CORPORATE REPORTING PROFESSIONAL 1 EXAMINATION - AUGUST 2014

Transcription

1 CORPORATE REPORTING PROFESSIONAL 1 EXAMINATION - AUGUST 2014 NOTES: You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5. (If you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through the answer not to be marked. Otherwise, only the first answer to hand for Question 4 or 5 will be marked.) Provided are pro-forma: Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss and Other Comprehensive Income By Function, and Statements of Financial Position. TIME ALLOWED: 3.5 hours, plus 10 minutes to read the paper. INSTRUCTIONS: During the reading time you may write notes on the examination paper, but you may not commence writing in your answer book. Please read each Question carefully. Marks for each question are shown. The pass mark required is 50% in total over the whole paper. Start your answer to each question on a new page. You are reminded to pay particular attention to your communication skills, and care must be taken regarding the format and literacy of your solutions. The marking system will take into account the content of your answers and the extent to which answers are supported with relevant legislation, case law or examples, where appropriate. List on the cover of each answer booklet, in the space provided, the number of each question attempted. NB: PLEASE ENSURE TO ENCLOSE YOUR ANSWER SHEET TO QUESTION 3 IN THE ENVELOPE PROVIDED. The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.

2 THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND CORPORATE REPORTING PROFESSIONAL 1 EXAMINATION AUGUST 2014 Time allowed 3.5 hours, plus 10 minutes to read the paper. You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5. (If you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through the answer not to be marked. Otherwise, only the first answer to hand for Question 4 or 5 will be marked.) You are required to answer Questions 1, 2 and The following statements of comprehensive income relate to Firestack plc (Firestack) and its investee companies, Smokey plc (Smokey) and Flamer plc (Flamer). Statements of Profit or Loss and Other Comprehensive Income for year ended 31 July 2014 Firestack plc Smokey plc Flamer plc million million million Revenue... 2, , Cost of Sales... (837.0) (432.0) (340.2) Gross profit 1, Operating expenses... (558.0) (414.0) (261.0) Finance costs... (90.0) (54.0) (27.0) Other income 16.2 Investment income Profit before taxation Taxation (135.0) (54.0) (27.0) Profit for the year Other comprehensive income (Amounts that will not be reclassified to profit or loss) Gains on revaluations of property Total comprehensive income for the year Page 1

3 The following additional information is provided: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Firestack bought an 80% holding in the equity of Smokey on 1 April The purchase price of the investment was agreed at 2,200 million, of which 800 million was paid in cash. The balance was satisfied by issuing 400 million equity shares each of 1 nominal value to the seller at their then fair value of 3.50 each. The 20% noncontrolling interest in Smokey had a fair value of 450 million at that date. Smokey s net assets had a fair value of 2,350 million on 1 April It was decided to apply the fair value method to calculate goodwill on acquisition. Firestack has owned 40% of the equity shares in Flamer for several years, and has had three representatives on Flamer s eight-person board of directors since the date of its investment. Included in the fair value of Smokey s net assets on the acquisition date was some machinery owned by Smokey but carried at 45 million below its fair value. The revised fair value was not incorporated into the books of Smokey as Smokey has not adopted a policy of revaluing machinery assets. The useful economic life of this machinery at the acquisition date was estimated to be six years. During the post-acquisition period Smokey sold goods to Firestack for 25 million. These goods were sold by Smokey at a profit margin of 30% on sales price and 40% of the goods remained in the inventory of Firestack at 31 July An amount of 3 million remained outstanding to Smokey in respect of these goods at 31 July Since acquiring its investment in Smokey, Firestack has managed the administration of the entire group. Firestack invoiced Smokey 2 million for its share of these costs. Firestack recorded this transaction within other income, and Smokey within operating expenses. The goodwill of Smokey was reviewed for impairment at 31 July 2014 and was found to have a recoverable amount of 200 million. There was no impairment of the investment in Flamer. On 1 July 2014, Firestack sold some land to Flamer for 6 million, recording a profit of 4 million. This profit is included within other income in the books of Firestack. All calculations may be taken to the nearest 0.1 million. Assume all expenses and gains accrue evenly throughout the year unless otherwise instructed. REQUIREMENT: (a) Calculate (i) the goodwill arising on the acquisition of Smokey by Firestack, and (ii) the goodwill amount that should appear in the consolidated Statement of Financial Position of Firestack as at 31 July Show the journal entries required to record the acquisition in the group financial statements. (5 marks) Prepare a consolidated Statement of Profit or Loss and Other Comprehensive Income for the Firestack Group for year ended 31 July 2014 in accordance with IFRS. (23 marks) Format & presentation (2 marks) [Total: 30 MARKS] Page 2

4 2. Rumpus plc is a public listed manufacturing company. Its summarised consolidated financial statements for the year ended 31 March 2014 (and 2013 comparatives where relevant) are as follows: Rumpus plc: Consolidated Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 March 2014: million Revenue 310 Cost of sales (270) Gross profit 40 Distribution costs (10) Administrative expenses (29) Share of profit for year from associate 14 Finance costs (6) Profit (loss) before taxation 9 Income tax expense (3) Profit for the year 6 Other comprehensive income (net of tax) Items that will not be reclassified to profit or loss: Revaluation gains on group property 13 Share of revaluations gains from associate s property 4 17 Total comprehensive income for the year 23 Profit for the year attributable to: Owners of the parent 5 Non-controlling interest 1 6 Total comprehensive income for the year attributable to: Owners of the parent 22 Non-controlling interest 1 23 Rumpus plc: Consolidated Statements of Financial Position as at 31 March: million million Non-current assets: Property, plant and equipment Goodwill Investments in associates Current assets: Inventory and work-in-progress Trade receivables Cash & cash equivalents Total assets Equity: Equity shares of 1 each Share premium Revaluation reserve Retained earnings Non-controlling interests Non-current liabilities: 12% Debentures Long term provisions Current liabilities: Trade payables Current tax payable Total equity and liabilities Page 3

5 The following additional information is available: (i) The group acquired an 80% interest in Sacker plc during the year on the following terms: Cost of purchase of 80% of the equity shares of Sacker plc was 45 million. The agreed payment for the purchase was settled by issuing 25 million equity shares valued at 35 million plus cash of 10 million. The non-controlling interest was fair-valued at 11 million on the acquisition date. The net assets of Sacker plc at the acquisition date consisted entirely of the following: o Property plant & equipment 33 million o Inventory 8 million o Cash 6 million Sacker plc was correctly accounted for and fully consolidated in the above financial statements. (ii) (iii) (iv) (v) (vi) No disposals of non-current assets took place during the year. Depreciation charged to cost of sales during the year amounted to 41 million. The group purchased an interest in an associate company for cash of 13 million during the year. Equity dividends were paid during the year out of retained earnings. Goodwill was tested for impairment at the reporting date. An impairment loss was recognised and charged to expenses. REQUIREMENT: (a) Prepare a consolidated statement of cash flows for year ended 31 March 2014 in accordance with IAS 7. (19 marks) Format & Presentation (2 marks) Evaluate the liquidity position of Rumpus plc as portrayed by the above financial statements and the statement of cash flows you have prepared. (9 marks) [Total: 30 MARKS] Page 4

6 3. The following multiple choice question contains eight sections, each of which is followed by a choice of answers. Only one answer is correct in each case. Workings are not marked in this question. REQUIREMENT: Give your answer to each section in the answer sheet provided. 1. Radoff Ltd has its reporting date on 31 July each year. It has traditionally reported under Irish GAAP. Its directors wish to present the company s annual report for year ended 31 July 2014 using IFRS, as permitted by Irish regulations. What is Radoff Ltd s transition date to IFRS under IFRS 1 First Time Adoption of IFRS? (a) 31 July August 2013 (c) 31 July 2013 (d) 1 August Under IFRS 13 Fair Value Measurement which of the following would be considered a level 1 input when assessing the fair value of an asset? (a) (c) (d) The sale price of a similar asset recently sold by the entity. The sale price of a similar asset recently sold by another entity. The sale price of an identical asset sold in an open market exchange with publicly available prices. The value as determined by a valuation model commonly used in the industry to value similar assets. 3. Under the IASB s revised Conceptual Framework for Financial Reporting (Conceptual Framework), issued in 2010, qualitative characteristics of financial information are divided into those considered fundamental and enhancing. The following is a list of some qualitative characteristics which the framework identifies: (i) (ii) (iii) (iv) (v) (vi) Relevance; Comparability; Understandability; Timeliness; Faithful representation; Verifiability. Which of the above are identified by the Conceptual Framework as enhancing characteristics? (a) (c) (d) None of the above; All of the above; (ii), (iii), (iv) and (vi); (i) and (v). 4. Yellow plc is an Irish company whose functional currency is the Euro. On 31 May 2014, it bought goods from an American supplier at an agreed price of US$100,000. On 30 June 2014, it paid $50,000 to the supplier at a cost of 37, At the reporting date 31 July 2014, the balance remained payable. The relevant exchange rates were as follows: 31 May 2014: 1 = US$ June 2014: 1 = US$ July 2014: 1 = US$ Ignoring the time value of money, what is the amount of exchange gain or loss that would appear in the financial statements of Yellow plc for year ended 31 July 2014 based on the above transactions? (a) (c) (d) gain loss 1, loss 1, gain Page 5

7 5. During the financial year ended 31 July 2014, RealTrust plc paid corporation tax of 30,000 in respect of profits earned during the year ended 31 July It had provided for an amount of 28,500 in the 2013 financial statements for this purpose. The directors expect the corporation tax liability in respect of 2014 profits to be 32,500. How much should be charged to the Statement of Profit or Loss and Other Comprehensive Income (SPLOCI) for year ended 31 July 2014, in respect of the corporation tax expense and how much should be reported as a liability in the Statement of Financial Position (SOFP) as at that date? SPLOCI Expense SOFP Liability (a) 31,000 31,000 31,000 32,500 (c) 34,000 32,500 (d) 34,000 34, Which of the following is NOT a condition that must be met in order to recognise a provision under IAS 37 Provisions, Contingent Liabilities and Contingent Assets? (a) (c) (d) There must be a present obligation at the reporting date. An outflow of economic benefit as a result of the obligation must be probable. It must be possible to estimate reliably the amount of the expected outflow of economic benefit. Any outflow of economic benefit must be expected to occur within twelve months of the reporting date. 7. Gillen plc provides the following information in respect of the year ended 31 July Profit before taxation was 340 million Depreciation charged to expenses was 45 million A provision for resolution of a compensation claim of 60 million was made Inventory increased by 12 million Trade payables decreased by 8 million What is the cash generated from operations based on the above information? (a) (c) (d) 436 million 449 million 465 million None of the above. 8. During the year ended 31 July 2014, Spades plc entered into a joint arrangement with another entity under which they both took up a 50% holding in a new entity, Hearts Ltd. Under this arrangement, both parties agreed to control jointly the net assets of Hearts Ltd, taking all decisions by consensus and sharing all profits and losses equally. How should its interest in Hearts Limited be accounted for in the group financial statements of Spades plc at 31 July 2014 in order to comply with IFRS 11 Joint Arrangements? (a) (c) (d) Spades plc must use equity accounting, showing its share (50%) of the results and net assets as one line entries in each of its group financial statements. Spades plc must include its share (50%) of each of Hearts Ltd s assets, liabilities, expenses and gains within the total of each equivalent heading on a line-by-line basis in its group financial statements. Either (a) or is permitted at the discretion of Spades plc. Neither (a) nor is correct. [Total: 20 MARKS] Page 6

8 Answer either Question 4 or Question 5 4. IAS 10 Events After the Reporting Period sets out guidance for dealing with events which occur after the reporting date but which may have implications for the financial statements up to the reporting date. Its provisions are consistent with the Conceptual Framework for Financial Reporting and with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. It sets out some clear principles to assist preparers to determine when an event needs to be accounted for in the period ending on the reporting date (adjusting event), and when it should be accounted for in the subsequent period (non-adjusting event). In some cases detailed application guidance is also provided. REQUIREMENT: (a) Explain the term Events after the Reporting Period, defining clearly the period of time within which IAS 10 requires events to occur in order to be considered as such. (4 marks) (c) Distinguish clearly between adjusting and non-adjusting events, and explain the accounting treatment and disclosures required in each case. (4 marks) Henderson plc is in the process of finalising its financial statements for year ended 31 July The draft statements were completed on 15 August 2014, and the audit is currently ongoing. The financial statements are expected to be approved by the board of directors on 15 September 2014, and published on 20 September The matters (i) to (iv) below have come to light during the audit and you are required to explain the accounting treatment and/or disclosures required as a result of the event after the reporting date. (i) (ii) (iii) (iv) The directors of Henderson plc wish to propose a dividend to be paid in November No decision has yet been taken on this proposal. (3 marks) Some investments held by Henderson plc at the reporting date have fallen significantly in value since the reporting date due to a shock increase in interest rates by the Central Bank on 10 August The effect of the fall in value is material to the company s financial position. (3 marks) Henderson plc has been sued by a client claiming breach of contract. The suit was filed early in 2014, but the case was heard in August No provision had been made, as the directors expected they would win the case. As required by IAS 37 Provisions, Contingent Liabilities and Contingent Assets disclosure was made of the contingent liability in the draft financial statements. The outcome of the case, decided on 25 August, was a judgement against Henderson plc for a material sum in damages. (3 marks) On 5 August 2014, Henderson plc entered into an agreement to acquire another entity. The acquisition is planned to close on 15 October (3 marks) [Total: 20 MARKS] Page 7

9 OR 5. IAS 16 Property, Plant & Equipment sets out the accounting treatment of tangible non-current assets while, IAS 40 Investment Property deals with properties held for their investment potential only. The distinction between investment and non-investment property is very important, as the accounting treatment required is significantly different in each case. REQUIREMENT: (a) Explain the definition of Investment Property according to IAS 40. (3 marks) Discuss the key differences between the accounting treatment of investment properties and the accounting treatment of non-investment properties. Why does the International Accounting Standards Board (IASB) require a different treatment in each case? (5 marks) (c) In each case (i) to (iii) below, show the entries in the financial statements of Muttingham plc for year ended 31 July 2014 resulting from recording the events described. Your answer should clearly identify any depreciation charges involved and how each transaction may impact upon the statement of profit or loss and other comprehensive income of Muttingham plc for the year ended 31 July 2014, if at all. Muttingham plc has several properties on its books. During the year ended 31 July 2014, the events detailed below took place. (i) (ii) (iii) Property A was acquired on 1 August 2009 for 1.6 million for use as company offices. The buildings element of the property was estimated at 90% of the purchase price and this was assigned a 50 year useful economic life from the date of purchase (the balance consisted of land). On 1 August 2013 an independent valuation was obtained and the property was revalued to 1.8 million including land, this being assigned a value of 300,000. The useful economic life of the building was assessed at 50 years from that date. Property B was acquired in March 2013 at an auction of distressed properties. This property is a block of land in Galway city, which was bought for investment potential. The cost was 750,000. No revaluation took place on 31 July However, on 31 July 2014, a professional valuer placed a value of 1,200,000 on the land. Property C was a building acquired on 1 August 2006 for 4.4 million for use as a factory. This was a leasehold property with 20 years left to run. Following a national decline in property values, a revaluation on 1 August 2008, reduced the value of the leasehold to 1.26m. On 1 August 2013, the property was estimated by the same professional valuers to have a value of 2.6m. The company applies straight-line depreciation wherever depreciation is required. The fair value model of valuation is applied wherever permitted. The company does not apply the option to transfer revaluation surpluses annually to retained earnings. Assume all properties were correctly accounted for up to 31 July 2013, unless otherwise instructed. END OF PAPER (12 marks) [Total: 20 MARKS] Page 8

10 SUGGESTED SOLUTIONS THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND CORPORATE REPORTING PROFESSIONAL 1 EXAMINATION AUGUST 2014 SOLUTION 1 Marking Scheme: (a) Goodwill Calculation of goodwill on acquisition 2 Calculation of impairment loss 1 Journal to record acquisition 2 Subtotal 5 Statement Basic consolidation plan (100% Firestack + 100% Smokey * 4/12) 4 Goodwill impairment (inclusion in expenses) 1 Depreciation on FVA (calculation and inclusion in expenses) 2 Intra-group revenue and purchases (exclusion) 2 Unrealised profit (calculation and elimination) 2 Administration cost (exclusion from both headings) 2 Recognition of share of PFY and OCI of associate (40%) 4 Elimination of share of profit on sale of land to associate 1 Calculation and attribution of results to NCI and owners of parent 5 Presentation 2 Subtotal 25 [Total: 30 Marks] Page 9

11 Suggested solution (a) Calculation of goodwill on acquisition: m m Cost of investment 2,200 Fair value of NCI 450 Fair value of net assets at acquisition (2,350) Goodwill 300 Impairment loss 31 July 2014 (100) Recoverable amount 31 July 2014 (to SOFP) 200 Journal entry to record acquisition in group financial statements: DR m CR m Dr Net assets acquired (at fair value) 2,350 Dr Goodwill (at acquisition date) 300 Cr Cash 800 Cr Share capital 400 Cr Share Premium 1,000 Cr Non-controlling interest 450 Firestack plc: Consolidated statement of profit or loss and other comprehensive income for year ended 31 December 2011 (100% Firestack + 100% Smokey*4/12) million Revenue (2,214 + (1,224 * 4/12) 25 (iv) 2,597.0 Cost of Sales [837 + (432 * 4/12) (iii) 25 (iv) + 3 (iv)] (961.5) Gross Profit 1,635.5 Operating expenses [558 + (414 * 4/12) (ii) 2 (v)] (794.0) Finance costs [90 + (54 * 4/12)] (108.0) Other income ( (v) 1.6 (vii)) 12.6 Investment income (64.8) 64.8 Share of profit for year of associate [109.8 * 40% (vi)] 43.9 Profit before taxation Taxation (135 + (54 * 4/12)) (153.0) Profit for the year Other comprehensive income (Amounts that will not be reclassified to profit or loss): Gains on revaluation of property ( (36 * 4/12) Share of other comprehensive income of associate (32.4 * 40%) 13.0 Total comprehensive income for the year Profit for the year attributable to: Owners of the parent (balancing figure ) Non-controlling interest (viii) Total comprehensive income attributable to: Owners of the parent (balancing figure ) Non-controlling interest (viii) Working (i) Group structure: Firestack plc Parent Smokey plc 80% subsidiary for 4 months of year therefore include 100% of results *4/12 Flamer 40% interest, board representation is evidence of significant influence exerted. Therefore Flamer is an associate held for several years. Include 40% of profit for year and 40% of Other Comprehensive Income with group figures. Working (ii) Impairment loss on consolidated goodwill 100m included as operating expense in year of recognition. NCI is affected as the fair value method was used to calculate goodwill. Page 10

12 Working (iii) Additional depreciation not yet charged re fair value adjustment: 45m / 6 years * 4/12 = 2.5m Add to cost of sales expense this year. NCI is affected as it is Smokey s asset that is being adjusted. Working (iv) Eliminate intra-group sales and purchases ( 25m) in full from group revenue and group cost of sales. Unrealised profit provision required = 25m * 30/100 * 2/5 = 3m [Dr Cost of sales, Cr Inventory in SOFP] NCI is affected as Smokey was the internal selling company that recorded the gain. Working (v) Eliminate intragroup income and expenses 2m from other income and operating expenses. Working (vi) Share of associate s profit for year * 40% = 43.9 Share of associate s OCI 32.4 * 40% = 13.0 Working (vii) This is a transaction between parent and associate. We should eliminate 40% of the profit earned on the transaction. 4m * 40% = 1.6m. This should be eliminated from the other income heading (though it would be acceptable to show it as a deduction from Share of results from associate ). It should NOT be time apportioned. Working (viii) non-controlling interest Profit m TCI m Smokey per SPLOCI Less goodwill impairment loss (ii) (100) (100) Less adjustment for depreciation on FVA (iii) (2.5) (2.5) Less unrealised profit on intra-group sales (iv) (3) (3) Adjusted figures NCI percentage 20% 20% NCI amount Page 11

13 SOLUTION 2 Marking Scheme: (a) Cash generated from operations / reconciliation to PBT 8 Interest paid 1 Income tax paid 1 Purchase of PPE 2 Associate companies (incl purchase and dividend) 2 Purchase of subsidiary (cash paid) 1 Proceeds from issue of equity shares 1 Dividends paid - equity 1 Dividends paid to NCI 1 Opening cash / cash equivalents 1 Presentation (statement and workings) 2 Subtotal 21 Analysis at appropriate depth (maximum of 3 marks for ratio calculation) 9 Subtotal 9 Suggested solution [Total: 30 Marks] (a) Statement of cash flows for the year ended 31 March 2014 million million Cash flows from operating activities Cash generated from operations (see note below) 31 Interest paid (SPLOCI) (6) Income tax paid (W6) (11) Net cash inflow from operating activities 14 Cash flows from investing activities Purchase of interest in subsidiary (W7) (4) Purchase of property plant and equipment (W1) (40) Purchase of interest in associate (note iv) (13) Dividend received from associates (W3) 7 Net cash outflow from investing activities (50) Cash flows from financing activities Proceeds from issue of ordinary share capital (29+29) 58 Dividends paid to NCI (W4) (3) Equity dividends paid (W4) (2) Net cash inflow from financing activities 53 Net increase in cash and cash equivalents 17 Cash and cash equivalents at beginning of period 1 Cash and cash equivalents at end of period 18 Note: Reconciliation of profit before tax to cash generated from operations Profit before tax (SPLOCI) 9 Finance cost (SPLOCI) 6 Profit for year attributable to associate (14) Depreciation charge (note iii) 41 Goodwill impairment (W2) 3 Increase in long term provisions (W5) 5 Decrease in inventories (22-(19+8)) (W7) 5 Increase in trade and other receivables (42-28) (14) Decrease in trade and other payables (23-33) (10) Cash generated from operations 31 Page 12

14 W1 Property, Plant & Equipment million million Bal b/d 245 Depreciation (note iii) 41 Acquired on acq. of Sacker plc (W7) 33 Revaluation gains on group PPE (OCI) 13 Acquired for cash (balancing figure) 40 Bal b/d W2 Goodwill million million Bal b/d -- Impairment charge (bal fig) 3 Recognised on acq. of Sacker plc (W7) 9 Bal c/d W3 Investments in Associates million million Bal b/d 40 Cash dividend received (bal fig) 7 Purchase of associate (note iv) 13 Bal c/d 64 Profit for year (non cash flow) 14 OCI for year W4 Equity Reconciliation Share Cap. Share Prem. Revaluation R/E NCI million million million million million Opening Balance Profit for year 5 1 OCI for year 17 Issued for acq. (W7) Arising on acq. (W7) 11 Shares issued cash Dividend paid to NCI (3) Equity dividends paid (2) Closing balance W5 Long term provisions million million Bal b/d 7 Bal c/d 12 SPLOCI (bal fig) W6 Taxation million million Cash paid (balancing figure) 11 Bal b/d 13 Bal c/d 5 SPLOCI Page 13

15 W7 Acquisition million Cost of investment (80%) Shares issued (25 share capital, 10 share premium) 35 Cash FV of NCI 11 FV of net assets at acquisition: PPE 33 Inventory 8 Cash 6 (47) Goodwill 9 Net cash flow impact on purchase is an outflow of 4m (cash paid 10m less cash acquired 6m) Current Ratio 82 : : :1 1.04:1 Acid Test Ratio 60 : : : : 1 Gearing (D/E) 50 / / % 23% Liquidity The liquidity of Rumpus plc has improved significantly over the past year. The current ratio improved from 1.04:1 to 2.93:1. The Acid Test (Quick) ratio likewise improved from 0.63:1 to 2.14:1. These changes transform the ratios from being worryingly low in 2013 to their present extremely healthy levels. This change is mainly due to a share issue which contributed 58m to company funds. Despite this share issue, the statement of cash flows shows that net cash inflow for the year was just 17m. The main reason for the lower net cash inflow is the high level of investment made by the company in PPE and in other entities. 40m was used to purchase new PPE, and 17m cash plus a further equity issue was used to purchase a subsidiary and associate. The fact that the company is investing in future earnings potential is positive. The fact that shareholders were willing to invest so much money at a significant premium indicates that the company is well regarded by the market. The profit generated in 2014 would seem to be relatively poor, considering the value of the company. This profit may of course be abnormally low, and normalised profits may be higher. We have insufficient information to make this judgment. The statement of cash flows shows that the cash flow from operations is healthy at 14m. The fact that cash flow from operations is higher than profits reflects the high depreciation charge among other things. Viewed in this light, the expenditure on PPE would seem to be little more than maintaining capacity (being roughly equal to the depreciation amount). Gearing ratios are very conservative, and would not seem to be of concern. However, close attention should be paid to the debentures maturing in If the company is performing poorly at that time from a profit perspective, it may be difficult to refinance these. If cash is not available at that time, the company faces a risk of default or very unfavourable refinancing terms. It is important to prepare contingency plans to avoid such an eventuality. Overall, there seems to be little liquidity pressure on this company. There is ample cash to pay short-term liabilities as they fall due. However I would recommend watching profits closely, in order to assess whether the additional investment pays off. If not, cash flow will tighten in future years. Page 14

16 SOLUTION 3 Marking Scheme: 8 parts * 2.5 mark each 20 [Total: 20 Marks] Suggested solution Part 1: Answer (d) IFRS 1 requires that comparatives are presented with the first IFRS financial statements. Hence the transition date is the first date covered by the comparatives, or the beginning of the previous accounting period. Part 2: Answer (c) This is directly from IFRS 13. Level 1 inputs are those directly and independently observable and relate to identical assets. An example is the quoted share price for an equity investment. Part 3: Answer (c) Relevance and Faithful Representation are fundamental characteristics. Part 4: Answer (c) Trade payables a/c Payment 37, Purchases 74, Balance c/d 38, Profit / Loss (balancing fig) 1, , , May 2014: US$100,000 / = 74, This is recorded as trade payables 30 June 2014: Amount paid = US$ 50,000 / = 37, This is the cash actually paid on 30 June 2014 Balance 31 July = $50,000/ = 38, This remains outstanding, and under IAS 21 should be remeasured as it is a monetary item. The balancing figure is the overall gain or loss. It is a loss here, as we owe and have paid more than was originally recorded. Part 5: Answer (c) The provision for 2013 was insufficient to meet the actual liability. Hence we must add the amount underprovided to the 2014 provision of 32,500. This requires a total charge to P/L of 34,000. As the 1,500 in respect of 2013 is actually paid, this does not form part of the SOFP liability. The amount actually payable at 31 July 2014 is 32,500. Part 6: Answer (d) IAS 37 sets no time limit on the expected payment date. Page 15

17 Part 7: Answer (c) m Profit before tax 340 Depreciation 45 Increase in provision 60 Increase in inventory 12 Decrease in trade payables 8 Cash flow generated 465 Part 8: Answer (a) IFRS 11 requires that a joint arrangement be accounted for in accordance with the substance of the arrangement. If the interest of each venture is in individual assets and liabilities, then their respective shares of these assets and liabilities should be recorded as part of their individual assets and liabilities. If, however, their interest is in a portion of the entire net assets of the entity, as is the case here, then equity accounting must apply. Discretion is not afforded to the entity. Page 16

18 SOLUTION 4 Marking Scheme: (a) Explanation of the term Events after the Reporting Period 2 Definition of the period such events are to be considered 2 Subtotal 4 Adjusting event and accounting treatment 2 Non-adjusting event and accounting treatment 2 Subtotal 4 (c) 4 parts at 3 marks each 12 Subtotal 12 Suggested solution [Total: 20 Marks] (a) It is normal that financial statements take some time after the year-end to be finalised, audited and approved for issue by the board of directors. Events after the reporting date are those events, favourable and unfavourable, that occur between the reporting date and the date when the financial statements are authorised for issue. Adjusting event: An adjusting event is an event which provides further evidence of a condition existing at the reporting date. An entity shall adjust the amounts recognised in its financial statements for the period just ended to reflect adjusting events after the reporting period. Non-adjusting event: An entity shall not adjust the amounts recognised in its financial statements to reflect non-adjusting events after the reporting date. In this case, there was no condition existing at the reporting date, so no adjustment should be made. Disclosures should be made in the financial statements of significant non-adjusting events after the reporting date. If a non-adjusting event means the going concern concept no longer applies to the entity, the event should be treated as an adjusting event, and the financial statements should not be prepared on a going concern basis. (c) (i) (ii) (iii) (iv) As no dividend was proposed at the reporting date, no liability existed at that date. Therefore no adjustment should be made. Disclosure should be made of the dividend if proposed after the reporting date, and prior to the date of approval by the directors. However no accrual should take place. The event causing the investments to fall in value did not exist at the reporting date. Hence the fall in value should be considered a non-adjusting event. Again, disclosure should be made if the amount of loss is material. The liability existed at the reporting date, but confirmation of the amount was only received on 25 August. This is an adjusting event, and the treatment of this item in the financial statements (assuming a nil payment) should be amended to reflect the information received subsequently. Accordingly, provision should be made for the entire amount of the judgment. No agreement existed at the reporting date, hence this is a non-adjusting event. However disclosure should be made in the financial statements. Page 17

19 SOLUTION 5 Marking Scheme: (a) Explanation of the term Investment Property 3 Subtotal 3 3 key differences in accounting treatment 3 Explanation of reasons for different treatment 2 Subtotal 5 (c) 3 parts at 4 marks each 12 Subtotal 12 Suggested solution [Total: 20 Marks] (a) Definition Investment property is property held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for: use in the production or supply of goods or services or for administrative purposes; or for sale in the ordinary course of business. Accounting Treatment There are two options given under IAS 40 for accounting for investment properties: cost model or the fair value model. Under the cost model, properties are accounted for as under the cost model of IAS 16. This means the property is carried at cost and depreciated over its useful economic life. If this model is chosen, the fair value should be disclosed. There is no difference between the accounting treatment of properties under the cost model of both standards. Under the fair value model of IAS 40: o Investment properties are revalued each year to fair value. o Any gain or loss is credited / debited to profit or loss (i.e. through the income statement) each year. o Depreciation should not be charged. Under the fair value model of IAS 16: o Properties are revalued sufficiently often to ensure their carrying value does not differ materially from their fair value. This does not need to be every year. o Any gain is credited to a revaluation reserve through other comprehensive income. o Any loss is taken to profit or loss. o If a gain or loss reverses previously recognised losses or gains on the same property, the original accouting treatment is reversed first. o Depreciation must be charged. Page 18

20 (c) (i) Carrying value of property A at 1 August 2013 (prior to revaluation): 000 Cost 1,600 Depreciation per year (1,600 * 90% * 1/50) 28.8 Depreciation for 4 years (115.2) Carrying value 1,484.8 Revalued amount at 1 August ,800.0 Revaluation gain Depreciation for year ended 31 July 2014 (1, ) * 1/50 30 Carrying value 31 July ,770 Accounting entries for year ended 31 July 2014: SPLOCI profit or loss: Depreciation for year (30) SPLOCI other comprehensive income: Gain on revaluation of property SOFP Property, plant & equipment: 1,770 Note: The date of revaluation is the beginning of the year. Therefore depreciation for the year is based on the new valuation and useful economic life. (ii) 000 Carrying value of property B on 1 August 2013: 750 Fair value 31 July ,200 Gain on valuation 450 Accounting entries for year ended 31 July 2014: 000 SPLOCI profit or loss: Gain on valuation of investment property 450 SPLOCI other comprehensive income: n/a SOFP Investment property: 1,200 Note: This property is an investment property as it was purchased and continues to be held for its investment potential, and is not being used by the entity or any group company for use in the production or supply of goods or services or for administrative purposes; or for sale in the ordinary course of business. Hence the revaluation gain is recognised in profit or loss, and no depreciation is charged. Page 19

21 (iii) First revaluation of property C at 1 August 2008: 000 Cost 4,400 Amortisation per year (4,400 * 1/20) 220 Amortisation for 2 years (440) Carrying value 1 August ,960 Revalued amount at 1 August ,260 Revaluation loss (2,700) Carrying value of property C at 1 August 2013 (prior to revaluation): Value 1 August ,260 Amortisation per year (1,260 * 1/18) 70 Amortisation for 5 years (350) Carrying value 1 August Revaluation gain (2, ) 1,690 Revalued amount 1 August ,600 Amortisation for year ended 31 July 2014 (2,600 * 1/13) 200 Carrying value 31 July ,400 What would the carrying value at 1 August 2013 be if no revaluation had ever taken place (HC value)? Cost 4,400 Amortisation (4,400 * 1/20 * 7) (1,540) Depreciated historic cost (2,860) As the revalued amount (2,600) is less than the HC carrying value would have been, the entire revaluation gain should be taken to profit or loss. Accounting entries for year ended 31 July 2014: SPLOCI profit or loss: Amortisation for year (200) Reversal of previous revaluation loss charged to P/L 1,690 SPLOCI other comprehensive income: n/a SOFP Property, plant & equipment: 1,490 Note 1: The date of revaluation is the beginning of the year.therefore amortisation for the year is based on the new valuation and useful economic life. Note 2: A revaluation gain on a non-investment property would normally be taken to OCI. However in the case when the same property previously suffered a revaluation loss, and this was taken to profit or loss (as it would have been as it was a first revaluation), this loss may be reversed before a gain in taken to OCI. As the gain in this case is less than the previous loss, and does not take the carrying value of the property above its depreciated historical cost (DHC), it it taken entirely to profit or loss. If the gain took the carrying value of the property above DHC, the excess would be taken to OCI and revaluation reserve. Page 20