问题详情

(a)Kayteoperatesintheshippingindustryandownsvesselsfortransportation.InJune2014,KayteacquiredCeemonewhoseassetswereentirelyinvestmentsinsmallcompanies.Thesmallcompanieseachownedandoperatedoneortwoshippingvessels.TherewerenoemployeesinCeemoneorthesmallcompanies.Attheacquisitiondate,therewereonlylimitedactivitiesrelatedtomanagingthesmallcompaniesasmostactivitieswereoutsourced.AllthepersonnelinCeemonewereemployedbyaseparatemanagementcompany.Thecompaniesowningthevesselshadanagreementwiththemanagementcompanyconcerningassistancewithchartering,purchaseandsaleofvesselsandanytechnicalmanagement.Themanagementcompanyusedashipbrokertoassistwithsomeofthesetasks.
KayteaccountedfortheinvestmentinCeemoneasanassetacquisition.Theconsiderationpaidandrelatedtransactioncostswererecognisedastheacquisitionpriceofthevessels.KaytearguedthatthevesselswereonlypassiveinvestmentsandthatCeemonedidnotownabusinessconsistingofprocesses,sinceallactivitiesregardingcommercialandtechnicalmanagementwereoutsourcedtothemanagementcompany.Asaresult,theacquisitionwasaccountedforasifthevesselswereacquiredonastand-alonebasis.
Additionally,Kaytehadborrowedheavilytopurchasesomevesselsandwasstrugglingtomeetitsdebtobligations.Kaytehadsoldsomeofthesevesselsbutinsomecases,thebankdidnotwishKaytetosellthevessel.Inthesecases,thevesselwastransferredtoanewentity,inwhichthebankretainedavariableinterestbasedupontheleveloftheindebtedness.Kayte’sdirectorsfeltthattheentitywasasubsidiaryofthebankandareuncertainastowhethertheyhavecompliedwiththerequirementsofIFRS3BusinessCombinationsandIFRS10ConsolidatedFinancialStatementsasregardstheabovetransactions.(12marks)
(b)Kayte’svesselsconstituteamaterialpartofitstotalassets.Theeconomiclifeofthevesselsisestimatedtobe30years,buttheusefullifeofsomeofthevesselsisonly10yearsbecauseKayte’spolicyistosellthesevesselswhentheyare10yearsold.Kayteestimatedtheresidualvalueofthesevesselsatsaletobehalfofacquisitioncostandthisvaluewasassumedtobeconstantduringtheirusefullife.Kaytearguedthattheestimatesofresidualvalueusedwereconservativeinviewofanimmaturemarketwithahighdegreeofuncertaintyandpresenteddocumentationwhichindicatedsomevesselswerebeingsoldforapriceconsiderablyabovecarryingvalue.BrokervaluationsoftheresidualvaluewereconsiderablyhigherthanthoseusedbyKayte.Kaytearguedagainstbrokervaluationsonthegroundsthatitwouldresultingreatervolatilityinreporting.
Kaytekeepssomeofthevesselsforthewhole30yearsandthesevesselsarerequiredtoundergoanengineoverhaulindrydockevery10yearstorestoretheirservicepotential,hencethereasonwhysomeofthevesselsaresold.Theresidualvalueofthevesselskeptfor30yearsisbaseduponthesteelvalueofthevesselattheendofitseconomiclife.Atthetimeofpurchase,theservicepotentialwhichwillberequiredtoberestoredbytheengineoverhaulismeasuredbasedonthecostasifithadbeenperformedatthetimeofthepurchaseofthevessel.Inthecurrentperiod,oneofthevesselshadtohaveitsenginetotallyreplacedafteronlyeightyears.Normally,engineslastforthe30-yeareconomiclifeifoverhauledevery10years.Additionally,onetypeofvesselwashavingitsfunnelsreplacedafter15yearsbutthefunnelshadnotbeendepreciatedseparately.(11marks)
Required:
DiscusstheaccountingtreatmentoftheabovetransactionsinthefinancialstatementsofKayte.
Note:Themarkallocationisshownagainsteachoftheelementsabove.
Professionalmarkswillbeawardedinquestion3forclarityandqualityofpresentation.(2marks)


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