QUESTION TWO 

The directors of Moonshine UK Ltd, a newly established company, have decided to comply with IFRS 13 Fair Value Measurement in preparing financial statements for the financial year ending 31 March 2020. The following extract from its records shows the assets that need to be reported at their fair values:

The company’s finance director has presented the following additional information that could be used to estimate fair values of the above assets: 

1. The machine was purchased on 1 April 2019. The machine is depreciated on a straight-line basis over its useful economic life, which was estimated to be four (4) years at the date of its purchase. The machine is expected to generate £400,000 cash flows each year during the remaining period of its useful life. At the end of its useful life the machine will have a negligible value. The company’s cost of capital is 10% per annum. Currently, there is no active market for used (second-hand) machine and the company was not able to obtain any information about the market prices of similar machines from other active markets.

2. The investment in Ash Plc comprises 200,000 shares and 100,000 shares acquired on 12 April 2019 and 16 January 2020 when the share prices were £1.50/share and £2.80/share respectively. The shares of Ash Plc were being traded on the London Stock Exchange at £2.50/share on 31 March 2020. The company has the intention of selling them in the near future.

3. The investment in Posh Ltd consists of 184,000 shares purchased on 30 October 2019 at £1/share. The shares are not listed on an active stock market, however there is a comparable stock in an active market whose shares worth £0.9/share on 31 March 2020. 

4. There is no available market price information for the trademarks due to the absence of an active market. However, the directors relied on internally generated inputs and estimated the value of the trademarks as £850,000 on 31 March 2020. 

REQUIRED:

(a) Calculate the (i) Remaining useful life of the machine, (ii) Annual depreciation of the machine, (iii) Purchase price of the machine 

(b) Based on the above-mentioned information, calculate the fair value and unrealised gain/loss of each asset. State which measurement level (Level 1, 2 or 3) you have adopted, and the assumptions made in order to calculate the fair value. 

(c) Following your understanding of IFRS 13 - Fair Value Measurement, briefly discuss whether value can ever be fair.