Question 1 Total 8 marks Oris Engineering Ltd (Oris) is an Australian company that manufactures steel products at its factory in Sydney.
The process that Oris uses to manufacture steel involves feeding a blast furnace with iron ore, coke (which is
produced from coal) and air that has been heated. One of the by-products of this process is the emission of
carbon dioxide (CO2).
Carbon dioxide is a greenhouse gas that is implicated in global warming and one of the objectives of the
Australian government is to reduce the emissions of CO 2 by Australian entities. To achieve this objective, the
Australian government introduced an emission rights scheme that will become effective on 1 July 2017. The
purpose of this scheme is to control the production of CO 2 through providing incentives for entities to reduce
their emissions.
On 1 July 2017, the regulator of the scheme (the Clean Energy Regulator) will allocate emission allowances to
each entity based on the average emissions of CO 2 made by the entity during the last three years. On 1 July
2017, Oris will receive allowances that permit it to emit 150,000 tonnes of CO 2 during the year ending 30 June
2018. These allowances are allocated free of charge; there is no cost to Oris.
A trading market for allowances will be established and the price that the allowances trade for will be
determined by the supply and demand of allowances. This trading market can be used by Oris to purchase
additional allowances (if emissions are expected to exceed 150,000 tonnes during the year) or to sell any
unused allowances (if emissions are expected to be below 150,000 tonnes during the year).
During the year, Oris will deliver allowances to the regulator to ‘pay’ for the CO 2 emissions it makes. If
emissions are made and no allowances are delivered, or the number of allowances delivered does not cover
the emissions, then Oris will have to pay a shortfall charge by way of penalty. This charge will be significantly
higher than the market price for allowances.
The directors of Oris have requested a report from Rebecca Jones, the Chief Accountant, about the accounting
treatment of the emission allowances. To assist her in preparing the report, Rebecca called the accounting
staff together for a discussion. However, this meeting produced conflicting views on how to account for the
emission allowances.
Steven Knight, a senior accountant, proposed that all allowances (whether received for free or purchased)
should be recognised as assets on the date of allocation or purchase.
This approach was challenged by Madelaine Smith, another senior accountant, who stated that only the
purchased allowances should be recognised as assets. Her reasoning was that, prior to the introduction of the
emissions scheme, Oris could make unlimited CO 2 emissions at no cost. The free allowances do not alter the
fact that Oris is in a worse position after the introduction of the scheme through being restricted in its ability
to emit CO2. However, any purchased allowances should be recognised as assets because they have a cost to
Oris.
A different approach was taken by Rodney Kirby, one of the junior accountants. He agreed with Steven that all
allowances were assets. However, he was of the opinion that the assets represented by the free allowances
would offset the liability for emissions. He argued that whether an asset or liability was recognised by Oris
would depend on whether there was an excess or deficiency of allowances held in relation to the liability for
emissions. If the allowances held exceeded the probable emissions then only the surplus allowances would be
recognised as an asset.
Concerned by these conflicting positions, Rebecca has approached you and requested your advice. 1 Required Question 1 continued over next page Using the AASB’s Framework for the Preparation and Presentation of Financial Statements, prepare a
memorandum for the Chief Accountant that addresses the following:
(a) Explain the definition of an asset and the criteria that must be satisfied before an asset can be
recognised in the financial statements.
(1 mark)
(b) Explain whether Oris should recognise the emission allowances (both the allowances received for
free and the purchased allowances) as assets.
(5 marks)
Two marks are allocated for written communication skills: Format: the format of the Memorandum should conform to the example included in the ‘Assignment
information’ below. Organisation: the material included in the Memorandum should be directly relevant to the issue,
logically structured and include appropriate headings. Clarity: meaning should be clearly expressed and should not be ambiguous or confusing. Technical writing skills: there should be no errors in grammar, spelling, punctuation and
capitalisation. Note: you are not required to make reference to any specific accounting standards (for example, AASB 138
Intangible Assets) in your response to this question. 2 Question 2 Total 6 marks Capricorn Holdings Ltd is an Australian public company. The accounting staff of Capricorn Holdings Ltd have
asked for your assistance in preparing the company’s financial statements for the year ended 30 June 2016
and have provided you with the following information: Capricorn Holdings Ltd
Trial Balance
As at 30 June 2016
Item
Sales revenue
Revaluation of property, plant and equipment
Other income
Exchange differences on translation of foreign operations
Cost of goods sold
Distribution expenses
Occupancy expenses
Administrative expenses
Income tax expense
Finance costs
Loss for the year from discontinued operations
Other operating expenses
Loss on investments in equity instruments
Unrealised losses on cash flow hedges
Income tax related to items of other comprehensive income:
Investments in equity instruments
Cash flow hedges
Exchange differences on translation of foreign operations
Revaluation of property, plant and equipment Notes
1. Debit Credit
50,000
6,000
5,000
4,500 30,000
5,000
3,500
3,000
3,000
2,000
2,000
1,500
2,000
1,000 2,000
1,500 500
500 In relation to items of other comprehensive income: The revaluation of property, plant and equipment and investments in equity instruments will not
be reclassified subsequently to profit or loss. The cash flow hedges and exchange differences on translation of foreign operations may be
reclassified subsequently to profit or loss. 2. Comparative figures for the preceding year (ending 30 June 2015) have been omitted. 3. All amounts in the trial balance are in thousands ($’000). 3 Question 2 continued over next page Required (a) Prepare the Statement of profit or loss and other comprehensive income for Capricorn Holdings Ltd
for the year ended 30 June 2016 in accordance with the requirements of AASB 101 Presentation of
Financial Statements.
(4
marks)
(b) On 1 July 2016, Capricorn Holdings Ltd paid $500,000 to purchase a portfolio of financial assets
comprising shares in companies listed on the Australian Securities Exchange. In accordance with
AASB 9 Financial Instruments, Capricorn Holdings Ltd made an irrevocable decision to measure the
portfolio of financial assets at fair value through other comprehensive income.
As at 30 June 2017, the fair value of the portfolio of financial assets had increased to $580,000. Due
to concerns about the volatility of the Australian share market, Capricorn Holdings Ltd sold the
portfolio of financial assets on 1 July 2017 for $580,000. Capricorn Holdings Ltd reclassifies gains on
the sale of financial assets that were measured at fair value through other comprehensive income to
profit or loss.
Complete the following tables in relation to the portfolio of financial assets. Ignore tax. For each of
the two years, you should provide the appropriate line item description/s (for example, gain on sale
of financial assets) and the amount/s to be recognised in profit or loss and/or other comprehensive
income and show the net effect on total comprehensive income.
(2
marks) 30 June 2017 Line item description: Amount ($): Line item description: Amount ($): Profit or loss

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