Reference no: EM133004217

Question - You are the Financial Controller for Uther plc. Draft financial statements for the year ended 31 December 2020 have been prepared by the assistant accountant. The Finance Director has asked you to make any adjustments required in respect of the following outstanding matters.

An e-mail received from the Finance Director stated the following: "As you know, the year-end profit figure is of critical importance. It is essential that the profit figure is as high as possible so that we retain the confidence of our shareholders and lenders. We also need to keep gearing as low as possible so that we can obtain further borrowing. Without this borrowing we may need to make redundancies. Please provide me with a revised figure for the profit for the year and a calculation of earnings per share."

Consolidated profit for the year in the draft statement of profit or loss is £937,000. The following outstanding matters have been identified:

(1) On 1 January 2020, Uther plc received a government grant of £100,000, representing 50% of the cost of a specialised asset, which was acquired on 1 January 2020. The asset has a four-year useful life and has been correctly depreciated in the draft financial statements on a straight-line basis. Uther plc's stated accounting policy is to recognise government grants using the deferred income method. The grant is only repayable if the asset is sold within four years of the date of receipt of the grant. Management currently plan to continue using the asset for the full useful life. The Finance Director asked the assistant accountant to credit the full grant of £100,000 to investment income in the draft statement of profit or loss for the year ended 30 December 2020 on the grounds that she does not expect the grant will have to be repaid.

(2) Uther plc has the right to use the first floor of a building as its head office under a lease arrangement. The commencement date of the lease was 1 January 2020. The lease term is 20 years, which is the same as the remaining useful life of the building. Uther plc paid legal fees of £20,000 and 6 PLEASE TURN OVER is required to pay £50,000 on 31 December each year commencing on 31 December 2020. The assistant accountant has posted both the legal fees and the payment on 31 December 2020 as debit to administration expenses in the statement of profit or loss. This is on the basis that Uther plc only uses one floor out of the twenty-five floors of the building and therefore Uther plc is only using a very small portion of the building. The interest rate implicit in the lease is 4% and on 1 January 2020, the present value of the future lease payments was £679,500. Company policy is to recognise depreciation of similar non-current assets on a straight line basis within administration expenses.

(3) On 1 January 2020, Uther plc had ordinary share capital of £4m, with each share having a nominal value of 50p per share. On 1 June 2020, Uther plc made a 1 for 4 rights issue at a price of £1.10 per share. The market value of each share on this date was £1.30.

a) Explain the IFRS financial reporting treatment of items (1) and (2) in the financial statements of Uther plc for the year ended 31 December 2020, preparing all relevant calculations. As part of your answer you need to make reference to the definitions and treatments required by the relevant financial reporting standards.

b) Evaluate the extent to which accounting treatment for items (1) and (2) provide information that is useful to the users of financial statements. As part of your answer you should also consider the likely impact upon the gearing ratio and the extent to which the relevant financial reporting standards prevent the Finance Director of Uther plc from manipulating the financial statements. You may use the characteristics of financial information according to the conceptual framework to support your arguments.