standards for for-profit entities and one for public benefit entities. Prior to that, the IFRS standards were primarily applied by both profit-orientated and PBE entities. (a) Describe five ways in which public benefit entities typically differ from profit-oriented entities. (b) Explain why you think the XRB made the decision to adopt a multi-standards approach. (c) Do you agree with the XRB’s decision to have separate financial reporting standards for public benefit entities or do you think retaining the approach of a single set of standards with more public benefit entity variations would have been preferable? (Irrespective of your opinion, be sure to consider arguments both for and against the decision.)

SUGGESTED ANSWER: The objective of Question 2 is to familiarise students with WHY we now have a multistandards approach. This will hopefully reinforce the idea that perhaps there are different reporting needs and other factors that should influence what is reported by different categories of entity. A key message I hope is that if there are different user needs, then financial reporting should also differ. You may want to first rehearse with students what a PBE is (although this was covered in class) as follows: Public Benefit Entities are “reporting entities whose primary objective is to provide goods or services for community or social benefit and where any equity has been provided with a view to supporting that primary objective rather than for a financial return to equity holders.” Examples of PBEs are:  Local authorities  Government departments e.g. The Treasury, Department of Conservation.  Crown entities such as district health boards, universities, schools etc  Charities (many of whom have in recent years registered under the Charities Act 2005)  Other not-for-profit entities such as cultural bodies, sporting bodies etc Appendix A: When is an Entity a Public Benefit Entity? to overarching standard XRB A1 gives guidance on how to determine if an entity is a PBE. a) Students were asked to identify 5 differences. Any of the characteristics below or other valid characteristics could be identified. It is not necessary to consider public sector PBEs separately from other PBEs such as not-for-profits. Some differences: “Private sector A 1.1

A 1.2

Not-for-profit entities in the private sector generally have the following characteristics:  their objective is to provide goods and services to various recipients and not to make a profit;  they are generally characterised by the absence of defined ownership interests that can be sold, transferred or redeemed or that convey an entitlement to a share of a residual distribution of resources, including on liquidation of the entity;  they may have a wide group of stakeholders to consider (including the public at large in some cases);  most of their revenues generally are contributions rather than sales. Contributions may be solicited in the form of donations or assessed such as through membership dues; and  their capital assets are typically acquired and held to deliver services without the intention of earning a return on them. There are many similarities between business (for-profit) and not-for-profit entities in the private sector. Specifically, the basic accounting systems

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and the accounting for most transactions is the same. However financial reporting is concerned with the needs of users of financial information and the different objective of not-for-profit entities does have a significant influence on the needs of the users of their financial reports. Some of these issues emerge in Parts 1 and 2 of this Report. Public sector A 1.3 A 1.4

Not-for-profit entities in the public sector have very similar key characteristics to not-for-profit entities in the private sector. These entities are typically established by legislation and:  their objective is to provide goods and services to various recipients or to develop or implement policy on behalf of governments and not to make a profit;  they are almost always characterised by the absence of defined ownership interests that can be sold, transferred or redeemed;  they typically have a wide group of stakeholders to consider (including the public at large);  their revenues are generally derived from taxes or other similar contributions obtained through the exercise of coercive powers; and  their capital assets are typically acquired and held to deliver services without the intention of earning a return on them.”

b) A number of concerns can be raised to support the need for separate standards for PBEs –  The process of adoption of IFRS in New Zealand had replaced the objective – which he argues should be high quality standards that meet the needs of users of public sector financial reports.  The process was not open-minded – he did not think adequate consideration was given to public sector issues.  Adoption of IFRS had not added value to the public sector – put in the language of the conceptual framework, the benefits of the extra compliance were not exceeding the costs of that compliance.  New Zealand was being driven by the IASB agenda – when that body is focused on writing standards for large for-profit corporations.  There was a lack of guidance on public sector issues - such as how to comply with the then new requirement to capitalise borrowing costs.  The desire for a common set of standards was stronger than the desire for appropriate standards for the different circumstances faced by different entities.  The standards on financial instruments do not have regard to the many non-commercial situations in which such instruments are held in the public sector.  The International Public Sector Accounting Standards Board is developing its own conceptual framework which is likely to be different to that of the IASB. The latter is heavily focused on decision-usefulness and cash flow information. It will become increasingly difficult to retain one set of accounting standards in New Zealand with two international conceptual frameworks. The XRB has set out its own thinking in various places but I suggest you use the Accounting Standards Framework as your source for this. They consider that User Needs are the key starting point and that PBE users’ needs differ from those of profitoriented entities. At paragraph 70 they quote Brady and at 71 they quote the former NZICA NFP Sector Advisory Committee as agreeing that PBE user needs were not being

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met under NZ IFRS. They explain that they considered two options (para 73). These are to do a single set of standards better (more modifications or supplements) or a separate suite of standards. Both were explored but the latter concluded as the best option. The XRB considers that IFRS and IPSAS will diverge over time due to the influence of different user needs (para 79) – and maintaining a single set of standards would become cumbersome and probably confusing. A key reason for the decision is the POTENTIAL for IPSAS to better meet user needs in the future (para 81). A downside is the fragmentation which arises. However the XRB did not consider the fragmentation implication outweighs the benefit of better meeting user needs (para 88). The cost of change at this moment is assessed as low – an argument for making the change NOW (not necessarily an argument for making the change itself) (paras 93 to 94). Other points are made in the XRB document – refer to it. c) In relation to whether students agree with the XRB’s decision or not, a range of views may be expressed. The arguments for and against a single set of standards in the PowerPoint slides forwarded to you may support a particular view as may some of the arguments in (b) above. THERE IS NO RIGHT ANSWER – what is important is that the view formed is based on sound arguments and formed after weighing the competing arguments. An approach you might want to take to this part is to start by taking a poll of who thinks multiple standards are now necessary and who thinks a single set could have been maintained. Then ask those with each view to explain the reasons for their view and you will hopefully build up (and can perhaps write up on a slide or on the Board) some of the arguments for and against the current approach.

Question 3: Identifying an acquirer White Ltd has been negotiating with Cloud Ltd for several months, and agreements have finally been reached for the two companies to combine. In considering the accounting for the combined entities, management realises that, in applying NZ IFRS 3, an acquirer must be identified. However, there is debate among the accounting staff as to which entity is the acquirer. Required 1. What factors/indicators are important for management to consider in determining which entity is the acquirer? 2. Why is it necessary to identify an acquirer? In particular, what differences in accounting would arise if White Ltd or Cloud Ltd were identified as the acquirer? SUGGESTED ANSWER: Part 1. The acquirer is the combining entity that obtains control of the other combining entities. [Appendix A, NZ IFRS 3]. However, determination of the acquirer requires judgement. Paragraphs B13-B18 of NZ IFRS 3 provides indicators/guidelines to assist in this judgement: -

form of consideration: did one entity transfer cash or other assets for the shares of the other? [para B14]; did one entity issue its own equity interests in exchange for another

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entity’s equity interests? [para B15] Was there a premium paid by one of the entities? [para B16(e)] subsequent management: which entity’s management subsequently controls the business combination? What are the relative voting rights after the business combination? [para B15(a)] What is the composition of the senior management of the combined entity? [para B15(d)] large minority voting interest: The acquirer normally holds the largest minority voting interest in the combined entity. [para B15(b)] predator or target: which entity initiated the combination? [B17]. relative size of the businesses: is the fair value of one entity significantly greater than another? [para B16]]. Large entities normally takeover small entities;

Part 2. Why identify an acquirer? The consideration transferred is measured on the basis of the consideration given by the acquirer, while the identifiable assets and liabilities of the acquiree are measured at fair value. In relation to White Ltd – Cloud Ltd, the main effect then would be: If White Ltd is the acquirer, the identifiable assets, liabilities and contingent liabilities of Cloud Ltd would be measured at fair value while White Ltd assets and liabilities remain at their original carrying amounts. If Cloud Ltd were the acquirer, it would be White Ltd’s assets and liabilities that would be at fair value.

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