On 1 April 2019, Bahtiar acquired 80% of the equity interests of Masla, a privately owned entity, for a consideration of RM 57 million

Subject:AccountingPrice:5.87 Bought7

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On 1 April 2019, Bahtiar acquired 80% of the equity interests of Masla, a privately owned entity, for a consideration of RM 57 million. The consideration comprised cash of RM 52 million and the transfer of non-depreciable land with a fair value of RM 5 million.

(a)  When Bahtiar acquired the majority shareholding in Masla, there was an option on the remaining non-controlling interest (NCI), which could be exercised at any time up to 31 December 2020. On 30 April 2020, Bahtiar acquired the remaining NCI which related to the purchase of Masla. The payment for the NCI was structured so that it contained a fixed initial payment and a series of contingent amounts payable over the following two years. The contingent payments were to be based on the future profits of Masla up to a maximum amount. Bahtiar felt that the fixed initial payment was an equity transaction. Additionally, Bahtiar was unsure as to whether the contingent payments were equity, financial liabilities or contingent liabilities. After a board discussion which contained disagreement as to the accounting treatment, Bahtiar is preparing to disclose the contingent payments in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The disclosure will include the estimated timing of the payments and the directors' estimate of the amounts to be settled.

Required:

Advise Bahtiar on the difference between equity and liabilities and on the proposed accounting treatment of the contingent payments on acquisition of the NCI of Masla

(b)  The directors of Bahtiar are considering the purchase of a company in the USA. They have heard that the accounting standards in the USA are 'rules based' and that there are significant differences of opinion as to whether 'rules based' standards are superior to 'principles based' standards. It is said that this is due to established national approaches and contrasting regulatory philosophies. The directors feel that 'principles based' standards are a greater ethical challenge to an accountant than 'rules based' standards.

Required:

Discuss the philosophy behind 'rules based' and 'principles based' accounting standards, setting out the ethical challenges which may be faced by accountants if there were a switch in a jurisdiction from 'rules based' to 'principles based' accounting standards.