The financial statements do contain a provision of £1.5 million but
no equivalent asset. Disclosure of the information relating to both, the claim
against Worldwide Fuels and the compensation that is expected to be
received from the supplier, is made in the notes to the financial statements.
How can it be the correct accounting treatment to include a liability but not
the corresponding asset, given the above facts?.”
ii)
“Worldwide Fuels operates profitably from a factory that it leases for five
years under an operating lease. At 31 December 2020, the market rent for
the factory is £800 per month while the monthly operating lease instalments
that we pay are £1,350 per month. I would have expected to see a provision
from the onerous contract in the consolidated statement of financial
position.”
Requirements:
a) Using Exhibit 1, show, with appropriate calculations, how the above events
would be reported in the financial statements of Alpha for the year ended 31
December 2020. Ignore the unwinding of the provision by the end of the year.
[10 Marks]
b) Using Exhibit 2, discuss, with the reference to IAS 38: Intangible Assets, the
correct accounting treatment for all the costs incurred in relation to the research
project for the year ended 31 December 2020. (Hint: use the definitions of
“research” and “development”).
[20 Marks] (350 words).
c) Using Exhibit 3, provide answers to the queries raised by the director. You
should justify your answers with reference to relevant IFRS Standards.
Page 4 of 6
[20 Marks] (350 words)
Question 2 [50 marks]
a) Discuss, with reference to the relevant literature, the impact of the treatment of
R&D expenditure under IAS 38 on the quality of the accounting information.
[25 Marks] (400 words)
b) Discuss, with reference to relevant IFRS Standards and academic literature,
how managerial judgments on the recognition of a provision affects the
usefulness of financial information.
[25 Marks] (400 words)