ASSIGNMENT 2 - DIPLOMA IN IFRSs

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1 16 December 2013 ASSIGNMENT 2 - DIPLOMA IN IFRSs This assignment consists of FOUR written test questions (100 marks). Attempt all parts of all four questions. 1. Present your answers to the assignment questions in order. Each answer must begin on a new page and must be clearly numbered. 2. Files must be prepared in both Microsoft Word format (as a single A4 printable Word file with all pages numbered) and as a PDF file and you should submit both files via by midnight GMT on 13 January 2014 to dipifrsassessments@icaew.com. It is the responsibility of each candidate to ensure that assignments, as submitted, are complete and presented in the appropriate format. 3. Ensure that your submission includes the title page, ASSIGNMENT 2 - DIPLOMA IN IFRSs, and your 7 digit registration number (but not your name). 4. Confirm that your submission is your own work by completing and attaching the Declaration of Ownership which you must with your assignment (as a separate PDF file to your answers as it includes your name). 5. Retain the question paper and an electronic copy of your submitted answer for reference purposes. 6. Ensure you have read and complied with the full regulations as published. 7. Answers should be based on IFRSs issued at 1 January 2013 (ie, those in the 2013 IFRS 'red book') and, where required, examinable Exposure Drafts in accordance with the examinable documents list for this sitting. Companies report under IFRSs unless a particular question states that they report under the IFRS for SMEs. 8. You should spend approximately 3½ to 5 hours preparing your answers to this assignment. Answers should be presented succinctly where possible. All workings must be shown and clearly referenced. 9. No correspondence will be entered into regarding assignment content. Copyright The Institute of Chartered Accountants in England and Wales ICAEW\DIPLOMA IN IFRSs\Dec13

2 1(a) Catana entered into an operating lease agreement on 1 July 2012 with Valor Renting SA to lease a Volkswagen Golf for $ % sales tax per month for 60 months, subject to a maximum of 80,000 kilometres during the total lease term. Lease payments are made by Catana on the first day of each month. Valor Renting SA provides 24 hour assistance, maintenance, tyre changes and insurance during the period of the contract. There is no option for Catana to purchase the car or extend the lease at the end of the lease period. Sales tax on private use cars is not recoverable in the tax regime in which Catana operates. However, 100% of the monthly payment (net of sales tax) is deductible for corporate tax purposes, plus the proportion of the sales tax considered to be related to business use (which is deemed to be 50% by the tax authority), when paid. The remainder of the sales tax is not tax deductible. Any adjustment for kilometres in excess of the permitted 80,000 kilometres is paid at the end of the contract, calculated based on proportionate total cost of the 80,000 kilometres. There are no refunds where the car has been driven for less than 80,000 kilometres. At the end of the first year, Catana's sales representative using the car had driven 20,000 kilometres. Catana pays corporate tax at 30%. Requirement Explain how the operating lease would be accounted for in Catana's financial statements for the year ended 30 June (5 marks) 1(b) Pegasus is adopting IFRSs for the first time for the year ended 30 September 2013, with one year of comparative information. Information in respect of the years ending 30 September 2011 and 30 September 2012 is as follows: 30/9/ /9/2012 Property, plant and equipment - depreciated cost (previous GAAP) 40,200 38,800 - fair value 44,000 46,000 Capitalised staff training costs 2,000 1,500 (at carrying amounts under previous GAAP) Borrowing costs incurred for an asset under construction (cumulative) (expensed under previous GAAP) (asset construction began on 1 October 2010) Provision for court case - previous GAAP valuation and recognition basis IFRS valuation and recognition basis Pegasus wishes to use all exemptions available to the company on transition to IFRSs. Requirement Calculate the total adjustment required to Pegasus' opening equity at the date of transition to IFRSs (insofar as the information provided permits). (4 marks) ICAEW\DIPLOMA IN IFRSs\Dec13 Page 2 of 11

3 1(c) Explain whether each of the parties in the following diagram is or is not considered a related party of Central Ltd in accordance with IAS 24 Related Party Disclosures. (8 marks) Fairfox plc 60% 25% Blackcurrant Ltd CENTRAL LTD Alex (CEO of Central Ltd) = Vivian (Alex's domestic partner) Sam (Vivian's former spouse) 5% The twins (Alex & Vivian's 5 year old children) 15% Relevant notes: Components Ltd CupCakes Ltd Fairfox plc shares control of Blackcurrant Ltd, with another company Carlane plc, which owns 40% of Blackcurrant Ltd. Under an agreement between Fairfox plc and Carlane plc all decisions about operating and all other activities are made jointly. In all other circumstances above, percentage shareholdings are equivalent to voting rights and influence. Components Ltd is Central Ltd's main customer, representing approximately 55% of Central's revenue stream. Vivian pays monthly maintenance to Sam, Vivian's former spouse. 1(d) Yago is a subsidiary of Bryson, the parent company of a group reporting under IFRSs. Bryson's year end is 31 March and the consolidated financial statements are prepared to this date. Yago was acquired a few years ago and has a different year end to Bryson, being 31 December, due to a law in the country in which Yago operates which required a 31 December year end. Yago's financial statements are prepared in accordance with IFRSs. In the past, the financial statements of Yago to its 31 December year end prior to the group year-end were treated as if they were for the year ended 31 March and consolidation performed on this basis. Yago is a material subsidiary and its income and expenses accrue evenly over each year. Due to a change in local law, Yago has been able to change its year end to 31 March for the first time for the financial statements for the year ended 31 March In changing the year end, local law requires preparation of data for a short accounting period for the 3 months ended 31 March 2013, plus full year's data for the year ended 31 March 2013 (including comparative data). Requirement Explain the accounting treatment of the change of year end in the consolidated financial statements of Bryson for the year ended 31 March (4 marks) ICAEW\DIPLOMA IN IFRSs\Dec13 Page 3 of 11

4 1(e) Appa company's draft profit after tax for the year ended 31 October 2013 is $10.2 million. At the beginning of the year, the company had 3.6 million, $1 ordinary shares in issue. On 1 February 2013, the company entered into an arrangement with a supplier where the supplier would be given 48,000 $1 ordinary shares in Appa in return for services with a fair value of $600,000 at 1 February 2013 to be performed evenly over the period 1 February 2013 to 31 January The shares will be delivered on 31 January 2014 and earned proportionately over the year to 31 January 2014 as the services are rendered. The arrangement has not been recognised in the draft financial statements. Requirement Calculate the basic earnings per share figure for Appa for the year ended 31 October 2013 (to the nearest cent). There are no tax or deferred tax consequences of the share issue in the jurisdiction in which Appa is resident. (5 marks) (26 marks) ICAEW\DIPLOMA IN IFRSs\Dec13 Page 4 of 11

5 2 Discuss the effects of each of the following items on the financial statements of Alba for the year ended 31 October The financial statements are due to be authorised for issue on 15 January (1) Alba holds an investment in the shares of a listed company, Norvac Inc. During November 2013 there was a material fall in the value of Norvac shares. Analysts attribute the fall in value principally to a fraud dating back to December 2012 that was discovered by Norvac's management and announced publicly in November (2) In December 2013, the directors of Alba publicly announced a plan to reduce the workforce by 10% as a result of worsening economic conditions. (3) A surprise emergency law was passed on 30 November 2013 which increases corporate income tax rates by 4%, effective 1 January This will affect the reversal of deferred tax temporary differences included in Alba's 31 October 2013 year-end financial statements. (10 marks) ICAEW\DIPLOMA IN IFRSs\Dec13 Page 5 of 11

6 3 Pablock Construction was awarded a contract as part of a tender process to excavate and construct a tunnel under an estuary by the City Council in 2011, with completion anticipated by 31 March The project includes tunnel boring, cut-and-cover access tunnels at each end, surface carriageways and tunnel fit out. Costs for viability studies, route planning and land acquisition were borne by the City Council. Work began on 1 October 2011 and total budgeted costs to be incurred by Pablock Construction were estimated at $320 million at that date and at 30 June This was revised to $350 million by 30 June The following information relates to costs in each of the two years ended 30 June 2012 and 30 June 2013, according to management information: Year ended Year ended 30 June June 2013 Purchase of boring machine (to be used for the contract 28,000 and then expected to be sold for 20% of its original price) Hired plant and equipment charges 14,400 18,200 Disposal of excavated material costs 4,100 10,300 Detailed design costs 4,800 Direct construction labour 23,400 32,200 Construction staff supervision costs 2,400 3,200 Construction materials purchased 28,400 22,300 Inventories of construction materials remaining at year end 6,100 2,200 (of all construction materials purchased) Insurance 1,200 1,600 Allocation of senior management time Over-run costs as a result of unexpected geological conditions (of the $20 million total mentioned below) 16,000 Pablock Construction determined that the outcome of the contract could be estimated reliably at both 30 June 2012 and 30 June Pablock Construction measures stage of completion of the contract as work certified (by an independent firm of surveyors, named in the contract) as a proportion of total contract revenue. Work certified by the firm of surveyors was: At 30 June ,000 At 30 June 2013 (including the revenue impact of the claims below) 211,000 The initial agreed price of the contract was $400 million. Invoicing is scheduled in the contract as follows: 31 March , March , March , March , ,000 ICAEW\DIPLOMA IN IFRSs\Dec13 Page 6 of 11

7 Payments are subject to a retention of 20% until Pablock Construction meets certain construction milestones (as determined by the City Council's own surveyor). Payment by the City Council is made 30 days after the date of the invoice. At 30 June 2013, all amounts invoiced on 31 March 2012 have been paid. The invoice from 31 March 2013 has been paid, other than the retention element. In certain circumstances specified in the contract, Pablock Construction is able to claim overrun costs from the City Council, plus a 10% mark-up. Of the additional $30 million ($350 million less $320 million) in the revised estimate of total costs at 30 June 2013 mentioned above, $20 million is as a result of unexpected geological conditions which necessitate additional work, and can be claimed (plus the 10% mark-up) from the City Council. The City Council's surveyor has accepted the validity of the $20 million estimate. The remaining $10 million must be borne by Pablock Construction. Of the additional $20 million estimated claimable over-run costs, $16 million were incurred by 30 June 2013 and are identified separately in the table above. Costs incurred by 30 June 2013 relating to the $10 million of estimated non-claimable over-run costs are included within each relevant category of costs above. Under the terms of the contract, recoverable over-run costs are invoiced separately and paid 30 days after the date of the invoice (with no retention). $16 million of over-run costs plus mark-up were invoiced by Pablock on 30 April 2013 and were paid a month later. Requirements (a) Prepare extracts from the statement of profit or loss and the statement of financial position showing the financial reporting treatment of the above contract in accordance with IAS 11 Construction Contracts for the year ended 30 June Notes and comparatives figures are not required (22 marks) (b) Explain how the accounting treatment would likely be affected if the contract is recognised in accordance with ED/2011/6 Revenue from Contracts with Customers. Calculations are not required. Work to the nearest $1,000. (6 marks) (28 marks) ICAEW\DIPLOMA IN IFRSs\Dec13 Page 7 of 11

8 4 Quantex is a small group (a parent and one 80% owned subsidiary, Swan). The Group was listed on the National Stock Exchange and reported using IFRSs. Recently, the new owner of Quantex delisted the company and has decided that the group will apply the IFRS for Small and Medium-sized Entities. For the year ended 31 December 2012, information will be reported under both IFRSs and the IFRS for Small and Medium-sized Entities. The following financial statements have been prepared (correctly) in accordance with IFRSs as a basis for their conversion to reporting under the IFRS for Small and Medium-sized Entities. All adjustments will be applied with full retrospective application and no exemptions on firsttime adoption of the IFRS for Small and Medium-sized Entities will be used. Quantex Consolidated statement of financial position at 31 December 2012 ASSETS Non-current assets Property, plant and equipment 71,400 Goodwill 2,600 Other intangible assets (development expenditure) 13,300 Investments in equity instruments 12,400 99,700 Current assets Inventories 24,000 Trade and other receivables 26,600 Cash and cash equivalents 5,200 55, ,500 EQUITY AND LIABILITIES Equity attributable to owners of the parent Share capital ($1 shares) 10,000 Retained earnings 73,340 Revaluation surplus 7,520 Investments in equity instruments reserve 1,840 92,700 Non-controlling interests 8, ,900 Non-current liabilities Long-term borrowings 20,000 Net defined benefit liability 4,400 Deferred tax liability 11,800 36,200 Current liabilities Trade and other payables 18, ,500 ICAEW\DIPLOMA IN IFRSs\Dec13 Page 8 of 11

9 Consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2012 Revenue 160,400 Cost of sales (98,600) Gross profit 61,800 Expenses (40,400) Finance costs (1,000) Profit before tax 20,400 Income tax expense (5,800) PROFIT FOR THE YEAR 14,600 Other comprehensive income: Items that will not be reclassified to profit or loss: Gains on property revaluation 1,800 Investments in equity instruments 1,200 Remeasurement of defined benefit pension plan 5,000 Income tax relating to items that will not be reclassified (800) Other comprehensive income, net of tax 7,200 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 21,800 Profit attributable to: 13,720 Owners of the parent 880 Non-controlling interests 14,600 Total comprehensive income attributable to: Owners of the parent 20,620 Non-controlling interests 1,180 21,800 The following information has been correctly accounted for in accordance with IFRSs and is included in the above financial statements: (a) Included in property, plant and equipment are Quantex's land and buildings which were all acquired on 1 January 2010 for $40 million (including $10 million in respect of the land). The buildings are being depreciated over a 50 year life to a zero residual value. The depreciation is recognised in cost of sales. They were revalued on 31 December 2011 to $48 million (including $12 million in respect of the land). The useful life and residual value of the buildings did not require revision at that date. No further revaluations were necessary at 31 December The revaluation in other comprehensive income relates to land and buildings of Swan and was the first revaluation made since their acquisition. No land or buildings were acquired or disposed of since 1 January Group policy is to treat revaluation surpluses as realised on sale of the asset or at the end of its useful life. Revaluation gains and losses on land and buildings are taxable/tax deductible on disposal of the land and buildings All other property, plant and equipment in the consolidated financial statements are items of plant and equipment held under the cost model. ICAEW\DIPLOMA IN IFRSs\Dec13 Page 9 of 11

10 (b) The development expenditure was incurred in the development of a new product by Quantex in each of the following years (ie not cumulatively) as follows: , , (before 1 July 2012) 2,000 The above figures include a total of $400,000 capitalised borrowing costs (of which $100,000 arose in 2012). Interest is tax deductible when charged to profit or loss in the tax regime in which Quantex operates. Commercial production began on 1 July 2012 and the development expenditure is being amortised over 10 years through cost of sales. Development expenditure is tax deductible as incurred in the tax regime in which Quantex operates. (c) The investments in equity instruments held by each company are made up as follows: Quantex Swan Cost 7,800 1,900 Fair value at 31 December ,000 2,200 Fair value at 31 December ,000 2,400 No investments in equity instruments were purchased or sold since their original acquisition. Quantex and Swan elected to recognise gains and losses on these investments in other comprehensive income. The investments held by Quantex are traded on a public stock exchange. Those held by Swan are not publicly traded and their fair value was measured using IFRS 13 valuation techniques. In the regime in which the companies operate, gains (or losses) on investments in equity instruments are taxable (or tax deductible) when they are sold. (d) Quantex acquired its 80% investment in Swan on 1 January Details of the acquisition were: Consideration transferred 16,400 Non-controlling interests (measured at fair value) 3,600 Fair value of identifiable net assets 16,000 Under IFRSs, Quantex elected to measure the non-controlling interests in Swan at fair value at acquisition. An impairment test was conducted in accordance with IFRSs at 31 December 2012, and as a result an impairment loss on goodwill was recognised for the first time and is included in 'Expenses' above. The recoverable amount of Swan's net assets and goodwill was $25 million at that date. The carrying amount of Swan's net assets ICAEW\DIPLOMA IN IFRSs\Dec13 Page 10 of 11

11 (excluding goodwill) in the consolidated financial statements at 31 December 2012 was $22.4 million. The fair value of the net assets at the date of acquisition is equivalent to the figure that would have been used if the IFRS for Small and Medium-sized Entities had been applied. There are no tax consequences of the impairment loss. (e) The defined benefit pension plan is provided by the parent for all employees of the group. The re-measurement of the defined benefit plan relates to the difference between the actual return on plan assets and amounts recognised in net interest, net of an actuarial loss of $400,000 due to changes in actuarial assumptions. The pension plan liability is treated the same way for tax as for accounting purposes in the tax regime in which Quantex operates. Income and changes in the values of plan assets are taxable (or tax deductible) in the pension plan and no further tax arises in the Quantex s financial statements. Under the IFRS for Small and Medium-sized Entities, Quantex wants to recognise all amounts possible in profit or loss. (f) Quantex pays tax at 30% and Swan pays tax at 25%. These rates are not expected to change in the foreseeable future, and have remained the same since Current tax can be settled on a net basis with the single tax authority in the tax regime in which Quantex operates. (g) No dividends were paid by either company in Requirement Prepare for the Quantex Group a consolidated statement of comprehensive income for the year ended 31 December 2012 and the consolidated statement of financial position at that date in accordance with the IFRS for Small and Medium-sized Entities (insofar as the information provided permits). (36 marks) Work to the nearest $1,000 where necessary. ICAEW\DIPLOMA IN IFRSs\Dec13 Page 11 of 11

ASSIGNMENT 2 - DIPLOMA IN IFRSs

30 April 2012 ASSIGNMENT 2 - DIPLOMA IN IFRSs This assignment consists of FOUR written test questions (100 marks). Attempt all parts of all four questions. 1. Answer the assignment questions in order.