Governance and Reporting

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1 Subject no. 56A Diploma in Offshore Finance and Administration Governance and Reporting July 2011 Friday morning 15 July 2011 Time allowed: 3 hours Do not open this examination paper until the presiding officer or an invigilator tells you to. You must not take this paper out of the examination room. This examination paper is divided into three sections. You must attempt all parts of Question 1 in Section A, all questions in Section B, and two questions only in Section C. Section A carries 10 marks (1 mark for each part of Question 1). Section B carries 40 marks (4 marks for each question). Questions in Section C each carry 25 marks. You should allow yourself approximately 20 minutes in total to answer the questions in Section A, 70 minutes in total to answer the questions in Section B and 45 minutes for each of the questions attempted in Section C. ICSA, 2011 Page 1 of 9

2 Section A Answer all parts of Question 1. Select only one of the options A, B, C or D for each part. 1. (i) Which of the following correctly describes purchased goodwill? A. It represents the difference between the total purchase price of a business and the total value of its separable net assets. B. It is an example of unascertainable internally-generated goodwill. C. It can only be positive, not negative. D. It represents the difference between the total purchase price of a business and the total value of its separable net tangible assets. (ii) All public limited companies ( plc ): A. Are much larger in number than private companies. B. Are quoted on a stock exchange. C. Can invite members of the public to invest in their equity. D. Are government-owned companies. (iii) A company has: 000 Called-up share capital 500,000 50p ordinary shares 250 Share premium account 200 The company pays a dividend of 5%. What is the cost of the dividend? A. 10,000 B. 12,500 C. 22,500 D. 25,000 (iv) A company s fully paid share capital is 2,000,000, comprising 2,000,000 ordinary shares of 1 each. It decides to make a 3-for-2 bonus issue and, immediately afterwards, a rights issue of 1-for-5 at a price of Ignoring costs and fees, how much money could the company potentially raise from the rights issue? A. 1,500,000 B. 4,500,000 C. 7,500,000 D. 9,000,000 ICSA, 2011 Page 2 of 9

3 (v) The role of the external auditor of a plc: A. Guarantees that no fraud has taken place. B. Favours equity shareholders at the expense of providers of debt finance. C. Can be undertaken by suitably qualified employees of the company. D. Plays a crucial role in good corporate governance. (vi) Limited partnerships: A. Are often described as corporate vehicles. B. Can be described as unincorporated entities. C. Will have limited and general partners, all with unlimited liability. D. Can be described as corporate vehicles in which the limited partners enjoy limited liability. (vii) FRS 18 Accounting Policies states that the appropriateness of accounting policies is to be judged against: A. Completeness, relevance, reliability and comparability. B. Measurability, relevance, reliability and understandability. C. Timeliness, relevance, reliability and understandability. D. Relevance, reliability, comparability and understandability. (viii) The accruals principle in accounting means that the income and expenditure of a company over a specified period: A. Should be recorded consistently year on year to aid comparison. B. Should be recorded on a going concern basis. C. Should be recorded in the accounts regardless of whether the income has been received or the expenses paid. D. Should be recorded in a prudent and reliable manner. (ix) FRS 5, Reporting the Substance of Transactions, is concerned with ensuring that when preparing accounts: A. Precedence is given to the underlying commercial nature rather than the legal form of a business arrangement. B. Intangible assets are recorded in the most creative manner. C. Legal title takes precedence over economic rights and control. D. Balance sheets are prepared in the most creative manner. ICSA, 2011 Page 3 of 9

4 (x) Extracts from the Profit and Loss Account for Z plc for the year ended 31 March 2011 are as follows: m Profit before taxation 5.0 Taxation (1.5) Profit after taxation 3.5 Dividend paid (2.0) Retained profit 1.5 Z plc has had 4,000,000 1 ordinary shares in issue all year and the current share price on the London Stock Exchange is 500p. What is the price / earnings ratio for Z plc? A. 4.0 B. 5.7 C D (Total: 10 marks) ICSA, 2011 Page 4 of 9

5 Section B Answer all ten questions. 2. Explain, giving examples, the difference between trust income and trust capital. 3. Identify and explain four significant differences between ordinary shares and preference shares. 4. Identify two examples of external stakeholders. For each of the external stakeholders you have suggested, give two types of control that each can exercise in terms of the corporate governance of a limited company. 5. An international financial centre can become a safe haven (or financial haven) which is an attractive base for criminal activity such as money-laundering. Outline four of the major characteristics of such a base referred to as an ideal financial haven by the United Nations Office on Drugs and Crime (UNODC). 6. Ignoring managed banks, explain two significant levels of banking licensing applicable within many offshore jurisdictions. 7. Identify and explain the key contexts in which the term offshore structure is used. 8. Explain three reasons why offshore companies may be perceived to be vehicles for potential illicit business practices. 9. Identify four advantages of International Accounting Standards ( IASs ) and International Financial Reporting Standards ( IFRSs ). 10. Explain what is meant, within accounting, by the term asset, identifying two types of fixed asset and two examples of a current asset. 11. In accounting there is often a trade-off between profit margin and asset turnover (volume). Explain why. (Total: 40 marks) ICSA, 2011 Page 5 of 9

6 Section C Answer two questions only. 12. The balance sheets of OPQ Ltd as at 31 March are as follows: Fixed assets: '000 '000 '000 '000 Plant and machinery at cost 25,646 14,000 Accumulated depreciation (1,669) (1,009) 23,977 12,991 Current assets: Stock in trade Trade debtors Cash and bank ,534 Creditors payable within a year: 2,518 Trade creditors (157) (356) Taxation (776) (800) Bank overdraft (10) (235) (943) (1,391) 24,568 14,118 Capital and reserves: '000 '000 '000 '000 Ordinary shares 4,500 3,500 Share premium account 1,228 1,028 Retained profit 18,140 8,890 23,868 13,418 Long term liability: Debentures (6%) ,568 14,118 ICSA, 2011 Page 6 of 9

7 The profit and loss account of OPQ Ltd for the year ended 31 March is as follows: Sales Cost of sales Gross profit Expenses excluding depreciation Depreciation Operating profit Interest paid Profit before taxation Taxation Profit after taxation Dividend paid Retained profit for year Retained profit brought forward Retained profit carried forward '000 40,000 (25,470) 14,530 1, (1,674) 12,856 (56) 12,800 (2,300) 10,500 (1,250) 9,250 8,890 18,140 OPQ Ltd did not dispose of or revalue any fixed assets during the year to 31 March Required (a) Prepare a cash flow statement for OPQ Ltd for the year ended 31 March 2011 in accordance with the requirements of Financial Reporting Standard 1 Cash flow statements, including the note reconciling the operating profit to the net cash inflow from operating activities and the analysis of changes in net debt. (20 marks) (b) Explain the main purpose and function of the cash flow statement. (5 marks) (Total: 25 marks) ICSA, 2011 Page 7 of 9

8 13. The capital and reserves of two companies, A Ltd and B Ltd, as at 31 March 2011 are as follows: Capital and reserves: A Ltd B Ltd '000 '000 '000 '000 Ordinary shares of Share premium account Retained profit Long term liability: Debentures (10%) ,000 1,000 The profit and loss accounts of A Ltd and B Ltd for the year ended 31 March 2011 are as follows: A Ltd B Ltd 000 '000 Operating profit before interest and taxation Debenture interest paid Profit before taxation Taxation at 20% Profit available for ordinary shareholders 100 (10) 90 (18) (50) 50 (10) 40 Required (a) For each of the companies, calculate: (i) (ii) (iii) The gearing ratio or the debt/equity ratio. The earnings per share. The fixed interest times covered. (6 marks) (b) For each of the companies, assuming that profit before interest and tax had been 80,000 (instead of 100,000) and that the taxation rate had remained at 20%, re-calculate: (i) (ii) (iii) (iv) The profit available for ordinary shareholders. The earnings per share. The change in earnings per share. The fixed interest times covered. (12 marks) Note: You must show your calculations for (a) and (b) above. continued ICSA, 2011 Page 8 of 9

9 (c) (d) Explain the importance of a company s long term capital structure in terms of understanding its financial stability. Explain, using your calculations to (a) and (b) above, the impact of the financial gearing of company A Ltd and B Ltd on profit available for ordinary shareholders. (3 marks) (Total: 25 marks) 14. In relation to offshore finance, explain eight legitimate ways in which a multinational corporation may use an offshore subsidiary and identify seven potential disadvantages of using offshore centres. (25 marks) The scenarios included here, except where expressly identified, are entirely fictional. Any resemblance of the information in the scenarios to real persons or organisations, actual or perceived, is purely coincidental. ICSA, 2011 Page 9 of 9

Governance and Reporting July 2011

Governance and Reporting July 2011 s and examiner s comments Important notice When reading these suggested answers, please note that the answers are intended as an indication of what is required rather