ASSIGNMENT 1 - DIPLOMA IN IFRSs

17 March 2014 ASSIGNMENT 1 - 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. 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 email by midnight GMT on 14 April 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 and to check that a confirmation email is received from ICAEW within 48 hours of submission. 3. Ensure that your submission includes the title page, ASSIGNMENT 1 - 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 and Compliance with Regulations which you must email with your assignment (as a separate PDF file to your answers as it includes your name). The Regulations can be accessed at www.icaew.com/ifrsdiploma. 5. Retain the question paper and an electronic copy of your submitted answer for reference purposes. 6. 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. 7. 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. 8. No correspondence will be entered into regarding assignment content. Copyright The Institute of Chartered Accountants in England and Wales 2014. ICAEW\DIPLOMA IN IFRSs\Mar14

1(a) Architex is an architectural design company reporting under IFRSs. On 1 July 2013 the company refreshed the computers used by its architects. The total amount paid for the refresh for each computer can be broken down as follows: $ Desktop computer and monitor (no software included) 1,320.00 Windows 8 licence 206.80 Microsoft Office Professional Plus 2013 licences (perpetual licence) 558.80 Autodesk AutoCAD Design Suite Ultimate 2014 7,617.50 The desktop computer, monitor and Windows 8 software are expected to be used by the company for four years. It is expected that the company will switch to a new version of Microsoft Office and a new subscription period-based licence after two years. The company is expected to take advantage of upgrade options on the AutoCAD software allowing the software to be used for four years, with the upgrade after two years for an additional fee which is substantially lower than buying a new version of the software. All of the above figures are inclusive of sales tax at 10%. Architex is registered for sales tax and can recover input sales tax. Discuss the classification and accounting treatment of the above items, including relevant calculations, in so far as the information provided permits, in the financial statements of Architex for the year ended 31 December 2013. (6 marks) 1(b) Caperri is a company which is a subsidiary of a media company. Caperri's principal asset is the rights it owns to a classic film. Caperri had the following intangible assets as at the year end 31 December 2012: Classic Website Total film Cost 10,000 150 10,150 Accumulated amortisation (6,000) (90) (6,090) Carrying amount 4,000 60 4,060 The following information includes all relevant events that occurred during the year ended 31 December 2013: (i) The film was originally published on 1 January 1965 and the rights were acquired by Caperri on 1 January 2010 for $10 million. Copyright was set at 50 years from the date the film was originally published and the film was amortised by Caperri straight line over the remaining copyright period. However, recent legislative changes passed on 1 January 2013 have extended the copyright period by 20 years, to 70 years, subject to payment of a registration fee prior to the original expiry date. This, together with associated legal costs, amounted to $70,000 and was paid on 1 January 2013. As a result, the market value of the rights to the film was $12.1 million at 31 December 2013, according to Caperri's professional valuers, who determined the valuation on 1 January 2013. ICAEW\DIPLOMA IN IFRSs\Mar14 Page 2 of 9

(ii) During the year Caperri developed a new interactive website to market the film and associated merchandise given its extended copyright period. The website includes its own e-commerce system for online DVD sales, direct streaming of the film and associated material and merchandise sales. Costs incurred were as follows: Planning the new website 8 Registration of various domain names 18 Internal design costs 85 External contractor design costs 112 New content development 38 Advertising of the new website 22 The new website went live on 1 July 2013 and the old website, which was being amortised straight line over five years, was taken offline on that date and will not be used for any other purpose. Prepare the note reconciling the carrying amount of Caperri's intangible assets at the beginning and end of the year ended 31 December 2013 as required by IAS 38 Intangible Assets. Comparative information is not required. All amounts are material. (8 marks) 1(c) Critically appraise the current process for setting standards followed by the International Accounting Standards Board, specifically identifying areas where the approach could be improved or made more transparent. (6 marks) 1(d) The Applet Group consists of a parent (Applet) and one 90% owned subsidiary (Partlet). The Group owned the following properties at 31 December 2013. The fair value of each property at 31 December 2013 was as follows: $m Property owned by Applet Property being constructed by Applet for future use as investment property 5.2 Factory building let out under an operating lease to Partlet 11.0 Former warehouse, unoccupied at the year end and no longer required as a warehouse future use to be determined 2.3 Vacant land intended for the construction of a new warehouse for use by Applet in 2014 0.6 Property owned by Partlet Property let under an operating lease to unrelated third parties 3.0 The group's accounting policy is to use the fair value model of IAS 40 for investment property. ICAEW\DIPLOMA IN IFRSs\Mar14 Page 3 of 9

Calculate the maximum amount that Applet can recognise as 'Investment property' in its consolidated statement of financial position as at 31 December 2013. (5 marks) 1(e) Identify and explain four benefits specifically relevant to the United States of America of replacing its national generally accepted accounting practice with IFRSs for domestic listed entities. (4 marks) 1(f) The DEF Group is a multinational group that has the following group structure: DEF International plc (United Kingdom) 80% 60% 70% DEF Tobacco Inc (United States) DEF Technik GmbH (Germany) DEF Mining Limited (China) 75% Notes: Potenz GmbH (Germany) DEF International plc is quoted on the London Stock Exchange. The directors of DEF International plc would like to exclude DEF Tobacco Inc from the consolidation on the grounds that its business (tobacco products) is very dissimilar to the rest of the group. DEF Mining Limited is 70% owned by DEF International plc and 30% owned by the Chinese government. As part of the agreement to set up the mine, the Chinese government obtained a 30% stake in DEF Mining Limited and no key operating policy decisions can be made without mutual agreement between DEF International plc and the Chinese government. Shareholdings equate to voting rights for all companies other than in respect of the agreement between DEF International plc and the Chinese government. All companies have the same year end, present their financial statements in the same currency and report under IFRSs, except DEF Tobacco Inc which reports under US GAAP. All subsidiaries are material at group level. ICAEW\DIPLOMA IN IFRSs\Mar14 Page 4 of 9

Discuss, in so far as the information provided permits, how each of the companies in which DEF has an ownership interest should be treated in the consolidated financial statements of DEF. (5 marks) 1(g) Identify three key changes that could be made to improve the current approach to recognition of impairment losses on financial assets in IAS 39 Financial Instruments: Recognition and Measurement. Explain why you consider each of the changes to be an improvement to the current accounting treatment. (6 marks) (Total: 40 marks) ICAEW\DIPLOMA IN IFRSs\Mar14 Page 5 of 9

2. Morantes is undertaking an impairment test for one of its divisions which represents a separate cash-generating unit. The carrying amount of the assets of the division (which is a separate subsidiary) before the impairment test are as follows at 31 December 2013: Property, plant and equipment 6,800 Goodwill 980 Other intangible assets 1,700 Trade receivables 520 Inventories 280 10,280 Morantes has prepared the following list of budgeted cash flows for the purpose of calculating value in use over the next five years (31 December 2014 year end onwards) using 31 December 2013 prices: 2014 2015 2016 2017 2018 Cash from sales 4,200 4,400 4,600 4,200 3,800 Cash paid to acquire inventories (1,680) (1,760) (1,840) (1,680) (1,520) Wages and salaries payments (420) (420) (420) (420) (380) Apportioned overheads payments (200) (200) (200) (200) (200) attributable to division assets Payment of restructuring costs, provided for at 31 December 2013 (300) Interest payments on loans (20) (20) (20) (30) (30) Tax payments (360) (376) (400) (424) (374) Morantes' policy for impairment testing is to assume cash flows occur on the last day of each year. Morantes assumes that the assets of the division will be disposed of on 31 December 2018 for $1.2 million, net of selling costs of $0.1 million, and these cash flows are not included in the figures above. Morantes pre-tax risk-adjusted discount rate (including the effect of price increases attributable to general inflation) is 9.18% per annum. General inflation is expected to be 3% per annum and all cash flows are assumed to rise annually at this rate. No impairment losses have previously been recognised in respect of the division. It was estimated that the division as a whole could be sold for $7.4 million at 31 December 2013, net of selling costs. If sold separately, the property, plant and equipment would realise $6.6 million and the other intangible assets would realise $1.5 million. Present your answer to the nearest $1,000. (a) Discuss the purpose of an impairment test and critically appraise the measurement basis using for impairment testing in IAS 36 Impairment of Assets. (6 marks) (b) Determine the carrying amount of the division as at 31 December 2013, showing the allocation of any impairment losses over the different assets of the unit. (15 marks) (Total: 21 marks) ICAEW\DIPLOMA IN IFRSs\Mar14 Page 6 of 9

3. Campana is a quoted housebuilder reporting under IFRSs. During the year ended 31 December 2013 it entered into two arrangements for the first time which need to be accounted for in the financial statements for the year ended 31 December 2013. (a) Campana purchased a substantial item of equipment on 1 January 2013 and entered into an arrangement whereby it will pay the supplier in its own ordinary shares on 31 December 2014. The list price of the equipment was $4 million, and Campana agreed that it will deliver the required number of its own ordinary shares to equal $4 million on 31 December 2014, based on the shares fair value on that date. The $4 million price will not vary if the share prices changes. Campana is undecided whether it will issue new shares or whether it will buy back existing shares in order to deliver the shares on 31 December 2014. Campana's share price for each $1 ordinary share was $18.60 on 1 January 2013 and $20.20 on 31 December 2013. An appropriate discount rate for use if necessary is 5% per annum. (5 marks) (b) Due to the economic downturn, to boost housing sales, Campana offered customers for its residential properties a new option during the ended 31 December 2013. Under the terms of the arrangement, customers pay for the full price of the house as normal, but within the contract there is an option of a refund which customers can exercise on 31 December 2015 if they choose to do so. The refund would amount to the price paid for the house less rental payments (at a pre-agreed rate). The aim of the arrangement is to encourage house buyers to purchase, knowing that they can get out of the contract should house prices fall. Campana expects house prices to rise by 31 December 2015. Even if house prices fall, Campana expects few customers to exercise the option as they will be settled in their new home. (7 marks) Explain how the above transactions should be presented and accounted for in Campana's financial statements for the year ended 31 December 2013 in so far as the information provided permits, showing relevant calculations where appropriate. Notes to the financial statements are not required. (Total: 12 marks) ICAEW\DIPLOMA IN IFRSs\Mar14 Page 7 of 9

4. Pointer is a listed group reporting under IFRSs. At the beginning of the current accounting period, Pointer had one subsidiary, Solita, a private company. The following show the draft statements of financial position the two companies as at 31 December 2013: Draft statements of financial position as at 31 December 2013 Pointer Solita ASSETS Non-current assets Property, plant & equipment 360,400 77,400 Investment in Solita 10,900 - Intangible assets 18,000 6,400 389,300 83,800 Current assets 131,400 20,600 520,700 104,400 Notes: Equity Share capital ($1 ordinary shares) 100,000 20,000 Share premium 84,000 8,600 Retained earnings 132,800 37,800 Investment in equity instruments reserve (re Solita) 13,900 Revaluation surplus 64,000 9,600 394,700 76,000 Liabilities 126,000 28,400 520,700 104,400 (1) On 31 August 2013, Pointer sold 12 million of its shares in Solita. Pointer retained significant influence over Solita after the disposal. The sale proceeds of $51 million have been recorded in current assets in Pointer's financial statements above and credited to the 'Investment in Solita' line. No other adjustments have been made in respect of the disposal. The fair value of the remaining investment on 31 August 2013 was $17 million. (2) Pointer originally purchased 16 million ordinary shares of Solita, on 1 January 2010 for $48 million. At that date, the carrying amount of the equity of Solita was as follows: Share capital 20,000 Share premium 8,600 Retained earnings 16,500 Revaluation surplus 5,400 50,500 Solita has not issued any shares since Pointer acquired its investment. ICAEW\DIPLOMA IN IFRSs\Mar14 Page 8 of 9

(3) The fair value of Solita's net assets at the date of acquisition was higher than their carrying amount due to the following items: Brands not recognised in Solita's own financial statements 2,700 Excess of market value over the carrying amount of inventories 1,400 Contingent liability (best estimate of fair value) (500) The brands had an average remaining useful life of six years at 1 January 2010 (and no residual value). The inventories were sold later in that year. The contingent liability related to a court case which was not considered a probable loss at the date Pointer acquired Solita and so it was not included as a provision in Solita's own financial statements. In the event, Solita lost the case in 2011 and had to pay $0.9 million in damages and court costs. (4) Pointer elected to measure the non-controlling interests in Solita on 1 January 2010 at their fair value of $11 million. In Pointer's separate financial statements, the investment in Solita was held at fair value through other comprehensive income. Gains on the investment in Solita of $13.9 million have been recognised in Pointer's other comprehensive income in its separate financial statements since Solita was acquired, up to 31 December 2012. No changes have been recorded in the current year ended 31 December 2013. (5) Solita's total comprehensive income for the year ended 31 December 2013 was made up as follows: Profit for the year 5,700 Other comprehensive income: Gain on property revaluation, net of tax 2,400 8,100 The income, expenses and revaluation gains of Solita accrued evenly over each accounting year. No dividends were paid by Solita in 2013. Prepare the consolidated statement of financial position of the Pointer Group (as a consolidation schedule) as at 31 December 2013. (Total: 27 marks) Notes: Ignore any deferred tax effect of adjustments. Work to the nearest $1,000. ICAEW\DIPLOMA IN IFRSs\Mar14 Page 9 of 9