SUGGESTED ANSWERS AND EXAMINER S COMMENTARY

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1 SUGGESTED ANSWERS AND EXAMINER S COMMENTARY The suggested answers set out below were those used to mark this question. Markers were encouraged to use discretion and to award partial marks where a point was either not explained fully or made by implication. More marks were available than could be awarded for each requirement. This allowed credit to be given for a variety of valid points or alternative calculations (based on valid assumptions) which were made by candidates. Short Answer Questions Question 1 Total Marks: 38 Examiner comments This question was well answered in general. Parts (b), (c) and (e) were the best answered parts. It was particularly pleasing to see that most candidates demonstrated a good understanding of the IASB's approach to deferred tax in part (e). The following discusses particular areas where candidates did not perform so well. In part (a), the loss on remeasurement was sometimes calculated incorrectly. Items (3) and (4) of part (c) on related parties often caused issues. In part (d), the fact that the payment was at the beginning of each period rather than the end of each period meant that a number of candidates calculated the non-current asset incorrectly (although due credit was given for the workings where they were correct). In part (f) a number of candidates included the contributions in the calculation of the defined benefit obligation, a significant error. (a) '000 Post-tax loss of discontinued operations (3,600) Loss recognised on measurement to fair value less costs to sell (W1) (2,000) * Loss for the year from discontinued operations (5,600) Working 1 Loss on remeasurement Net assets at 31 December 2012 (60,200 (2,800 x 9/12)) 58,100 Goodwill 4,200 62,300 Fair value less costs to sell (61,800 1,500) (60,300) (2,000) Note: credit was also awarded for reducing this by a 25% deferred tax credit (although a tax rate was not explicitly given in this question). 4 4 (b) (1) The subsidiary was a reportable segment during part of the year ended 31 December 2012 and is therefore is a reportable segment. (2) The subsidiary is not a reportable segment for the year ended 31 December 2012 as it does not exceed 10% of revenue (internal plus external), profit or assets. However, the CB can choose to report the new subsidiary as a segment if management believes that information about the segment would be useful to users of financial statements. Copyright ICAEW All rights reserved. Page 1 of 13

2 (3) Two operating segments that do not meet the quantitative thresholds can be combined to create a reportable segment if they have similar economic characteristics and share a majority of the aggregation criteria. In this case four of the aggregation criteria appear to be met as: - similar products - similar production process - same distribution method - same regulatory environment. The type of customer is different (wholesale vs retail), but a majority of the aggregation criteria are met. Therefore the two operating segments can be combined to create a reportable segment. (4) The subsidiary was a reportable segment last year, but is not a reportable segment in the current period. However, if management judges the operating segment to be of continuing significance, as it was a reportable segment in the period immediately preceding the current one, it can continue to be treated as a reportable segment in the current year. 8 8 (c) (1) Segna is a related party of Calza as it is a member of the same group. (2) Gamma is not a related party of Calza, as, although it owns 20% of Calza it does not have significant influence over Calza. (3) The pension fund is the ultimate controlling party of Calza, and, as such is a related party. (4) Beta is not a related party as it is an associate of Gamma. This would be the case even if Gamma had significant influence over Calza as two parties significantly influenced by the same party are not considered related. (5) Netta is a related party of Calza as it is a member of the same group, even though Calza did not trade with Netta. (Disclosure is only required where transactions have occurred however). (6) Peter Hann is not a related party of Calza as he is not key management personnel of Calza. Prestaprint is not a related party of Calza as it is not controlled by key management of Calza or Calza's controlling party. Note: If Peter Hann were key management personnel at a group level (not the case here), Netta would be considered a related party of Calza. 6 6 Copyright ICAEW All rights reserved. Page 2 of 13

3 1(d) Delta is a manufacturer lessor, therefore the 2,000 direct costs incurred in setting up the lease are charged to profit or loss rather than being included in the calculation of the discount rate. The half yearly interest rate is 4% (( ½ 1) x 100%). The amount initially recognised as a lease asset is: Cash flow Discount rate Present value 1 July , ,000 1 January ,000 1/ , July ,000 1/ , January ,000 1/ , July ,000 1/ , January ,000 1/ , July ,000 1/ , January ,000 1/ , , This can also be calculated using a 7 period cumulative discount factor at 4% (as the first payment is not discounted as payments are in advance): 50,000 + (50,000 x ) = 350,103. Lease asset 1 July ,103 Payment (50,000) 300,103 Interest at 4% 12, December ,107 1 January 2013 Payment (50,000) 262,107 Interest at 4% 10,484 1 July 2013 Payment (50,000) 222,591 Interest at 4% 8, December ,495 The non-current amount at 31 December 2012 is 221,591 (231,495 8,904). The profit recognised by Delta is: Revenue 350,103 Cost (260,000) Legal costs (2,000) 88,103 Finance income 12,004 Overall profit 100, Copyright ICAEW All rights reserved. Page 3 of 13

4 (e) Temporary differences are defined by IAS 12 as 'differences between the carrying amount of an asset or liability in the statement of financial position and its tax base'. Temporary differences therefore encompass all differences between an asset or liability's carrying amount and the amount recognised for tax purposes, whether or not those amounts are recognised in profit or loss. This is a statement of financial position approach, and amounts recognised for deferred tax are calculated by comparing the brought down and carried down amounts, and the difference recognised in profit or loss, other comprehensive income or directly in equity as appropriate. Timing differences are differences between income and expenses recognised for accounting purposes versus the equivalent amounts recognised for tax purposes. Some GAAPs focus on the profit or loss effect of deferred tax and only consider timing differences, or timing differences with limited modifications, eg for the revaluation of fixed assets. The IASB's approach is comprehensive. Deferred tax is recognised for all temporary differences relating to the recovery of the carrying amount (whether by sale or by use generating taxable income) with very limited exceptions. Key differences between the temporary difference and timing difference approaches include that under the temporary difference approach: Deferred tax is recognised on assets revalued outside profit or loss Deferred tax is recognised on fair value adjustments to non-current assets on a business combination Deferred tax is recognised on undistributed earnings of investments in subsidiaries, associates and joint ventures, whether or not there is a commitment to distribute those earnings 7 7 (f) Present value of defined benefit obligation: '000 1 July ,200 Interest July at 0.5% 521 Current service cost 7,000 Benefits (5,000) 106,721 Interest August at 0.5% 534 Current service cost 7,000 Benefits (5,000) 109,255 Interest September at 0.5% 546 Current service cost 7,000 Benefits (5,000) 111,801 Interest October at 0.5% 559 Current service cost 7,000 Benefits (5,000) 114,360 Copyright ICAEW All rights reserved. Page 4 of 13

5 Interest November at 0.5% 572 Current service cost 7,000 Benefits (5,000) 116,932 Interest December at 0.5% 585 Current service cost 7,000 Benefits (5,000) 119,517 Remeasurement loss (balancing figure) 3, December (actuary) 122,600 Maximum for the question Copyright ICAEW All rights reserved. Page 5 of 13

6 Question 2 Total Marks: 30 Examiner comments Answers to part (a) of the question were generally very good. In part (b)(i) almost all candidates applied a valid recognition approach by applying IAS 18 to the mobile phone industry and credit was given to a range of reasonable approaches taken by candidates which reflected the variety of accounting treatments adopted by mobile phone operators. However, in some cases the requirement to 'explain' the accounting treatment was ignored in part (b), limiting the mark that could be scored from the calculations alone. Part (b)(ii) required application of the Exposure Draft and generated more mixed answers. Some candidates believed that the approach would be the same as their answer to part (b)(i) under IAS 18, rather than recognising that the different performance obligations and time value of money needed to be accounted for separately. (a) ED/2011/6 proposes a 5 step approach to revenue recognition: (1) Identify the contract with the customer (2) Identify performance obligations (which may be multiple under a single contract) (3) Determine the transaction price (4) Allocate transaction price to the separate performance obligations (5) Recognise revenue recognition when/as each performance obligation is satisfied. This is a statement of financial position approach which recognises revenue when or over the period that the obligation is satisfied by transferring a promised good or service to a customer. Transfer occurs when control of the good or service is transferred. In IAS 18, revenue is measured at the fair value of the consideration receivable and allocates revenue to multiple components based on identifiable amounts for each component The Exposure Draft places more emphasis on separating multiple performance obligations accurately, and does that by explicitly allocating the transaction price in proportion to standalone selling prices, where the company sells the items separately. In order to determine the transaction prices, the consideration is discounted to present value to reflect the time value of money. The Exposure Draft provides an exemption where payment of all or substantially all of the consideration and the transfer of the goods or services is within one year or less: the consideration on such contracts does not need to be discounted. In the mobile phone operator business, transactions which include handsets and services will need to be separated into the fair value of each obligation and this will include sale of the handset, call and data services and a financing element where mobile phones are sold for a discounted price which is subsidised by future monthly payments Copyright ICAEW All rights reserved. Page 6 of 13

7 (b) (i) IAS 18 approach IAS 18 does not provide specific guidance specifically related to the mobile industry. Different approaches are followed, however the general approach tends to be recognition of amounts received for the handset on transfer of the handset, and amounts received monthly as the months progress. This results in the following effect on profit or loss for the year ended 31 December 2012 for a contract beginning on 1 October 2012: Profit or loss Revenue - handset 99 - monthly payments (40 x 3) Cost of sales (450 + (5 x 3)) (465) Gross profit (246) Clearly, this results in a loss upfront on an individual contract basis, although when amalgamated with many different contracts and commencement dates, the difference may not be material to overall profit or loss. No amounts receivable are recognised in the statement of financial position, unless the customer has not paid. Other approaches are followed by some mobile operators. (ii) Exposure Draft approach ED/2011/6 will require the contract to be split into 3 separate performance obligations: Delivery of the handset Supply of call and data services Finance services for delayed payment of the fair value of the handset (time value of money) In practice the latter would only need to be separated if judged material. Yellow's accounting policy in this case however is to separate it. The present value of the contract discounted at the monthly interest rate of 0.545% is: Upfront fee 99 Monthly payments (40 x ) The present value of the standalone option is: Handset 699 Call and data services (15 x ) , Therefore the present value of the 24 month contract is allocated as follows based on the standalone selling prices of the two elements without a contract: Handset ( x 699/1,035.59) Call and data services ( x /1,035.59) At commencement of the contract: DR Cash DR Receivables (remainder) CR Revenue Copyright ICAEW All rights reserved. Page 7 of 13

8 The monthly amount relating to the call and data services is / = Therefore the monthly amount relating to recovery of the handset receivable is = Each month: DR Cash CR Receivables CR Revenue (call and data services) The receivables are recorded at amortised cost: 1 October Effective interest ( x 0.545%) October 2012 Cash received (25.57) Effective interest ( x 0.545%) November 2012 Cash received (25.57) Effective interest ( x 0.545%) December 2012 Cash received (25.57) Effective interest ( x 0.545%) January 2013 Cash received (25.57) Effective interest ( x 0.545%) February 2013 Cash received (25.57) Effective interest ( x 0.545%) March 2013 Cash received (25.57) Effective interest ( x 0.545%) April 2013 Cash received (25.57) Effective interest ( x 0.545%) May 2013 Cash received (25.57) Effective interest ( x 0.545%) June 2013 Cash received (25.57) Effective interest ( x 0.545%) July 2013 Cash received (25.57) Effective interest ( x 0.545%) August 2013 Cash received (25.57) Effective interest ( x 0.545%) September 2013 Cash received (25.57) Effective interest ( x 0.545%) October 2013 Cash received (25.57) Effective interest ( x 0.545%) November 2013 Cash received (25.57) Effective interest ( x 0.545%) December 2013 Cash received (25.57) Copyright ICAEW All rights reserved. Page 8 of 13

9 Profit or loss Revenue - handset call and data services (14.43 x 3) Cost of sales (450 + (5 x 3)) (465.00) Gross profit Finance income ( ) 9.01 Profit before tax Statement of financial position as at 31 December 2012 Non-current assets Trade receivables Current assets Trade receivables ( ) Maximum for the question Copyright ICAEW All rights reserved. Page 9 of 13

10 Question 3 Total Marks: 32 Examiner comments This question tested an area of the syllabus which had not been tested before (preparation of notes to the financial statements). Candidates found both parts, but particularly part (a), challenging. In part (a) some candidates made a prior period adjustment at both 1 April 2011 and 1 April 2012 rather than at the beginning of the comparative period and restating figures thereafter. The gain on the investment properties was generally correctly calculated, however some candidates treated this as an other comprehensive income item, which is not the IAS 40 fair value model approach. The deferred tax caused problems and a number of candidates posted the full amount of the deferred tax each year to profit or loss rather than the movement (double counting it). In part (b), various valid presentations of the notes were accepted, and credit was given for following through the candidate s figures generated in part (a). In part (b)(ii), many candidates only dealt with the note on the error and did not do the note of the provision itself (which was explicitly mentioned in the requirement). Where it was presented, the 2012 figures were often not restated for the error. In part (b)(iii), a number of candidates failed to mention that the event was non-adjusting, and therefore had no numerical impact on the 2013 primary statements. (a) Statement of changes in equity for the year ended 31 March 2013 Share Share Retained Revaluation Total capital premium earnings surplus 'm 'm 'm 'm 'm Balance at 1 April ,050 Changes in accounting policy (W1) Restated balance ,065 Changes in equity for 2012 Dividends (11) (11) Total comprehensive income (28 + (W1) 9 + (W2) 1.8) Balance at 31 March ,104.8 Changes in equity for 2013 Dividends (12) (12) Total comprehensive income (30 + (W1) 2.9 (W2) 1.8) Balance at 31 March ,134.5 Non-current assets held for sale are a non-adjusting event after the reporting period. 1 Change in accounting policy New Old policy policy Property Deferred tax Property Deferred tax Effect liability liability 'm 'm 'm 'm 'm 1 April 2011 (see below) 140 (11) 120 (6) 15 TCI 2012 (balancing figure) 8 (3.6) (4) (0.6) 9 31 March 2012 (see below) 148 (14.6) 116 (6.6) 24 TCI 2013 (balancing figure) 6 (3.1) March 2013 (see below) 154 (17.7) 26.9 Copyright ICAEW All rights reserved. Page 10 of 13

11 Deferred tax liability: Accounting Tax Temporary Deferred carrying base difference tax amount liability 'm 'm 'm 'm 1 April 2011 (TB: 160 (160 x 10/25)) March 2012 (TB: 160 (160 x 11/25)) March 2013 (TB: 160 (160 x 12/25)) Provision The relocation costs should not have been included in the opening provision as they are not part of a restructuring provision. This is an error which must be corrected retrospectively in the 2012 financial statements: For the 2012 year end: 'm DR Provision 2.4 CR Deferred tax liability (2.4 x 25%) 0.6 CR P/L 2012 (2.4 (2.4 x 25%)) 1.8 For the 2013 year end: The above adjustment results in an additional charge of 1.8 million to the draft 2013 financial statements as the b/d deferred tax liability and provision figures change. 3 Non-current assets held for sale This is a non-adjusting event after the reporting period and does not affect the statement of changes in equity (b) (i) Note: change of accounting policy The company changed its accounting policy with respect to investment properties from 1 January 2012, adopting the fair value model. The company believes that the new policy provides reliable more relevant information as the performance of investment properties, by nature, depends on the change in fair value as well as rental income. As a result, investment properties at 1 April 2011 increased by 20 million, the deferred tax liability increased by 5 million and a prior period adjustment of 15 million was made to retained earnings. The effect of the change on the current and prior period was as follows: 'm 'm Investment income (W1) (6 + 4*)/8 + 4) Profit before tax Income tax expense (W1) (0.6* 3.1)/( ) (2.5) (3) Profit for the year Copyright ICAEW All rights reserved. Page 11 of 13

12 Cumulative effect on statement of financial position figures: Investment properties ( *)/( ) Retained earnings ( )(9 + 15) Deferred tax liability (increase) ( )/(3 + 5) (12.5) (8) It is impracticable for the company to show the effect on periods prior to those presented. * figure same as 2012 as the question states that depreciation is straight line 10 8 (ii) Note: material error During the accounting period it was discovered that 2.4 million of relocation costs had been included in the restructuring provision as at 31 March In accordance with IAS 37 these amounts should not have been included in the provision as at 31 March A deferred tax saving of 0.6 million was also recorded as a result of the provision. The 2012 financial statements have been restated as a result of this error. The following line items in the 2012 financial statements were affected as a result of this error: 'm Other operating expenses (decrease) 2.4 Profit before tax 2.4 Income tax expense (increase) (0.6) Profit for the year 1.8 Retained earnings 1.8 Provisions (decrease) 2.4 Deferred tax liability (increase) (0.6) Note: Restructuring provision (Restated) 'm 'm Carrying amount at beginning of period Provisions made 4.7 Amounts used ( ) (4.3) - Unused amounts reversed (0.4) - Carrying amount at end of period Copyright ICAEW All rights reserved. Page 12 of 13

13 (iii) Note: non-current assets held for sale After the year end on 30 April 2013, the company made the decision to dispose of owneroccupied property with a carrying amount of 32 million on that date. The property has been marketed for sale and the sale is expected to be completed within 1 year from the above date. Estimated costs of the sale are 0.2 million, offset by a reduction in the tax charge of 0.05 million (25%). No gain on derecognition is expected at 30 April 2013 as the property was carried at its fair value. In accordance with IFRS 5, the financial statements for the year ended 31 March 2013 have not been adjusted for the above item, as the date of classification as held for sale was after the year end. Maximum for the question Copyright ICAEW All rights reserved. Page 13 of 13

and Marking Scheme Marks

and Marking Scheme Marks Answers Diploma in International Financial Reporting December 2017 Answers and Marking Scheme 1 Consolidated statement of financial position of Alpha at 30 September 2017 Assets Non-current assets: Property,