(a)    The measurement of financial instruments is dependent on the business model of the entity. The business model of an entity can typically be observed through the activities which an entity undertakes to achieve its business objective. The business model is a matter of fact rather than an assertion. The assessment of a business model is based on how key personnel actually manage the business, rather than management’s intent for specific financial assets. It implies a more rigorous test and may potentially require entities to provide additional evidence or accumulate more historical analysis. IFRS 9 Financial Instruments has taken a strategic approach as the business model test requires companies to assess the nature of their business and how it allocates its financial assets. It is not as simple as establishing the nature and risk of the asset itself.
Financial assets are held at amortised cost where the entity has a business model whose objective is to hold assets to collect contractual cash flows. Having some sales activity is not necessarily inconsistent with this business model. For example, sales which are infrequent or insignificant in value or have been made as a result of an increase in credit risk may be consistent with this business model.
Financial assets classified and measured at fair value through other comprehensive income are held in a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. Compared to a business model whose objective is to hold financial assets to collect contractual cash flows, this business model will typically involve greater frequency and volume of sales. This measurement category results in amortised cost information being provided in profit or loss and fair value information in the statement of financial position.
It appears that Spamgate has a business model whose objective is to hold assets in order to collect contractual cash flows as it seldom buys and sells financial assets but issues loans to individuals and businesses. It has only accepted the preference shares in Bosey because of the poor liquidity position of Bosey. Although Spamgate intends to sell the preference shares held in Bosey as soon as it is feasible, it does not intend to change its business model. Therefore, both the loans and the shares in Bosey should be valued at amortised cost.
The exchange of part of the loan for Bosey’s shares should lead to the derecognition of that part of the loan as Spamgate’s rights to that part of the loan have expired and the risks and rewards relating to that part of the loan have been extinguished.
Upon derecognition, the difference between the carrying amount of the loans and the fair value of the preference shares received should have been presented as a loss on loans instead of reducing the carrying amount of the loans, with an offsetting increase in the value of the investment in Bosey’s shares. In addition, the valuation of the preference shares was not based upon their fair value as the share price used to calculate the exchange rate for the loans was three times higher than the subscription price for the unsuccessful share issue. This seems to indicate that the fair value of the shares received in the conversion was considerably lower than that used to reduce the carrying amount of the converted loans.
In addition, Spamgate is required, under IFRS 9, to recognise expected credit losses and to update the amount of expected credit losses recognised at each reporting date to reflect changes in the credit risk of financial instruments. This does not appear to have occurred.
For financial assets carried at amortised cost, a gain or loss is recognised when the financial asset is derecognised. Upon derecognition, the difference between the loans’ carrying amount and the fair value of the shares received should have been recognised as a gain or loss.
(b)    IAS 37 Provisions, Contingent Liabilities and Contingent Assets normally requires separate provisions for onerous contracts. IAS 37 defines an onerous contract as a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. IAS 37 states that if an entity has a contract which is onerous, the present obligation under the contract shall be recognised and measured as a provision. Therefore, the contract is not an asset and should not be allocated to a CGU. IAS 37 further clarifies that before a separate provision for an onerous contract is established, an entity should recognise any impairment loss which has occurred on assets dedicated to that contract. If there are assets dedicated to an onerous contract, an entity recognises an impairment loss for those assets (or the CGU to which they belong) before a separate provision for the contract is established.
Certain intangible assets should be tested for impairment annually. If it is not possible to determine an individual asset’s recoverable amount, an entity shall determine the recoverable amount of the CGU to which the asset belongs. Impairment tests are sensitive to which level assets, or groups of assets, are identified as part of the CGU. Incorrect identification of a CGU may result in assets generating significant cash inflows erroneously being grouped with assets which may not generate cash flows. This may result in impairments not being accounted for. A CGU should be determined consistently over time, unless a change is justified. Where an onerous contract is separated from the CGU, but a separate provision for the contract is not established, the financial statements will give an incomplete presentation of the total liabilities.
Therefore, the onerous contract should not be allocated to a CGU thereby changing its composition. The onerous contract provision for the gas storage contract should be recognised and an impairment loss calculated for the intangible asset in the financial reporting period to 31 May 2018.
(c)    IAS 12 Income Taxes states that deferred tax assets for deductible temporary differences arising from investments in subsidiaries, branches and associates, and interests in joint arrangements, are only recognised to the extent that it is probable that the temporary difference will reverse against available profits.
The estimate of probable future taxable profit may include the sale of some of an entity’s assets for more than their carrying amount, if there is sufficient evidence that it is probable that this will be achieved. In the case of Rooble, there is a possibility that the commercial centre may be sold for more than its carrying amount and thus can be included in the calculation of future taxable profit. However, when assessing the availability of taxable profits against which a deductible temporary difference can be utilised, Spamgate should consider whether tax law restricts the usage of those tax losses. If tax law restricts the utilisation of losses to deduction against income of a specific type, a deductible temporary difference is assessed in combination only with other deductible temporary differences of the appropriate type. Thus in this case, the tax losses can only be utilised against trading profits and not against the potential gain on the sale of the commercial centre.
In evaluating whether it will have sufficient taxable profit in future periods, Spamgate should compare the deductible temporary differences with future taxable profit which excludes tax deductions resulting from the reversal of those deductible temporary differences. It should ignore taxable amounts arising from deductible temporary differences which are expected to originate in future periods.
According to IAS 12, the existence of unused losses is a strong evidence that future taxable profit may not be available. Rooble has a history of recent losses, and therefore, it has to provide convincing evidence that sufficient taxable profit will be available to utilise the unused tax losses. However, there was no convincing evidence disclosed in the financial statements showing that the unused tax losses could be utilised by the entities in future. The country in which Rooble operates is in economic crisis including a significant decline in the currency’s exchange rate and high inflation. Spamgate has no convincing evidence that this situation will reverse in the foreseeable future. The conclusion would appear to be that, based on the challenging economic environment and the fact that the construction of the commercial centre was postponed, even though there is a possibility of its sale, there is no convincing evidence that the tax losses could be utilised by Rooble in the near future. Therefore, no deferred tax asset for the unused tax losses should have been recognised.