Reference no: EM132952860
Question - Bower is a 70% subsidiary of Minny. The directors of Bower are preparing its individual financial statements for the year ended 30 November 20X2 under IFRS Standards.
(a) Bower has a property which has a carrying amount of $2 million at 30 November 20X2. This property had been revalued at the year end and a revaluation surplus of $400,000 had been recorded in other components of equity. The directors were intending to sell the property to Minny for $1 million shortly after the year end. Bower previously accounted for the property under the historical cost basis. Discuss the ethical and accounting implications of the intended sale of assets to Minny by Bower.
(b) On 30 November 20X2, Bower sold some of its land (which had cost $8 million) to Hendrix Bank for $10 million, its fair value at that date as determined by an independent surveyor. The terms of the agreement were as follows:
Bower has the right to develop the land at any time during Hendrix Bank's ownership. The cost of any development will be incurred by Bower.
Bower has the option to reacquire the land for $10 million at any time within five years from the date of sale.
Bower will pay Hendrix a quarterly sum calculated by reference to Hendrix Bank's lending rate plus 2% per annum applied to the purchase price of $10 million.
On the expiry of Bower's five-year option to reacquire the land, Hendrix Bank will offer it for sale generally. At any time prior to that it may only offer the land for sale if it obtains the consent of Bower.
The finance director of Bower entered into this transaction to raise finance without increasing the gearing ratio of Bower. He has recorded the transaction as a normal disposal of property, plant and equipment.
(i) Discuss whether the finance director's accounting treatment of this transaction is correct.
(ii) Discuss briefly the importance of ethical behaviour in the preparation of financial statements and whether the finance director's accounting treatment for this transaction could constitute unethical behaviour.
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