Examiners commentaries 2015

Examiners commentaries 2015 AC3091 Financial reporting Important note This commentary reflects the examination and assessment arrangements for this course in the academic year 2014 15. The format and structure of the examination may change in future years, and any such changes will be publicised on the virtual learning environment (VLE). Information about the subject guide and the Essential reading references Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2012). You should always attempt to use the most recent edition of any Essential reading textbook, even if the commentary and/or online reading list and/or subject guide refers to an earlier edition. If different editions of Essential reading are listed, please check the VLE for reading supplements if none are available, please use the contents list and index of the new edition to find the relevant section. General remarks Learning outcomes At the end of this course, and having completed the Essential reading and activities, you should be able to: explain and apply a number of theoretical approaches to financial accounting record and analyse data prepare financial statements under alternative accounting conventions describe a number of regulatory issues relating to financial accounting critically evaluate theories and practices of, and other matters relating to, financial accounting. What are the Examiners looking for? The combined questions in Section A will require you to prepare calculations on a variety of topics as well as show a critical grasp of the theories underlying the techniques. To do well, you need to be able both to explain and evaluate the theories and prepare a range of financial statements and calculations. For quantitative parts of questions, Examiners are looking for the accurate preparation of financial statements that follow generally accepted formats with clear headings and accurate application of accounting techniques to specific areas within financial reporting. Workings should always be clearly provided. Written components of combined questions require clear and coherent explanations of theories, techniques and practices. You must critically evaluate theories and practices. 1

AC3091 Financial reporting Good answers to essay-based questions in Section B will be structured coherently and logically. They should include an introduction, a main body and conclusion, and cover all parts of the question. Typically, an essay-based question will require an explanation of an issue within financial reporting and a critical analysis of the issue. Explanations should be clear and include a discussion of key definitions, with examples if appropriate. The analysis should show critical awareness of both sides of an argument or the application of a theory or concept to financial reporting, with an assessment of its appropriateness to financial reporting. Planning your time in the examination All questions in the examination paper carry equal marks and equal time should be devoted to each question. It is important that you attempt four questions and all parts of each question you answer. Marks for each section are shown and should be used to guide your work and time management. Where questions are in parts, you should avoid excessively long answers to some parts and missing out other parts. Key steps to improvement You can enhance your performance by improving the presentation of your work, providing clear workings, answering the required number of questions and attempting all sections of a question. Often candidates seem to focus attention on the preparation of financial statements and the financial calculations without being able to explain, discuss and evaluate the theories and practices central to financial reporting. 2

Examination revision strategy Many candidates are disappointed to find that their examination performance is poorer than they expected. This may be due to a number of reasons. The Examiners commentaries suggest ways of addressing common problems and improving your performance. One particular failing is question spotting, that is, confining your examination preparation to a few questions and/or topics which have come up in past papers for the course. This can have serious consequences. We recognise that candidates may not cover all topics in the syllabus in the same depth, but you need to be aware that examiners are free to set questions on any aspect of the syllabus. This means that you need to study enough of the syllabus to enable you to answer the required number of examination questions. The syllabus can be found in the Course information sheet in the section of the VLE dedicated to each course. You should read the syllabus carefully and ensure that you cover sufficient material in preparation for the examination. Examiners will vary the topics and questions from year to year and may well set questions that have not appeared in past papers. Examination papers may legitimately include questions on any topic in the syllabus. So, although past papers can be helpful during your revision, you cannot assume that topics or specific questions that have come up in past examinations will occur again. If you rely on a question-spotting strategy, it is likely you will find yourself in difficulties when you sit the examination. We strongly advise you not to adopt this strategy. 3

AC3091 Financial reporting Examiners commentaries 2015 AC3091 Financial reporting Zone A Important note This commentary reflects the examination and assessment arrangements for this course in the academic year 2014 15. The format and structure of the examination may change in future years, and any such changes will be publicised on the virtual learning environment (VLE). Information about the subject guide and the Essential reading references Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2012). You should always attempt to use the most recent edition of any Essential reading textbook, even if the commentary and/or online reading list and/or subject guide refers to an earlier edition. If different editions of Essential reading are listed, please check the VLE for reading supplements if none are available, please use the contents list and index of the new edition to find the relevant section. Comments on specific questions Candidates should answer FOUR of the following questions: ONE from Section A, ONE from Section B and TWO further questions from either section. All questions carry equal marks. Section A Answer one question and no more than two further questions from this section. Question 1 The statements of financial position as at 31 December 2014 and the statements of comprehensive income for the year ended 31 December 2014 for Tea Plc, Coffee Ltd and Juice Ltd are given as follows: [For the full version of this question, please refer to the examination paper.] Subject guide, Chapter 5. International financial reporting and analysis, 5th edition, Chapters 25 28. You need to prepare the statement of financial position and statement of comprehensive income as follows giving full workings. Please note that there is some choice in the presentation of the statement of comprehensive income for profit attributable to H and retained profits brought forward and carried forward. 4

Statement of financial position Workings 000 Non current assets 1,100,000 200 + 900 Investments 400,000 1,100 400 300 Goodwill 160,000 Share in A 365,000 Inventories 280,000 100 + 200 20 Inter-company from A 5,000 Management fee 40,000 Cash 355,000 Total assets 2,705,000 Share capital 200,000 Retained earnings 1,171,000 NCI 104,000 Trade payables 1,230,000 Capital, reserves and liabilities 2,705,000 Statement of comprehensive income Workings 000 Revenue 1,500,000 900 + 700 100 Cost of sales (420,000) 200 + 300 00 + 20 Gross profit 1,080,000 Operating expenses (250,000) 90 + 160 Share in A 10,000 25% * (290 10 40) 50 Management fee from A 40,000 Impairment (40,000) Profit before tax 840,000 Tax (315,000) 240 + 70 + 0.25 * 20 Profit after tax 525,000 Profit attributable to shareholders 509,000 NCI 16,000 20% * (170 20 70) Profit after tax 525,000 Statement of changes in equity Retained profit bfwd 662,000 450 + 80% * (260 70) + 25% * (400 160) Profit attributable to shareholders 509,000 Retained profit cfwd 1,171,000 Alternative presentations for figures such as goodwill and share in A are acceptable. Key workings ( 000) Goodwill Shares in S 400 80% * 250 = 200 Shares in A 300 25% * 200 = 250 Goodwill of S impairment = 200,000 40,000 = 160,000 5

AC3091 Financial reporting Reserves table ( 000) H S A Retained earnings 820 430 670 Provision for unrealised profit (20) (10) Management fee 110 (70) (40) Revised retained earnings 930 340 620 Share capital 200 80 40 Revaluation reserves 100 Revised equity 1,130 520 660 Retained earnings= 930 + 80% * (340 70) + 25% * (620 160) 90 = 930 + 216 + 115 90 = 1,171 Non-controlling interest = 20% * 520 = 104 share in A = 300 + 25% * (620 160) 50 = 365 Question 2 Answer all parts of the question. a. Lid Plc is considering whether to (i) issue share capital of 600,000 ( 1 nominal value shares) or (ii) issue 300,000 ( 1 nominal value shares) and raise 300,000 from a long term loan with an interest rate of 5% per annum. The future is uncertain and if Lid Plc has a good year, profit before interest and tax will be 200,000 but if it has a poor year, profit before interest and tax will be 40,000. Required: Calculate profit after tax and earnings per share in both scenarios and comment on your results. Assume the tax rate is 35%. (8 marks) Subject guide, Chapter 12. International financial reporting and analysis, 5th edition, Chapters 26 27. Share capital Good Bad Profit before interest 200,000 40,000 Tax (70,000) (14,000) Profit after tax 130,000 26,000 Earnings per share 0.22 0.04 Share capital + debentures Profit before interest and tax 200,000 40,000 Interest (15,000) (15,000) Profit before tax 185,000 25,000 Tax (64,750) (8,750) Profit after tax 120,250 16,250 Earnings per share 0.40 0.05 Comments should relate to the figures you have calculated and discuss the impact of introducing debt into the company on the ratios. 6

b. Define ordinary shares, preference shares, share premium and debentures. Discuss the permissible uses for the share premium account. (5 marks) Subject guide, Chapter 10. International financial reporting and analysis, 5th edition, Chapters 16 18. Your answer should clearly define the terms and identify appropriate uses of the share premium account. c. Define LIFO (last in first out) and FIFO (first in and first out) in relation to inventory valuations. Discuss the impact on cost of sales and closing inventory if a company used the LIFO method for valuing inventory instead of the FIFO method in times of decreasing prices. (5 marks) Subject guide, Chapter 9. International financial reporting and analysis, 5th edition, Chapters 15. You should clearly outline LIFO and FIFO and discuss how the cost of sales and closing inventory would be affected by using the different methods for inventory valuation. You may wish to illustrate your discussion with an example. d. Company D issued 400,000 ordinary shares with a nominal value of 50p for 3.00 each and then issued bonus shares, in respect of all its ordinary shares, on a 4 for 1 basis. Before the share issue and the bonus issue Company D s share capital and reserves were as follows: Ordinary share capital (nominal value 50p) 3,000,000 Ordinary share premium 9,000,000 Preference share capital 4,400,000 Retained profits 96,000,000 Total capital and reserves 112,400,000 Required: i. What are bonus issues and rights issues? (2 marks) ii. Show the capital and reserves of Company D after the share issues. (5 marks) Subject guide, Chapter 10. International financial reporting and analysis, 5th edition, Chapters 16 18. You must clearly define bonus and rights issues. The revised reserves after the transactions entered into by the company are as follows: 7

AC3091 Financial reporting Initial reserves After share issue After bonus issue Ordinary shares 3,000,000 3,200,000 16,000,000 Share premium 9,000,000 10,000,000 0 Preference share capital 4,400,000 4,400,000 4,400,000 Retained profits 96,000,000 96,000,000 93,200,000 112,400,000 113,600,000 113,600,000 Question 3 Cal Ltd has decided in future to account for assets on a current value basis, using deprival value of the assets as the definition of current value. The table and notes below give management estimates relating to three of the non-current assets owned by the company: [For the full version of this question, please refer to the examination paper.] Subject guide, Chapters 3 and 4. International financial reporting and analysis, 5th edition, Chapters 4, 5, 6 and 7. a. You should provide a brief definition of deprival value, perhaps illustrating this with an appropriate example. You must discuss both advantages and disadvantages of the concept for users of financial statements, covering both in detail. You need to discuss a range of advantages and disadvantages and not just focus on one or two. You should avoid preparing brief lists in your answer as essay style is required. b. Asset 1 Present value (PV) Rent saved = 34,000 Less maintenance (20,000) 14,000 Present value at perpetuity at 10% per annum = 14,000/.1 = 140,000 Replacement cost (RC) = 180,000 Net realisable value (NRV) = 120,000 Net present value (NPV) = 140,000 retain asset since worth more in use than in selling deprival value = net present value = 140,000 since net present value is lower than replacement cost Asset 2 Present value Annual contribution in service = 60,000 Present value of 10 year annuity at 10% = 60,000 * 6.1446 368,676 Terminal realisation value = 150,000 Present value of terminal value = 150,000 * 0.3855 57,825 Present value of future contribution in use = 368,676 + 57,825 426,501 Replacement cost = 375,000 8

Net realisable value = 360,000 Present value = 426,501 Present value > Net realisable value, therefore keep asset Present value >Replacement cost, therefore deprival value = RC = 375,000 Asset 3 Annual contribution in service = 90,000 Present value = 90,000 * 3.7908 341,172 Terminal value 150,000 Present value of terminal value = 150,000 * 0.6209 93,135 Present value of future contribution = 341,172 + 93,135 434,307 Replacement cost = 555,000 Net realisable value = 510,000 Net present value= 434,307 =>deprival value = net realisable value = 510,000 Therefore, sell asset since net realisable higher than net present value and net realisable value lower than RC. Question 4 i. Pat Plc bought a non-current asset denominated in the currency imps. The non-current asset cost 30,000 imps on 1 August 2013 and on this date the exchange rate was 1:4 imps. Pat Plc has a December year end and the exchange rate on 31 December 2013 was 1:6 imps. Pat Plc paid for the asset on 31 January 2014 when the exchange rate was 1:2 imps. ii. Pat Plc raised a 3 year loan of 1,000,000 rolls on 1 January 2013. Rolls are a foreign currency. The exchange rates were 1:5 rolls on 1 January 2013 1:6 rolls on 31 December 2013 and 1:4 rolls on 31 December 2014. [For the full version of this question, please refer to the examination paper.] Subject guide, Chapter 6. International financial reporting and analysis, 5th edition, Chapter 29. a. You should discuss when the two different methods should be used with reference to the functional currency and type of subsidiary. Your answer should include a discussion of the definition of functional currency, identifying the different factors that can determine the functional currency. You need to provide a clear comparison of the two methods, identifying the differences in a range of areas including the exchange rates used, when the methods should be used, the treatment of the foreign exchange reserve and the calculation and translation of goodwill in the consolidated financial statements. You also need to discuss the advantages and disadvantages of each of the methods. You should avoid brief lists and comments, instead use an essay style in this part of the question. 9

AC3091 Financial reporting b (i) 1 August 2013 non current asset = 30,000/4 = 7,500 creditor = 30,000/4 = 7,500 31st December 2013 non current asset = 7,500 creditor = 30,000/6 = 5,000 profit in income statement = 2,500 31st January 2014 in accounts for 31st December 2014 non current asset = 7,500 creditor repaid = 30,000/2 = 15,000 loss in income statement = (10,000) c (ii) 1 January 2013 loan = 1,000,000/5 = 200,000 year end 31st December 2013 loan 1,000,000 / 6 = 166,666 gain of 33,334 to income statement year end 31st December 2014 loan = 1,000,000/4 = 250,000 loss of 83,334 to income statement Section B Answer one question and no more than two further questions from this section. Question 5 Either: Discuss the need for, and critically assess, conceptual frameworks for financial reporting. Subject guide, Chapter 2. International financial reporting and analysis, 5th edition, Chapter 8. For this question you need to briefly define a conceptual framework and summarise the main contents of a conceptual framework. You may want to illustrate this with reference to a conceptual framework of your choice; for example, the IASB conceptual framework, the UK statement of principles or the FASB conceptual framework. You need to discuss the reasons why a conceptual framework was required in the 1970 s and this discussion should include issues in relation to: the accounting regulatory environment in the 1970 s; the accounting choice available; the credibility of the profession; and the potential role of the Government. A good answer will cover as many points as possible. You should also discuss a range of advantages and disadvantages of conceptual frameworks, and not just focus on one or two points. 10

Your essay should include an introduction, main body and conclusion and you need to link the issues you discuss. You should avoid just briefly listing points. Your answer should address all parts of the question and not just focus on one element of the question. Or: Compare and contrast current purchasing power accounting and current value accounting. Critically assess these two methods and discuss the impact of the different methods on financial statements. Subject guide, Chapter 4. International financial reporting and analysis, 5th edition, Chapters 5, 6 and 7. In your answer you should provide an explanation of both CPP and CCA, perhaps illustrating each of the methods with an example. Both methods should be compared and areas of comparison may include asset valuations, capital maintenance concepts, which indices to use, net monetary working capital adjustment in CPP and realised/unrealised reserves in CCA. Your answer should include a detailed critical assessment of both methods, including a range of advantages and disadvantages for each method. Finally, you need to discuss the impact of each method on the financial statement; for example, in relation to impact on profits, asset valuations, inventory valuations and capital, tax implications and the ability to continue operations. A good answer will cover a wide range of issues. The essay should include an introduction, main body and conclusion and you need to link the issues you discuss. You should avoid just briefly listing points. Your answer should address all parts of the question and not just focus on one element of the question. Question 6 Either: Discuss the concepts of substance over form, off balance sheet finance and the impact of these concepts on financial statements. Illustrate your answers with three examples. Subject guide, Chapter 7. International financial reporting and analysis, 5th edition, Chapter 12. You need to discuss the concepts of substance over form and off balance sheet finance. You need to give three examples illustrating these concepts and these may include leases, quasi-subsidiaries, sale, consignment stock, debt factoring, derivatives and securitisation. Other examples are also acceptable. For each example you need to outline the transaction and give full and clear explanations of the application of off balance sheet finance and substance over form. For all three examples you also need to discuss the impact on the financial statements, debt and risk and on key ratios. 11

AC3091 Financial reporting Your essay should include an introduction, main body and conclusion and you need to link the issues you discuss. You should avoid just briefly listing points. Your answer should address all parts of the question and not just focus on one element of the question. Or: Define goodwill and discuss how goodwill should be accounted for. Discuss the main issues that arise when accounting for goodwill. Subject guide, Chapter 8. International financial reporting and analysis, 5th edition, Chapter 13. You need to provide a clear discussion and definition of goodwill including purchased and internally generated goodwill and positive and negative goodwill. You also need to discuss the different accounting treatments for goodwill including capitalisation and impairment review, capitalising and amortising over useful economic life, writing off to the income statement, writing off to reserves and the dangling debt method. You need to discuss a range of issues that lead to goodwill being a complicated asset to account for and these issues may include: the characteristics and nature of goodwill the assumptions behind accounting for goodwill how to determine current value in goodwill calculations the different accounting concepts that may be applied such as relevance, reliability, prudence and matching the different accounting treatments that have been proposed and used for accounting for goodwill what the nature of the goodwill asset is who controls the right to benefit from goodwill what the cost of acquiring asset is does goodwill have a finite useful economic life how should asset be amortised, if at all should goodwill be recorded at current value. You may also discuss the impact of goodwill and its different accounting treatments on financial statements and key ratios and discuss different accounting standards in this area. Your essay should include an introduction, main body and conclusion and you need to link the issues you discuss. You should avoid just briefly listing points. Your answer should address all parts of the question and not just focus on one element of the question. 12

Compound interest factors over n periods at rate i per period Table 1: Present value factors To determine the present value of a single payment of 1 received n periods from the present at a constant discount rate of x% per period. Periods 5% 6% 7% 8% 9% 10% 12% 13% 15% 1 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929 0.8850 0.8696 2 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.7972 0.7831 0.7561 3 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7118 0.6931 0.6575 4 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6355 0.6133 0.5718 5 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5674 0.5428 0.4972 6 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5066 0.4803 0.4323 7 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4523 0.4251 0.3759 8 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4039 0.3762 0.3269 9 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3606 0.3329 0.2843 10 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3220 0.2946 0.2472 11 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.2875 0.2607 0.2149 12 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2567 0.2307 0.1869 13 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897 0.2292 0.2042 0.1625 14 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633 0.2046 0.1807 0.1413 15 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.1827 0.1599 0.1229 16 0.4581 0.3936 0.3387 0.2919 0.2519 0.2176 0.1631 0.1415 0.1069 17 0.4363 0.3714 0.3166 0.2703 0.2311 0.1978 0.1456 0.1252 0.0929 18 0.4155 0.3503 0.2959 0.2502 0.2120 0.1799 0.1300 0.1108 0.0808 19 0.3957 0.3305 0.2765 0.2317 0.1945 0.1635 0.1161 0.0981 0.0703 20 0.3769 0.3118 0.2584 0.2145 0.1784 0.1486 0.1037 0.0868 0.0611 13

AC3091 Financial reporting Table 2: Cumulative present value factors ( annuity factors ) The table gives the present value of n annual payments of 1 received for the next n years with a constant discount rate of x% per year. For example, with a discount rate of 8% and with six annual payments of 1 the present value is 4.6229 Periods 5% 6% 7% 8% 9% 10% 12% 13% 15% 1 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929 0.8850 0.8696 2 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.6901 1.6681 1.6257 3 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4018 2.3612 2.2832 4 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.0373 2.9745 2.8550 5 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6048 3.5172 3.3522 6 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.1114 3.9975 3.7845 7 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.5638 4.4226 4.1604 8 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 4.9676 4.7988 4.4873 9 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.3282 5.1317 4.7716 10 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.6502 5.4262 5.0188 11 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951 5.9377 5.6869 5.2337 12 8.8633 8.3838 7.9427 7.5361 7.1607 6.8137 6.1944 5.9176 5.4206 13 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034 6.4235 6.1218 5.5831 14 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667 6.6282 6.3025 5.7245 15 10.3797 9.7122 9.1079 8.5595 8.0607 7.6061 6.8109 6.4624 5.8474 16 10.8378 10.1059 9.4466 8.8514 8.3126 7.8237 6.9740 6.6039 5.9542 17 11.2741 10.4773 9.7632 9.1216 8.5436 8.0216 7.1196 6.7291 6.0472 18 11.6896 10.8276 10.0591 9.3719 8.7556 8.2014 7.2497 6.8399 6.1280 19 12.0853 11.1581 10.3356 9.6036 8.9501 8.3649 7.3658 6.9380 6.1982 20 12.4622 11.4699 10.5940 9.8181 9.1285 8.5136 7.4694 7.0248 6.2593 14

Examiners commentaries 2015 AC3091 Financial reporting Zone B Important note This commentary reflects the examination and assessment arrangements for this course in the academic year 2014 15. The format and structure of the examination may change in future years, and any such changes will be publicised on the virtual learning environment (VLE). Information about the subject guide and the Essential reading references Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2012). You should always attempt to use the most recent edition of any Essential reading textbook, even if the commentary and/or online reading list and/or subject guide refers to an earlier edition. If different editions of Essential reading are listed, please check the VLE for reading supplements if none are available, please use the contents list and index of the new edition to find the relevant section. Comments on specific questions Candidates should answer FOUR of the following questions: ONE from Section A, ONE from Section B and TWO further questions from either section. All questions carry equal marks. Section A Answer one question and no more than two further questions from this section. Question 1 The statements of financial position as at 31 December 2014 and the statements of comprehensive income for the year ended 31 December 2014 for Brown Plc, Red Ltd and White Ltd are given as follows: [For the full version of this question, please refer to the examination paper.] Subject guide, Chapter 5. International financial reporting and analysis, 5th edition, Chapters 25 28. You need to prepare the statement of financial position and statement of comprehensive income as follows giving full workings. Please note that there is some choice in the presentation of the statement of comprehensive income for profit attributable to H and retained profits brought forward and carried forward. 15

AC3091 Financial reporting Statement of financial position Workings 000 Non current assets 4,400,000 800 + 3,600 Investments 1,600,000 4,400 1,600 1,200 Goodwill 560,000 Share in A 1,560,000 Inventories 1,120,000 400 + 800 80 Inter-company from A 20,000 Management fee 160,000 Cash 1,420,000 10,840,000 Share capital 800,000 Retained earnings 4,912,000 NCI 208,000 Trade payables 4,920,000 10,840,000 Statement of comprehensive income Revenue 6,000,000 3,600 + 2,800 400 Cost of sales (1,680,000) 800 + 1,200 400 + 80 Gross profit 4,320,000 Operating expenses (1,000,000) 360 + 640 Share in A 96,000 30% * (1,160 40 160) 192 Management fee from A 160,000 Impairment (140,000) Profit before tax 3,436,000 Tax (1,264,000) 960 + 280 + 0.30 * 80 Profit after tax 2,172,000 Profit attributable to shareholders 2,140,000 NCI 32,000 10% * (680 80 280) Profit after tax 2,172,000 Statement of changes in equity Retained profit bfwd 2,772,000 1,800 + 90% * (1,040 280) + 30% * (1,600 640) Profit attributable to shareholders 2,140,000 Retained profit cfwd 4,912,000 Presentation mark 1 Note alternative calculations and presentations are acceptable for goodwill, share in A, profit attributable to H and retained profit carried forward. 16

Key workings Goodwill Shares in S 1,600,000 90% * 1,000,000 = 700,000 Shares in A 1,200,000 30% * 800,000 = 960,000 Goodwill impairment for S = 700,000 140,000 = 560,000 Impairment for A = 20% * 960,000 = 192,000 Reserves table workings 000 H S A Retained earnings 3,280 1,720 2,680 Provision for unrealised profits (80) (40) Management fee 440 (280) (160) 3,720 1,360 2,480 Revised retained earnings Share capital 800 320 160 Revaluation reserve 400 Revised equity 4,520 2,080 2.640 Retained earnings = 3,720 + 90% * (1,360 280) + 30% * (2,480 640) 332 = 3,720 + 972 + 552 332 = 4,912 Sfp NCI = 10% * 2,080 = 208 Sfp share in A = 1,200 + 30% * (2,480 640) 192 = 1,560 Question 2 Sign Ltd has decided in future to account for assets on a current value basis, using deprival value of the assets as the definition of current value. The table and notes below give management estimates relating to three of the noncurrent assets owned by the company: [For the full version of this question, please refer to the examination paper.] Subject guide, Chapters 3 and 4. International financial reporting and analysis, 5th edition, Chapters 4, 5, 6 and 7. a. You should provide a brief definition of deprival value, perhaps illustrating this with an appropriate example. You must discuss both advantages and disadvantages of the concept for users of financial statements, covering both in detail. You need to discuss a range of advantages and disadvantages and not just focus on one or two. You should avoid preparing brief lists in your answer as an essay style is required. b. Asset 1 Present value (PV) Rent saved = 136,000 Less maintenance (80,000) 56,000 17

AC3091 Financial reporting 18 Present value at perpetuity at 10% per annum = 56,000/.1 = 560,000 Replacement cost (RC) = 720,000 Net realisable value (NRV)= 480,000 Net present value (NPV)= 560,000 retain asset since worth more in use than in selling deprival value = net present value = 560,000 since net present value is lower than replacement cost Asset 2 Present value Annual contribution in service = 240,000 Present value of 10 year annuity at 10% = 240,000 * 6.1446 1,474,704 Terminal realisation value = 600,000 Present value of terminal value = 600000*0.3855 231,300 Present value of future contribution in use = 1,706,004 1,474,704 + 231,300= Replacement cost = 1,500,000, Net realisable value = 1,440,000, Present value = 1,706,004 Present value > net realisable value, therefore keep asset Present value > replacement cost, therefore deprival value = RC = 1,500,000 Asset 3 Annual contribution in service = 360,000 Present value = 360000 * 3.7908 1,364,688 Terminal value 600,000 Present value of terminal value = 600000 * 0.6209 372,540 Present value of future contribution = 1,364,688 + 372,540 1,737,228 Replacement cost = 2,220,000, Net realisable value = 2,040,000 Net present value= 1,737,228 =>deprival value = net realisable value Therefore, sell asset since net realisable higher than net present value and net realisable value lower than RC. Question 3 Answer all parts of the question. a. Outline the main differences between the merger (pooling of interest) and acquisition accounting methods and discuss the reasons why merger accounting has been discontinued. (5 marks) Subject guide, Chapter 5. International financial reporting and analysis, 5th edition, Chapter 24. You need to identify the main differences between the techniques and these may include differences in the treatment of net assets, goodwill, merger reserve, profits and valuation of shares. You also need to provide

a brief outline of why merger (pooling of interest) accounting has been discontinued. b. Discuss the treatment of events after the statement of financial position date under IAS 10 (FRS 21). (5 marks) Subject guide, Chapter 10. International financial reporting and analysis, 5th edition, Chapters 16 18. You need to clearly define post balance sheet events, perhaps illustrating your definition with an appropriate example. You need to discuss the different types of post balance sheet events and how these would be treated in the financial statements. c. You are given the following information: 2014 2013 Gross profit percentage 20% 25% Cost of sales 750,000 1,200,000 Administration and distribution expenses 75,000 300,000 Ordinary share capital 600,000 400,000 Preference share capital 450,000 225,000 Long term loans 150,000 100,000 Retained earnings 900,000 700,000 Required: Calculate the net profit margin and the gearing ratio for 2014 and 2013. Discuss two possible reasons for the changes seen in the net profit margin and discuss the problems associated with increasing levels of debt within companies. (8 marks) Subject guide, Chapter 12. International financial reporting and analysis, 5th edition, Chapters 26 27. You need to define the ratios. The calculations are given as follows: Sales = 750,000/0.8 = 937,500 Net profit = 937,500 750,000 75,000 = 112,500 Net profit % = 112.5/937.5 * 100 =12% Gearing = 600/1500 = 40% 2013 Sales = 1,200,000/0.75 =1,600,000 Net profit = 1,600,000 1200,000 300,000 = 100,000 Net profit % = 100/1600 * 100 = 6.25 Gearing = 325/1100 = 29.5% Alternative calculations of gearing are acceptable. You need to present possible reasons for the changes seen in both ratios. 19

AC3091 Financial reporting d. Mint Ltd acquired a building on 1 January 2011 for 400,000. The depreciation policy for Mint Ltd for buildings is the straight line method with a rate of 10% per annum. The useful economic life of the building remains unchanged as at the end of 2014. The valuations of the building are given as follows: [For the full version of this question, please refer to the examination paper.] Subject guide, Chapter 7. International financial reporting and analysis, 5th edition, Chapter 12. The non current asset would be accounted for as follows under the different scenarios: 20 Fair value model Each year at Fair value with revaluations in income statement 2011 revaluation = 100,000, sfp = 500,000 2012 revaluation = 150,000, SFP = 650,000 2013 = revaluation = 350,000 sfp = 1,000,000 2014 revaluation = 0, sfp = 1,000,000 Cost model with revaluation in 2014 Cost 400,000 Accumulated depreciation ( 120,000) Net book value at revaluation 280,000 Revaluation reserve 720, 000 Revalued asset depreciated over remaining useful economic life Depreciation = 1,000,000/7 = 142,857 2011 depreciation = 40,000 net book value = 360,000 2012 depreciation = 40,000 net book value = 320,000 2013 depreciation = 40,000, net book value = 280,000 2014 revaluation reserve = 720,000 depreciation = 142,857 net book value = 857,143 Question 4 Bob Plc has the following construction contract, contract Y, under way. The position on the contract as at 31 December 2013 and 2014 is given as follows: [For the full version of this question, please refer to the examination paper.] Subject guide, Chapter 9. International financial reporting and analysis, 5th edition, Chapter 15. a. You need to define construction contracts, perhaps illustrating your definition with an appropriate example. You need to define the key accounting concepts of reliability, relevance, prudence and matching and discuss how these concepts are

applied to the accounting of construction concepts. This part of the question needs to be answered in essay style, avoiding lists and bullet points. b. Contract Y Is project profitable? 2013 2014 000 000 Contract price 6,000 6,000 Costs to date (800) (6,160) Future costs (3,600) (5,040) Expected profit/loss on contract 1,600 (5,200) Not reliable in 2013 2013 Costs = 800,000 Sales = 800,000 to give 0 profit/loss on contract since not reliable 2014 Cost method to estimate completion = costs to date/total costs of project = 6,160/11,200 = 55% complete Foreseeable loss needs to be provided Cumulative sales = 0.55 * 6,000,000 = 3,300,000 Cumulative cost of sales = 0.55 * 11,200,000 = 6,160,000 Provision for foreseeable loss = 2,340,000 Income statement 2013 2014 Cumulative 000 000 000 Sales 800 2,500 3,300 Cost of sales (800) (5,360) (6,160) Provision for foreseeable loss (2,340) (2,340) Loss in income statement 0 (5,200) (5,200) SFP WIP Costs to date (WIP) 800 6,160 Recognised loss 0 (5,200) Progress billings 0 (2,880) Gross amounts due to/from customer 800 (1,920) Construction payables = progress billings payments on account in 2014 = 2,880 3,600 (720) 21

AC3091 Financial reporting 22 Section B Answer one question and no more than two further questions from this section. Question 5 Either: Discuss, and critically assess, the accountants and economists approach to income and capital. What are the implications of Hicks s concepts for financial reporting? Subject guide, Chapter 3. International financial reporting and analysis, 5th edition, Chapter 4. You must discuss both the accountant s and the economist s approach to income and capital. For the accountant s approach, you must explain how they measure income and capital, illustrating your explanation with reference to financial statements. For the economist s approach, you must discuss the key definitions of Hicks s measures of income and capital, giving explanations and examples of these as well as referring to the equations. You must avoid stating the equations without clear explanations and examples. You must also discuss a wide range of advantages and limitations of both the accountant s approach and the different Hicks s measures of income and capital under the economist s approach. Finally, you must discuss the impact of Hicks s concepts for financial reporting, both positive and negative. Your essay should include an introduction, main body and conclusion and you need to link the issues you discuss. You should avoid just briefly listing points. Your answer should address all parts of the question and not just focus on one element of the question. Or Discuss the need for standard setting in the 1970 s in the UK and critically assess the standard setting system set up in the 1970 s. Critically assess how standard setting has developed over time. Subject guide, Chapter 1. International financial reporting and analysis, 5th edition, Chapter 1. You must identify the reasons for standard setting in the 1970 s in the UK together with an assessment of its advantages and disadvantages. These may include financial scandals, choice available in financial reporting, the regulatory environment, the credibility of the accounting profession, improvement in accounting, the potential involvement of government, enforcement issues, quality of standards and the process for the issuing of standards. Other issues too may be discussed. Your essay should also address the changes to the standard setting system over time and discuss the current standard setting system based on IFRS s. Your answer should include a discussion of some of the advantages and limitations of this latest standard setting system.

The essay should include an introduction, main body and conclusion and you need to link the issues you discuss. You should avoid just briefly listing points. Your answer should address all parts of the question and not just focus on one element of the question. Question 6 Either Compare, contrast and critically assess the closing rate and temporal methods for accounting for overseas entities. What impact do the different methods make on financial reports? Subject guide, Chapter 6. International financial reporting and analysis, 5th edition, Chapter 29. You must explain both the closing rate method and the temporal method, possibly illustrating your explanation with appropriate examples. The methods should be compared including when the methods should be used, the differences in functional currency, where the foreign exchange reserves are presented, how the foreign exchange differences arise and the calculation and translation of goodwill in the consolidated financial statements. The advantages and disadvantages of both methods must also be discussed. Finally the impact on the financial statements and on key ratios of each of the methods needs to be addressed. The essay should include an introduction, main body and conclusion and you need to link the issues you discuss. You should avoid just briefly listing points. Your answer should address all parts of the question and not just focus on one element of the question. Or What are intangible assets? Discuss, and critically assess, IAS 38 in relation to intangible assets. Illustrate your answer with two examples. Subject guide, Chapter 8. International financial reporting and analysis, 5th edition, Chapter 13. You must define intangible assets in general and discuss the general treatment of such assets, according to IAS 38. You must provide a summary of the main provisions of IAS 38 and discuss the advantages and disadvantages of IAS 38. Your answer should discuss two intangibles in detail; including defining these assets; a discussion of their accounting treatment under IAS 38; and any issues or inconsistencies arising in the accounting of the intangible assets you have chosen; as well as the impact the accounting treatment has on the financial statements. Intangible assets that you may choose include goodwill, research and development, and brands. Other examples are also acceptable. The critical assessment of IAS 38 should include a general critique of the standard and a critique of the standard as applied to the two intangibles you have chosen to discuss. The essay should include an introduction, main body and conclusion and you need to link the issues you discuss. You should avoid just briefly listing points. Your answer should address all parts of the question and not just focus on one element of the question. 23

AC3091 Financial reporting Compound interest factors over n periods at rate i per period Table 1: Present value factors To determine the present value of a single payment of 1 received n periods from the present at a constant discount rate of x% per period. Periods 5% 6% 7% 8% 9% 10% 12% 13% 15% 1 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929 0.8850 0.8696 2 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.7972 0.7831 0.7561 3 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7118 0.6931 0.6575 4 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6355 0.6133 0.5718 5 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5674 0.5428 0.4972 6 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5066 0.4803 0.4323 7 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4523 0.4251 0.3759 8 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4039 0.3762 0.3269 9 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3606 0.3329 0.2843 10 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3220 0.2946 0.2472 11 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.2875 0.2607 0.2149 12 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2567 0.2307 0.1869 13 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897 0.2292 0.2042 0.1625 14 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633 0.2046 0.1807 0.1413 15 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.1827 0.1599 0.1229 16 0.4581 0.3936 0.3387 0.2919 0.2519 0.2176 0.1631 0.1415 0.1069 17 0.4363 0.3714 0.3166 0.2703 0.2311 0.1978 0.1456 0.1252 0.0929 18 0.4155 0.3503 0.2959 0.2502 0.2120 0.1799 0.1300 0.1108 0.0808 19 0.3957 0.3305 0.2765 0.2317 0.1945 0.1635 0.1161 0.0981 0.0703 20 0.3769 0.3118 0.2584 0.2145 0.1784 0.1486 0.1037 0.0868 0.0611 24

Table 2: Cumulative present value factors ( annuity factors ) The table gives the present value of n annual payments of 1 received for the next n years with a constant discount rate of x% per year. For example, with a discount rate of 8% and with six annual payments of 1 the present value is 4.6229 Periods 5% 6% 7% 8% 9% 10% 12% 13% 15% 1 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929 0.8850 0.8696 2 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.6901 1.6681 1.6257 3 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4018 2.3612 2.2832 4 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.0373 2.9745 2.8550 5 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6048 3.5172 3.3522 6 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.1114 3.9975 3.7845 7 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.5638 4.4226 4.1604 8 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 4.9676 4.7988 4.4873 9 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.3282 5.1317 4.7716 10 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.6502 5.4262 5.0188 11 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951 5.9377 5.6869 5.2337 12 8.8633 8.3838 7.9427 7.5361 7.1607 6.8137 6.1944 5.9176 5.4206 13 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034 6.4235 6.1218 5.5831 14 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667 6.6282 6.3025 5.7245 15 10.3797 9.7122 9.1079 8.5595 8.0607 7.6061 6.8109 6.4624 5.8474 16 10.8378 10.1059 9.4466 8.8514 8.3126 7.8237 6.9740 6.6039 5.9542 17 11.2741 10.4773 9.7632 9.1216 8.5436 8.0216 7.1196 6.7291 6.0472 18 11.6896 10.8276 10.0591 9.3719 8.7556 8.2014 7.2497 6.8399 6.1280 19 12.0853 11.1581 10.3356 9.6036 8.9501 8.3649 7.3658 6.9380 6.1982 20 12.4622 11.4699 10.5940 9.8181 9.1285 8.5136 7.4694 7.0248 6.2593 25