Module Contact: Mrs A Williams, NBS Copyright of the University of East Anglia Version 2

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1 UNIVERSITY OF EAST ANGLIA Norwich Business School Main Series UG Examination ADVANCED FINANCIAL ACCOUNTING NBS-3A1Y Time allowed: 3 Hours Answer SECTION A, TWO questions from SECTION B and ONE question from SECTION C. Notes are not permitted in this examination. Do not turn over until you are told to do so by the invigilator. NBS-3A1Y Module Contact: Mrs A Williams, NBS Copyright of the University of East Anglia Version 2

2 Page 2 SECTION A 1. On 1 July 2013 Jupiter, a quoted company, acquired 75% of the ordinary shares of Saturn, a private company. On the same day it also acquired 30% of the ordinary shares of Pluto, a private company. The statements of financial position and the extracts from the statements of profit or loss and other comprehensive income at 31 December 2014 are as follows: Jupiter Saturn Pluto ASSETS '000 '000 '000 Non-current assets Property plant & equipment Investments: in Saturn 250 in Pluto Inventory Receivables Cash EQUITY AND LIABILITIES Equity Share capital ( 1 ordinary shares) Retained earnings Bank Loan 200 Payables

3 Page 3 Jupiter Saturn '000 '000 Revenue Cost of sales (100) (90) Gross profit Expenses (50) (40) Profit before tax In addition, the following information is available relating to the three companies: i. The accumulated profits as at 1 July 2013 for Saturn and Pluto were 100,000 and 90,000 respectively. ii. At the date of acquisition the fair value of the net assets of Saturn was 28,000 higher than their book value. This has not been reflected in the statement of Saturn above. The difference in fair value related to a piece of land owned by Saturn. iii. Jupiter sold goods to Saturn in the year at a mark-up on cost of 20%. These goods had originally cost Jupiter 75,000. One third of these goods had still not been sold by Saturn as at 31 December iv. The goodwill arising on acquisition of Saturn has been reviewed for impairment in the year and is deemed to have been impaired by 12,000. No impairment has previously been recognised on this goodwill. Required a. Prepare the consolidated statement of financial position for the Jupiter Group as at 31 December 2014, in accordance with international financial reporting standards. b. Explain providing illustrative calculations, the effect on the consolidated statement of profit or loss of the Jupiter Group for the year ended 31 December 2014 of the intra-group trading between Jupiter and Saturn detailed in note iv) above. (20 marks) (5 marks) PLEASE TURN OVER

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5 Page 5 SECTION B ANSWER TWO QUESTIONS 2. a. The directors of Dechmont have decided to lease rather than buy a machine. The machine would have cost 1,650,000 to buy outright. The lease is for four years with annual payments of 480,000 payable in advance. The interest rate implicit in the lease is estimated to be 16%. The following discount factors may be useful: Time 16% DF Required Assuming that the lease is a finance lease what entries over the period of the lease should be made in the financial statements of Dechmont in respect of the lease? (8 marks) b. Discuss the factors which would determine whether this arrangement is treated as a finance or operating lease in the financial statements of Dechmont (no marks are available for calculations). (7 marks) c. Dechmont is planning to issue a 100 million four year bond which has a nominal interest rate of 0% in year 1, 5% in year 2, 10% in year 3 and 15% in year 4. The bond will be issued at a 20% discount and redeemed at a 7% premium. The effective interest rate on the bond is 15% d. Explain, with supporting calculations, the entries that should be made in profit or loss and in the statements of financial position of Dechmont in respect of the bond? (10 marks) PLEASE TURN OVER

6 Page 6 3. On 1 March 2014, the UK company, Ebchester plc, established a wholly owned foreign subsidiary, Fonston Ltd. Ebchester subscribed for 2 million cash for 100 million shares of 1 Hans each in Fonston. The rate of exchange between the currencies was 50 Hans to 1. During March 2014 Fonston obtained a long term bank loan of 25 million Hans at a rate of interest of 10%. By 31 March 2014 Fonston had acquired an eight year lease on shops and office premises. The lease cost 60 million Hans and the shop fittings, office equipment and furniture cost 50 million Hans. The shop fittings, office equipment and furniture are to be fully depreciated on a straight line basis over eight years. The exchange rate has not changed during March Fonston Ltd began trading on 1 April 2014 and the results for the year to 31 March 2015 are as follows: Statement of financial position at 31 March 2015 Hans (000s) Non-current assets Leasehold premises 60,000 Depreciation (7,500) Equipment etc 50,000 Depreciation (6,250) Current assets Inventories (at NRV) 60,000 Receivables 65,000 Cash 16,500 Hans (000s) 52,500 43,750 96, ,500 Total Assets 237,750 Equity Share capital 100,000 Retained profit 16, ,375 Long term loan 25,000 Current liabilities Payables 80,000 Taxation 16,375 96,375

7 Page 7 Total equity and liabilities 237,750 Profit or loss for the year ended 31 March 2015 Hans Hans (000s) (000s) Revenue 300,000 Cost of sales (225,000) 75,000 Expenses Management expenses (26,000) Depreciation (13,750) Interest (10%) (2,500) (42,250) Profit before tax 32,750 Taxation (50%) (16,375) Profit for year 16,375 During the year the exchange rates were: Hans to 1 At 1 March Average for the year 48 At 31 March Required a. Prepare the translated accounts of Fonston Ltd for the year ended 31 March 2015 that will be used for the consolidated accounts of Ebchester plc, using the method required by IFRS. (12 marks) b. Comment on the reasons for the gain or loss on translation arising in part (a). (5 marks) c. Fonston has considerable freedom of action over how it conducts its operations. Suggest an alternative method of translation which could be used if the activities of Fonston were, in fact, more tightly controlled by Ebchester and explain the impact on the resulting translated financial statements if this alternative method was used. (8 marks) PLEASE TURN OVER

8 Page 8 4. Horgabost is a company which operates in several markets. For the year ended 30 April 2015 it has the following accounting problems to solve: i. The pharmaceuticals division of the company has developed and patented a new weight loss drug, Dromocilagyn, which is marketed under the trade name Waylessa. The drug has been licenced for use with patients. The initial research into the drug cost 6 million, the more recent development work has cost 8 million, the company has spent 2 million on marketing activities in connection with launching the drug and they have been offered 20 million by another company who wish to purchase the patent and the Waylessa brand. (15 marks) ii. Horgabost trades in six different business areas which are reported separately in its internal accounts provided to the chief operating decision maker (CODM). The operating segments have in the past been Chemicals, Pharmaceutical wholesale, Pharmaceutical retail, Cosmetics, Hair care and Body care. The Chemicals market is divided into two sub-groups (which are not reported separately for the CODM). The results of the subgroups in millions are: Chemicals: Europe Chemicals: Rest of World Pharmaceuticals wholesale Pharmaceuticals retail Revenue External Internal Total Profit/ (loss) Assets Liabilities (2) Cosmetics Hair care Body care (6) (10 marks)

9 Page 9 Required For each problem identify the financial reporting issue, discuss the relevant accounting standard, and explain how the matter should be accounted for. You should include supporting calculations where appropriate and, where appropriate, your explanation should specify how the statement of financial position and the statement of profit or loss and other comprehensive income would be affected in the year ended 30 April (There are 15 marks available for the first problem and 10 marks available for the second problem.) 5. Grandtully Hotels Ltd (Grandtully), runs a chain of fifteen hotels and was established many years ago. Until recently the company was run by the children of the original founder, each of whom owned 25% of the company s ordinary share capital. In 2010 these shareholders agreed to sell 75% of their shares to a listed company, Supreme Hotels. Each of the four shareholders retained some shares, but only one, Peter Grandtully, is still actively involved in the company s management as CEO, his role since Apart from Peter, all of Grandtully s directors are also directors of Supreme Hotels. In 2011 Grandtully, which previously had had no borrowings, acquired loans of 24 million, repayable in ten years, from its bankers Investobank. The borrowings are secured by a fixed charge on Grandtully s hotel property assets. Grandtully is now seeking a further long-term loan, of 8 million, from another commercial lender, Quickbank. The new loan will also be secured on the hotel property assets. Grandtully owns the freeholds of all its hotels, which have an average of 105 rooms each. There have been no acquisitions or disposals of hotels since In June 2013 Grandtully carried out a review of its property portfolio, which was professionally valued at million. All property plant and equipment is carried under the cost model. In 2008 and 2011 Grandtully won an industry award for best medium sized hotelier in the country. Travel review websites continue to rate the hotels highly, although there have been some recent complaints about the lack of maintenance and repair. Peter Grandtully has announced his plan to retire from the business in 2016, after 30 years as CEO. PLEASE TURN OVER

10 Page 10 Statement of profit or loss for the year ended 31 December m m Revenue Cost of sales (38.7) (40.5) Gross profit Administrative expenses (6.0) (5.1) Profit from operations Finance costs (1.7) (1.5) Profit before tax Income tax (0.8) (0.6) Profit after tax Statement of financial position at 31 December m m m m ASSETS Non-current assets Property, plant and equipment Current assets Inventories Trade receivables Cash Total Assets EQUITY AND LIABILITIES Equity Issued share capital Retained earnings Total equity Non-current liabilities Bank loan Current liabilities Trade and other payables Short-term borrowings Taxation Total equity and liabilities

11 Page 11 The following ratios have already been calculated and you are not required to calculate any further ratios Room occupancy 82% 82% Average room rate per night Gearing (Debt/Equity) 36% 33% Return on capital employed 4.5% 3.9% Gross profit margin 21% 18% Current ratio Quick ratio Required Analyse the financial performance and financial position of Grandtully from the perspective of the bank thinking about lending a further 8 million. You are not required to calculate any ratios and the calculation of ratios will not attract any marks. SECTION C Answer one question (25 marks) 6. Expenditure on internally generated brands and items similar in substance cannot be distinguished from the cost of developing the business as a whole. Therefore, such items are not recognised as intangible assets. (IAS 38, revised, 2004) Critically discuss both the theoretical and practical arguments for and against the capitalisation of internally generated and purchased brands in the balance sheet. (25 marks) 7. The Conceptual Framework for Financial Reporting describes four different measurement bases. Discuss the use of different measurement bases in financial statements. (25 marks) 8. Describe and critically evaluate the process of global harmonisation of financial reporting standards. Does local GAAP still exist? END OF PAPER (25 marks)