FINANCIAL & CORPORATE REPORTING. Time allowed 3 hours Total marks 100

Transcription

1 FINANCIAL & CORPORATE REPORTING Time allowed 3 hours Total marks 100 [N.B. - The figures in the margin indicate full marks. Question must be answered in English. Examiner will take account of the quality of language and of the way in which the answers are presented. Different parts, if any, of the same question must be answered in one place in order of sequence] 1. (a) Extract from draft financial statements of Apple Foods Limited is given below. Statements of Profit or Loss and Other Comprehensive Income for the years ended 30 June: BDT 000 BDT 000 Revenue Cost of Sales (550) (500) Gross Profit Expenses (70) (60) Profit for year Statements of Changes in Equity (Retained Earnings only) for the years ended 30 June: BDT 000 BDT 000 Balance 1 July Profit for the year Dividends declared (90) (85) Balance 30 June Statements of Financial Position as at 30 June: BDT 000 BDT 000 Non-current Assets Net Current Assets Share Capital Retained Earnings Before signing the accounts, following events are identified by auditor: - The head of collection had been misappropriating monies paid to the company by its customers. The effect of the fraud was that amounts shown in the financial statements as receivables need to be written off as they were in fact paid. There is no prospect of recovering the money as the employee is traceless. The amounts were BDT 50,000, BDT 60,000 and BDT 70,000 in the year of 2015, 2016 and 2017 respectively. - It is discovered that a special asset is being depreciated by less amount than the actual amount since 2015 due to computation error. As a result, non-current asset is being overstated. Such overstatement is BDT 25,000 in each year since Marks As an Audit Manager, suggest the Company as to how to restate the financial statements of Apple Foods Limited for the year ended June 30, 2017 as per BAS 8. Prepare the extracts from financials including comparatives, incorporating the adjustments you deem necessary as a result of the above mentioned events. 12 Page 1 of 6

2 (b) Brick Limited has a foreign currency liability payable in 1 year time and it wishes to hedge the amount payable on settlement against foreign currency fluctuations. To that end, it takes out a forward contract to buy the foreign currency in 1 year time. The conditions for hedge accounting were met. Should the hedge be treated as a fair value hedge of the foreign currency liability or as a cash flow hedge of the amount to be settled in the future? How should gains and losses on the liability and the forward contract be accounted for? 5 (c) Oil Boss (OB) is a manufacturer and retailer of Rice Barn Oil. On 31 October 2016, the cost of OB s inventories of finished goods was BDT 125 million with 1,250 Metric Ton (MT) of Oil. At that date their sales value was BDT million. OB's management wished to reduce their business risk of fluctuations in future cash inflow from sale of the oil by hedging the value of the oil. Therefore, it sold futures contracts for 1,250 MT at BDT 115,000 per MT at 31 October The contracts mature on 30 October On 30 September 2017 the fair value of the oil was BDT 145 million and the forward price of oil per MT for delivery on 30 October 2017 was BDT 105,000 MT. Explain how the above transactions would be treated in OB's financial statements for the year ended 30 September Concord Ltd is a private company that manufactures and sells specialized items of plant and machinery. The company prepares financial statements in accordance with IFRS. You have recently been appointed as Financial Controller. The previous Financial Controller resigned suddenly due to illness. The Board of Directors is ambitious and has plans to expand the company. In order to do this, further finance will be needed. The Managing Director plans to approach the bank for a substantial long term loan as soon as the financial statements are finalized. He also hopes to persuade several private individuals and firms to invest in the company. For this reason, he is particularly concerned about the level of profit as he needs to be able to demonstrate that the company will be capable of providing a reasonable return on an equity investment. You have been asked to finalize the financial statements for the year ended 30 June, The draft income statement and balance sheet are shown below: Draft Income statement for the year ended 30 June 2017 TK'000 Revenue 4,088 Cost of sales (2,520) Gross profit 1,568 Operating expenses (542) Profit from operations 1,026 Finance costs (154) Profit before tax 872 Tax (140) Profit for the period 732 Page 2 of 6

3 Balance sheet at 30 June 2017 Non-current assets Property plant and equipment 6,375 Intangible assets: development cost 525 6,900 Current assets 2,042 Total assets 8,942 Capital and reserves Issued capital 1,000 Retained earnings 4,012 Non-current liabilities 2,500 Current liabilities 1,430 Total equity and liabilities 8,942 During the year ended 30 June 2017 Concord Ltd entered into a number of unusual transactions. The following information about them has been provided: (i) On 1 July 2016 the company leased an item of plant to a customer. The item cost Tk. 240,000 to produce and its normal sales price would have been Tk.320,000. Under the terms of the lease, the customer pays four annual rentals of Tk.85,000 in advance and legal title to the goods will be transferred at the end of the lease term. The estimated useful life of the plant is four years and its residual value at the end of the lease term is expected to be nil. The market rate of interest for this type of lease agreement is 12%. Revenue of Tk. 340,000 has been recognized in respect of this transaction and the outstanding installments have been treated as a trade receivable. The cost of producing the plant has been included in cost of sales. The customer has been informed that the arrangement is interest free. (ii) During the year ended 30 June 2017, Concord Ltd has been developing a new type of compressing plant. The work has been successful and has already generated a significant amount of interest in the industry sector. Since the year end there have been several orders and production of the new compressors began shortly after the year-end. Development expenditure of Tk.525,000 has been recognized on the balance sheet at 30 June The amount is made up as follows: TK'000 Initial research into techniques 75 Design of prototype plant 90 Purcahse and construction of new plant and machinery 108 Labour costs 93 Construction and testing 78 Training of production staff 57 Advertising within the trade press The plant and machinery was purchased and constructed specifically for use in developing and producing the new compressors and has an estimated useful life of six years. It became operational on 1 September (iii) On 1 November 2016 the company sold a machine that had been produced specially for a customer. The sales price of Tk.750,000 included servicing and technical support for five Page 3 of 6

4 years from 1 November The normal cost of providing similar levels of technical support is estimated at Tk.50,000 per annum and the company normally sets its prices so that it achieves a markup of 50% on cost. The sale proceeds were received on 15 December 2016 and recognized as revenue. Requirements: Draft a memorandum to the Board of Directors of Concord Ltd that includes: (a) An explanation of the required IFRS accounting treatment of these issues, preparing relevant calculations where appropriate. 8 (b) A revised draft of the income statement for the year ended 30 June 2017 and the balance sheet at that date. 10 (c) A calculation of the following financial ratios before and after the accounting adjustments and an explanation of the changes: 10 i. Net profit margin ii. Return on capital employed (ROCE) iii. Gearing 3. Shabib Ltd. is a small publicly listed company. On 1 April 20x6 it acquired 90% of the equity shares in Sohel Ltd., a private limited company. On the same day Shabib accepted a 10% loan note from Sohel for Tk.200,000 which was repayable at Tk.40,000 per annum (on 31 March each year) over the next five years. Sohel s retained profits at the date of acquisition were Tk.2,200,000. Balance Sheet as at 31 March 20x7 Shabib Ltd. Sohel Ltd. Tk'000 Tk'000 Non-current assets Property, plant and equipment 2,120 1,990 Intangible-Software - 1,800 Investments - equity in Sohel Ltd. 4, % loan note Sohel Ltd others ,495 4,000 Current assets Inventories Trade receivables Sohel current account 75 - Cash 20 1, Total assets 7,833 4,888 Page 4 of 6

5 Equity and liabilities Capital and reserves Equity shares of Tk 1 each 2,000 1,500 Share premium 2, Retained earnings 2,900 6,900 1,955 3,955 Non-current liabilities 10% Loan note from Shabib Ltd Government grant Current liabilities Trade payables Shabib current account - 60 Income tax payable Operating overdraft Total equity and liabilities 7,833 4,888 The following information is relevant: (i) Included in Sohel s property at the date of acquisition was a leasehold property recorded at its depreciated historic cost of Tk.400,000. The leasehold had been sublet for its remaining life of only four years at an annual rental of Tk. 80,000 payable in advance on 1 April each year. The directors of Shabib Ltd are of the opinion that the fair value of this leasehold is best reflected by the present value of its future cash flows. An appropriate cost of capital for the group is 10% per annum. The present value of Tk.1 annuity received at the of each year where interest rates are 10% can be taken as 3 years annuity Tk.2.50 and 4 years annuity Tk (ii) The software of Sohel represents the depreciated cost of the development of an integrated business accounting package. It was completed at a capitalized cost of Tk.2,400,000 and went on sale on 1 April 20x5. Sohel s directors are depreciating the software on a straight line basis over an eight year life. However, the directors of Shabib are of the opinion that a five year life would be more appropriate as sales of business software rarely exceed this period. (iii) The inventory of Shabib on 31 March 20x7 contains goods at a transfer price of Tk. 25,000 that were supplied by Sohel who had marked them up with a profit of 25% on cost. Unrealized profits are adjusted for against the profit of the company that made them. (iv) On 31 March 20x7 Sohel remitted to Shabib a cash payment of Tk.55,000. This was not received by Shabib until early April. It was made up of an annual repayment of the 10% loan note of Tk.40,000 (the interest had already been paid) and Tk.15,000 off the current account balance. (v) Goodwill has fallen in value by Tk.120,000 since the acquisition occurred. Prepare the consolidated balance sheet of Shabib Ltd. as at 31 March 2x (a) On 1 April 20x6, R Ltd. acquired A Ltd. for a cash payment of Tk.300mn. The fair value of identifiable net assets as on that day was Tk.260mn which included Tk.10mn towards acquisition of customer relationships (derived from sale of customer data bases in the past). On 31 March 20x7 R Ltd. carried out a review of the goodwill for evidence of impairment. As part of the review the value in use of all its non-current assets was calculated at Tk.280mn. Two cash generating units X and Y were identified and their value in use was estimated at Tk. 140mn and Tk.130mn respectively. The carrying values of the individual units were as follows: Page 5 of 6

6 One machine (having a carrying value of Tk.5mn) of cash generating unit X was destroyed by fire. Goodwill on consolidation could not be allocated meaningfully to any of its individual cash generating units. Requirements: (i) Show how the impairment loss (if any) will affect the carrying value of the net assets in the consolidated financial statements of R Ltd. 10 (ii) Explain the effect of the impairment review on the carrying value of the goodwill on consolidation as at 31 March 20x7. 8 (b) Red Tomato purchased 90% of the 100,000,000 BDT 10per ordinary share capital of Green Chilly on 1 January 2017, giving rise to goodwill of BDT 80,000,000. At this date Green Chilly's retained earnings were BDT 130,000,000. There were no other reserves. On 30 September 2017, when the net assets of Green Chilly were BDT 330,000,000, Red Tomato disposed of the majority of its holding in Green Chilly, retaining just 10% of share capital, with a fair value of BDT 40,000,000. Red Tomato received BDT 315,000,000 consideration for the sale. The following information is relevant: - Goodwill in Green Chilly has been impaired by BDT 15,000,000 - In April 2017, Green Chilly revalued a plot of land from BDT 50,000,000 to BDT 75,000,000. This land was held with the intention of building a new head office on it. - Since acquisition, Green Chilly as recognised a net amount of BDT 20,000,000 gains on AFS investments in other comprehensive income - The non-controlling interest is valued using the proportion of net assets method. What is the impact of the disposal on the Red Tomato Group Statement of profit or loss and other comprehensive income? 7 (c) The following transactions took place for PLQ Ltd. for the year ended 31 March, (i) PLQ Ltd has traditionally repainted its premises every five years. The next painting is due in a year s time. The entity proposes to accrue as a provision the expected cost of repainting the premises. 2 (ii) PLQ Ltd has guaranteed the debts of its associate company up to a maximum amount of BDT 3 million. The associate is in excellent financial health and the directors are of the opinion that it is unlikely the guarantee will ever be called in. 3 Unit X Tkmn Unit Y Tk mn Trademark and patents 0 8 Property, plant and equipment Net current assets Total Discuss briefly how each of the above transactions and events should be recorded by PLQ Ltd in compliance with the requirements of BAS 37 Provisions, Contingent Liabilities and Contingent Assets. Page 6 of 6