SECTION A – CASE QUESTIONS (Total: 50 marks)

Answer ALL of the following questions. Marks will be awarded for logical argumentation and
appropriate presentation of the answers.

CASE

Perth Holdings Limited ("PHL") was incorporated in Hong Kong and its shares are listed on
the Main Board of the Stock Exchange of Hong Kong Limited ("SEHK"). PHL and its
subsidiaries (together referred to as PHL Group) are principally engaged in the gaming
business, comprising the development and production of gaming machines, related operating
software system and networks for the gaming industry. The consolidated financial
statements of the PHL Group, with a financial year ended at 31 March, were prepared in
accordance with Hong Kong Financial Reporting Standards ("HKFRS").

Sandy Koo Limited ("SKL")

On 1 April 2019, Sandy Koo Limited ("SKL") was established by PHL and an unrelated party,
Daily News Limited ("DNL"). PHL injected its gaming website platform for the gaming
business in the Philippines into SKL and held 65% equity interest in SKL. DNL is
incorporated in the Philippines, which principally engaged in operating a news platform in the
Philippines, and DNL held 35% equity interest in SKL. Interestingly, it is noted that both PHL
and DNL had consolidated the results of SKL into their consolidated financial statements for
the year ended 31 March 2020.

After an investigation of the details and Articles of Association of SKL, it is found that:

(i) out of the seven members of the board of directors of SKL, DNL could nominate four,
including the Chairman, while PHL could nominate three, including the Executive Director.
Each director has one vote on a board resolution and a resolution is passed by simple
majority;

(ii) the board of directors of SKL is the decision level for directing the relevant activities of
SKL;

(iii) the Executive Director is responsible for the daily operations of SKL. The appointment
or dismissal of the Executive Director shall be approved by the board of directors; and

(iv) shareholders' resolutions require 2/3 voting rights to be approved.

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On 8 October 2020, PHL issued a clarification announcement to explain a proposed change
in the accounting treatments of SKL:

"In April 2020, SKL was informed that all gaming centres should be suspended. Therefore,
SKL suspended its operations and PHL withheld its investment plan in SKL. The Executive
Director, who was initially a representative of PHL, withdrew his support of PHL because
he was not satisfied with PHL's decision to withhold its investment plan. PHL considered this
as an indication of loss of control as PHL did not have the practical ability to unilaterally direct
the relevant activities of SKL. Therefore, the management of PHL determines that SKL
should not have been consolidated in the consolidated financial statements of PHL Group on
and after 1 April 2020; it should be recognised as a financial asset under HKFRS 9 in
the consolidated financial statements of PHL Group."

Kediri Manufacturing Limited ("KML")

Kediri Manufacturing Limited ("KML") was set up by PHL as a subsidiary in Indonesia on

1 April 2018. For the year ended 31 March 2019, KML made all its sales, purchases, rental
and labour costs in Indonesia Rupiah ("IDR"), and KML presented its financial statements in
IDR for the year ended 31 March 2019.

However, due to the volatility of the exchange rates, the main customers and suppliers of KML
insisted on 1 April 2019 to determine the price and pay in United States Dollars ("USD").
As a result of the change, more than 90% of its sales and purchases has been made in USD
since 1 April 2019.

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After incorporating all the necessary accounting adjustments as required for
the abovementioned information, extracts of the consolidated financial statements of
PHL Group for the year ended 31 March 2020 are as follows:

Consolidated statement of profit or loss and other comprehensive income of PHL Group for
the year ended 31 March 2020

HKD million
Revenue 4,500
Cost of sales (3,000)
Other expenses (1,000)
Profit from operation 500
Interest expense (31)
Share of profit of associates 4
Profit before tax 473
Tax (190)
Profit for the year 283

Other comprehensive income:

Item that may be reclassified to profit of loss in future period
Total exchange difference on retranslation of foreign operations (Note 2) 30
Total comprehensive income 313

Profit for the year attributable to

Owners of the parent 280
Non-controlling interests 3
283

Total comprehensive income for the year attributable to

Owners of the parent 310
Non-controlling interests 3
313

Summary of changes in equity attributable to the owners of the parent of PHL for
the year ended 31 March 2020

Retained Translation
Share capital earnings reserves Total
HKD million HKD million HKD million HKD million
Equity b/f 780 580 50 1,410
Profit for the year - 280 - 280
Dividends paid - (45) - (45)
Translation difference - - 30 30
Equity c/f 780 815 80 1,675

Module A (December 2020 Session) Page 3 of 12

Consolidated statement of financial position of PHL Group at 31 March

2020 2019
Note HKD million HKD million

Non-current assets
Goodwill (7) 150 100
Property, plant and equipment (1) 1,000 800
Investment in associate (6) 32 30
1,182 930

Current assets
Inventories 950 760
Trade receivables 550 440
Cash 250 115
1,750 1,315
2,932 2,245

Ordinary share capital 780 780

Retained earnings 815 580
Translation reserves (2) 80 50
1,675 1,410
Non-controlling interest (5) 20 2
Total equity 1,695 1,412

Non-current liabilities
Bank loans 210 170
Deferred tax liabilities 57 40
267 210

Current liabilities
Trade payables 430 300
Accrued interest 73 55
Current tax payable 347 260
Bank overdraft (3) 120 8
970 623
2,932 2,245

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Additional information:

(1) Property, plant and equipment

HKD million
Depreciation charge for the year 90
Proceeds from disposals 84
Carrying amount upon disposals 30

(2) Translation reserves

The net translation gain on translating the financial statements of a wholly owned
subsidiary has been recorded in other comprehensive income and is held within
translation reserves. The gain comprises differences on the retranslation of
the following:

HKD million
Property, plant and equipment 15
Accrued interest (3)
Inventories 13
Trade receivables 28
Trade payables (23)
Net translation gain 30

(3) Bank overdraft

Bank overdrafts are regarded as part of the Group's cash management.

(4) New South Limited

During the year, PHL acquired 80% of the issued ordinary share capital of
New South Limited ("NSL") for a cash consideration of HKD130 million. The fair values
of the assets of NSL are as follows:

HKD million
Property, plant and equipment 20
Inventories 60
Trade receivables 50
Cash in hand 25
Trade payables (40)
Bank loans (30)
85

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(5) Non-controlling interest

The non-controlling interest ("NCI") is measured at its proportionate share of the fair
value of the acquiree's identifiable net assets. The increase in NCI for the year ended
31 March 2020 is due to the share of total comprehensive income to NCI, the acquisition
of NSL and the dividend paid to NCI only.

(6) Investment in associate

The increase in the investment in associate for the year ended 31 March 2020 is due to
the share of profit of associate and the dividend received from associate only.

(7) Goodwill

The increase in goodwill is due to the goodwill arising on the acquisition of NSL, net off
the impairment of goodwill of another subsidiary.

Module A (December 2020 Session) Page 6 of 12

Question 1 (13 marks – approximately 23 minutes)

Assume that you are Karen Lam, the newly appointed accounting manager of PHL.
In a meeting, the newly appointed finance director asked you to advise him on the appropriate
accounting treatment of SKL in PHL's consolidated financial statements.

Required:

Prepare a memorandum to:

(a) comment on the accounting treatment of SKL in PHL's consolidated financial

statements for the year ended 31 March 2020;

(b) comment on the proposed accounting treatment of SKL in PHL's consolidated

financial statements on and after 1 April 2020; and advise the appropriate
accounting treatment of SKL in PHL's consolidated financial statements.

Note: Mark(s) will be awarded for proper memorandum format with logical presentation.
(13 marks)

Question 2 (13 marks – approximately 23 minutes)

(a) Advise the appropriate accounting treatment for the change of currency in price
determination and settlement from IDR to USD for KML on and after 1 April 2019.

(b) Advise the appropriate accounting treatment if KML would like to change
its presentation currency from IDR to USD on 1 April 2019, and the relevant impact
to the comparative amounts presented in its financial statements for the year
ended 31 March 2020.
(13 marks)

Question 3 (24 marks – approximately 44 minutes)

Prepare the consolidated statement of cash flows of PHL Group for the year ended
31 March 2020 using indirect method beginning with profit before tax.
(24 marks)

* * * * * * * *

Module A (December 2020 Session) Page 7 of 12

End of Section A
SECTION B – ESSAY/ SHORT QUESTIONS (Total: 50 marks)

Answer ALL of the following questions. Marks will be awarded for logical argumentation and
appropriate presentation of the answers.

Question 4 (14 marks – approximately 25 minutes)

Alswell Limited ("AL") is a company listed on the Main Board of the Stock Exchange of
Hong Kong Limited ("SEHK"). It is controlled by Good Day Limited ("GDL"), a private
company wholly-owned by Felix Lo. The functional currency of AL is USD, but it is presenting
its financial statements in HKD.

During the financial year ended 31 March 2020, AL issued a series of three-year USD
denominated convertible bonds also quoted on the SEHK to expand its base of funding.
Interest is accrued at 5% on par payable at the end of each year.

Under the terms of the convertible bonds, the holder has the option to convert the holding any
time up to maturity into 100 ordinary shares of AL for every USD10,000 outstanding.
The instrument would not give the holder control/ joint control/ significant influence over AL.

Lo Hay Limited ("LHL") was one of the major subscribers to the convertible bond.

During the year, AL also obtained another loan financing from Hopping Joy Limited ("HJL").
HJL is controlled by Happy Lo, brother of Felix Lo. HJL is a joint venture partner with AL
where they co-invest in AussieSky, an entity located in Australia.

Required:

(a) Explain the accounting treatments on initial recognition applicable to the

convertible bonds from the perspective of both:

(i) AL; and

(4 marks)

(ii) LHL.
(4 marks)

Note: Ignore transaction costs.

(b) Explain whether the following entities are related parties of AL:

(i) LHL
(ii) HJL
(iii) AussieSky
(6 marks)

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Question 5 (21 marks – approximately 38 minutes)

Glamorous Living Design Limited ("GLD") is in the business of interior design and the selling
of designer-grade furniture. Production/ assembly of its products are carried out through
its manufacturing facilities located in mainland China.

GLD sells exclusively to chain stores. Under the terms of the sales contracts,
once the specific furniture is delivered to the shop and accepted, the shop is obliged to pay
within 30 days and there will be no right of return. GLD considers that it is probable for them
to collect the consideration from each of the chains.

In June 2019, GLD entered into the smart furniture market - smart furniture includes items
such as dressing tables with internet connectivity, or cabinet doors with built-in touch screens.
These devices allow users to browse the Web, listen to music, as well as to look for a recipe
without the need for a phone in their hands.

GLD outsources the assembly of its smart furniture exclusively to Assembly Lines Limited
("ALL"). GLD's staff are stationed at the venue to make sure ALL is operating under
GLD's international standards.

As a contract manufacturer, ALL is required to build a complex almost exclusively to serve

GLD. The assembly, testing and packaging of GLD's products have to follow GLD's specific
requirements. The components of GLD's furniture will be manufactured based on
GLD's specifications using materials from designated suppliers as approved by GLD.
The finished goods have to be sold exclusively to GLD or to the distributors designated by
GLD.

ALL is required to pay the full consideration to the suppliers for the purchase of the materials.
Under the terms of the contract, ALL will be reimbursed by GLD on "cost" plus basis.
"Cost" includes expenses incurred on staff, materials and other costs directly attributable to
the production as further defined in Appendix A to the contract.

Module A (December 2020 Session) Page 10 of 12

Required:

(a) Advise whether GLD should include the following costs incurred in the cost of
inventories before the introduction of smart furniture in June 2019:

(i) staff costs incurred in design, which includes the searching of alternative
material to be used in the design of specific models;

(ii) for materials that were purchased on deferred settlement terms, difference
between the purchase price for normal credit terms and the amount paid;

(iii) cost of material wasted – due to an unexpected flood in the factory, some of
the material that was ordered for a particular product was soaked through
and needed to be scrapped.
(8 marks)

(b) Consider whether ALL should recognise revenue from GLD based on the gross
amount of the sales or merely the margin.

(i) Explain your view based on the fact pattern given.

(8 marks)

(ii) Advise if there are any further factors that you would look into so as to arrive
at a more solid conclusion.
(5 marks)

Module A (December 2020 Session) Page 11 of 12

Question 6 (15 marks – approximately 27 minutes)

Flying Cat Limited ("FC") is a restaurant chain that operates across Hong Kong with
a 31 December year end. On 1 June 2019, the company enters into a non-cancellable
four-year lease contract for a shop in Central.

Leasehold improvements were installed for consistency in look and feel and were completed
on 1 September 2019 at a cost of HKD5 million. Even though it was already ready
to commence business, the shop was not officially opened until 15 October 2019, after
a two-week trial run from 1 October 2019.

Management of the company estimates that the leasehold improvements could last for
five years at least. If FC moves out of the venue, all the leasehold improvements will need
to be scrapped as they cannot be taken down without being damaged.

Felix Chiu, the Finance Manager of the company, advised that given that the leasehold
improvement is expected to be used for five years it would only make sense to depreciate
it over five years, starting from 15 October 2019 when the shop opens.

In December, a fire broke out and damaged a part of the shop. The portion damaged by
the fire was estimated to cost HKD2 million. Felix advised that given that the damage was
supposed to be fully covered by insurance, he did not expect to present separately
an impairment charge/ loss as a result of the accident in the statement of profit or loss for
the year ended 31 December 2019.

FC adopts the cost model and depreciates its property, plant and equipment on straight-line
basis.

Required:

(a) Evaluate Felix's comments regarding the accounting treatment of the following:

(i) depreciation of the leasehold improvements.

(5 marks)

(ii) relevant impact of the damage and expected compensation payment during
the period.
(3 marks)

(b) Prepare the journal entries, as applicable, in respect of the leasehold

improvements and insurance compensation for the year ended 31 December 2019.
(7 marks)

* * * END OF EXAMINATION PAPER * * *

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