1. The essay requires 1500 words2. In total it needs at least 12 references with Harvard style.3. If answering the questions need to calculate, please do remember to write down the calculation process.4. Below are two questions, please answer all of them.5. I have attached the essay requirement doc, please read thoroughly.6. I will email the support team about the lecture ppt, please read if needed.Assignment:This assignment consists of two questions.Candidates should answer all parts of all questions.Question 1 [50 marks]
Worldwide Fuels, a public limited company, is preparing its financial statements for theyear ending 31 December 2020. The exhibits contain information relevant to thequestion.Exhibit 1 – Construction of energy generating facilityOn 1 February 2020 Worldwide Fuels started the construction of an energy generatingfacility. The following costs were incurred during the construction:£000Freehold land 1,500Site preparation 725Materials 3,500Direct labour costs 8,250Legal fees 1,000General overheads 575To aid construction of the energy generating facility, Worldwide Fuels issued a £10million unsecured loan on 1 February 2020. The loan carried an interest rate of 15%per annum and is repayable on 1 February 2025. On 30 June 2020, Worldwide Fuelsfinalised the construction of the energy generating facility. The facility was brought intouse on 1 August 2020. The facility has an expected useful economic life of 30 yearsand that will have no residual value at that date. Worldwide Fuels uses the straight-line method for calculating depreciation. Worldwide Fuels has a legalrequirement todecommission the facility at the end of its estimated useful life. The directors ofWorldwide Fuels estimated the costs of this decommissioning to be £32 million –based on prices prevailing at 30 June 2050. At an appropriate discount rate the presentvalue of the cost of decommissioning the facility is £9 million.Exhibit 2 – Research & DevelopmentOn 1 March 2020, Worldwide Fuels began a research project. The aim of the projectwas to investigate ways of streamlining its production process. The initial costs ofsetting up the project were £7 million. From 1 March 2020 to 31 May 2020 ongoingproject costs were £300,000 per month. On 1 June 2020, the project was consideredto be technically feasible and commercially viable and from this date project costsincreased to £750,000 per month. From 1 July 2020 to 31 August 2020, additional£1,750,000 was spent for the design and construction of a pilot for the project. Thispilot is not capable of operating on a scale economically feasible for commercialproduction. From 1 September 2020 to 1 December 2020, additional £430,000 werealso spent for testing of the pilot. The project was not completed till 31 December 2020.Worldwide Fuels charged all the costs to complete the project to administrativeexpenses.Exhibit 3 – ProvisionAt a recent board meeting, a director of Worldwide Fuels has the following questions:i)“At 31 December 2020, Worldwide Fuels was engaged in a legal disputewith a customer who alleged that Worldwide Fuels has supplied faultyproducts that caused the customer an actual financial loss. The lawyers ofWorldwide Fuels consider that the consumer has a 70% chance ofsucceeding in this action and that the likely outcome, should the customersucceed, is that the customer will be rewarded damages of £1.5 million. Thedirectors of Worldwide Fuels believe that the fault in the products wascaused by the supply of defective components by one of the suppliers toWorldwide Fuels. Worldwide Fuels has initiated legal action against thesupplier and considers that there is a 70% chance that Worldwide Fuels willreceive £910,000 of compensation from the supplier. I expected to see aprovision for legal claims based on the likelihood of the claims succeeding.However, I also expected to see an equivalent asset in respect of amountsreceived 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 notthe corresponding asset, given the above facts?.”ii)“Worldwide Fuels operates profitably from a factory that it leases for fiveyears under an operating lease. At 31 December 2020, the market rent forthe factory is £800 per month while the monthly operating lease instalmentsthat we pay are £1,350 per month. I would have expected to see a provisionfrom the onerous contract in the consolidated statement of financialposition.”Requirements:a) Using Exhibit 1, show, with appropriate calculations, how the above eventswould be reported in the financial statements of Alpha for the year ended 31December 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, thecorrect accounting treatment for all the costs incurred in relation to the researchproject 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. Youshould 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 ofR&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 theusefulness of financial information.[25 Marks] (400 words)
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