ACCA P2 Corporate Reporting

June 2014

Live Online 2 Days Revision Note

Lesco Group Limited, April 2015 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Lesco Group Limited.

Tips for June20 14 P2 exam:

Q1: Foreign sub consolidation (SFP)

But make sure you are happy with consol I/S & consol cash flow

Q2/Q3: make sure you prepare well for Q23 in revision note

Q4: Articles in the back by examiner

Revision plan

Q1 Plan:

(All questions are updated in this note as well as answers)

DEC2008 Q1 Warrburt group -group statement of cash flow

June2010 Q1 Ashanti -group statement of profit or loss and OCI

DEC2010 Q1 Jocatt Group -group statement of cash flow

June2011 Q1 Rose Foreign Sub (similar to June2008 Q1 Ribby(video))

DEC2011 Q1 Traveler - group statement of financial position

DEC2012 Q1 Minny -complex group

June2013 Q1 Trailer - complex group

Supplementary questions: [homework]

[ Covered in the video and make sure you do them then watch them]

1. June2007 Q1 Glove -complex group[video]

2. June2008 Q1 Ribby -Foreign sub consol

3. June2009 Q1 Bravado - simple group

Q2+Q3 revision plan:

Deferred tax question (Kesare)

June2009 Q2 Aron(financial instrument)

June2010 Q2 Cate (mix)

June2011 Q3 Alexandra

DEC2011 Q3

June2012 Q3

June2012 Q2

DEC2012 Q2

DEC2012 Q3

June2013 Q2

June2013 Q3

Q4 revision plan

June2010 Q4 Holcombe (IAS17 lease)

June2011 Grainger (IFRS9)

Q Wallet(IFRS10,11,12) + investment entity+liability&equity

DEC2010 Q4 SMEs

Articles from examiner

DEC2008 Q1 (updated) (Group statement of cash flow)

WARRBURT GROUP: STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER

2013

30 NOV 2013 30

NOV 2012

WARRBURT GROUP: STATEMENT OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 NOVEMBER 2013

WARRBURT GROUP: STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30

NOVEMBER 2013 ($m)

The following information relates to the financial statements of Warrburt.

(i) Warrburt holds investments in equity instruments (IEI) which are ow ned by the

parent company. At 1 December 2012 , the total carrying amount of those

investments was $150m. In r espect of $112m of this $150m, Warrburt had made

an irrevocable election under IFRS 9 for changes in fair value to go through other

comprehensive income (items that will not be reclassified to profit or loss). The

remaining $38m related to an investment in the shares of Alburt, in respect of

which changes in fair value had been taken to profit or loss for the year. During the

year, the investment in Alburt was sold for $45m, with the fair value gain shown in

ollowing schedule summarises the

changes:

Alburt Other Total

CV at 1 DEC 2012 38 112 150

Less sales of IEI at FV (45) - (45)

Add gain on derecognition/revaluation of

IEI

7 30 37

CV at 30 NOV 2013 - 142 142

Deferred tax of $3 million arising on the $30m revaluation gain above has been

$m Share capital

Retained earnings

IEI Revaluation surplus (PPE)

Total Non -controlling interest

Total equity

Balance at 1 DEC 2012

595 454 16 4 1,069 53 1,122

Share capital issued

55 55 55

Dividends (9) (9) (5) (14)

Total comprehensive

income for the year

(78) 27 2 (49) (2) (51)

Balance at

30NOV 2013

650 367 43 6 1,066 46 1,112

(ii) The retirement benefit liability is shown as a long - term provision in the

statement of financial position and comprises the following: ($m)

Liabili ty at 1DEC 2012 96

Expense for period 10

Contributions to scheme(paid) (10)

Actuarial losses 4

Liability at 30 NOV 2013 100

Warrburt recognises remeasurement gains and losses in other comprehensive

income in the period in which they occur, in accorda nce with IAS 19 (revised 2011).

The benefits paid in the period by the trustees of the scheme were $3 million. There

is no tax impact with regards to the retirement benefit liability.

(iii) The property, plant and equipment (PPE) in the statement of financial position

comprises the following: ($m)

CV at 1 DEC 2012 360

Additions at cost 78

Gains on property revaluation 4

Disposals (56)

Depreciation (36)

Carrying value at 30 NOV 2013 350

Plant and machinery with a carrying value of $1 million had been destroyed by fire

in the year. The asset was replaced by the insurance company with new plant and

machinery which was valued at $3 million. The machines were acquired directly by

th e insurance company and no cash payment was made to Warrburt.

deduction from administrative expenses.

The disposal proceeds were $63 million. The gain on disposal is included in

administrative expenses.

The remaining additions o f PPE comprised imported plant and equipment from an

overseas supplier on 30 June 2013 . The cost of the PPE was 380 million dinars with

280 million dinars being paid on 31 October 2013 and the balance to be paid on 31

December 2013 .

The rates of exchange were as follows:

Dinars to $

30 June 2013 5

31 Otc 2013 4.9

30 NOV 2013 4.8

Exchange gains and losses are included in administrative expenses.

(iv) Warrburt purchased a 25% interest in an associate for cash on 1 December

2012 . The net assets of the associate at the date of acquisition were $300 million.

The associate made a profit after tax of $24 million and paid a dividend of $8 million

out of these profits in the year ended 30 November 2013 .

(v) An impairment test had been carried out at 30 November 2013 , on goodwill and

other intangible assets. The result showed that goodwill was impaired by $20 million

and other intangible assets by $12 million.

(vi) The short term provisions relate to finance costs which are payable wit hin six

months.

of profit or loss and other comprehensive income and the subsequent effect on the

statement of cash flows. They have suggested that the proceeds of the sale of

property, plant and equipment and the sale of investments in equity instruments

an adverse market reaction to their results and of the importance of meeting

targets in o rder to ensure job security, and feel that the adjustments for the

Required

(a) Prepare a group statement of cash flows for Warrburt for the year ended 30

November 2013 in accordance with IAS 7 Sta tement of cash flows , using the

indirect method. (35 marks)

(b) Discuss the key issues which the statement of cash flows highlights regarding

the cash flow of the

company. (10 marks)

(c) Discuss the ethical responsibility of the company accountant in ensuring that

manipulation of the statement of cash flows, such as that suggested by the

directors, does not occur. (5 marks)

Note: requirements (b) and (c) include 2 professional marks i n total for the quality

of the discussion.

(Total = 50 marks)

June2010 Q1 (Group Statement of profit or loss and OCI)

The following financial statements relate to Ashanti, a public limited

company.

consolidated statement of profit or loss and other comprehensi ve income for

the year ended 30 April 2014

The following information is relevant to the preparation of the group

statement of profit or loss and other comprehensive income:

(i ) On 1 May 2012, Ashanti acquired 70% of the equity interests of Bochem,

a public limited company. The purchase consideration comprised cash of

$150 million and the fair value of the identifiable net assets was $160

million at that date. The fair value of the non -controlling interest in Bochem

method for all acquisitions. The share capital and retained earnings of

Bochem were $55 million and $85 million respectively and other

component s of equity were $10 million at the date of acquisition. The excess

of the fair value of the identifiable net assets at acquisition is due to an

increase in the value of plant, which is depreciated on the straight - line

method and has a five year remaining life at the date of acquisition. Ashanti

disposed of a 10% equity interest to the non - controlling interests (NCI) of

Bochem on 30 April 2014 for a cash consideration of $34 million. The

carrying value of the net assets of Bochem at 30 April 2014 was $210

million before any adjustments on consolidation. Goodwill has been

impairment tested annually and as at 30 April 2013 had reduced in value by

15% and at 30 April 2014 had lost a further 5% of its original value before

the sale of the equity interest to the NCI. The goodwill impairment should be

allocated between group and NCI on the basis of equity shareholding.

(ii) Bochem acquired 80% of the equity interests of Ceram, a public limited

company, on 1 May 2012. The purchase consideration was cash of $136

mi

the NCI of Ceram attributable to Ashanti had a fair value of $26 million at

that date. On 1 November 2013, Bochem disposed of 50% of the equity of

Ceram for a consideration of $90 million.

of the NCI of Ceram attributable to Bochem was $35 million at the date of

disposal. The remaining equity interest of Ceram held by Bochem was fair

valued at $45 million. After the disposal, Bochem can still exert significant

influence. Goodwill had been impairment tested and no impairment had

(iii) Ashanti has sold inventory to both Bochem and Ceram in October 2013.

The sale price of the inventory was $10 million and $5 million respectively.

Ashanti sells goods at a gross profit margin of 20% to group companies and

third parties. At the year -end, half of the inventory sold to Bochem

remained unsold but t he entire inventory sold to Ceram had been sold to

third parties.

(iv) On 1 May 2011, Ashanti purchased a $20 million five -year bond with

semi annual interest of 5% payable on 31 October and 30 April. The

purchase price of the bond was $2162 million. The effective annual interest

rate is 8% or 4% on a semi annual basis. The bond is held at amortised cost.

At 1 May 2013 the amortised cost of the bond was $21.046 million. The

issuer of the bond did pay the interest due on 31 October 2013 and 30 April

2014, but was in financial trouble at 30 April 2014. Ashanti feels that as at

30 April 2014, the bond is impaired and that the best estimates of total

future cash receipts are $234 million on 30 April 2015 and $8 million on 30

April 2016. The current interest r ate for discounting cash flows as at 30 April

2014 is 10%. No accounting entries have been made in the financial

statements for the above bond since 30 April 2013. (You should assume the

annual compound rate is 8% for discounting the cash flows.)

(v) Asha nti sold $5 million of goods to a customer who recently made an

announcement that it is restructuring its debts with its suppliers including

Ashanti. It is probable that Ashanti will not recover the amounts outstanding.

The goods were sold after the announ cement was made although the order

was placed prior to the announcement. Ashanti wishes to make an

additional allowance of $8 million against the total receivable balance at the

year end, of which $5 million relates to this sale.

(vi) Ashanti owned a p iece of property, plant and equipment (PPE) which

cost $12 million and was purchased on 1 May 2012. It is being depreciated

over 10 years on the straight - line basis with zero residual value. On 30 April

2013, it was revalued to $13 million and on 30 April 2014, the PPE was

revalued to $8 million. The whole of the revaluation loss had been posted to

other comprehensive income and depreciation has been charged for the

excess depreciation following revaluation.

(vii) The salaried employees of Ashanti are entitled to 25 days paid leave

each year. The entitlement accrues evenly over the year and unused leave

may be carried forward for one year. The holiday year is the same as the

financial year. At 30 April 2014, Ashanti has 900 salaried employees and the

average unused holiday entitlement is three days per employee. 5% of

employees leave without taking their entitlement and there is no cash

payment when an employee leaves in respect of holi day entitlement. There

are 255 working days in the year and the total annual salary cost is $19

million. No adjustment has been made in the financial statements for the

above and there was no opening accrual required for holiday entitlement.

(viii) As per mitted by IFRS 9 Financial instruments all group companies have

made an irrecoverable election to recognise changes in the fair value of

investments in equity instruments in other comprehensive income (items

that will not be reclassified to profit or loss) .

(ix) Ignore any taxation effects of the above adjustments and the disclosure

requirements of IFRS 5 Non -current assets held for sale and discontinued

operations .

Required

(a) Prepare a consolidated statement of profit or loss and other

comprehensi ve i ncome for the year ended 30 April 2014 for the Ashanti

Group. (35 marks)

DEC2010 Q1 updated (Group statement of cash flow)

The following draft group financial statements relate to Jocatt, a public limited

company.

JOCATT GROUP

STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER

2013 2012

$m $m

JOCATT GROUP STATEMENT OF PROFIT OR LOSS AND OTHER C OMPREHENSIVE

INCOME FOR THE YEAR ENDED 30 NOVEMBER 2013

JOCATT GROUP STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 NOVEMBER

2013

$m Share

capital

Retained

earnings

Investment

in equity

instrument

Revaluation

surplus

(PPE)

Total Non -

controll ing

interest

Total

equity

Balance at 1

DEC 2012

275 324 4 16 619 36 655

Share capital

issued

15 15 15

Dividends (5) (5) (13) (18)

Right issue 2 2

acquisitions 20 20

Total

comprehensive

income for the

year

32 2 (7) 27 10 37

Balance at

30NOV 2013

290 351 6 9 656 55 711

The following information relates to the financial statements of Jocatt.

(i) On 1 December 2011, Jocatt acquired 8% of the ordinary shares of Tigret. Jocatt

had treated this as an investment in equity instruments in the financial statements

to 30 November 2012 with changes in fair value taken to profit or loss for the year.

There were no changes in fair value in the year to 30 November 2012. On 1 January

2013 , Jocatt acquired a further 52% of the ordinary shares of Tigret and gained

control of the company. The consideration for the acquisitions was as follows.

Holding Consideration ($m)

1 DEC 2011 8% 4

1 JAN 2013 52% 30

60% 34

At 1 January 2013, the fair value of the 8% holding in Tigret held by Jocatt at the

time of the business

combination was $5 million and the fair value of the non -controlling interest in

Tigret was $20 million. The purchase consideration at 1 January 2013 c omprised

cash of $15 million and shares of $15 million.

The fair value of the identifiable net assets of Tigret, excluding deferred tax assets

and liabilities, at the date of acquisition comprised the following.

$m

PP&E 15

Intangible assets 18

Trade receivables 5

Cash 7

The tax base of the identifiable net assets of Tigret was $40 million at 1 January

2013. The tax rate of Tigret is 30%.

(ii) On 30 November 2013,Tigret made a rights issue on a 1 for 4 basis. The issue

was fully subscribed and raise d $5 million in cash.

(iii) Jocatt purchased a research project from a third party including certain patents

on 1 December 2012 for $8 million and recognised it as an intangible asset. During

the year, Jocatt incurred further costs, which included $2 mill ion on completing the

research phase, $4 million in developing the product for sale and $1 million for the

initial marketing costs. There were no other additions to intangible assets in the

period other than those on the acquisition of Tigret.

(iv) Jocatt operates a defined benefit scheme. The current service costs for the year

ended 30 November 2013 are $10 million. Jocatt enhanced the benefits on 1

December 2012.The total cost of the enhancement is $2 million. The interest on

plan assets was $8 million f or the year and Jocatt recognises remeasurement gains

and losses in accordance with IAS 19 as revised in 2011.

(v) Jocatt owns an investment property. During the year, part of the heating system

of the property, which had a carrying value of $05 million, was replaced by a new

system, which cost $1 million. Jocatt uses the fair value model for measuring

investment property.

(vi) Jocatt had exchanged surplus land with a carrying value of $10 million for cash

of $15 million and plant valued at $4 million. T he transaction has commercial

substance. Depreciation for the period for property, plant and equipment was $27

million.

(vii) Goodwill relating to all subsidiaries had been impairment tested in the year to

30 November 2013 and any impairment accounted for . The goodwill impairment

related to those subsidiaries which were 100% owned.

(viii) Deferred tax of $1 million arose in the year on the gains on investments in

equity in the year where the irrevocable election was made to take changes in fair

value through other comprehensive income

(ix) The associate did not pay any dividends in the year.

Required

(a) Prepare a consolidated statement of cash flows for the Jocatt Group using the

indirect method under IAS 7 Statements of cash flows.

Note. Ignore deferred taxation other than where it is mentioned in the question. (35

marks)

Rose June2011 Q1

Rose, a public limited company, operates in the mining sector. The draft statements

of financial position are as follows, at 30 April 2011:

The following information is relevant to the preparation of the group financial

statements:

1 On 1 May 2010, Rose acquired 70% of the equity interests of Petal, a publi c

limited company. The purchase consideration comprised cash of $94 million. The

fair value of the identifiable net assets recognised by Petal was $120 million

excluding the patent below. The identifiable net assets of Petal at 1 May 2010

included a patent which had a fair value of $4 million. This had not been recognised

in the financial statements of Petal. The patent had a remaining term of four years

to run at that date and is not renewable. The retained earnings of Petal were $49

million and other components of equity were $3 million at the date of acqui sition.

The remaining excess of the fair value of the net assets is due to an increase in the

value of land.

-controlling

interest in Petal was $46 million on 1 May 2010. There have been no issues of

ordinary shares since acquisition and goodwill on acquisition is not impaired.

Rose acquired a further 10% interest from the non -controlling interest in Pe tal on

30 April 2011 for a cash consideration of $19 million.

2 Rose acquired 52% of the ordinary shares of Stem on 1

retained e arnings were 220 million dinars. The fair value of the identifiable net

assets of Stem on 1 May 2010 was 495 million dinars.

The excess of the fair value over the net assets of Stem is due to an increase in th e

value of land . The fair value of the non -controlling interest in Stem at 1 May 2010

was 250 million dinars.

Stem is located in a foreign country and operates a mine. The income of Ste m is

denominated and settled in dinars. The output of the mine is routinely traded in

dinars and its price is determin ed initially by local supply and demand. Stem pays

40% of its costs and expenses in dollars with the remai nder being incurred locally

and

and autono my in carrying out the operations of Stem and is not dependent upon

group companies for finance.

ements

of Stem. There have been no issues of ordinary shares and no impairment o f

goodwill since acquisition.

The following exchange rates are relevant to the preparation of the group financial

statements:

Dinars to $

1 May 2013 6

30 April 2011 5

Average for year to 30 April 2011 5.8

3 Rose has a property located in the same country as Stem. The property wa s

acquired on 1 May 2010 and is carried at a cost of 30 million dinars. The property is

depreciated over 20 years on the straight - line method. At 30 April 2011, the

property was revalued to 35 million dinars. Depreciation ha s been charged for the

year but the revaluation has not been taken into account in the preparation of the

financial statem ents as at 30 April 2011.

4 Rose commenced a long - term bonus scheme for employees at 1 May 2 010. Under

the scheme employees receive a cumulative bonus on the completion of five years

service. The bonus i s 2% of the total of the annual salary of the employees. The

total salary of employees for the year to 30 April 2011 was $40 million and a

discount rate of 8% is assumed. Additionally at 30 April 2011, it is assumed that all

employees will receive the bonus and that salaries will rise by 5% per year.

5 Rose purchased plant for $20 million on 1 May 2007 with an estimated useful l ife

of six years. Its estimated residual value at that date wa s $14 million. At 1 May

2010, the esti mated residual value changed to $26 million. The change in the

residual value has not been taken into accou nt when preparing the financial

statements as at 30 April 2011.

Required:

(a) (ii) Prepare a consolidated sta tement of financial position of the Rose

Group at 30 April 2011, in accordance with International Financial

Reporting Standards (IFRS), showing the exchange difference arising on

(35 marks)

DEC2011 Q1 Traveller (Basic Group Consolidation SFP) [full]

Traveler, a public limited company, operates in the manufacturing sector. The draft

statements of financial position are as follows at 30 November 2011:

The following information is relevant to the preparation of the group financial

statements:

1

On 1 December 2010, Traveler acquired 60% of the equity interests of Data, a

public limited company. The purchase consideration comprised cash of $600 million.

At acquisition, the fair value of the non -controlling interest in Data was $395 million.

value of the identifiable net assets acquired was $935 million and retained earnings

of Data were $299 million and other components of equity were $26 million. The

excess in fair value is due to non -depreciable land.

On 30 November 2011, Traveler acquired a further 20% interest in D ata for a cash

consideration of $220 million.

2

On 1 December 2010, Trave ler acquired 80% of the equity interests of Captive for a

consideration of $541 million. The consideration comprised cash of $477 million and

the transfer of non -depreciable land with a fair value of $64 million. The carrying

amount of the land at the acqu isition date was $56 million. At the year end, this

asset was still included in the non -current assets of Traveler and the sale proceeds

had been credited to profit or loss.

At the date of acquisition, the identifiable net assets of Captive had a fair val ue of

$526 million, retained earnings were $90 million and other components of equity

were $24 million. The excess in fair value is due to non -depreciable land. This

acquisition was accounted for using the partial goodwill method in accordance with

IFRS 3 (Revised) Business Combinations .

3

Goodwill was impairment tested after the additional acquisition in Data on 30

November 2011. The recoverable amount of Data was $1,099 million and that of

Captive was $700 million.

4

Included in the financial assets of Traveler is a ten -year 7% loan. At 30 November

2011, the borrower was in financial difficulties and its credit rating had been

downgraded. Traveler has adopted IFRS 9 Financial Instruments and the loan asset

is currently held at amortised cost of $29 million. Traveler now wishes to value the

loan at fair value using current market interest rates. Traveler has agreed for the

loan to be restructured; there will only be three more annual paymen ts of $8 million

effective interest rate is 67% and the effective interest rate under the revised

payment schedule is 63%.

5

Traveler acquired a new factory on 1 December 2 010. The cost of the factory was

$50 million and it has a residual value of $2 million. The factory has a flat roof,

which needs replacing every five years. The cost of the roof was $5 million. The

useful economic life of the factory is 25 years. No deprec iation has been charged for

the year. Traveler wishes to account for the factory and roof as a single asset and

depreciate the whole factory over its economic life. Traveler uses straight - line

depreciation.

6

The actuarial value of pension plan showed a surplus at 1 December 2010 of

$72 million. Lossesof $25 million on remeasurement of the net defined benefit asset are

to be recognised in othercomprehensive income in accordance with IAS 19 (revised 201

1). The aggregate of the current service costand the net interest cost amounted to a cost o

f $55 million for the year. After consulting with the actuaries,the company decided to re

duce its contributions for the year to $45 million. The contributions were paid on7 Dece

mber 2011. No entries had been made in the financial statements for the above amounts.

The presentvalue of available future refunds and reductions in future contributions was $

18 million. After consulting with the actuaries, the company decided to reduce its

contributions for the year t o $45 million.

Required:

(a) Prepare a consolidated statement of financial position for the Traveler

Group for the year ended 30 November 2011. (35 marks)

(b) Traveler has three distinct business segments. The management has calculated

the net assets, turnover and profit before common costs, which are to be allocated

to these segments. However, they are unsure as to how they should allocate certain

common costs and whether they can exercise judgement in the allocation process.

They wish to allocate head office management expenses; pension expense; the cost

of managing properties and interest and related interest bearing assets. They also

are uncertain as to whether the allocation of costs has to be in conformity with the

accounting policies used in the f inancial statements.

Required:

Advise the management of Traveler on the points raised in the above

paragraph. (7 marks)

(c) Segmental information reported externally is more useful if it conforms to

information used by management in making decisions. The information can differ

from that reported in the financial statements. Although reconciliations are required,

these can be complex and difficult to understand. Additionally, there are other

standards where subjectivity is involved and often the profit mot ive determines

which accounting practice to follow. The directors have a responsibility to

shareholders in disclosing information to enhance corporate value but this may

conflict with their corporate social responsibility.

Required:

Discuss how the ethics of corporate social responsibility disclosure are

difficult to reconcile with shareholder expectations. (6 marks)

Professional marks will be awarded in part (c) for clarity and expression of your

discussion. (2 marks)

(50 marks)

DEC2012 Q1 Minny - complex group

Minny is a company which operates in the service sector. Minny has business

relationships with Bower and Heeny.

All three entities are public limited companies. The draft statements of financial

position o f these entities are as follow s at 30 November 2012:

The following information is relevant to the preparation of the group financial

statements:

1. On 1 December 2010, Minny acquired 70% of the equity interests of Bo wer. The

purchase consideration comprised cash of $730 million. At acquisition, the fair value

of the non -controlling interest in Bower was $295 million. On 1 December 2010, the

fair value of the identifiable net asset s acquired was $835 million and retained

earnings of Bower were $319 million and other components of equi ty were $27

million. The excess in fair value is due to non -depreciable land.

2. On 1 December 2011, Bower acquired 80% of the equity interests of Heeny for a

cash consideration of $320 million. The fair value of a 20% holding of the non -

controlling inter est was $72 million; a 30% holding was $108 million and a 44%

holding was $161 million. At the date of acquisition, the identifiabl e net assets of

Heeny had a fair value of $362 million, retained earnings were $106 million and

other components of equity were $20 million. The excess in fair value is due to non -

depreciable land.

-controlling interest at fair value at the

date of acquisition.

3. Both Bower and Heeny were impairment tested at 30 November 2012. The

recoverable amounts of both cash generating units as stated in the individual

financial statements at 30 November 2012 were Bower, $1,425 million, and Heeny,

$604 million, respectively. The directors of Minny fel t that any impairment of assets

was due to th e poor performance of the intangible assets. The recoverable amo unt

has been determined without consideration of liabilities which all relate to the

financing of operations.

4. Minny acquired a 14% interest in Puttin, a public limited company , on 1

Decemb er 2010 for a cash consideration of $18 million. The investment was

accounted for under IFRS 9 Financial Instruments and was designated as at fair

value through other comprehensive income. On 1 June 2012, Minny acquired an

additional 16% interest in Puttin for a cash consideration of $27 million and

achieved sign ificant influence. The value of the original 14% investment on 1 June

2012 was $21 million. Puttin made profits after tax of $20 million and

$30 million for the years to 30 November 2011 and 30 Nove mber 2012 res pectively.

On 30 November 2012, Minny received a dividend from Puttin of $2 million, which

has been credited to other components of equity.

5. Minny purchased patents of $10 million to use in a project to develop n ew

products on 1 December 20 11. Minny has completed the investigative phase of the

project, incurring an additi onal cost of $7 million and has determined that the

product can be developed profitably. An effective and wor king prototype was

created at a cost of $4 million and in order to put the product into a condition for

sale, a further $3 million was spent. Finally, marketing costs of $2 million were

incurred. All of the above costs are included in the intangible assets of Minny.

6. Minny

the date the held for sale criteria were met, the carrying amount of the assets and

liabilities comprising the line of business were:

$m

PP&E 49

Inventory 18

Current liabiliti es 3

It is anticipated that Minny will realise $ 30 million for the business. No ad justments

have been made in the financial statements in relation to the above decision.

Required:

(a) Prepare the consolidated statement of financial position for the Minny

Group as at 30 November 2012.

(35 marks)

(b) Minny intends to dispose of a major line of business in the above scenario and

the entity has stated that the held for sale criteria were met under IFRS 5 Non -

current Assets Held for Sale and Discontinued Operations . The criteria in IFRS 5 are

very strict and regulators have been known to question ent ities on the application of

the standard. The two criteria which must be met before an asset or disposal group

will be defined as recov ered principally through sale are: that it must be available

for immediate sale in its pres ent condition and the sale must be highly probable.

Required:

the sale must be highly

briefly why regulators may question ent ities on the application of the

standard. (7 marks)

(c) Bower has a property which has a carrying value of $2 million at 30 Novemb er

2012. This property had been revalued at the year end and a revaluation surplus of

$400,000 had been recorded in other components of equity. The directors were

intending to sell the property to Minny for $1 million sh ortly after the year end.

Bower previously used the historical cost basis for valuing property.

Required:

Without adjusting your answer to part (a), discuss the ethical and

accou nting implications of the above intended sale of assets to Minny by

Bower. (8 marks)

(50 marks)

June2013 Q1 Trailer - complex group [full]

(a) Trailer, a public limited company, operates in the manufacturing sector. Trailer

has investments in two other companies. The draft statements of financial position

at 31 May 2013 are as follows:

The following information is relevant to the preparation of the group financi al

statements:

1. On 1 June 2011, Trailer acquired 14% of the equity interests of Cal ler for a cash

consideration of $260 million and Park acquired 70% of the equity interests of Cal ler

for a cash consideration of $1,270 million. At 1 June 2011, the identifiable net

assets of Caller had a fair value of $990 million, retained earnings were $190 million

and other components of equity we re $52 million. At 1 June 2012, the identifiable

net assets of Caller had a fair va lue of $1,150 million, reta ined earnings were $240

million and other components of equity were $70 million. The excess in fair value is

due to non -depreciable land.

The fair value of the 14% holding of Trailer in Caller was $280 million at 31 May

2012 and $310 million

had not changed since acquisition.

2. On 1 June 2012, Trailer acquired 60% of the equity interests of Park, a public

limited company. The purchase consideration comprised cash of $1 ,250 million. On

1 June 2012, the fair value of the identifiable net assets acquired was $1,950

million and retained earnings of P ark were $650 million and other components of

equity were $55 million. The excess in fair value is due to non -depreciable land .

- controlling interest at acquisition at its

proportionate share of the

3. Goodwill of Park and Caller was impairment tested at 31 May 2013. Ther e was no

impairment re lating to Caller. The recoverable amount of the net assets of Park was

$2,088 million . There was no impairment of the net assets of Park before this date

and any impairment loss has been d etermined to relate to goodwill and property,

plant and equipment.

4. Trailer has made a loan of $50 million to a charitable organisation for the build ing

of new sporting facilities.

The loan was made on 1 June 2012 and is repayable on maturity in three

time. Interest is to be charged one year in arrears at 3%, but Trailer assesses that

an unsubsidised rate for such a loan would have been 6%. The only accounting

entries which have been made for the year ended 31 May 2013 are the cash entries

for the loan and interest received which have resulted in a balance of $48 5 million

being shown as

a financial asset.

5. On 1 June 2011, Trailer acquired office accommodation at a cost of $90 m illion

with a 30 -year estimated useful life. During the year, the property market in the

area slumped and the fair value of the accommodation fell to $75 million at 31 May

2012 and this was reflected in the financial statements. However, the market

recovered unexpectedly quickly due to the announcement of major gove rnment

transport infrastructure. On 31 May 2013, the valuer

advised Trailer that t he offices should now be valued at $105 million. Trailer has

charged depreciation for the year but has not taken account of the upward valuation

of the offices. Trailer uses the revaluation model and records an y valu ation change

when advised to do so.

6. Trailer has announced two major restructuring plans. The first plan is to red uce

its capacity by the closure of some of its smaller factories, which have already been

identified. This wil l lead to the redundancy of 5 00 employees, who have all

individually been selected and communicated w ith. The costs of this plan are $9

million in redundancy costs, $4 million in retraining costs and $5 million in lease

termination costs. The second plan is to re -organise the finance and information

technology department over a one -year period but

it does not commence for two years. The plan results in 20% of finance sta ff losing

their jobs during the restructuring. The costs of this plan are $10 million in

redundancy cost s, $6 million in retraining costs and $7 million in equipment lease

termination costs. No entries have been made in the financial statements for the

above plans.

7. The following information relates to the group pension plan of Trailer:

1 June 2012 ($m) 31 May 2013 ($m)

Fair value of plan assets 28 29

Actuarial value of defined

benefit obligation

30 35

The contributions for the period received by the fund were $2 million and th e

employee benefits paid in the year amounted to $3 million. The discount rate to be

used in any calculation is 5%. The current service cost for the period based on

actuarial calculations is $1 million. The above figures have not been taken into

account for the year ended 31 May 2013 except for the contributions paid wh ich

have been entered in cash and the defined benefit obligation.

Required:

Prepare the group consolidated statement of financial position of Trailer as

at 31 May 2013. (35 marks)

(b) -controlling interest (NCI) at

acquisition at its proportionate sh are

The directors of Trailer have used th is policy for several years and do not know the

implications, if any, of changing the policy to that of accounti ng for the NCI at fair

value. The

fair value of the NCI of Park at 1 June 2012 was $800 million. The fair value o f the

NCI of Caller, based upon the effective shareholdings, was $500 million at 1 June

2011 and $530 million at 1 June 2012.

Required:

Explai n to the directors, with suitable calculations, the impact on the

finan cial statements if goodwill was calculated using the fair value of the

NCI. (9 marks)

(c) The directors of Trailer are involved in takeover talks with another entity. In the

di scussion s, one of the directors stated that there was no point in an accountant

studying ethics because every accountant already has a set of moral beliefs that are

followed and these are created by simply following generally accepted accounting

practice.

He furt her stated that in adopting a defensive approach to the takeover, there was

no ethical issue in falsely

for the discussions becaus e, in his opinion, the takeover did not benefit the

company, its executives or society as a whole.

Required:

Discuss the above views of the director regarding the fact that there is no

point in an accountant studying ethics and that there was no ethical issue

in the false disclosure of accounting profits. (6 marks)

(50 marks)

Q2+Q3 revision plan:

Deferred tax question (Kesare)

June2009 Q2 Aron(financial instrument)

June2010 Q2 Cate (mix)

June2011 Q3 Alexandra

DEC2011 Q3

June2012 Q2

June2012 Q3

DEC2012 Q2

DEC2012 Q3

June2013 Q2

June2013 Q3

Deferred tax question (Kesare)

This question comes from Q2 of you P2 pilot paper. Note this version has been updated to

reflect the latest version of accounting standards.

The following statement of financial position relates to Kesare Group, a public

limited company, at 30 June 2006 .

$000 Assets

Non current assets: Property, plant and equipment 10,000 Goodwill 6,000 Other intangible assets 5,000 Financial assets (cost) 9,000 30,000

Current assets Trade receivables 7,000 Other receivables 4,600 Cash and cash equivalents 6,700 18,300

Total assets 48,300 Equity and liabilities Equity

Share capital 9,000 Other reserves 4,500 Retained earnings 9,130

Total equity 22,630 Non -current liabilities

Long term borrowings 10,000 Deferred tax liability 3,600 Employee benefit liability 4,000

Total non -current liabilities 17,600 Current liabilities

Current tax liability 3,070 Trade and other payables 5,000

Total current liabilities 8,070 Total liabilities 25,670 Total equity and liabilities 48,300

The following information is relevant to the above statement of financial position:

(i) The financial assets are classified as 'investments in equity instruments' but are

shown in the above statement of financial position at their cost on 1 July 2005 . The

market value of the assets is $10.5 million on 30 June 2006 . Taxation is payable on

the sale of the assets. As allowed by IFRS 9, an irrevocable election was made for

changes in fair value t o go through other comprehensive income (not reclassified to

profit or loss).

(ii) The stated interest rate for the long term borrowing is 8 per cent. The loan of

$10 million represents a convertible bond which has a liability component of $9.6

million an d an equity component of $0.4 million.

The bond was issued on 30 June 2006 .

(iii) The defined benefit plan had a rule change on 1 July 2005 , giving rise to past

service costs of $520,000. The past service costs have not been accounted for.

(iv) The tax bases of the assets and liabilities are the same as their carrying

amounts in the draft statement of financial position above as at 30 June 2006

except for the following:

(1)

$000

Property, plant and equipment 2,400

Trade receivables 7,500

Other receivables 5,000

Employee benefits 5,000

(2) Other intangible assets were development costs which were all allowed for tax

purposes when the cost was incurred in 2005 .

(3) Trade and other payables includes an accrual for compensation to be paid to

empl oyees. This amounts to $1 million and is allowed for taxation when paid.

(v) Goodwill is not allowable for tax purposes in this jurisdiction.

(vi) other adjustments

(1)Kesare buys a sub just after year end. The sub has inventory as at cost of

$60,000

but fair value of $ 65,000. All the inventory is still in inventory a few days later at

the year end.

(2)Kesare bought a foreign sub for $ 500,000, measured in the parental home

currency in the second year. The subsi diary has grown to $ 570,000 because of net

profits of $70,000 that the sub has retained. The withholding tax rate is 60%. Show

the deferred tax implication at 30June2007.

(3)The company had granted 20million options in the scheme and they are all

expected to vest at the end of the forth year. The fair value of the options at the

grant date was $10 and the current intrinsic value of each is $8. Show the deferred

tax implication at 30June2007.

(4) Kesare is leasing plant under a finance lease over a five year period. The asset

was recorded at the present value of the minimum lease payments of $12 million at

the inception of the lease which was 31 May 2005 . The asset is depreciated on a

straight line basis over the five years and has no residual value. The annual lease

payments are $3 millio n payable in arrears on 1 June and the effective interest rate

is 8% per annum. The directors have not leased an asset under a finance lease

before and are unsure as to its treatment for deferred taxation. The company can

claim a tax deduction for the annu al rental payment as the finance lease does not

qualify for tax relief.

( vii ) Assume taxation is payable at 30%.

Required

(a) Discuss the conceptual basis for the recognition of deferred taxation using the

temporary difference approach to deferred taxation . (5 marks including)

(b) Calculate the deferred tax liability at 30 June 2006 after any necessary

adjustments to the financial statements showing how the deferred tax liability would

be dealt with in the financial statements. (Assume that any adjustments do not

affect current tax. Candidates should briefly discuss the adjustments required to

calculate deferred tax liability.) ( 30 marks)

(Total = 3 5 marks)

June2009 Q2 Aron(financial instrument)

The directors of Aron, a public limited company, are worried about the challenging

market conditions which the company is facing. The markets are volatile and illiquid.

The central government is injecting liquidity into the economy. The directors are

concerned about the significant shift towards the use of fair values in financial

statements. IFRS 9 Financial instruments in conjunction with IFRS 13 Fair value

measurement defines fair value and requires the initial measurement of financial

instruments to be at fair value. The directors are uncertain of the relevance of fair

value measurements in these current market conditions.

Required

(a) Briefly discuss how the fair value of financial instrum ents is measured,

commenting on the relevance of fair value measurements for financial instruments

where markets are volatile and illiquid. (4 marks)

(b) Further they would like advice on accounting for the following transactions

within the financial statements for the year ended 31 May 20X8.

(i) Aron issued one million convertible bonds on 1 June 20X5. The bond s had a term

of three years and were issued with a total fair value of $100 million which is also

the par v alue. Interest is paid annually in a rrears at a rate of 6% per annum and

bonds, without the conversio n option, attracted an interest rate of 9% per annum

on 1 June 20X5. The company incurred is sue costs of $1 million. If the investor did

not convert to shares they would have been redeemed at pa r. At maturity all of the

bonds were converted into 25 million ordinary shares of $1 of Aron. No bonds could

be converted before that date. The directors are uncertain how the bonds should

have be en accounted for up to the date of the conversion on 31 M ay 20X8 and have

been told that the impact of the issue costs is to increase the effective interest rate

to 9.38%. (6 marks)

(ii) Aron held a 3% holding of the shares in Smart, a public limi ted company, The

investment was classified as an investment in eq uity instruments and at 31 May

20X8 had a carrying value of $5 million (brought forward from the previous period).

As permitted by IFRS 9 Financial instruments , Aron had made an irrevocable

election to recognise all changes in fa ir value in other comprehen sive income (items

that will not be reclassified to profit or loss). The cumulative gain to 31 May 20X7

recognised in other comprehensive income relating to the inv estment was $400,000.

On 31 May 20X8, the whole of the share capital of Smart was acquired b y Given, a

public limited company, a nd as a result, Aron received shares in Given with a fair

value of $5.5 mill ion in exchange for its holding in Smart. The company wishes to

know how the exchange of shares in Smart for the shares in Given should be

accou nted for in its financial records. (4 marks)

(iii) The functional and presentation currency of Aron is the dollar ($). Aron has a

wholly owned foreign subsidiary, Gao, whose functional currency is the zloti. Gao

owns a debt instrument which is held for t

the year ended 31 Ma y 20X7, the debt instrument was carried at its fair value of 10

million zloti.

At 31 May 20X8, the fair value of the debt instrument had increased to 12 million

zloty. The exchange rates were:

Zloti to $1

31 May 20X7 3

31 May 20X8 2

Average rate for year to 31 May 20X8 2.5

The company wishes to know how to account for this instrument in Ga

financial statements and the consolidated financial statements of the group. (5

marks)

(iv) Aron granted interest free loans to its employees on 1 June 20X7 of $10 million.

The loans will be paid back on 31 May 20X9 as a single payment by the employees.

The market rate of interest for a two year loan on both of the above dates is 6% per

annum. Th e c ompany is unsure how to account for the loan but wishes to hold the

loans at amortised cost under IFRS 9 Financial instruments

(4 marks)

Required

Discuss, with relevant computations, how the above financial instruments should be

accounted for in the financial statements for the year ended 31 May 20X8.

Note 1 . The mark allocation is shown against each of the transactions above.

Note 2 . The following discount and annuity factors may be of use.

Discount

factors

Annuity

factors

6% 9% 9.38% 6% 9% 9.38%

1 year 0.9434 0.9174 0.9142 0.9434 0.9174 0.9174

2 years 0.8900 0.8417 0.8358 1.8334 1.7591 1.7500

3 years 0.8396 0.7722 0.7642 2.6730 2.5313 2.5142

Professional marks will be awarded for clarity and quality of discussion. (2 marks)

(Total = 25 marks)

June2010 Q2 Cate (mix)

2

(a) Cate is an entity in the software industry. Cate had incurred substantial losses

in the financial years 31 May 2004 to 31 May 2009. In the financial year to 31 May

2010 Cate made a small profit before tax. This included signify cant non -operating

gains. In 2009, Cate recognised a material deferred tax asset in respect of carried

forward losses, which will expire during 2012. Cate again recognised the deferred

tax asset in 2010 on the basis of anticipated performance in the years from 2010 to

2012, based on budgets prepared in 2010.

The budgets included high growth rates in profi tability. Cate argued that the

budgets were realistic as there were positive indications from customers about

future orders. Cate also had plans to expand sales to new markets and t o sell new

products whose development would be completed soon. Cate was taking measures

to increase sales, implementing new programs to improve both productivity and

profi tability. Deferred tax assets less deferred tax liabilities represent 25% of

shareho

available to Cate that would create taxable profi t in the near future. (5 marks)

(b) At 31 May 2010 Cate held an investment in and had a signifi cant infl uence

over Bates, a public li mited company.

Cate had carried out an impairment test in respect of its investment in accordance

with the procedures prescribed in IAS 36, Impairment of assets . Cate argued that

fair value was the only measure applicable in this case as value - in -use was not

determinable as cash fl ow estimates had not been produced. Cate stated that there

were no plans to dispose of the shareholding and hence there was no binding sale

agreement. Cate also stated that the quoted share price was not an appropriate

measure w

Therefore, Cate estimated the fair value of its interest in Bates through application

of two measurement techniques; one based on earnings multiples and the other

based on an option pricing model. Neither of these methods supported the

existence of an impairment loss as of 31 May 2010. (5 marks)

(c) At 1 April 2009 Cate had a direct holding of shares giving 70% of the voting

rights in Date. In May 2010, Date issued new shares, which w ere wholly subscribed

for by a new investor. After the increase in capital, Cate retained an interest of 35%

of the voting rights in its former subsidiary Date. At the same time, the

shareholders of Date signed an agreement providing new governance rules f or Date.

board or participate in its management. As a consequence Cate considered that its

decision not to subscribe to the issue of new shares was equivalent to a decision to

disi nvest in Date. Cate argued that the decision not to invest clearly showed its new

intention not to recover the investment in Date principally through continuing use of

the asset and was considering selling the investment. Due to the fact that Date is a

separate line of business (with separate cash fl ows, management and customers),

Cate considered that the results of Date for the period to 31 May 2010 should be

presented based on principles provided by IFRS 5 Non -current Assets Held for Sale

and Discontinue d Operations . (8 marks)

(d) In its 2010 financial statements, Cate disclosed the existence of a voluntary

fund established in order to provide a post - retirement benefit plan (Plan) to

employees. Cate considers its contributions to the Plan to be voluntary, and has not

recorded any related liability in its consolidated financial statements. Cate has a

history of paying benefits to its former employees, even increasing them to keep

pace with inflation since the commencement of the Plan.

The main characteristics of the Plan are as follows:

(i) the Plan is totally funded by Cate;

(ii) the contributions for the Plan are made periodically;

(iii) the post retirement benefit is calculated based on a percentage of the fi nal

salaries of Plan participants dependent on the years of service;

(iv) the annual contributions to the Plan are determined as a function of the fair

value of the assets less the liability arising from past services.

Cate argues that it should not have to recognise the Plan because, ac cording to the

underlying contract, it can terminate its contributions to the Plan, if and when it

wishes. The termination clauses of the contract establish that Cate must

immediately purchase lifetime annuities from an insurance company for all the

retire d employees who are already receiving benefit when the termination of the

contribution is communicated. (5 marks)

Required:

Discuss whether the accounting treatments proposed by the company are

acceptabl e under International Financial Reporting Standards.

Professional marks will be awarded in this question for clarity and quality of

discussion. (2 marks)

The mark allocation is shown against each of the four parts above.

(25 marks)

Alexandra (June2011 Q3) (mix)

Alexandra, a public limited company, designs and manages business solutions and

IT infrastructures.

(a) In November 2010, Alexandra defaulted on an interest payment on an issued

bond loan of $100 million repayable in 2015. The loan agreement stipulates that

such default leads to an obligation to repay the whole of the loan immediately,

including accrued interest and expenses. The bondholders, however, issued a

waiver postponing the interest payment until 31 May 2011. On 17 May 2011,

Alexandra felt that a further waiver was req uired, so requested a meeting of the

bondholders and agreed a further waiver of the interest payment to 5 July 2011,

when Alexandra was confident it could make the payments. Alexandra classified the

loan as long - term debt in its statement of financial posi tion at 30 April 2011 on the

basis that the loan was not in default at the end of the reporting period as the

bondholders had issued waivers and had not sought redemption.

(6 marks)

(b) Alexandra enters into contracts with both customers and suppliers. The supplier

solves system problems and provides new releases and updates for software.

Alexandra provides maintenance services for its customers. In previous years,

Alexandra recognised revenue and related costs on software maintenance contracts

when the cus tomer was invoiced, which was at the beginning of the contract period.

Contracts typically run for two years.

During 2010, Alexandra had acquired Xavier Co, which recognised revenue, derived

from a similar type of maintenance contract as Alexandra, on a st raight - line basis

over the term of the contract. Alexandra considered both its own and the policy of

Xavier Co to comply with the requirements of IAS 18 Revenue but it decided to

adopt the practice of Xavier Co for itself and the group. Alexandra concluded that

the two recognition methods did not, in substance, represent two different

accounting policies and did not, therefore, consider adoption of the new practice to

be a change in policy.

In the year to 30 April 2011, Alexandra recognised revenue (and the related costs)

on a straight - line basis over the contract term, treating this as a change in an

accounting estimate. As a result, revenue and cost of sales were adjusted, reducing

(c) Alexandra has a two - ti er board structure consisting of a management and a

supervisory board. Alexandra

remunerates its board members as follows:

Annual base salary

Variable annual compensation (bonus)

Share options

In the group financial statements, within the related parties note under IAS 24

Related Party Disclosures , Alexandra disclosed the total remuneration paid to

directors and non -executive directors and a total for each of these boards. No

further breakdown o f the remuneration was provided.

The management board comprises both the executive and non -executive directors.

The remuneration of the non -executive directors, however, was not included in the

key management disclosures. Some members of the supervisory an d management

boards are of a particular nationality. Alexandra was of the opinion that in that

jurisdiction, it is not acceptable to provide information about remuneration that

could be traced back to individuals. Consequently, Alexandra explained that it had

provided the related party information in the annual accounts in an ambiguous way

to prevent users of the financial statements from tracing remuneration information

back to specific individuals. (5 marks)

(d) as a defined benefit plan in 2010.

In the year ended 30 April 2011, Alexandra changed the accounting method used

for the scheme and accounted for it as a defined contribution plan, restating the

comparative 2010 financial information. The effect of the res tatement was

significant. In the 2011 financial statements, Alexandra explained that, during the

year, the arrangements underlying the retirement benefit plan had been subject to

detailed review. Since the pension liabilities are fully insured and indexati on of

future liabilities can be limited up to and including the funds available in a special

trust account set up for the plan, which is not at the disposal of Alexandra, the plan

qualifies as a defined contribution plan under IAS 19 Employee Benefits rath er than

a defined benefit plan. Furthermore, the trust account is built up by the insurance

company from the surplus yield on investments. The pension plan is an average pay

plan in respect of which the entity pays insurance premiums to a third party

insur ance company to fund the plan. Every year 1% of the pension fund is built up

and employees pay a contribution of 4% of their salary, with the employer paying

the balance of the contribution. If an employee leaves Alexandra and transfers the

pension to anot her fund, Alexandra is liable for, or is refunded the difference

between the benefits the employee is entitled to and the insurance premiums paid.

(7 marks)

Professional marks will be awarded in question 3 for clarity and quality of discussion.

(2 marks)

Required:

Discuss how the above transactions should be dealt with in the financial

statements of Alexandra for the year ended 30 April 2011.

(25 marks)

DEC2011 Q3 Scramble

3 Scramble, a public limited company, is a developer of online computer games.

by internally developed intangible assets comprising the capitalised costs of the

development and produ ction of online computer games.

evenue. The costs incurred in relation to

maintaining the games at the same standard of performance are expensed to the

statement of comprehensiv e income. The accounting policy note states that

intangible assets are valued at historical cost. Scramble cons iders the games to

have an indefinite useful life, which is reconsidered annually when the intangible

assets are tested for impairment. Scramble determines value in use using the

estimated future cash flows which includ e maintenance expenses, capital expen ses

incurred in developing different versions of the games and the expected increase in

turnover resulting from the above mentioned cash outflows. Scramble does not

conduct an analysis or investigation of differences between expected and actual

cash flows. Tax effects were also taken into account. (7 marks)

(b) Scramble has two cash generating units (CGU) which hold 90% of the internal ly

developed intangible assets. Scramble reported a consolidated net loss for the

period and an impairment charge in re spect of the two CGUs representing 63% of

the consolidated profit before tax and 29% of the total costs in the period. The

recoverable amount of the CGUs is defined, in this case, as value in use. Specific

discount r ates are not directly available from the mark et, and Scramble estimates

the discount rates, using its weigh ted average cost of capital. In calculating the cost

of debt as an input to the determination of the discount rate, S cramble used the

risk - free rate adjusted by the company specific average cred it spread of its

outstanding debt, which had been raised two years previously. As Scramble did not

have any need for additional financing and d id not need to repay any of the existing

loans before 2014, Scramble did not see any reason for using a different discount

rate. Scramble did not disclose either the events and circumstances that led to the

recognition of the i mpairment loss or the amount of the loss recognised in respect

of each cash -generating unit. Scramble felt that the events and circumstan ces that

led to the recognition of a loss in respect of the first CGU were common knowled ge

in the market and the events and the circumstances that led to the recognition loss

of the second CGU were not needed to be disclosed.

(7 marks)

(c) Scramble wished to diversify its operations and purchased a professional football

s financial statements for the year ended 30 November

2011, it was proposed to include significant intangible assets which related to

transferred t o the club or when the contract of a player is extended. Scramble

believes that the registration rights of the pla yers are intangible assets but that the

agents fees do not meet the criteria to be recognised as intangible assets as they

are not directly attributable

has purchased the rights to 25% of the revenu e from ticket

sales generated by another football club, Santash, in a different league. Rashing

does not sell these tickets nor has any discretion over the pricing of the tickets.

Rashing wishes to show these rights as intangible assets in its financial st atements.

(9 marks)

Required:

Discuss the validity of the accounting treatments proposed by Scramble in its

fi nancial statements for the year ended 30 November 2011.

The mark allocation is shown against each of the three accounting treatments above.

Professional marks will be awarded for clarity and expression of your discussion. (2

marks)

(25 marks)

June2012 Q2 William

2 William is a public limited company and would like advice in relation to the

following transactions.

(a) William owned a building on which it raised finance. William sold the build ing for

$5 million to a finance company on 1 June 2011 when the carrying amount was

$35 million. The sam e building was leased back from the finance company for a

period of 20 years, which s

economic life. The lease rentals for the period are $441,000 payable annually in

arre ars. The interest rate implicit in the lease is 7%. The present value of the

minimum lease payments is the same as the sale proceeds.

William wishes to know how to account for the above transaction for the year ended

31 May 2012. (7 marks)

(b) William operates a defined benefit scheme for its employees. At June 2011, the

net pension liability recognized in the stateme nt of financial position was $18 million,

excluding an unrecognise d actuarial gain of $15 million which William wishes to

spread over the remaining working lives of the emplo yees. The scheme was revised

on 1 June 2011. This resulted in the benefits being e nhanced for some members o f

the plan and because benefits do not vest for these members for five years, William

wishes to spread the i ncreased cost over that period. However, part of the scheme

was to be closed, without any redundancy of employees.

William requires advice on how to account for the above scheme under IAS 19

Employee Benefits including the presentation and measurement of the pension

expense. (7 marks)

(c) On 1 June 2009, William granted 500 share appreciation rights to each of its 20

managers . All of the ri ghts vest after two years service and they can be exercised

during the following two ye ars up to 31 May 2013. The fair value of the right at the

grant date was $20. It was thought that three manage rs would leave over the initial

two -year period and they did so. The fair value of each right was as follows:

Year Fair value at year end $

31 May 2010 23

31 may 2011 14

31 may 2012 24

On 31 May 2012, seven managers exercised their rights when the intrin sic value of

the right was $21. Willi am wishes to know what the liability and expense will be at

31 May 2012. (5 marks)

(d) William acquired another entity, Chrissy, on 1 May 2012. At the time of the

acqu isition, Chrissy was being sued as there is an alleged mis -selling case

potentially impl icating the entity. The claimants are suing for damages of $10

million. William estimates that the fair value of any contingent liability is $4 million

and feels that it is more

likely than not that no outflow of funds will occur.

entity

financial statements and whether the treatment would be the same in the

consolidated financial statements. (4 marks)

Required:

Discuss, with suitable computations, the a dvice that should be given to Will iam in

accounting for the above events.

Note: The mark allocation is shown against each of the four events above.

Professional marks will be awarded in question 2 for the quality of the discussion. (2

marks)

(25 marks)

June2012 Q3[ important ]

3 Ethan, a public limited company, develops, operates and sells investment

properties.

(a) Ethan focuses mainly on acquiring properties where it foresees growth potential,

through rental income as well as value appreciation. The acquisition of an

investment property is usually realised through the acquisition of the entity, which

holds the prope rty.

through business combinations are recognised at fair value, using a discounted cash

flow model as approximation to fair value. There is currently an active market for

this t ype of property. The difference between the fair value of the investment

property as determined under the accounting policy, and the value of the

investment property for tax purposes results in a deferred tax liability.

Goodwill arising on business combin ations is determined using the measurement

principles for the investment properties as outlined above. Goodwill is only

considered impaired if and when the deferred tax liability is reduced below the

amount at which it was first recognised. This reduction can be caused both by a

reduction in the value of the real estate or a change in local tax regulations. As long

as the deferred tax liability is equal to, or larger than, the prior year, no impairment

is charged to goodwill. Ethan explained its accounting treatment by confirming that

almost all of its goodwill is due to the deferred tax liability and that it is normal in

the industry to account for goodwill in this way.

Since 2008, Ethan has incurred substantial annual losses except for the year ended

31 M ay 2011, when it made a small profit before tax. In year ended 31 May 2011,

most of the profit consisted of income recognised on revaluation of investment

properties. Ethan had announced early in its financial year ended 31 May 2012 that

it anticipated sub stantial growth and profit. Later in the year, however, Ethan

announced that the expected profit would not be achieved and that, instead, a

substantial loss would be incurred. Ethan had a history of reporting considerable

negative variances from its budget ed results.

-on -year despite

tax assets consist primarily of unused tax losses that can be carried forward which

are unlikely to be offset against anticipated future taxable profits. (11 marks)

(b) Ethan wishes to apply the fair value option rules of IFRS 9 Financial

Instruments

for applying the fair value option is based upon the fact that the recognition of gains

and losses on its investment properties and the related debt would otherwise be

inconsistent. Ethan argued that there is a specific financial correlation between the

factors, such as interest rates, that form the basis for determining the fair value of

(c) Ethan has an operating subsidiary, which has in issue A and B shares, both of

which have voting rights. Ethan h olds 70% of the A and B shares and the remainder

are held by shareholders external to the group. The subsidiary is obliged to pay an

annual dividend of 5% on the B shares. The dividend payment is cumulative even if

the subsidiary does not have sufficient l egally distributable profit at the time the

payment is due.

subsidiary were accounted for in the same way as equity instruments would be,

with the B shares owned by external part ies reported as a non -controlling interest.

(5 marks)

Required:

Discuss how the above transactions and events should be recorded in the

consolidated financial statements of Ethan.

Note: The mark allocation is shown against each of the three transactions ab ove.

Professional marks will be awarded in question 3 for the quality of the discussion. (2

marks)

(25 marks)

DEC2012 Q2 Coate

2 (a) Coate , a public limited company, is a producer of ecologically friendly

electricity and green certificates. Coate obtains green certificates under a national

government scheme. G reen certificates represent the environmental value of green

electricity. The national government requires suppliers who do not produce green

electricity to purchase a certain number of green certificates. Suppliers who do not

produce green electricity can buy green certificates either on the market on which

they are traded or directly from a producer such as Coate. The national government

wishes to give incentives to producers such as Coate by allowing them to gain extra

income in this way.

Coate obtains the certificates from the national government on satisfactory

completion of an audit by an independent organisation, which confirms the origin of

production. Coate then receives a certain number of green certificates from the

national government depending on the volume of green electricity generated. The

green certificates are allocated to Coate on a quarterly basis by the national

government and Coate can trade the green certificates.

Coate is uncertain as to the accounting treatment of the green certific ates in its

financial statements for the period ended 30 November 2012 and how to treat the

green certificates which were not sold at the end of the reporting period. (7 marks)

(b) During the year ended 30 November 2012, Coate acquired an overseas

subsid iary whose financial statements are prepared in a different currency to Coate.

The amounts reported in the consolidated statement of cash flows included the

effect of changes in foreign exchange rates arising on the retranslation of its

overseas operations .

effect of foreign exchange rate changes on cash and cash equivalents as Coate held

some foreign currency of its own denominated in cash.

(5 marks)

(c) Coate also sold 50% of a previously wholly owned subsidiary, Patten, to a third

party, Manis. Manis is in the same industry as Coate. Coate has continued to

account for the investment in Patten as a subsidiary in its consolidated financial

statements. The main reason for this accounting treatment was the agreement that

had been made with Manis, under which Coate would exercise general control over

directors to the board. The agreeme nt also stated that certain decisions required

consensus by the two shareholders.

Under the shareholder agreement, consensus is required with respect to:

plans or budgets that deviate from the business plan;

accounting policies; acquisition of assets above a certain value; employment or

dismissal of senior employees; distribution of dividends or establishment of loan

facilities Coate feels that the consensus required above does not constitute a

hindran ce to the power to control Patten, as it is customary within the industry to

agreement. (6 marks)

(d) ovember

adjustment. These items related to adjustments arising from tax audits by the

authoritie s in relation to previous reporting periods.

The issues that resulted in the tax audit adjustment were not a breach of tax law

but related predominantly to transfer pricing issues, for which there was a range of

possible outcomes that were negotiated duri ng 2012 with the taxation authorities.

Further at 30 November 2011, Coate had accounted for all known issues arising

from the audits to that date and the tax adjustment could not have been foreseen

as at 30 November 2011, as the audit authorities changed t he scope of the audit.

No penalties were expected to be applied by the taxation authorities. (5 marks)

Required:

Discuss how the above events should be accounted for in the individual or,

as appropriate, the consolidated financial statements of Coate.

Note: The mark allocation is shown against each of the four events above.

Professional marks will be awarded in question 2 for the clarity and quality of the

presentation and discussion.

(2 marks)

(25 marks)

DEC2012 Q3 Blackcutt

3 Blackcutt is a local government organisation whose financial statements are

prepare d using International Financial Reporting Standards.

(a) Blackcutt wishes to create a credible investment property portfolio with a view

to determining if any property may be consid ered surplus to the functional

objectives and requirements of the loc al government organisation. The following

portfolio of property is owned by Blackcutt.

Blackcutt owns several plots of land. Some of the land is owned by Blackcutt fo r

capital appreciati on and this may be sold at any time in the future. Other plots of

land have no curre nt purpose as Blackcutt has not determined whether it will use

the land to provide services such as those pr ovided by national parks or for short -

term sale in the ordinary course of operations.

The local government organisation supplements its income by buying an d selling

property. The housing department regularly sells part of its housing inventory in the

ordinary course o f its operations as a result of changing demographi cs. Part of the

inventory, which is not held for sale, is t o provide housing to low - income employees

at below market rental. The rent paid by employees covers the cost of maintenance

of the property.

(7 marks)

(b) Blackcutt has outsourced its waste collection to a private sector provider called

Waste and Co and pays an annual amount to Waste and Co for its services. Waste

and Co purchases the vehicle s and uses them exclusively for waste

collection. The vehicles are painted with the Blackcutt local government

organ isation name and colours. Blackcutt can use the vehicles and the vehicles are

used for waste collectio life. In the event of Waste and

business ceasing, Blackcutt can obtain legal tit le to the vehicles and carry on

the waste collection service. (6 marks)

(c) Blackcutt owns a warehouse. Chemco has leased the warehouse from Blackcu tt

and is using it as a storage facility for chemicals. The national government has

announced its intention to enact environmental legislation requiring property

owners to accept liability for environmental pollution. As a res ult, Blackcutt has

introduced a hazardous chemical policy and has begun to apply the poli cy to its

properties. Blackcutt has had a report that the chemicals have contaminated the

land surrounding the warehouse. Bl ackcutt has no recourse against Chemco or its

insurance company for the clean -up costs of the pollution. At 30 November 2012, it

is virtually certain that draft legislation requiring a clean up of land already

contaminated wi ll be enacted shortly after the year end. (4 marks)

(d) On 1 December 2006, Blackcutt opened a school at a cost of $5 million. The

esti mated useful life of the sc hool was 25 years. On 30 November 2012, the school

was closed because numbers using t he school declined unexpectedly due to a

population shift caused by the closure of a major employe r in the area. The school

is to be converted for use as a library, and th ere is no expectation that numbers

using the school will increase in the

future and thus the building will not be reopened for use as a school. The current

replacement cost for a library of equivalent size to the school is $21 million.

Because of the natu re of the non -current asset, value - in -use and net selling price

are unrealistic estimates of the value of the school. The change in use would have

no effect on the estimated life of the building. (6 marks)

Required:

Discuss how the above events should be accounted for in the financial

statements of Blackcutt.

Note: The mark allocation is shown against each of the four events above.

Professional marks will be awarded in question 3 for the clarity and quality of the

pr esentation and discussion.

(2 marks)

(25 marks)

June2013 Q2

2 (a) In its annual financial statements for the year ended 31 March 2013,

Verge , a public limited company, had identified the following operating

segments:

(i ) Segment 1 local train operations

(ii) Segment 2 inter -city train operations

(iii) Segment 3 railway constructions

The company disclosed two reportable segments. Segments 1 and 2 were

aggr egated into a single reportable operating segment. Operating seg ments

1 and 2 have been aggregated on the basis of their similar business

characteristics, and the nature of their products and services. In the local

train market, it is the local transport authority which awards the contract

and pays Verge for its servic es. In the local train market, contracts are

awarded following a competitive tender process, and the ticket prices paid

by pa ssengers are set by and paid to the transport authority. In the inter -

city train market, ticket prices are set by Ver ge and the pas sengers pay

Verge for the service provided. (5 marks)

(b) Verge entered into a contract with a government body on 1 April 2011 to

undertake maintenance servi ces on a new railway line. The total revenue

from the contract is $5 million over a three -year peri od. The contract states

that $1 million will be paid at the commencement of the contract but

although inv oices will be subsequently sent at the end of each year, the

government authority will only settle the su bsequent amounts owing when

the contract is co mpleted. The invoices sent by Verge to date (including $1

million above) were as follows:

Year ended 31 March 2012 $28 million

Year ended 31 March 2013 $12 million

The balance will be invoiced on 31 March 2014. Verge has only accounted

for the i nitial pa yment in the financial statements to 31 March 2012 as no

subsequent amounts are to be paid unti l 31 March 2014. The amounts of

the invoices reflect the work undertaken in the period. Verge wishes to know

how to account for the revenue on the contract in th e financial statements

to date.

Market interest rates are currently at 6%. (6 marks)

(c) In February 2012, an inter -city train did what appeared to be superficial

damage t o a storage facility of a local company. The directors of the

company expressed an in tention to sue Verge but in the absence of legal

proceedings, Verge had not recognised a provision in its financial statements

to 31 March 2012. In July 2012,

Verge received notification for damages of $12m, which was based upon

the estimated cost to repa ir the building. The local company claimed the

building was much more than a storag e facility as it was a valuable piece of

architecture which had been damaged to a greater extent than was

origin ally thought. The head of legal services advised Verge that t he

company was clearly negligent but the view obtai ned from an expert was

that the value of the building was $800,000. Verge had an insurance policy

that would c over the first $200,000 of such claims. After the financial

statements for the year ended 31 Ma rch 2013 were aut horised, the case

came to court and the judge determined that the storage facility actually

was a valuable piece of architecture. The court ruled that Verge was

negligent and awarded $300,000 for the damage to the fabric of the facility.

(6 marks)

(d) Verge was given a building by a private individual in February 2012. The

benefact or included a condition that it must be brought into use as a train

museum in the interests of the local c ommunity or the asset (or a sum

equivalent to the fair v alue of the asset) must be returned. The fair value of

the ass et was $15 million in February 2012. Verge took possession of the

buil