Act Question 1

ACT 10



  1. Mussels and salmon were the biological assets reported by Sanford in its financial statements for the year 2013. These biological assets are indicated in Note 12 of the financial statements’ notes (Sanford Limited, 2013).

  2. According to the NZ IFRS, biological assets consist of living plants and animals. In a) above, mussels and salmon have been considered as biological assets because they fall in the category of living animals.

  3. Sanford measures its biological assets at fair value less costs to sell, with any change recognized in the income statement. The fair value is established with reference to the present value of the expected cash flows using projected harvest volumes, market values and expenses of cultivation until sold. In this case, costs to sell comprises of all the expenses that are necessary in selling the assets. Biological assets become transferred to inventories at the harvesting date. This is in accordance to note 3 of the notes to financial statements (Sanford Limited, 2013).

  4. NZ IAS 41 paragraph 12 has been used in writing the accounting policy note for biological assets of Sanford.

  5. The key assumption that was made by Sanford in determining the fair price of its biological assets is that the biological assets should be valued on the basis of their stage of development. The company made this assumption through measuring the size of the biological assets and determining their fair price based on the prevailing market selling price.

  6. The sources of change in the value of Sanford’s biological assets in its 2013 financial statements include movements of foreign exchange and market prices and risks associated with the growth of the biological assets such as predators, storms, and toxic algae blooms. The dollar value of risks associated with the growth of the biological assets is exceedingly high compared to that resulting from foreign exchange and market price movements (Sanford Limited, 2013).


  1. According to the NZ IAS 21, functional currency describes the currency of the primary economic environment in which an organization operates (paragraph 7). The functional currency is usually determined by the following factors the currency, which mainly influences the sales value for services and goods, the currency of the nation whose competitive forces and policies mainly determine the sales value of its services and goods, and the currency, which chiefly influences labor, material and other costs of providing services and commodities. In the determination of the foreign currency of a foreign operation, factors such as the reporting entity’s proportion of the foreign operation’s activities, the manner in which the activities of the foreign operation are carried out, and whether the cash flows from foreign operation activities are adequate in servicing existing and normally projected debt responsibility without the reporting firm providing funds are considered. However, when the functional currency is not obvious, the management utilizes its judgment in determining the functional currency, which most closely represents the economic impacts of the underlying events, conditions, and transactions. In most cases, evidence of the functional currency used by an organization can be given by the currency of the funds from financing activities and the currency in which funds from operating activities are usually retained. Since the functional currency reflects the underlying events, conditions, and transactions relevant to an entity, the functional currency can only change in case there is a change in the underlying events, conditions, and transactions of the entity nothing else can lead to the change of the functional currency.

  2. It is important for an entity to consider determining the functional currency, when reporting in order to ensure that the consolidation of information during reporting is easy. For instance, in case a United States company operates in another country, where it has a subsidiary, the subsidiary has to ensure that it uses US dollars as its functional currency in order to ensure that the consolidation of its financial information with that of the mother company is easy during reporting. Besides, it is critical to determine the functional currency since it can help a company in comparing the performance of the different subsidiaries with ease. For example, in case an Australian Company has subsidiaries in 50 different countries, the subsidiaries can have their performances compared easily, when financial reporting for all the 50 subsidiaries are done using the same currency. Through the same currency, the performance details will remain the same without the need of converting currencies.

  3. New Zealand dollars was the functional currency used by Sanford in preparing and reporting its 2013 annual financial statements. This is provided by note 2 part c, where the entity discloses its functional and presentation currency.



Theearnings per share of Sanford was 21.7 cents for 2013 and 21 centsfor 2012


Fromthe NZX Company Research database, the price of Sanford share on 2ndOctober 2012 was $ 4.3, while the price was $ 4.410 on 30thSeptember, 2013.


P/Eratio = market value per share divided by earnings per share

P/Eratio for 2012 = 4.3 /0.21


P/Efor 2013 = 4.41 /0.217



TheP/E ratios for 2012 and 2013 are slightly different due to changes inthe market value of shares and the earnings per share. The marketvalue of shares is likely to change due to influences of differentmarket factors such as interest rates and demand and supply. Forinstance, the prices of shares may change due to interest rates,which can lead to having different price-earnings ratio. However, incase the market price of share and earnings per share change at thesame rate for the two years, or remain constant, the P/E ratios forthe two years would not change.



(i)In this case, Entity A has introduced a bonus scheme to theemployees, which the entity will pay after three years of operationto the employees that are still employed by the entity within theperiod however, the benefits to be received by the employees areshare-based. Such employee benefits, where there is an involvement ofshare-based appreciation, are explained under the NZ IAS 2. Accordingto this standard, an entity should recognize share-based paymenttransactions in its financial statements, which is to be paid incash, equity instruments, or through other assets (NewZealand Institute of Chartered Accountants,2013). In the scenario presented, entity A will pay cash to employeesbased on the share appreciation over a period of three years. Theinvolvement of share-based benefit to the employees is a clearindication that this case relates to the NZ IAS 2 since it is thestandard that recognizes share-based employee benefits.

ii)In this case, entity C will pay employees a bonus, which is apercentage of their annual salary. Since this employee benefit is notbased on shares, it can be equated to the provisions of the NZ IAS19. According to the NZ IAS 19, the accounting and disclosure foremployee benefits is prescribed. The standard also requires an entityto recognize a liability upon an employee providing service inexchange for the employee benefits that are to be paid in the future(NewZealand Institute of Chartered Accountants,2013). In the case presented, the entity recognizes liability afterthree years of service, when employees will be paid their bonuspackage. This goes along with the standard since it requires that anentity should recognize an expense after the entity consuming theeconomic benefit that arise from the services provided by employeesin exchange for employee benefits. The employees first provided theservices to entity C, and then the entity recognized the service inexchange for benefits.


  1. Entity N has chosen the use of options rather than cash in paying employees. Through using options, the entity can be prevented from maximizing short term gains at the expense of long run survival of the entity. What the entity is doing is that it is postponing the costs in order to aid in meeting profit targets. This is because using options rather than cash incites employees to work so that the entity can attain long term earnings. The options should be treated as an expense since according to GAAP provisions, they should be expensed. Although there is a question of timing and fair value of options, the International Accounting Board (IASB) argues that financial statements usually exhibit the standard of relevance the moment they include all material costs that have been incurred by an entity. According to FAS 123, disclosure is necessary rather than recognition. This implies that options cost estimates should be disclosed as a footnote however, they do not have to be recognized as expenses on the income statement. Nevertheless, share options must be treated as expenses since they have the impact of increasing expenses on EPS. Furthermore, under the NZ IFRS 2, the options should be treated as an expense since they are part of employee remuneration (New Zealand Institute of Chartered Accountants, 2013) employee remuneration is considered an expense. This should make entity N to consider share options as an expense.

  2. The estimated amount of total remuneration during the grant date, prior to any re-pricing would be calculated by multiplying share option by the fair price at the grant date

Totalremuneration = share options * fair price

Shareoption = 10 * 1000 = 10,000

Fairvalue = $ 5

Totalremuneration = 10,000 * 5

=$ 50,000

Thishas been guided by the NZ IFRS 2 paragraph 15, which requires thatequity instruments that have been granted do not vest until theexchange party completes the specified period of service. Besides,the entity assumes that the services rendered by the employees willbe received in the future. Therefore, the initial fair value must beconsidered, even though the number of options may change (NewZealand Institute of Chartered Accountants,2013).

  1. Journal entries





Remuneration expense $16,000

Issued capital (options) $ 16,000


Remuneration expense $ 15,417

Issued capital (options) $ 15, 417


Bank $ 62,790

Issued capital (options) $ 44, 850

Bank $ 17,940


In2011, the number of employees decreased by 40, but the fair price hasto remain the same which implies that the entity is liable to paying960 employees 10 share options each at a fair price of $5, and has tobe distributed within three years that is, 960* 10 *5 then dividedby 3 (=48000 /3) to give a distribution of 16000 every year. It isgood to note that although the fair price of each share has increasedby $2, the re-pricing will be considered during the vesting date. In2012, further 35 employees leave, which makes the number of employeesto stand at 925. Since the fair price will not change until thevesting date, the fair price of grant date is considered and theoptions are distributed within three years this yields 15,417 peryear (9250 * 5 = 46,250/3). On the other hand, for 2013, which is thevesting date, the total number of employees is 897. Since the vestingdate fair price has to be considered, the entity will pay 897 *10 * 7= 62,790. However, the initial amount that the entity could have paidby considering the far price at grant date would have been 897 * 10 *5 = 44,850. The difference (17,940) is credited to the bank accountof the entity since the total value of share options that the entitywill pay by considering the fair price after re-pricing is higherthan what it should have paid by considering the grant fair price.The calculations presented in this section have been based on theprovisions of NZ IFRS 2 paragraph 15.


SanfordLimited, Annual Report 2013.

NewZealand Institute of Chartered Accountants. (2013).&nbspStudentedition: NZ IFRS, 2013 : New Zealand equivalents to internationalfinancial reporting standards for Tier 1 and Tier 2 for-profitentities.Wellington, N.Z: New Zealand Institute of Chartered Accountants.