1. In November 2012, US based information technology Hewlett Packard recorded a write-down of around $8.8 billion related to its $11.3 billion acquisition of the UK based software maker Autonomy Corporation. Hewlett Packard accused Autonomy of deliberately inflating the value of the company prior to its takeover. The former management team of Autonomy flatly rejected the charge.
Required:
Recount the Hewlett Packard Autonomy story to date and critically discuss the view that the occurrence of the Hewlett Packard Autonomy scandal was mainly as a result of a lack of accounting harmonisation between US GAAP and International Financial Reporting Standards (IFRSs).
2. If depreciation/amortisation is done properly, impairment adjustments will not arise.
Required:
Do you agree with the above statement? Critically and fully explain your reasoning. 20 Marks
3. (a) Critically evaluate the assertion that IAS 17 fails to give a clear definitional distinction between finance and operating leases.
(b) IAS 17 states that a particular lease which is a finance lease for the lessee need not automatically be a finance lease as regards the lessor. Can this make sense?
4. (a) Critically assess if goodwill on acquisition meets the IASB's own definition of an asset. 5 marks
(b) Outline five different ways of treating goodwill in financial statements, critically discussing arguments for and against each method.
5. AB Limited is a manufacturing entity that runs a number of operations including a bottling plant that bottles carbonated soft drinks. AB has been developing a new bottling process that will allow the bottles to be filled and sealed more efficiently.
The new process took a year to develop. At the start of development, AB estimated that the new process would increase output by 15% with no additional cost (other than the extra bottles and their contents). Development work commenced on 1 May 2011 and was completed on 20 April 2012. Testing at the end of the development confirmed AB's estimates.
AB incurred expenditure of £280,000 on the above development in 2011/12.
AB plans to install the new process in its bottling plant and start operating the new process from 1 May 2012.
AB's balance sheet is 30 April.
Required:
(a) Using IAS 38-Intangible Assets, carefully describe how AB should recognise and treat its development costs in its financial statements for the year ended 30 April 2012.