Question

The Chief Executive Officer of your company Hoota Limited wants you to explain the accounting treatment of the following transactions following your return from an IFRS workshop on various accounting standards. You are the finance manager of your company.

Transaction One

Hoota Limited introduced two pension schemes, ‘CON’ and ‘BEN’ on 1 April 2019 for the benefit of its employees. The following information relates to the two schemes as at 1 April 2020:

CON Scheme

Under this scheme the company’s obligation is limited to its fixed annual contribution of K600,000. The membership of this pension scheme is senior management staff of the company.

At 1 April 2019, there were contributions paid in advance for the year ending 31 March 2020 amounting to K150,000. In the year ending 31 March 2020, the company made total contribution of K1,040,000 out of which K200,000 related to the year ending 31 March 2021. During the year to 31 March 2021, total contributions of K1,400,000 were made out of which K250,000 were made in advance for the year that followed.

BEN Scheme          

Under this scheme, the company guarantees benefits to the employees when they reach 60 years or after working for the company for 30 years whichever comes earlier. The membership of this pension scheme is employees other than senior management staff.

The following relates to the pension scheme:                                  K’000

Net plan assets at 1 April 2020                                                  500

Current service cost                                                                2,000

Contributions paid                                                                      800

Pension benefits paid                                                                  400

Net plan liability at 31 March 2021                                            200

Appropriate annual discount rate 12%

During the year to 31 March 2021, Hoota Limited adjusted the formula used to calculate the benefits payable to employees. This resulted in a decrease of K510,000 in pension benefits payable to employees.

Contributions and pension benefits were all paid at 31 March 2021.

The company has only recorded contributions paid in its financial statements for the year to 31 March 2021.

Required:

Explain how the two schemes, CON and BEN should be treated in the financial statements of Hoota Limited for the year to 31 March 2021.

Note: Include all relevant calculations in your explanation.                                                                                                                                                                                             

Transaction two

Hoota Limited deals in groceries and hardware products. The company has thus two divisions, groceries’ division and hardware’s division. It was formed six (6) years ago by two Zambians who are the directors of the company. They have been responsible for the day to day running of the business. One of the directors made the following comments: “we have not seen the need to disclose the performance of each division. We have only been interested in the overall performance of the company; disclosing the performance of each division is a waste of time and

does not add any value to our financial statements. Further, as far as I am concerned, there are no known criteria for identifying operating segments”.

Required:

Discuss the comments made by the director of Hoota limited, making reference to appropriate accounting standards.                                                                                               

                                                                                                                        [Total: 20 marks]

Answer 1

Transaction Two:

As far as the comments of the Director of the Hoota Limited are concerned are totally wrong and invalid. Since the company is earning on two divisions which are distinct sectors, it has to make a disclosure as per IFRS 8 for Segment Reporting. IFRS 8 Segment Reporting is the accounting standard applicable to operating segments.

The director's comment "Further, as far as I am concerned, there are no known criteria for identifying operating segments” is invalid and shall identify the segnments and disclose them in the financial statements based on the below discussed criteria.

What is Segment Reporting? Segment reporting discloses financial information about the individual units of a company. It is the obligation of the company to give information to users of the financial statements regarding the financial performance and position about the most important operating units of a company.

What are operating Segments? An operating Segment is a division independently operating among the other segments which may be similar or distinct in the business but established under one ompany's name.

A reportable segment is a division of the entity where an entity shall report separately information about each identified operating segment and aggregated operating segments that exceed the thresholds.

Those thresholds may be quantitative or financial:

– Its reported revenue, including both sales to external customers and inter-segment sales or transfers, is 10 per cent or more of the combined revenue, internal and external, of all operating segments
– The absolute amount of its reported profit or loss is 10 per cent or more of the greater, in absolute amount, of (i)The combined reported profit of all operating segments that did not report a loss, and
(ii) The combined reported loss of all operating segments that reported a loss
– Its assets are 10 per cent or more of the combined assets of all operating segments.

If all the segments' revenue doesnot constitute more than 75% of the total company's revenue, then additional segaments must be included till all the segments' revenue reaches to 75% of the Company's revenue

Disclosing the operating segments is not a waste of time but definitely adds value to the company's financial statements. The users of finanacial statements will come to a quick conclusion or discussion that on which segment the company need to concentrate more or invest more etc.