Done by:Lim Yun Yi (s10131965b) Liu Jia Qi (s10088481c) Melvin (s10113874k) Tan Shi Ning(s10130889e)

Roles of group members Presenter- Melvin Scribe-Jia Qi Researcher - Shi Ning Coordinator - Yun Yi

Problem Cutsey Bakery Pte Ltd is a manufacturer and distributor of bakery products with a net profit of $100,000 for the year ended on 30 September 2012. The shareholders authorised the issue of the financial statements on 1 November 2012. On 2 October 2012, a small fire broke out in the company’s warehouse but was quickly extinguished. The store man checked the inventories and discovered several batches of flour were exposed to the fire. He examined the flour and did not notice any damage to them. As such, the flour was still carried at cost of $50,000 in the 30 September 2012 inventory balance. On 9 October 2012, another store man discovered that the above batch of flour was actually damaged beyond consumption due to the fire. Required: Comment on how the event, which occurred on 9 October 2012, is to be dealt with in the financial statements of Cutsey Bakery Pte Ltd for the year ended 30 September 2012 to comply with the requirements of FRS 10. Your answer should address the following questions: i. Is this an event after balance sheet date? Why or why not? ii. Is it an adjusting or non-adjusting event? iii. What are the appropriate journal entries where applicable? iv. Advise, with reasons, on the disclosure requirements (if any) with reference to the concept of materiality and the nature of the issue.

i. Is this an event after balance sheet date? Why or why not? According to FRS 10#3, events after the balance sheet date are those events, favourable and unfavourable, that occur between the balance sheet date and the date when the financial statements are authorized for issue. Two types of events can be identified: a. Those that provide evidence of conditions that existed at the balance sheet date (adjusting events after the balance sheet date); and b. Those that are indicative of conditions that arose after the balance sheet date (non-adjusting events after the balance sheet date). According to FRS 10 #7, events after the balance sheet date include events up to the date when the financial statements are authorized for issue, even if those events occur after the public announcement of profit or of other selected information. Therefore, this is an event after the balance sheet date, since the event occurred on 9 October 2012, between the balance sheet date of 30 September 2012 and the date of authorization for issue of 1 November 2012.

ii. Is it an adjusting or non-adjusting event? According to FRS 10#9, adjusting events after the balance sheet date include the receipt of information after the balance sheet date indicating that an asset was impaired at the balance sheet date, or that the amount of a previously recognized impairment loss for that asset needs to be adjusted. According to FRS 10#8 - An entity shall adjust the amounts recognized in its financial statements to reflect adjusting events after the balance sheet date. As such, the event is an adjusting event and the company must adjust for the impairment loss of the flour in its financial statements for the year ended 30 September 2013, to reflect the adjusting event after the balance sheet date.

iii. What are the appropriate journal entries where applicable? DR Loss on Inventory 50,000 CR Inventory 50,000 iv. Advise, with reasons, on the disclosure requirements (if any) with reference to the concept of materiality and the nature of the issue. According to FRS 10#17, an entity shall disclose the date when the financial statements were authorized for issue and who gave that authorization. If the entity’s owners or others have the power to amend the financial statements after issue, the entity shall disclose that fact. FRS10#19 states that if an entity receives information after the balance sheet date about conditions that existed at the balance sheet date, it shall update disclosures that relate to those conditions, in the light of new information. Hence, the company must disclose the authorized for issue date of 1 November 2012 and the shareholders that gave the authorization, and also information about the loss in inventory due to the fire. In case of non-adjusting event, the loss on inventory was $50,000, which means half of the bakery’s profits of $100,000, this proves that the loss on inventory was material. Since the amount of inventory was incorrect and proved to be material, the bakery should still disclose it.

Case Study OLD CHANG KEE i. What are the sources of revenue for the company? ii. Find out how the company recognises its various sources of revenue. iii. Discuss whether the company’s revenue recognition policies are in compliance with the requirements of FRS18.

Old Chang Kee i. What are the sources of revenue for the company? The main sources of revenue for the company includes all revenue from outlets and service revenue. These include the sale of food and beverages under Old Chang Kee and franchise earnings. Other sources include rental income, interest income and royalties.

Old Chang Kee ii. Find out how the company recognises its various sources of revenue. Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured, regardless of when the payment is made. The Group assesses its revenue arrangements to determine if it is acting as principal or agent. The following specific recognition criteria must also be met before revenue is recognised: (a) Outlet sales Revenue from sale of goods is recognised net of goods and services tax and discounts upon the passing of title to the customer which generally coincides with delivery and acceptance of the goods sold. (b) Franchise and royalties income Franchise income is recognised as the services are rendered or the rights used, completion of the designated phases of the franchise set-up, or when the supplies of equipment and other tangible assets are delivered or title passed to the franchisee. Royalties income is recognised on annual basis as a percentage of the franchisees’ turnover in accordance with terms as stated in the franchise agreement.

Old Chang Kee ii. Find out how the company recognises its various sources of revenue. (c) Interest income Interest income is recognised using the effective interest method. (d) Rental income Rental income is accounted for on a straight-line basis over the lease terms.

Old Chang Kee iii. Discuss whether the company’s revenue recognition policies are in compliance with the requirements of FRS 18. Recognition of sale of goods FRS 18#14(a) states that recognition of the sale of goods is when the entity has transferred to the buyer the significant risks and rewards or ownership of the goods and, under FRS 18#14(c), that the amount of revenue can be measured significantly. In this case, Old Chang Kee did recognise the sale of goods correctly -sale of food and beverages contributed to the outlet sales -recognised when the title of goods is passed to customers upon delivery and acceptance of goods (significant risks and rewards have been transferred to the customers) - different food and beverages each have a fixed price Old Chang Kee complies with the requirements under FRS 18#14(a) and FRS 18#14(c).

Old Chang Kee iii. Discuss whether the company’s revenue recognition policies are in compliance with the requirements of FRS 18. Rendering of services (franchise) FRS 18#30(b) states that royalties shall be recognised on an accrual basis in accordance with the substance of the relevant agreement. Old Chang Kee recognises royalties, according to the franchise agreement, as a percentage of the franchisees’ turnover. Old Chang Kee complies with the requirements under FRS 18#30(b).

Old Chang Kee iii. Discuss whether the company’s revenue recognition policies are in compliance with the requirements of FRS 18. Rendering of services (franchise) FRS 18#20 states that when the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction should be recognised by reference to the stage of completion of transaction at the balance sheet date. The outcome of a transaction can be estimated reliably when all the following conditions have been satisfied: (a) the amount of revenue can be measured reliably; (b) it is probable that the economic benefits associated with the transaction will flow to the entity; (c) the stage of completion of the transactions at the balance sheet date can be measured reliably; and (d) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably. Applying FRS 18#20 regarding franchise fees, the amount of supplies of equipment and other tangible assets is based on the fair value of the assets is sold and is recognised as revenue when the items are delivered or title passes. Old Chang Kee complies with the requirements under FRS 18#20.

Old Chang Kee iii. Discuss whether the company’s revenue recognition policies are in compliance with the requirements of FRS 18. Interest Income Regarding interest, FRS 18#30(a) states that it shall be recognised using the effective interest method as set out in FRS 39, paragraphs 9 and AG-5AG8. Old Chang Kee calculates interest using the effective interest method. Old Chang Kee complies with the requirements under FRS 18#30(a).

References http://oldchangkee.listedcompany.com/ http://www.oldchangkee.com/index.htm http://jehanara.wordpress.com/2007/12/03/old-chang-kee/ http://www.deal.com.sg/deals/singapore/old-chang-kee-deal-exclusive-pay-only-4-5-cash-voucher-old-chang-kee-or-pay-only-19-?a_aid=special http://www.oldchangkee.com/seafood-products.htm http://www.asc.gov.sg/frs/frsEffective01012013.htm