International Financial Reporting Standards (IFRS) – JJ Victory Group: Case Study Information And Ba

Question

Task

1. Apply key International Financial Reporting Standards (IFRS) requirements and assess specific accounting policies for IFRS compliance.
2. *Describes current accounting practices in a professional context and in accordance with International Financial Reporting Standards. (IFRS).
3. Prepare the elements of separate financial statements and explain current accounting practices under IFRS.
4. Prepare consolidated financial statements for corporate groups, including affiliates and joint ventures.

Professional Background: Use professional communication skills to explain prepared financial information clearly and concisely, as appropriate. This means writing the right format, writing the right description for your audience, and using the right business language.

You are the new Chief Financial Officer of JJ Victory Plc (JJ Victory). The Finance Department is responsible for the preparation of JJ Victory’s individual financial statements and the Group’s consolidated financial statements.

JJ Victory is a manufacturer of luxury, high performance motorcycles and a distributor of motorcycle parts and services. As of September 30, 2018, the company has four main models of his, which are handcrafted and sold through a network of franchised dealers. The company also offers highly specialized bespoke motorcycles. It can take him from three months to a year to design and build these units to a customer’s specifications. Due to the uniqueness and luxury of his bespoke JJ Victory motorcycles, these units can be charged a hefty premium.

The JJ Victory brand has a great reputation. Handcrafted motorcycles are known worldwide for their style and quality. In the 1960s, one of the bespoke models was used in a hit movie series based on the famous Phantom Rider series of novels, greatly increasing the value of the brand. The company’s products continue to be part of the Phantom Rider series, whose films continue to be box office hits.

JJ Victory’s strategy is to maintain and expand its niche market position within the motorcycle industry. The Board recognizes that while the JJ Victory brand is solid, it targets a very narrow customer base, accessible only to those with significant disposable income. The company hopes to raise brand awareness and appeal to a younger market, which tends to be more environmentally conscious. Most of JJ Victory’s customers are now between the ages of 40 and 60.

Module’s assessed learning outcomes:

Two strategies implemented during the year ended September 30, 2018 are:

Development of the company’s entire product line to reduce engine harmful emissions without sacrificing performance. This is an ongoing effort by JJ Victory’s R&D team to reduce emissions with each new model introduced over the last five years. To accelerate development of the ultimate “clean” engine, JJ Victory acquired his 60% stake in DAC Enviro Ltd on January 1, 2018. (DAC).

DAC develops and produces engines for various manufacturers in the automotive industry. DAC was not included among the suppliers, as the unique nature of JJ Victory’s product line means they always hand build their engines. However, this new acquisition has led to some trading between the two companies. In recent years, DAC has been working on engines that utilize alternative fuel technology. In 2016, DAC developed a dual-fuel engine for light vehicles that uses electrical energy more efficiently, reducing the use of petroleum-based fuels by 50% compared to other products on the market. DAC is currently developing a high performance sports engine powered exclusively by electricity. The investment in DAC was made to allow JJ Victory to benefit from in-house expertise and move closer to the company’s ultimate goal of making all types of motorcycles 100% electric powered. .

Over the past two years, JJ Victory has collaborated with Blast Plc (Blast!) to develop chassis and engines for Moto GP, and has hired experienced Moto GP engineers and test riders to ensure a competitive Moto GP. have adopted. Build a winning team. Race within 3 years. Blast is the market leader in energy drinks, but is known for its involvement and sponsorship of “extreme sports” events. The contract between JJ Victory and Blast stipulates that Blast will provide the funding and JJ Victory will be responsible for designing and building the racing bike. The Moto GP team is called “Blast 2 Victory” or B2V. B2V is structured as a separate entity with one million shares outstanding. Shares will be allocated to JJ Victory and Blast in a 40:60 ratio.

In the fiscal year ending September 30, 2018, B2V competed in its first race season and performed well in its first race season, although it did not win any races. Additional information on this interest is provided in section 2 of the Supplementary Information (Note 8).

JJ Victory Group: Case Study Information and Background

The following is the financial report of JJ Victory, DAC and B2V for the year ended September 30, 2018. Financial reports for all three companies were prepared before you became Chief Financial Officer of JJ Victory Group.

DAC and B2V’s financial statements have been approved by their respective boards of directors, while JJ Victory’s financial statements are draft financial statements.

Income statement for the fiscal year ended September 30, 2018

	Note	JJ Victory (Draft)	DAC	B2V
		£’000	£’000	£’000
Revenue		850,233	66,000	10,553
Cost of Sales		(490,760)	(31,800)	(9,812)
Gross profit		359,473	34,200	741
Distribution and administrative expenses		(211,063)	(14,760)	(992)
Investment income (dividend from DAC)		3,600	–
Finance costs		(24,311)	(2,950)	(232)
Profit before tax		127,699	16,490	(483)
Income tax expense/credit		(15,574)	(1,525)	38
PROFIT FOR THE YEAR		112,125	14,965	(445)

Statement of financial position as at 30 September 2018 

	Note	JJ Victory (Draft)	DAC	B2V
		£’000	£’000	£’000
Non-current assets:
Property, plant and equipment		257,567	13,735	7,972
Intangible assets		910,705	52,060	23,700
Investment in DAC	4	30,000	–	–
Investment in B2V	8	10,000	–	–
		1208,272	65,795	31,672
Current assets:
Inventories		78,785	3,556	3,442
Trade receivables		67,327	2,970	934
Contract costs	2	220
Cash and cash equivalents		102,572	133	21
		248,904	6,659	4,397
Total assets		1457,176	72,454	36,069
Equity and reserves:
Share capital (£1 nominal value equity shares)		4,000	1,300	1,000
Share Premium		10,000	1,200	32,500
Retained earnings		625,434	43,994	(6,031)
		639,434	46,494	27,469
Non-current liabilities
Bonds		750,000	23,850	5,300
Current liabilities:
Trade and other payables		52,500	1,710	2,800
Borrowings		15,242	400	500
		67,742	2,110	3,300
Total Equity and liabilities		1457,176	72,454	36,069

1. JJ Victory will transfer the motorcycle to the franchise dealer on the following terms:

1. Bikes are paid for when they are resold to third party customers.
2. Legal ownership remains with JJ Victory until sold to those customers.
3. Retailers are responsible for storage and insurance costs associated with units received from JJ Victory.
4. The price of the shares transferred will be determined at the time of the transfer.
5. Bikes can be returned to JJ Victory at the request of either party, but this is extremely rare.

As of 30 September 2018, the £62 million retail motorcycle has been transferred to the retailer and not resold to third party customers. In its draft income statement for the year ended September 30, 2018, JJ Victory has recognized revenue for these units upon delivery to retailers and has also included related production costs in cost of sales. These bikes cost £35.3m to build.

2. As of September 30, 2018, we are accepting orders for the bike as a build-to-order manufacturing. The contract selling price is £500,000 and the estimated total cost of the complete car is £270,000. The cost to date of £220,000 has been recognized as a current contract cost in the draft financial statements. The contract commenced on June 1, 2018 with an expected completion date of November 1, 2018.

The terms of the contract stated that the bike would be paid in two equal installments of £250,000. These initial payments were billed as accounts receivable and were received by the end of the year. To protect both parties, the terms of the contract stipulate that the customer takes ownership of any major component if it is certified that it has been completed by an independent engineer. As of September 30, 2018, the chassis, engine and engine management system have been integrity certified and the customer retains legal title to these components. The customer is contractually responsible for the cost of storing and insuring these parts.

JJ Victory’s policy is to measure the progress of this type of contract by production value. The company’s expert engineers estimate that the project is 70% complete.

In JJ Victory’s draft accounts, £220,000 of the cost was recorded as a current contract cost, and his £250,000 billed to the customer was recorded as a credit. By the end of the year the customer had paid £250,000, so the account receivable balance for this amount is zero.

Two strategies implemented during the year ended September 30, 2018 are:

3. On October 1, 2017, JJ Victory set up a new production line. The cost of the production line was £10m, which was capitalized as property, plant and equipment. The factory floor had to be modified to install the new line, resulting in a site preparation cost that cost him £1million. It also cost £500,000 to install. The production line has an estimated useful life of 10 years and no residual value. However, the line includes his £300,000 worth of key components, which will have to be replaced within three years.

Site preparation costs, installation costs, etc. are included in selling, general and administrative expenses.

Although this asset is operating, we have not adjusted for impairment of this asset as it is only 25% occupied.

JJ Victory’s policy is to add the depreciation of production equipment to the cost of sales.

Investment in other companies

4. Victory JJ acquired his 60% stake in DAC on January 1, 2018. DAC’s retained earnings at the time of acquisition were £32.8m.

Further investigation of the contract drawn up at the time of purchase revealed that the consideration for the investment was agreed upon in the contract as follows:

Investment in DAC Co., Ltd.

Cash (paid) £30m
Contingent Consideration £10m
Deferred Consideration: £15m

Contingent consideration is paid if engine development project efficiency and emissions test results meet specified targets. At the time of the acquisition, it was believed that this condition was likely to be met. Payment of the contingent consideration is scheduled to be made on January 1, 2020.

Deferred consideration of £15 million is also due on 1 January 2020. There are no restrictions on this payment.

1. The cost of investing in DAC is reported to be £30m, which is the cash amount paid on 1st January 2018.
2. JJ Victory uses a 6% discount rate on accruals for future payments and prorates reversal of discounts as needed.

5. JJ Victory has adopted a policy of measuring all non-controlling interests at fair value. At the time of JJ Victory’s acquisition of DAC (1 January 2018), the fair value of each DAC share was £65.

Conducted due diligence on the acquisition of DAC. The report found:

(i) DAC owns land with a fair value of £5m; The property was in DAC’s financial records as of 1 January 2018 and had a year-end acquisition value of £3m. As of September 30, 2018, there is no change in the fair value of the property.

(ii) DAC conducts extensive research and development activities; The current project to develop a high performance electric motor is progressing well. However, DAC has not capitalized the costs associated with this project due to the uncertainty that sufficient resources will be available to complete the project. The due diligence report includes a £12m valuation for the research. This evaluation was carried out by a reputable company that specializes in evaluating technological developments in the field of mechanical engineering. The fair value of the survey remained at £12m as at 30 September 2018.

(iii) DAC’s notes to financial statements contain a contingent liability disclosure for a legal claim made by one of DAC’s customers on August 1, 2017. The complaint alleges that the engines purchased from DAC used inferior materials, which required the rebuilding of some vehicles. DAC’s customers are alleged to have lost £10m due to lost production time and are demanding compensation for that amount. Amounts have not been disclosed in DAC’s financial statements because, in the view of DAC’s attorneys, it is unlikely that the client’s claim will be successful. Duck’s notes to the financial statements show a potential outflow of £10m, with a 30% probability of an outflow. The due diligence report therefore sets the fair value of the potential claims at £3m. The fair value of the contingent liability at 30 September 2018 remained at £3m. This claim is expected to be resolved within 12 months.

7。 On 12 August 2018, DAC sold some engines to JJ Victory for £2 million on credit. The production cost DAC £1.1 million. As of September 30, 2018, he has 70% of these engines on his JJ Victory motorcycles, all sold to authorized dealers. These retailers are companies other than JJ Victory Group.

On 28th September 2018, JJ Victory paid £1.6m of the engine’s outstanding balance and reduced its trade liability accordingly. DAC has not yet received the funds, so his balance of accounts receivable against JJ Victory remains at £2m.

8. B2V’s net worth was at fair value when JJ Victory acquired a 40 per cent interest in 1 million ordinary shares (valued at £1) in the company at its inception. B2V was established in October 2015 with JJ Victory’s £10m investment in the company. Another large investor, Blast!, invested £12m and also transferred some land and facilities at 60% interest on its issued share capital of £1m (£1). Under the terms of the joint partnership agreement, any significant financial or operational decisions must be made with the consent of both parties, and the profits or losses of the company (B2V) will be split 40:60 between JJ Victory and Blast! was stipulated. again.

9. Goodwill is tested for impairment at the end of each year. DAC and B2V share values ​​increased significantly during the year ended September 30, 2018. Therefore, DAC’s recognized goodwill or B2V investments will not be impaired.

10. The profits or losses of all three companies are distributed evenly throughout the year.

11. B2V has not been profitable since his 2015 inception, but the team, and therefore the company, is highly regarded in his MOTO GP community. The bikes used to race last season included innovative technology that could be repurposed for retail. B2V’s development team is known for having the highest quality, which contributes greatly to the company’s reputation. Engineers have a standard employment contract.

On October 1, 2017, B2V negotiated a three-year contract with Jasminder Rai.

12. Jasminder showed real potential even though he was only three years into professional racing. Since she signed with B2V, her reputation as a talented motorcycle racer has grown. As one of the few female motorcycle racers, Jasminder has received a lot of media attention.

13. One of the younger members of the finance team, Michael, is preparing consolidated financial statements for JJ Victory. Michael used JJ Victory’s draft financial statements in preparing the consolidated financial statements. The investment in DAC is the company’s first investment in a subsidiary, and this is the first time the group’s consolidated financial statements have been prepared.

The draft consolidated financial statements and accompanying working documents prepared by the Michael team are below.

JJ Victory Group – Consolidated Income Statement for the period ended September 30, 2018

	£’000
Revenue	916,233
Cost of Sales	(522,560)
Gross profit	393,673
Distribution and administrative expenses	(225,823)
Investment income (dividend from DAC)	3,600
Finance cost	(27,261)
Profit before tax	144,189
Income tax expense	(17,099)
PROFIT FOR THE YEAR	127,090
Profit attributable to:
Shareholders of JJ Victory Plc.	121,104
Non-controlling interest (W3)	5,986
	127,090

JJ Victory Group – consolidated statement of financial position as at 30 September 2018

		£’000
Non-current assets:
Property, plant and equipment (257,567 + 13,735)	271,302
Intangible assets (910,705+52,060)	962,765
Goodwill (W5)	8,820
Investment in B2V	10,000
		1,252,887
Current assets:
Inventories (78,785+3,556)	82,341
Trade receivables (67,327+2,970)	70,297
Contract costs (220 +0)	220
Cash and cash equivalents (102,572+133)	102,705
		255,563
Total assets		1,508,450
Equity and reserves:
Share capital (£1 nominal value equity shares)		4,000
Share Premium		10,000
Retained earnings (W7)		632,150
Equity attributable to shareholders		646,150
Non-Controlling interest (W6)		18,598
Total equity		664,748
Non-current liabilities (750,000+23,850)		773,850
Current liabilities:
Trade payables and other payables (52,500+1,710)	54,210
Borrowings (15,242 +400)	15,642
		69,852
Total Equity and liabilities		1,508,450