The Group is also expanding successfully overseas and has established many subsidiaries running successful operations in over 30 countries.

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1 CASE Lucky Star Holdings Limited ( Lucky Holdings or the Group when in aggregate with its subsidiaries) is incorporated in Hong Kong and has been listed on the Main Board of the Stock Exchange of Hong Kong Limited ( SEHK ) since The Group closes books at 31 December each year. The Group was founded by Mr Robert Luo who developed his company first into a leading real estate developer and then diversified it to become a global conglomerate, with listing status in Hong Kong. Mr Luo is the Chairman of the Group but he does not have control over Lucky Holdings under HKFRSs and he only owned 38% of Lucky Holdings issued capital as of 31 December Overview of operations of the Group Lucky Holdings is a market leader with a well-known brand name in property development / management. With its long history of property development, Lucky Holdings has completed a number of landmark commercial buildings and residential complexes in some high class suburbs in Hong Kong. The Group is also expanding successfully overseas and has established many subsidiaries running successful operations in over 30 countries. In recent years, many countries have engaged in a competing manner to devalue their home currencies in order to revive their slowing economies, which has led to volatility in financial markets. The global economy has slowed down, which has resulted in a decrease in private consumption and investment globally including Hong Kong. The economic conditions in global markets also are adversely affecting the Group s local and overseas business. For example, its financial conditions are affected by the declining price of crude oil at the international level. The management team has a lack of expertise in the financial risk management. Its property business is affected by changes in the price of land and property in Hong Kong. Fortunately, Lucky Holdings business is well diversified geographically and the Group has a professional management team specialising in sourcing project finance at low costs to support its business expansion. Regarding overseas markets, in addition to the recent acquisitions of infrastructure projects in Europe including a water processing plant in the United Kingdom and a public transportation service company in Spain, the Group has identified several infrastructure investments in Europe. Regarding the domestic market, there is excessive and keen demand for residential and commercial properties. Lucky Holdings has made use of its competitive advantage to expand its land bank for development and continues developing residential and commercial properties in Hong Kong to maintain its market share. Auditors of the Group J&J CPA ( J&J ), an international CPA firm, offers both audit and tax services to the Group and its subsidiaries. Final Examination (December 2016 Session) Paper I 1 of 11

2 Group structure as of 31 December 2014 The Group s core businesses run by its wholly-owned subsidiaries and an associate are as follows: Business Property development Retail Infrastructure Associate Wholly-owned subsidiaries / associate Lucky Real Estate, a private company incorporated in Hong Kong ( Lucky Estate ) The Wings Group ( Wings Retail ) Lucky Infrastructure ( Lucky Structure ) CCG Ltd, a private company incorporated and based in Australia ( CCG ) Others Over 30 subsidiaries Details of business develops and invests in real estate projects located in Hong Kong and mainland China which are held by wholly foreign owned enterprises ( WFOEs ) in mainland China operates its flagship retail chains in Asia such as supermarkets; food galleria, furniture and hardware stores, and wine cellars a diversified infrastructure company with businesses in transportation, water processing plants and related operations mining and property investment miscellaneous Remarks contributes 48% of the Group s revenue during the year - contributes 45% of the Group s revenue during the year - carries significant inventory balance, management has a programme of cycle inventory counting throughout the year and no inventory counting is arranged at the year-end contributes 5% of the Group s revenue during the year, with significant investment in property, plant and equipment 40% owned by Lucky Holdings which does not control the majority of the voting rights in CCG contribute 2% of the Group s revenue during the year and 1% of the Group s net assets which is insignificant to the Group Final Examination (December 2016 Session) Paper I 2 of 11

3 Acquisition of CCG by Lucky Holdings CCG, which is the existing associate of Lucky Holdings, has two wholly-owned subsidiaries incorporated in Australia, namely CC Mining Ltd ( CC Mining ) and CC Property Ltd ( CC Property ). CC Mining develops and operates a number of iron ore mines in Western Australia. CC Property invests in real estate primarily in the Middle East, the United Kingdom and North America. On 1 January 2015, Lucky Holdings made a share exchange offer to all the other 60% shareholders of CCG in order to acquire a controlling interest in CCG, which would then become a owned subsidiary. Under the offer, CCG shareholders would receive one Lucky Holdings share for every two shares in CCG. The 2014 financial information related to the price-earnings ratio ( P/E ) and earnings per share ( EPS ) immediately before the step acquisition is as follows: P/E Issued Price EPS Net profits shares Lucky Holdings million $40 $4.25 $85 million # CCG 8 10 million $20 $2.50 $25 million # The portion of net profits of CCG included in Lucky Holdings net profits is $10 million. All CCG shareholders accepted the offer. However, the validity of the share exchange was subject to approval by the shareholders of Lucky Holdings at the Extraordinary General Meeting ( EGM ) scheduled for 15 February The voting shares in CCG were not transferred and the board of directors of CCG remained unchanged until the approval of Lucky Holdings shareholders. A total of 3 million new Lucky Holdings shares were issued pursuant to the share exchange agreement on 1 March 2015, at which time Lucky Holdings has the right to appoint the majority of the board of directors of CCG. Upon completion of the acquisition of CCG, the simplified group structure is set out below and no single shareholder would have control over Lucky Holdings under the Hong Kong Financial Reporting Standards ( HKFRSs ): Mr Robert Luo Former CCG shareholders 33% 13% 54% Public shareholders Lucky Holdings (incorporated and listed in Hong Kong) Lucky Estate ( incorporated in Hong Kong) Lucky Holdings' non-property businesses CCG (incorporated in Australia) WFOEs CC Property (incorporated in Australia) CC Mining (incorporated in Australia) Final Examination (December 2016 Session) Paper I 3 of 11

4 Financial statements and audit of CCG CCG prepares consolidated financial statements in accordance with the Australian Accounting Standards. SuperFirm & Co ( SuperFirm ) has been the auditor of CCG for many years. For the purpose of auditing the Lucky Holdings consolidated financial statements, J&J, as the auditor of the Group, has sent an inter-firm instruction to request SuperFirm to perform an audit of CCG s financial information included in Lucky Holding s reporting package in accordance with International Standards on Auditing. The reporting package has to be prepared in accordance with the accounting policies and instructions in Lucky Holdings financial reporting procedures manual dated 30 September The accounting policies are prepared based on HKFRSs, but a complete set of financial statements of CCG in accordance with HKAS 1 (Revised) Presentation of Financial Statements is not required. Within the reporting package, both the consolidated information of CCG and the separate financial information of CC Mining and CC Property are included. The information includes statement of financial position, profit or loss and cash flow statements, with explanatory notes. At the same time, CCG also presents this financial information to Mr Luo, the Chairman of Lucky Holdings because Mr Luo is responsible for assessing performance, making operating decisions and the allocating resources of the Group. All this financial information is very essential for Mr Luo s future planning of the corporate restructuring and business development. Spin-Off Proposal and a separate listing of NewCo In November 2015, the Board of Directors of Lucky Holdings approved and announced the Spin-Off Proposal to reorganise and rationalise the property businesses of Lucky Estate and CC Property with (share) distribution in specie and (business) spin-off. The proposed corporate reorganisation is set out below: Step 1. Step 2. Step 3. Step 4. Step 5. NewCo will be incorporated in the Cayman Islands as a wholly-owned subsidiary of Lucky Holdings. Lucky Holdings will dispose of its shareholding in Lucky Estate and CC Property (by way of CCG disposing of CC Property) to NewCo, in return NewCo will issue its own new shares to Lucky Holdings. Lucky Holdings will spin off its shareholding of NewCo to the shareholders of Lucky Holdings by way of distribution in specie in the ratio of one share of NewCo for each Lucky Holdings share. NewCo will issue 5% of its total shares to senior executives of Lucky Estate and CC Property, the subscription price to be paid by the senior executives to NewCo will be calculated based on the corresponding net book value of NewCo. Half of these shares are restricted shares that can not be sold in the first two years after the listing. NewCo s shares will be listed on the Main Board of SEHK by way of introduction. NewCo will not offer any of its shares for sale or subscription. Final Examination (December 2016 Session) Paper I 4 of 11

5 Upon completion of the spin-off and listing of NewCo, the simplified group structure is set out below and no single shareholder will have control over either Lucky Holdings or NewCo under HKFRSs: Mr Robert Luo, former CCG shareholders & other public shareholders Senior executives 95% 5% Lucky Holdings (incorporated and listed in Hong Kong) Lucky Holdings' non real estate interests NewCo (to incorporate in the Cayman Islands and list in Hong Kong) CC Property (incorporated in Australia) CCG (incorporated in Australia) CC Mining (incorporated in Australia) Lucky Estate (incorporated in Hong Kong ) WFOEs The Spin-off Proposal and all transactions of the proposal are subject to, among other things, compliance with applicable legal and regulatory requirements. These mainly include (a) the requirements for approval by shareholders of Lucky Holdings at a general meeting, and (b) the approval by the Listing Committee of SEHK for the separate listing of NewCo by way of introduction. As of 31 December 2015, the approvals of (a) and (b) have not been obtained by Lucky Holdings; therefore all the above transactions have not taken place. Other information - Recruitment of Associate Finance Director Thomas Chiswick is the university classmate of Lucky Holdings Chief Financial Officer ( CFO ), Simon Snow. He sent Simon a request to post his son in Lucky Holding s Corporate Financing Department. Thomas son, Jerry, was a top student with a business master s degree and performed very well in a reputable Wall Street merchant bank. Simon has known Jerry since his childhood. Simon felt lucky to have the opportunity to hire Jerry and asked him to start work immediately without any recruitment arrangements. He also requested the Human Resource Director to hire Jerry as Associate Finance Director, with an above market salary. Thomas is the Minister of Commerce of the Island State, Country X. Lucky Holdings via Lucky Structure is applying for the Island s mobile network licence and tendering for the construction of a deep water harbour of Country X. Thomas is a committee member of the selection panels for these projects. The Group eventually won both contracts for the network licence and the harbour construction. Final Examination (December 2016 Session) Paper I 5 of 11

6 SECTION A CASE QUESTIONS (Total: 75 marks) Answer ALL of the following questions. Marks will be awarded for logical argumentation / calculation and appropriate presentation of the answers. Question 1 (15 marks approximately 27 minutes) Since CCG became the subsidiary of Lucky Holdings after the share exchange transaction, the management of CCG plans to prepare a complete set of Hong Kong Financial Reporting Standards ( HKFRSs ) financial statements starting from the annual financial year ended 31 December These HKFRSs financial statements would be distributed to the sole shareholder, Lucky Holdings. Required: As the Finance Manager of Lucky Holdings, advise the CFO, Simon Snow, on (a) whether CCG is a first-time adopter of HKFRSs under HKFRS 1 (Revised) Firsttime Adoption of Hong Kong Financial Reporting Standards when it presents the complete set of 2015 HKFRSs financial statements; and any requirements he needs to be aware of; (6 marks) (b) how to determine the date of acquisition of CCG for business combination accounting purposes; and (5 marks) (c) whether CC Mining and CC Property are two operating segments, as defined under HKFRS 8 Operating Segments, from the Group s perspective, upon completion of the acquisition. (4 marks) Question 2 (10 marks approximately 18 minutes) Although the underlying transactions of the Spin-Off proposal had not taken place as of 31 December 2015, analyse any impact on the consolidated financial statements of Lucky Holdings for the year ended 31 December 2015, with reference to the relevant accounting standards. (10 marks) Final Examination (December 2016 Session) Paper I 6 of 11

7 Question 3 (8 marks approximately 14 minutes) Carry out a brief SWOT analysis of Lucky Holdings. Identify two items under each category in your analysis. (8 marks) Question 4 (4 marks approximately 7 minutes) In November 2015, the Board of directors of Lucky Holdings approved and announced the Spin Off Proposal. (a) List two reasons for a corporate spin-off. (b) Explain the difference between a spin-off and the sale of a business unit. Question 5 (6 marks approximately 11 minutes) (a) Compute the earnings per share of the merged entity of Lucky Holdings immediately after the share exchange with CCG. Assumption: Based on the 2014 financial information as given. (3 marks) (b) Compute the price-earnings ( P/E ) ratio of the new merged entity based on the merger in Question 5(a). Comment on what will happen to Lucky Holdings stock price immediately after the merger and whether any shareholders would face a change in wealth. (3 marks) Final Examination (December 2016 Session) Paper I 7 of 11

8 Question 6 (12 marks approximately 22 minutes) (a) Explain the ethical issues faced by Simon Snow, the CFO of Lucky Holdings, as a professional accountant in business ( PAIB ), in the recruitment of the Associate Finance Director. (3 marks) (b) Propose to Simon guidelines designed to meet the ethical requirements for the recruitment and interview process for the recruitment of the Associate Finance Director. (4 marks) (c) During the audit for the financial year ended 31 December 2015, the audit manager noted that, Ada Chan, one of the management trainees in Lucky Holdings Accounting Department, is the cousin of Bobo Wong, one of the audit team members. Ada had offered to Bobo and other team members to purchase cash coupons at Wings Retail supermarket on their behalf because she is entitled to a 20% staff discount. Required: Identify the potential independence issues faced by J&J s audit team and suggest possible safeguards to mitigate the threats. (5 marks) Final Examination (December 2016 Session) Paper I 8 of 11

9 Question 7 (20 marks approximately 36 minutes) In the audit of the Lucky Group, J&J identifies different components of Lucky Holdings based on the different types of business. You are the audit engagement manager of J&J. Required: (a) (i) With reference to the relevant auditing standards, state how significant components are determined. (ii) Propose the type of audit work that should be performed on the financial information of different components (except for CCG, the associate) of Lucky Holdings. (8 marks) (b) The engagement partner received the inter-firm report from SuperFirm and he said that the opinion, as extracted below, was not appropriate: Basis of opinion In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of CCG as at 31 December 2015, and their financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards. Required: Prepare the appropriate opinion for the engagement partner to discuss with SuperFirm. (4 marks) (c) Discuss the audit procedures that should be performed in relation to the cycle inventory count of Wings Retail. (6 marks) * * * * * * * * Final Examination (December 2016 Session) Paper I 9 of 11

10 End of Section A

11 SECTION B ESSAY QUESTIONS (Total: 25 marks) Answer ALL of the following questions. Marks will be awarded for logical argumentation / calculation and appropriate presentation of the answers. Refer to the Case information. Question 8 (23 marks approximately 41 minutes) As the external Hong Kong tax advisor to Lucky Holdings, write a letter to analyse if there are any Hong Kong tax issues (including Hong Kong profits tax, stamp duty and salaries tax) to the CFO of Lucky Holdings, Simon Snow, on the 5 steps related to the Spin-Off Proposal and separate listing of NewCo plan. For Steps 2, 3 and 4, state the additional information that may be needed to ascertain the taxability with greater certainty. Propose the possible arguments of taxpayers and the Inland Revenue Department ( IRD ). Step 1 Step 2 Step 3 Step 4 Step 5 (8 marks) (4 marks) (7 marks) [Marks to be awarded for proper letter format with logical presentation.] Question 9 (2 marks approximately 4 minutes) In respect of the 5 Steps above, explain any mainland China income tax exposure you would expect. * * * END OF EXAMINATION PAPER * * * Final Examination (December 2016 Session) Paper I 11 of 11