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(b) (i) Matters to consider
Materiality
The receivable represents only 0·2% (25,000/12 million x 100) of total assets so is immaterial in monetary terms.
However, the details of the transaction could make it material by nature.
The amount is outstanding from a company under the control of Pulp Co’s chairman. Readers of the financial statements
would be interested to know the details of this transaction, which currently is not disclosed. Elements of the transaction
could be subject to bias, specifically the repayment terms, which appear to be beyond normal commercial credit terms.
Paul Sheffield may have used his influence over the two companies to ‘engineer’ the transaction. Disclosure is necessary
due to the nature of the transaction, the monetary value is irrelevant.
A further matter to consider is whether this is a one-off transaction, or indicative of further transactions between the two
companies.
Relevant accounting standard
The definitions in IAS 24 must be carefully considered to establish whether this actually constitutes a related party
transaction. The standard specifically states that two entities are not necessarily related parties just because they have
a director or other member of key management in common. The audit senior states that Jarvis Co is controlled by Peter
Sheffield, who is also the chairman of Pulp Co. It seems that Peter Sheffield is in a position of control/significant influence
over the two companies (though this would have to be clarified through further audit procedures), and thus the two
companies are likely to be perceived as related.
IAS 24 requires full disclosure of the following in respect of related party transactions:
– the nature of the related party relationship,
– the amount of the transaction,
– the amount of any balances outstanding including terms and conditions, details of security offered, and the nature
of consideration to be provided in settlement,
– any allowances for receivables and associated expense.
There is currently a breach of IAS 24 as no disclosure has been made in the notes to the financial statements. If not
amended, the audit opinion on the financial statements should be qualified with an ‘except for’ disagreement. In
addition, if practicable, the auditor’s report should include the information that would have been included in the financial
statements had the requirements of IAS 24 been adhered to.
Valuation and classification of the receivable
A receivable should only be recognised if it will give rise to future economic benefit, i.e. a future cash inflow. It appears
that the receivable is long outstanding – if the amount is unlikely to be recovered then it should be written off as a bad
debt and the associated expense recognised. It is possible that assets and profits are overstated.
Although a representation has been received indicating that the amount will be paid to Pulp Co, the auditor should be
sceptical of this claim given that the same representation was given last year, and the amount was not subsequently
recovered. The $25,000 could be recoverable in the long term, in which case the receivable should be reclassified as
a non-current asset. The amount advanced to Jarvis Co could effectively be an investment rather than a short term
receivable. Correct classification on the statement of financial position (balance sheet) is crucial for the financial
statements to properly show the liquidity position of the company at the year end.
Tutorial note: Digressions into management imposing a limitation in scope by withholding evidence are irrelevant in this
case, as the scenario states that the only evidence that the auditors have asked for is a management representation.
There is no indication in the scenario that the auditors have asked for, and been refused any evidence.

正确答案：

(c) The type of payment might influence the success of the bid. Paxis is proposing a share for share exchange which offers a continuation in ownership of the entity, albeit as part of the successful bidder. However, relative share prices will change during the period of the bid, and the owner of shares in the potential victim company will not know the precise postacquisition value of the bid. An alternative might be cash payments which provides a known, precise sum, and might be favoured for this reason. However, in some countries payment in cash might lead to an immediate capital gains tax liability for the investor.

The effective price offered would of course be a major influence. Paxis would need to offer a premium over the existing share price, but the size of the premium that would be acceptable is unknown. Informal discussions with major shareholders of Wragger might assist in determining this (subject to such discussions being permitted by the regulatory authorities).

正确答案：
(b) The main disagreement over a shift to fair value measurement is the debate over relevance versus reliability. It is argued that
historical cost financial statements are not relevant because they do not provide information about current exchange values
for the entity’s assets which to some extent determine the value of the shares of the entity. However, the information provided
by fair values may be unreliable because it may not be based on arm’s-length transactions. Proponents of fair value
accounting argue that this measurement is more relevant to decision makers even if it is less reliable and would produce
balance sheets that are more representative of a company’s value. However it can be argued that relevant information that is
unreliable is of no use to an investor. One advantage of historical cost financial information is that it produces earnings
numbers that are not based on appraisals or other valuation techniques. Therefore, the income statement is less likely to be
subject to manipulation by management. In addition, historical cost balance sheet figures comprise actual purchase prices,
not estimates of current values that can be altered to improve various financial ratios. Because historical cost statements rely
less on estimates and more on ‘hard’ numbers, it can be said that historical cost financial statements are more reliable than
fair value financial statements. Furthermore, fair value measurements may be less reliable than historical costs measures
because fair value accounting provides management with the opportunity to manipulate the reported profit for the period.
Developing reliable methods of measuring fair value so that investors trust the information reported in financial statements is
critical.
Fair value measurement could be said to be more relevant than historical cost as it is based on market values and not entity
specific measurement on initial recognition, so long as fair values can be reliably measured. Generally the fair value of the
consideration given or received (effectively historical cost) also represents the fair value of the item at the date of initial
recognition. However there are many cases where significant differences between historical cost and fair value can arise on
initial recognition.
Historical cost does not purport to measure the value received. It cannot be assumed that the price paid can be recovered in
the market place. Hence the need for some additional measure of recoverable value and impairment testing of assets.
Historical cost can be an entity specific measurement. The recorded historical cost can be lower or higher than its fair value.
For example the valuation of inventory is determined by the costing method adopted by the entity and this can vary from
entity to entity. Historical cost often requires the allocation of costs to an asset or liability. These costs are attributed to assets,
liabilities and expenses, and are often allocated arbitrarily. An example of this is self constructed assets. Rules set out in
accounting standards help produce some consistency of historical cost measurements but such rules cannot improve
representational faithfulness.
Another problem with historical cost arises as regards costs incurred prior to an asset being recognised. Historical costs
recorded from development expenditure cannot be capitalised if they are incurred prior to the asset meeting the recognition
criteria in IAS38 ‘Intangible Assets’. Thus the historical cost amount does not represent the fair value of the consideration
given to create the asset.
The relevance of historical cost has traditionally been based on a cost/revenue matching principle. The objective has been to
expense the cost of the asset when the revenue to which the asset has contributed is recognised. If the historical cost of the
asset differs from its fair value on initial recognition then the matching process in future periods becomes arbitrary. The
measurement of assets at fair value will enhance the matching objective. Historical cost may have use in predicting future
net reported income but does not have any necessary implications for future cash flows. Fair value does embody the market’s
expectations for those future cash flows.
However, historical cost is grounded in actual transaction amounts and has existed for many years to the extent that it is
supported by practical experience and familiarity. Historical cost is accepted as a reliable measure especially where no other
relevant measurement basis can be applied.