1)

You work as a financial accountant for Dax Ltd. The company commenced business on 1 July 2017 and does not yet prepare its annual financial reports in accordance with International Financial Reporting Standards (IFRS).

The following key account balances have been extracted from the trial balance at 30 June 2019: 

Provision for damage from hailstorms $250 000 (Cr)

Hailstorms expense $250 000 (Dr)

Research and development expense $380 000 (Dr)

Inventories  $980 000 (Dr)

Dividend payable $85 000 (Cr)

Dividend proposed $85 000 (Dr)

Share investment (12,000 shares in Pacific Trustees Ltd)  $62 750 (Dr)

The financial accountant of Dax Ltd’s head office has instructed you to translate the above balances into IFRS. Requirements of IFRS relating to this question are summarised below:

• Extract from IFRS standard on Provisions: A provision should be recognised when an enterprise has a present obligation (legal or constructive) as a result of a past event; and it is probable that an outflow of economic resources will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation.

• Research and development costs can be carried forward subject to meeting IFRS criteria.

• Inventories must be valued at lower of cost or net realizable value.

• Financial assets such as short-term investments must be measured at market value.

Other relevant data:

1. There has never been a hailstorm in Dax Ltd’s place of operations.

2. Of the $380 000 research and development expense, $65 000 satisfies IFRS criteria to carry forward.

3. The share investment is held for short term profit-making purposes. As at reporting date, shares in Pacific Trustees Ltd were trading at $5 each on the local stock exchange.

4. The directors have recommended that a dividend of $85 000 be paid. The dividend is required to be approved by the company's shareholders. As of reporting date, the shareholders have not met to approve this dividend, but the directors have recorded $85 000 as dividend to be paid anyway.

5. As at reporting date the net realizable value of inventories was $1 000 000.

 Required:

a) Prepare the necessary General Journal entries (Dr/Cr) to adjust the books of Dax Ltd to reflect the requirements of IFRS as at 30 June 2019. Narrations are not required.  (10  marks)

b) Show the impact of the above information on the relevant account balances as they will be disclosed in the Statement of Comprehensive Income (Profit and Loss Statement) and Statement of Financial Position (Balance Sheet) of Dax Ltd after taking into consideration the adjustments required to meet the requirements of IFRS as at 30 June 2019.  (5 marks)

2)

a) The United States of America and Japan have a number of differences in their accounting regulatory environments. Discuss the differences in the legal systems and in the ownership and financing of companies to explain the accounting regulatory environments and accounting practices prevailing in both countries.  (10 marks)

b) Discuss whether it is in the best interest of Japanese economy to fully adopt the International Financial Reporting Standards (IFRS)?  (5 marks)

3) Critically evaluate the findings of Nair and Frank [1980] study? In particular, do you think the findings are still valid in the current era given that most countries are now moving towards accounting convergence? (10 marks) 

4) Raval Ltd, based in Sydney, Australia, has a wholly owned subsidiary in Singapore. The Singaporean subsidiary manufactures bicycles at a cost equal to A$20 per bicycle, which it sells to Raval Ltd at a price of A$100 each. Raval Ltd pays an import duty of 10 percent on the A$100 invoice price. 

The cost to transport the bicycles to Australia is $10 per unit and is paid by the Singapore subsidiary.

Raval Ltd sells the bicycles in Australia for A$200 each. 

The Australian tax authority discovers that Raval Ltd’s Singaporean subsidiary also sells its bicycles to other Australian customers at a price of A$80 each. 

The effective income tax rate in Singapore is 17 percent, and Raval Ltd’s effective income tax rate in Australia is 30%. 

Required:

Determine the PER UNIT financial impact of Raval Ltd management’s decision to allow its Singaporean subsidiary to charge a higher price to Raval Ltd than other customers in Australia.  (10 marks)

5) Mr Jones work as an audit partner and he is currently conducting the audit of the annual financial report of Discount Prices Limited (DPL) for 2018. 

DPL is a discount chain-store which sells women’s clothes. It has an excessively large inventory on hand and is in urgent need of additional cash. Faced with this financial crisis, DPL approached several of the manufacturers from whom it purchases. Apparel Ltd indicated a willingness to lend DPL $500 000 under certain conditions. First, DPL was to submit an audited financial report for the express purpose of providing the correct financial condition of the company. The second condition insisted upon by Apparel Ltd was that it obtain a secured position in all unsecured inventory, accounts and other related personal property. In due course, a security agreement was properly executed.

In preparing the financial report, DPL valued the inventory at cost, which was approximately $200 000 over the current fair market value. DPL also failed to disclose two secured creditors to whom substantial amounts were owed and who took priority over Apparel Ltd’s security interests.

DPL has now asked Jones to issue an unqualified opinion on their financial reports so that they are able to secure the loan from Apparel Ltd. The managing director also said that if Jones did not issue a clean audit report, DPL would sue Jones for substantial damages which would result from not getting the loan. Under this pressure Jones is now considering whether he adjusts the financial reports or issues his audit report without making any adjustments.

Required:

Determine what decision Mr Jones will make regarding whether or not to report the misappropriation by applying the fundamental principles of IFAC Code of Ethics for Professional Accountants.