HFAC334-1 - Specific Financial Reporting (IFRS) Assignment

Assignment Task

Question 1

Hydrocraft Ltd is a manufacturing company in the deep-sea exploration sector and the entity has a 31 December financial year end. The entity is the only entity in the country that specializes in the manufacture of deep-sea vessels (submersibles) for their customers, namely private tourist entities. The deep-sea vessels are manufactured using specialized machines and it usually takes approximately 24 months to manufacture each deep-sea vessel.

Hydrocraft Ltd embarked on the manufacture of a deep-sea vessel for a client who ordered a vessel for their company, which takes tourists to visit the Titanic wreckage at the bottom of the Atlantic Ocean. As soon as the order was received on 1 January 2023, Hydrocraft Ltd started manufacturing the vessel.

In order to manufacture the inventory item (deep-sea vessel), a new specialized machine, Machine C, was required, which Hydrocraft Ltd decided to lease from a third party. Details of the lease agreement are as follows:

• Five annual fixed lease installments are due at the end of December each year.
• The lease installments will increase by 10?ch year as per the table below:

Required

1. Briefly discuss how you would classify the lease (i.e., operating or finance lease) in the accounting records of the lessor at the start of the lease. As part of your justification (amongst as many other factors as you can mention as per IFRS 16), calculate and comment on the present value of minimum lease payments.

• Structure you answer neatly using relevant headings where possible.
• Use only the information given in the question.
• Round off calculations to the nearest Rand.

2. Briefly discuss whether or not the accountant’s treatment of the lease is correct, in the accounting records of Hydrocraft, in terms of IFRS 16. Also briefly discuss how it should be measured (initially and subsequently) if you do not agree with the accountant’s treatment. No calculations are required as part of your answer.

• Structure your discussion neatly using relevant headings where possible.  

3. Assume that the lease is a finance lease. Prepare the general journal entries of Hydrocraft Ltd for the year ended 31 December 2023, in accordance with the International Financial Reporting Standards (IFRS), using only the information given in the question. Make reference to your calculations in 1.1.

• Round off answers to the nearest Rand.
• Dates are required.
• Narrations are not required.
• Ignore only VAT. 

4. Discuss in terms of IAS23 Borrowing Costs, whether or not the lease finance cost will be able to be capitalised to the cost of the inventory item (deep-sea vessel). Provide reasons to support your answer. No calculations are required.

Question 2

Sofia Limited is a national airlines company that offers long-term employee benefits to their employees. One of the employee benefits available to pilots and air hostesses is the defined benefit pension plan which will allow the eligible employees to receive monthly pension payouts once they are retired until their deaths. The following information relates to the financial year ended 31 December 2023:

Required

Prepare extracts to the Statement of Profit and Loss and Other Comprehensive Income of Sofia Ltd for the year ended 31 December 2023, in accordance with IAS 19, using all the information given in the question.

• Comparative figures are not required.
• Show and reference all your calculations and workings clearly.
• Round all amounts to the nearest Rand.

Question 3 

Skyscraper Ltd is an entity in the hospitality industry and runs a hotel franchise called OysterTM. Skyscraper Ltd constructed a new OysterTM hotel during the 2023 financial year on land that the entity already owned. To construct the hotel, Skyscraper Ltd made use of existing finance facilities already obtained by the entity. The construction began on 1 January 2023 and was completed on 30 September 2023.

The construction of the hotel cost R21 600 000 in total and the expenditure was incurred evenly throughout the 9-month period (i.e. the average expenditure over the 9 month period was therefore half the total).

Skyscraper Ltd’s general borrowings consisted of the following as at 1 January 2023:\

There were no additions nor any repayments regarding any of the borrowings during the year.

During February 2023, the construction was halted for the entire month since Skyscraper needed to do some substantial technical and administrative activities regarding the construction before recommencing construction activities on 1 March 2023.

You can assume that no borrowing costs were capitalised during the year and therefore there will be no borrowing costs on borrowing costs.

The Financial Manager at Skyscraper Ltd requires your assistance to determine the amount of borrowing costs that can be capitalized to the cost of hotel.

Required

Assist the Financial Manager of Skyscraper Ltd to calculate the amount of net borrowing costs that should be capitalised in terms of IAS 23 to the cost of the hotel.

• Ignore all taxation.
• Round off all amounts/rates to two decimal places, if necessary.

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