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2 Diploma in International Financial Reporting December 200 Answers (All numbers in $ 000 unless otherwise stated) (a) Consolidated statement of financial position of Alpha at 30 September 200 ASSETS Non-current assets: Property, plant and equipment (65, ,000 + (00,000 x 25%) + 2,000 (W)) 292,000 + Goodwill (W2) 46,200 5 (W2) Available for sale investment 2, ,200 Current assets: Inventories (65, ,000 + (30,000 x 25%) 2,400 (W5)) 07,00 + Trade receivables (35, ,000 + (32,000 x 25%) + 25,000) 00,000 + Cash and cash equivalents (0, ,000 + (8,000 x 25%)) 9, ,00 Total assets 576,300 EQUITY AND LIABILITIES Equity attributable to equity holders of the parent Share capital (80, ,000) 07,000 + Share premium (27,000 x $2 60) 70,200 Retained earnings (W4) 57,200 8 (W4) 334,400 Non-controlling interest (W3) 30,750 (W3) Total equity 365,50 Non-current liabilities: Long-term borrowings (35, ,000 + (20,000 x 25%)) 70,000 Contingent consideration 24,000 Deferred tax (W7) 23,650 2 (W7) Total non-current liabilities 7,650 Current liabilities: Trade and other payables (30, ,000 + (20,000 x 25%)) 59,000 Short-term borrowings (5, ,000 + (6,000 x 25%) + 20,000) 34,500 + Total current liabilities 93, Total equity and liabilities 576,300 Workings do not double count marks Working Net assets table Beta: October 30 September For W2 For W Share capital 60,000 60,000 Retained earnings: Per accounts of Beta 44,000 56,000 Accounting policy adjustment (,000) (2,000) Plant and equipment adjustment 4,000 2,000 Inventory adjustment,000 Nil Deferred tax on fair value adjustments,500 2,500 (W6) (W6) Net assets for the consolidation 99,500 08,500 The post-acquisition profi ts are 9,000 (08,500 99,500). 2 W2 2 W4 Marks 5

3 Marks Working 2 Goodwill on consolidation (Beta) Cost of investment: Share exchange (45,000 x 3/5 x $3 60) 97,200 Contingent consideration 20,000 Fair value of non-controlling interest at date of acquisition (5,000 x $ 90) 28,500 45,700 Net assets at October 2009 (W) (99,500) + 2 (W) So goodwill re: Beta equals 46,200 5 Working 3 Non-controlling interest in Beta: Fair value at date of acquisition (W2) 28,500 25% of post-acquisition profi ts (9,000 (W)) 2,250 30,750 Working 4 Retained earnings Alpha 40,000 Change in fair value of contingent consideration (24,000 20,000) (4,000) Reversal of fi nance charge on factoring of receivables 5,000 Beta (75% x 9,000 (W)) 6, (W) Gamma (25% x 54,000) 3,500 Unrealised profi ts (W5) (,800) 2 (W5) Loss on Foster investment ((3,000) (W8) (W7)) (2,250) (W8) 57,200 8 Working 5 Unrealised profits Sales to Beta (8,000 x ¼) 2,000 Sales to Gamma (6,400 x ¼ x 25%) 400 Related deferred tax (2,400 x 25%) (600),800 2 W4 Working 6 Deferred tax on fair value adjustments: October 30 September Intangibles adjustment (,000) (2,000) Plant and equipment adjustment 4,000 2,000 Inventory adjustment,000 Nil Net deductible temporary differences (6,000) (0,000) Related deferred tax (25%) (,500) (2,500) W Working 7 Closing deferred tax balance Alpha + Beta + ¼ x Gamma 27,500 On fair value adjustments (W6) (2,500) On Foster investment (3,000 (W8) x 25%) (750) On unrealised profi ts (W5) (600) 23,650 2 Working 8 loss on other investments Alpha investments per own fi nancial statements 50,000 Less investments in Beta and Gamma (20, ,000) (35,000) Carrying value of other investments 5,000 Market value of portfolio (2,000) Loss on re-measurement 3,000 W4 6

4 2 (a) Statement of comprehensive income of Delta for the year ended 30 September 200 $ 000 Revenue (W) 30,000 (W) Cost of sales (W4) (244,00) 5 (W4) Gross profi t 65,900 Distribution costs (2,000) Administrative expenses (W5) (27,427) 3 (W5) Finance costs (W7) (5,650) (W7) Profi t before tax 20,823 Income tax expense (W8) (6,000) (W8) Profi t for the year 4,823 Other comprehensive income (W9),250 (W9) 26,073 5 (b) Statement of financial position of Delta as at 30 September 200 $ 000 ASSETS Non-current assets Property, plant and equipment (W0) 88,800 2 (W9) Current assets Inventories (W4) 39,00 Trade receivables (50,000 2,727 (W6)) 47,273 Prepaid operating lease rentals (3,000 2,700) 300 Cash and cash equivalents 24,800,473 Total assets 300,273 EQUITY AND LIABILITIES Equity Share capital 54,000 Retained earnings (W) 27,823 (W) Revaluation surplus (W9),250 Total equity 93,073 Non-current liabilities Lease liability (W7) 37,933 (W7) Deferred tax (W2),550 (W2) Total non-current liabilities 49,483 Current liabilities Trade and other payables (W3) 35,000 (W2) Customer deposit 5,000 Lease liability (W7) 7,77 (W7) Total current liabilities 57,77 Total equity and liabilities 300,273 0 Workings Note references refer back to the question. Do not double count marks Working Revenue As shown in TB 35,000 Adjustment for revenue not yet earned (5,000) 30,000 Working 2 Inventory adjustment Cost of relevant components (200,000 x $20) 4,000 NRV of relevant components (200,000 x ($22 50 $ $6)) (3,00) So adjustment to cost of sales 900 W4 Marks 7

5 Marks Working 3 Depreciation Purchased plant (90,000 x 25%) 22,500 Leased plant (70,000 x 25%) 7,500 Property (54,000 x /45) see note below,200 4,200 2 (W4) Note: In previous years the total depreciation on the property is 0% of the depreciable amount. So the property is 45 (50 x 90%) years old. Therefore the remaining useful life of the property is 45 years Working 4 cost of sales Opening inventories 32,000 Raw material purchases 50,000 Closing inventories (40, (W2)) (39,00) + (W2) Production costs 60,000 Depreciation (W3) 4,200 2 (W3) To statement of comprehensive income 244,00 5 Working 5 administrative expenses As per TB 22,000 Operating lease rentals ( ( x 200)) 2,700 Impairment of fi nancial assets (W6) 2,727 (W6) To statement of comprehensive income 27,427 3 Tutorial note Alternative sensible allocations of operating expenses between cost of sales and administrative expenses will not lose marks. Working 6 impairment of financial assets Carrying value of trade receivable 0,000 Recoverable amount (8,000 x /( 0)) (7,273) So impairment 2,727 (W5) Working 7 lease liability Period ended Bal b/f Payment Bal in period Interest Bal c/f 3 March ,000 (0,000) 60,000 3,000 63, September ,000 (0,000) 53,000 2,650 55,650 3 March 20 55,650 (0,000) 45,650 2,283 47,933 The year end liability is 55,650 of which 7,77 (20,000 2,283) is current. The balance of 37,933 (55,650 7,77) is non-current. The total fi nance cost for the period is 5,650 (3, ,650) Working 8 tax charge This year s estimate 5,000 Last year s underprovision 400 Transfer to deferred tax 600 6,000 Working 9 other comprehensive income Market value of revalued property 00,000 Previous carrying value of revalued property (85,000) Gross revaluation surplus 5,000 Deferred tax at 25% (3,750) Net revaluation surplus,250 8

6 Marks Working 0 property plant and equipment Plant and equipment per trial balance 60,000 Market value of property 00,000 Initial carrying value of leased plant 70,000 Depreciation for the year (W3) (4,200) 88,800 2 Working retained earnings Opening balance 43,000 Profi t for the period 4,823 Dividend (30,000) Closing balance 27,823 Working 2 deferred tax Opening balance 7,200 Transfer for the period 600 On property revaluation (W9) 3,750,550 Working 3 trade and other payables Trade payables 30,000 Income tax liability 5,000 35,000 Numbers in $ 000 unless otherwise stated. 3 Transaction (a) Extract from fi nancial statements Statement of comprehensive income: Finance cost of 378 Statement of fi nancial position: Non-current liability 4,29. Other components of equity 849. Explanation and calculations Under the provisions of IAS 32 Financial instruments: presentation the loan needs to be split into its liability and equity components. The liability component is the present value of the future cash outfl ows discounted at 9%. This is 4,25 (5,000 x 0 05 x $ ,000 x 20 x $0 42). The equity element is therefore 875 (5,000 4,25). Both the above amounts are before accounting for the issue costs of 50 (5,000 x $0 03). These should be allocated to the liability and equity components in the ratio 4,25:875. This means that 24 (50 x 4,25/5,000) is allocated to the liability component and 26 (50 24) to the equity component. Therefore the opening liability component after allocating the issue costs is 4,00 (4,25 24) and the opening equity component is 849 (875 26) The equity component will be unchanged over the life of the instrument but the liability component will be measured at amortised cost using an effective interest rate of 9 45%. The fi nance cost for the year ended 30 September 200 will be 378 (4,00 x 9 45%) and the closing liability 4,29 (4, ,000 x 5%). Transaction (b) Extract from fi nancial statements Statement of comprehensive income Administrative expenses of 776 (rental of 700 plus depreciation of 76) Finance costs of 2. Statement of fi nancial position Property, plant and equipment of,366 in non-current assets 800 in respect of rent payable and 254 in respect of the future restoration of the property in non-current liabilities. 00 in respect of rent payable in current liabilities. 9

7 Explanation and calculations The lease of the property would be regarded as an operating lease because a 0-year lease would not be long enough to transfer the risks and rewards of ownership to Epsilon. Therefore the lease rentals will be charged as an expense in the income statement over the lease term, normally on a straight-line basis. Under the principles of SIC 5 Operating leases incentives the inducement will be recognised over the lease term, effectively as a reduced rental. Therefore the annual rental expense will be 700 (/0(800 x 0,000)). This will be charged in the statement of comprehensive income in arriving at the profi t for the period. Epsilon has received net cash of 200 (, ) from the lessor during the year and so there will be a closing payable of 900 ( ) at the year end. This will be reduced by 00 ( ) per annum over the remaining nine year term of the lease. Therefore 00 of this payable will be a current liability and 800 (900 00) will be non-current. Tutorial note Alternatively the 900 closing payable could be taken to be 9/0 of the inducement of,000 that, under the principles of IAS 7, needs to be recognised over the lease term. The costs of altering the property give Epsilon access to economic benefi ts over the remaining 9 years of the lease and should be capitalised as property, plant and equipment. Additionally, under the principles of IAS 37 Provisions, contingent liabilities and contingent assets Epsilon has an obligation to restore the property that needs to be recognised as a provision. Given the signing of the lease agreement the obligating event is the completion of the alterations. This provision should be appropriately discounted to 242 (600 x $0 404) to refl ect the time value of money. Because the provision has been measured on a discounted basis unwinding of the discount needs to be accounted for by debiting fi nance costs in the statement of comprehensive income and crediting the provision in the statement of fi nancial position. The relevant amount for the current year is 2 (242 x 0% x 6/2). Therefore the closing provision will be 254 (242 +2). The debit entry for initial recognition of the provision is to property, plant and equipment because it represents a further cost of access to the economic benefi ts available from the property. Therefore the total amount that will be taken to property, plant and equipment is,442 (, ). This amount will be depreciated over the useful economic life of 9 years to give a charge to the income statement (as an operating cost) in the current year of 76 (,442 x /9). The closing balance on PPE will therefore be,366 (,442 76). Transaction (c) Extract from fi nancial statements Statement of comprehensive income Gain on sale of shares of 960 in profi t and loss section. Unrealised gain of 20 on re-measurement of shares held at the year end in other comprehensive income. The previously unrealised gain of 720 realised on the sale of shares reclassifi ed out of other comprehensive income as part of the gain on sale of shares of 960 (see above). Statement of fi nancial position Financial asset (probably non-current) of,400. Valuation surplus relating to the remaining investment of 600 as a component of equity. Explanation and calculations The shares would be regarded as fi nancial assets under the principles of IAS 39 Financial instruments: recognition and measurement. They would be classifi ed as available for sale fi nancial assets as they are not part of a trading portfolio. Available for sale fi nancial assets are measured at fair value, with gains or losses on re-measurement recognised as other comprehensive income until the shares are sold. Therefore a gain of,200 (,000 x ($3 20 $2 00) will have been recognised in other comprehensive income in prior periods. In the current period 720 (,200 x 600/,000) of this gain becomes realised when the shares are sold. IAS 39 requires that in such circumstances the realised gain is reclassifi ed as part of the profi t on sale of the shares, which will be 960 (600 ($3 60 $3 20) + 720). The unsold shares will remain in the statement of fi nancial position as fi nancial assets (probably non-current) at their fair value of,400 (400 x $3 50). A gain on re-measurement of 20 (400 x ($3 50 $3 20) will be recognised as other comprehensive income in the statement of comprehensive income for the year. The closing balance in other components of equity relating to the investment will be 600 (400 x ($3 50 $2 00)). 4 (a) IAS 33 applies to entities whose ordinary shares or potential ordinary shares are traded in a public market (a potential ordinary share is a fi nancial instrument that gives the holder a right to acquire ordinary shares). Other entities who voluntarily disclose earnings per share (EPS) information must do so in accordance with the requirements of IAS 33. For entities that have no discontinued operations IAS 33 requires disclosure of basic and diluted EPS on the face of the statements of comprehensive income or (where separately presented) the income statement. The basic EPS of an entity is the profi t attributable to the ordinary shareholders (or, in the case of a group, the ordinary shareholders of the parent) divided by the weighted average number of ordinary shares in issue in the period. The diluted EPS is a hypothetical measure of EPS that adjusts the basic EPS measure for the potential effects on earnings and number of shares for the effects of all dilutive potential ordinary shares. 20

8 For entities that have discontinued operations IAS 33 requires disclosure of the EPS for total profi ts, and for profi ts on continuing operations, on the face of the statement of comprehensive income (or income statement, if separately presented). The EPS for discontinued operations also needs to be disclosed, but entities are permitted to make this disclosure in the notes to the fi nancial statements if they wish. (b). Computation of earnings for EPS purposes 35,000 (30,000 x 6%) = 33, Computation of theoretical ex-rights fair value and adjustment factor (7 x $ x $ 35) x /9 = $ 70. So adjustment factor is 80/ Computation of weighted average number of shares in issue (70,000 x 3/2 x 80/ 70) + (90,000 x 9/2) = 86, Compute basic EPS 33,200/86,029 = 38 6 cents 5. Compute earnings for diluted EPS 33,200 + ((23,000 x 7%) x 80%) = 34, Compute number for diluted EPS 86, ,000 = 06, Compute diluted EPS 34,488/06,029 = 32 5 cents (c) Equity settled share based payments should be recognised from the grant date. This is the date when the entity confers on the other party the right to equity instruments, dependent in some cases on vesting conditions. If there are no vesting conditions, the whole amount should be recognised immediately. If there are vesting conditions, the amount should be recognised on a systematic basis over the vesting period. The payments should be measured at fair value. In this context fair value means the fair value of the equity instruments granted in the case of transactions with employees. In the case of transactions with other parties fair value means the fair value of the goods and services received. The amount recognised in each period should be debited to the statement of comprehensive income as an operating cost (unless it qualifi es for inclusion in the cost of another asset, e.g. inventory). The credit entry is to equity. IFRS does not specify which component. (d) The cumulative amount recognised at 30 September 200 is 500 x 200 x $ 20 x 2/3 = $80,000. This is shown in the statement of fi nancial position as part of equity. The cumulative amount recognised at 30 September 2009 is 500 x 50 x $ 20 x /3 = $30,000. So the amount recognised in the statement of comprehensive income for the year is $50,000 ($80,000 $30,000). Marks 5 (a). Computation of goodwill on acquisition Cost of investment (800,000 x 2/5 x $4),280 Fair value of non-controlling interest (200,000 x $ 4) 280 Fair value of identifi able net assets at date of acquisition (,300) So goodwill equals 260 NB: Acquisition costs are not included as part of the fair value of the consideration given under IFRS 3 2. Calculation of impairment loss Unit Carrying value Recoverable Impairment amount loss Before Allocation After allocation allocation A Nil B C 400 * * After writing down assets in the individual CGU to recoverable amount 2

9 Marks 3. Calculation of closing goodwill Goodwill arising on acquisition (W) 260 Impairment loss (W2) (56) So closing goodwill equals Calculation of overall impairment loss Arising on goodwill (W3) 56 Arising on assets in unit C ( ) 50 So total loss equals (20%) of the above is allocated to the NCI with the balance allocated to the shareholders of Omega (b) The fi nancial statements of Newsub for the year ended 30 September 200 need to be prepared under international fi nancial reporting standards (IFRS) that are effective at the reporting date 30 September 200. This applies to the fi nancial statements for the current period as well as the comparative information. The comparative information will have been presented under local accounting standards in previous years and so it will need to be restated. Given the need to present a comparative statement of changes in equity Newsub will need to compute the equity under IFRS at October Therefore Newsub will need a statement of fi nancial position under IFRS at that date. This is referred to in IFRS First time adoption of IFRS as the opening IFRS statement of fi nancial position. The opening IFRS statement of fi nancial position will need to be prepared under IFRS that are in force on 30 September 200, the reporting date. Subject to certain specifi c exemptions that are given for practical reasons, this principle needs to be applied fully retrospectively to assets and liabilities of Newsub at October In the fi rst IFRS fi nancial statements IFRS requires a reconciliation of amounts that were presented under local accounting standards in previous periods to the amounts presented as comparatives under IFRS in the current period. This means that there will need to be a reconciliation of: The comprehensive income for the year ended 30 September The equity at October 2008 and 30 September (c) Since the lease is an operating lease the property will be removed from the fi nancial statements. A profi t on sale of $5 million ($70 million $55 million) will be shown as other income in the statement of comprehensive income. The rental expense of $8 million will be shown as an operating cost in the statement of comprehensive income. The difference of $20 million between the disposal proceeds ($90 million) and the market value of the asset ($70 million) will be shown as deferred income and released to the statement of comprehensive income over the lease term of 0 years. Therefore $2 million ($20 million x /0) will be credited to the statement of comprehensive income in the year ended 30 September 200, probably as a reduction in operating costs. The remaining deferred income balance of $8 million ($20 million $2 million) will be included as a liability in the statement of fi nancial position. $2 million of this will be a current liability and $6 million ($8 million $2 million) will be non-current. (d) The international fi nancial reporting standard that is relevant to this issue is IAS 37 Provisions, contingent liabilities and contingent assets. The amount payable to the customer of $5 5 million should be recognised as a provision in the statement of fi nancial position. The obligating event is the sale of goods under the warranty. There is a probable outfl ow of economic benefi ts that can be reliably estimated. The amount potentially recoverable from the manufacturer is a contingent asset which should not be recognised in the fi nancial statements unless the recovery is virtually certain. Where (as in this case) the recovery is probable the contingent asset should be disclosed in the notes to the fi nancial statements. 22

10 Diploma in International Financial Reporting December 200 Marking Scheme Marks Marks as annotated on model answer 25 NB if proportional consolidation NOT used for Gamma only give a maximum of 2 of the 3 marks highlighted in bold on the answer 2 Marks as annotated on model answer 25 3 (a) Principle liability/equity split Calculate split Correct treatment of issue costs up to Compute fi nance cost and say where shown Compute closing liability and say where shown Compute closing equity balance and say where shown Total 6 (b) Correctly conclude operating lease Principle rental expense in SCI Principle of correct treatment of inducement Calculate rental expense for year Calculate accrued rental expense and split Principle capitalise costs of $.2m Principle make provision (with explanation) Calculate unwinding of discount Unwinding of discount is fi nance cost and provision is non-current liability Principle capitalise future restoration costs Compute depreciation Compute closing PPE value and state non-current asset Total (c) Principle shares a fi nancial asset Correct classifi cation as AFS Explain measurement implications including reclassifi cation on sale Compute unrealised gain arising in prior periods Compute total gain on sale and state where shown Identify reclassifi ed gain and describe treatment in OCI Compute additional gain on remaining shares and describe treatment Compute and describe carrying value of shares in SFP Total 8 23

11 Marks 4 (a) Comment on scope up to Describe calculation of basic EPS up to Describe calculation of diluted EPS up to Disclosures for entities without discontinued operations Additional disclosures for entities with discontinued operations up to Total 7 (b) Compute earnings for basic EPS up to Compute number for basic EPS up to 3 So compute basic EPS in cents Compute earnings for diluted EPS Compute number for diluted EPS So compute diluted EPS in cents Total 8 (c) Recognition criteria up to 2 Measurement basis up to Reporting requirements up to Total 5 (d) Principle charge in SCI is difference between closing and opening amounts in SFP Compute closing amount ( per element) 2 Compute opening amount ( for $ 20, for 50, for /3) Calculate amount in SCI Total 5 5 (a) Marks as annotated on model answer (b) All amounts need to be measured using IFRS in force at reporting date Principle of opening IFRS SFP with identifi ed date up to 2 Appreciate application fully retrospectively with principle of exceptions Explain reconciliations needed Total 6 (c) Principle de-recognise property Compute correct profi t on sale and discuss treatment $8 million shown as rental expense Principle $20 million is deferred income in SFP Split into current and non-current amounts Total 5 (d) Explanation of provision Explanation of contingent asset Total 3 24

Dip IFR. Diploma in International Financial Reporting. Thursday 9 December The Association of Chartered Certified Accountants.

Dip IFR. Diploma in International Financial Reporting. Thursday 9 December The Association of Chartered Certified Accountants. Diploma in International Financial Reporting Thursday 9 December 2010 Time allowed Reading and planning: Writing: 15 minutes 3 hours This paper is divided into two sections: Section A This ONE question