19 May 2014 ASSIGNMENT 2 - DIPLOMA IN IFRSs This assignment consists of THREE written test questions (100 marks). Attempt all parts of all three questions. 1. Present your answers to 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 9 June 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 2 - 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\May14
1(a) Xurro Group is a large listed conglomerate with 7 divisions. Each division meets the definition of a separate operating segment. Xurro's draft financial statement figures include amounts for the following divisions reported to the entity's chief operating officer for the year ended 31 December 2013: Division External revenue Internal revenue Profit/ (loss) Total assets $ m $ m $ m $ m Segment A 791 86 556 Segment B 212 11 144 Segment C 210 54 (10) 148 Segment D 474 (4) 303 Segment E 200 14 11 98 Segment F 198 12 151 Segment G (associate) - 4 152 Interdivision items (68) (6) (50) Consolidated figures 2,085 0 104 1,502 Discuss, with relevant calculations, whether each of the divisions must be reported as a separate operating segment in Xurro Group's financial statements for the year ended 31 December 2013. (7 marks) 1(b) Zeppa is preparing its related party disclosures for the year ended 31 December 2013. (i) (ii) Flash owns 80% of Zeppa. Flash charged Zeppa $100,000 for management services during the year, none of which was outstanding at the year end. The transaction was eliminated in the consolidated financial statements of Flash. Karl Ican is the majority shareholder of Zeppa's parent company Flash. Karl Ican had no transactions with Zeppa during the year. (iii) Zeppa purchased consulting services from Natti, a company in which Natalia has a 20% interest. Natalia is the unmarried long-term partner of Ezequiel, Zeppa's finance director, who is also a board member of Natti. The services were purchased at market price. (iv) Zeppa purchased goods from Xenna, a company in which Flash has a 10% shareholding. The finance director of Zeppa is also a director of Xenna. (v) Zeppa sold some surplus investments (at market price) to the pension plan for Flash's (but not Zeppa's) employees. State, with reasons, for the parties mentioned above (Flash, Karl Ican, Natti, Xenna and Flash's pension plan) whether disclosure is or is not required in Zeppa's financial statements for the year ended 31 December 2013 in accordance with IAS 24 Related Party Disclosures. You should assume that shareholdings are equivalent to voting rights for the purpose of determining influence. (5 marks) ICAEW\DIPLOMA IN IFRSs\May14 Page 2 of 11
1(c) A company operates a defined benefit pension plan for its employees. Details of the plan relevant to the year ended 31 December 2013 are as follows: Present value of plan obligations at 31 December 2012 12,200 Present value of plan obligations at 31 December 2013 13,600 Past service cost (effective from 1 January 2013) 300 Current service cost 1,200 Contributions 1,500 Benefits paid 900 Market yield on high quality corporate bonds with a similar term to the plan obligations: At 31 December 2012 5% At 31 December 2013 6% The current service cost accrues and the contributions and benefits are paid evenly over the year. Calculate the remeasurement of plan obligations recognised in other comprehensive income for the year ended 31 December 2013. (7 marks) 1(d) Identify and explain SIX ways that the IFRS for Small and Medium-sized Entities could be improved to bring it more in line with changes made to IFRSs since it was published, while maintaining its simplicity for, and relevance to, smaller entities. (6 marks) 1(e) A company is restructuring its business by closing down a division and selling off its assets. It has approved a detailed a formal plan, and has communicated the fact to employees, customers and suppliers. It expects to have the following costs/(revenues) as a result of the restructuring: $m Training of staff for redeployment elsewhere in the business 2 Salaries of internal solicitors for time spent handling redundancies arising 0.2 as a result of the restructuring Write-down of assets to be sold off to their fair value less costs to sell 3 Expected profit on sale of intellectual property rights (1.3) Penalty to exit a contract that became onerous as a result of the 0.5 restructuring (and which cannot be fulfilled as a result of the restructuring) Operating losses to be incurred between the date of the announcement of 1.8 the restructuring and closure of the division Discuss and calculate how much of the amounts above could be included in a restructuring provision. State the total provision required. (6 marks) ICAEW\DIPLOMA IN IFRSs\May14 Page 3 of 11
1(f) Amber plc is the parent of a group with a number of subsidiaries. All group companies are located in the same country. Amber plc has incurred tax losses of $10 million in the accounting year ended 31 December 2013 (which is the same as the tax year). National tax law allows tax losses to be carried forward for two tax years against future profits of the same trade in the same company or in other group companies where share ownership is 75% or more. Amber plc expects to make losses over the next two years, but expects sufficient profits to be available in its subsidiaries where share ownership is 75% or more to relieve the losses over those two years. Losses cannot be carried back or relieved against current year profits of group companies in the tax regime in which the group operates. No payment is made for the surrender of tax losses between group companies. Amber plc pays tax at 30% and its subsidiaries pay tax at 25%. These rates are not expected to change. Discuss, with relevant calculations, the accounting treatment of the tax losses in the consolidated and separate financial statements of Amber plc the year ended 31 December 2013. (4 marks) (Total: 35 marks) ICAEW\DIPLOMA IN IFRSs\May14 Page 4 of 11
2. Anchor Holdings plc is preparing its financial statements for the year ended 31 December 2013 and has three issues outstanding. (1) Anchor Holdings plc has owned 80% of another company, Eska, for many years and controls its financial and operating policies. On 1 July 2013 the Board of Anchor Holdings plc made the decision to sell a 60% holding in Eska, retaining a 20% holding and significant influence over the financial and operating policies of Eska. The stake in Eska was marketed from 1 July 2013 and by the 31 December 2013 year end a potential buyer had been found. Negotiations were at an advanced stage at that date and Anchor Holdings plc expects the sale to be completed in June 2014. Eska represents 20% of Anchor Group's assets, profits and revenues and has previously been reported as a separate operating segment. (8 marks) (2) Anchor Holdings plc set up a bonus scheme for its own employees with effect from 1 January 2013. Anchor Holdings plc has traditionally had a good record of staff retention, but recently some key individuals have been poached by competitors. Under the terms of the scheme, employees will receive a bonus of 10% of their cumulative salary for the 5 years ending 31 December 2017, payable on 1 January 2018, if they remain in the company's employ until 31 December 2017. The bonus is to be recognised in the financial statements annually on 31 December. Anchor Holdings plc estimated at 1 January 2013 that 90% of its employees would remain in its employ until 31 December 2017 and receive the bonus, although revised that estimate to 85% on 31 December 2013 due to higher than expected departures. Total salaries of employees in the bonus scheme were $42 million for the year ended 31 December 2013 before taking into account any employee that left and did not earn their salary for the whole year. Salaries are estimated to rise at 3% annually after that date. An appropriate annual discount rate for use where necessary is 5%. Anchor Holdings plc has set aside $3 million of specific funds to cover the anticipated payments relating to the current period, however, these are not legally separated from the company. The bonus will be tax deductible in Anchor Holdings plc's financial statements only when paid on 1 January 2018. Anchor pays tax at 30% and this rate is unlikely to change. (12 marks) Advise the directors of Anchor Holdings plc how each of the above items should be treated in the Anchor Holdings plc's consolidated financial statements for the year ended 31 December 2013, including relevant calculations where appropriate. Calculations should be rounded to the nearest $1,000. (Total: 20 marks) ICAEW\DIPLOMA IN IFRSs\May14 Page 5 of 11
3. Nito Group consists of a parent, Nito Holdings plc, a number of subsidiaries and an associate. Below are the consolidated financial statements for the year ended 31 December 2013. Nito Holdings plc Consolidated statement of financial position as at 31 December 2013 2012 ASSETS Non-current assets Property, plant and equipment 417,610 465,220 Goodwill 5,610 12,850 Other intangible assets 9,660 8,600 Investment property 22,110 16,110 Investment in associate 36,550 34,650 Investments in equity instruments 14,140 3,570 505,680 541,000 Current assets Inventories 57,800 69,450 Trade receivables 88,460 98,400 Cash and cash equivalents 74,850 1,270 221,110 169,120 Total assets 726,790 710,120 EQUITY AND LIABILITIES Equity attributable to owners of the parent Ordinary share capital ($1 shares) 40,020 39,520 Ordinary share premium 49,660 42,300 Retained earnings 334,961 285,000 Translation of foreign operations 11,200 9,800 Investments in equity instruments reserve 630 420 Defined benefit pension plan reserve 3,600 1,200 Revaluation surplus 52,292 46,200 492,363 424,440 Non-controlling interests 39,118 50,080 531,481 474,520 Non-current liabilities Net defined benefit plan obligation 6,540 9,030 Long-term borrowings 33,449 61,510 Deferred tax 32,480 26,570 Long-term provisions 9,810 8,500 82,279 105,610 Current liabilities Trade payables 88,650 106,200 Short-term borrowings (bank overdraft) 3,130 Current tax payable 23,460 20,660 Short-term provisions 920 113,030 129,990 Total equity and liabilities 726,790 710,120 ICAEW\DIPLOMA IN IFRSs\May14 Page 6 of 11
Nito Holdings plc Consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2013 Continuing operations Revenue 809,630 Cost of sales (480,930) Gross profit 328,700 Distribution costs (85,340) Administrative expenses (154,171) Finance costs (5,299) Share of profit of associate 1,730 Investment income 1,380 Profit before tax 87,000 Income tax expense (26,100) Profit for the year from continuing operations 60,900 Discontinued operations Profit for the year from discontinued operations 17,160 PROFIT FOR THE YEAR 78,060 Other comprehensive income: Items that will not be reclassified to profit or loss: Investment in equity instruments 300 Gains on property revaluation 12,400 Defined benefit pension plans 2,400 Share of gain on property revaluation of associate 520 Income tax relating to items that will not be reclassified (3,810) 11,810 Items that may be reclassified subsequently profit or loss: Exchange differences on translating foreign operations 2,000 Income tax relating to items that may be reclassified (600) 1,400 Other comprehensive income for the year, net of tax 13,210 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 91,270 Profit attributable to: Owners of the parent Profit for the year from continuing operations 55,286 Profit for the year from discontinued operations 14,584 Profit for the year attributable to owners of the parent 69,870 Non-controlling interests Profit for the year from continuing operations 5,614 Profit for the year from discontinued operations 2,576 Profit for the year attributable to non-controlling interests 8,190 78,060 ICAEW\DIPLOMA IN IFRSs\May14 Page 7 of 11
Total comprehensive income attributable to: Owners of the parent Total comprehensive income for the year from continuing operations 67,628 Total comprehensive income for the year from discontinued operations 14,584 Total comprehensive income for the year attributable to owners of the parent 82,212 Non-controlling interests Total comprehensive income for the year from continuing operations 6,482 Total comprehensive income for the year from discontinued operations 2,576 Total comprehensive income for the year attributable to non-controlling interests 9,058 91,270 Notes The consolidated financial statements are correctly stated. The following information is relevant to the preparation of the consolidated statement of cash flows. (i) Nito Holdings plc purchased an 80% shareholding in one of its subsidiaries, Plato, on 1 January 2010 (40 million $1 shares). On 1 July 2013, Nito Holdings plc sold its entire 80% shareholding in Plato for $75 million in cash. The carrying amount of Plato's assets and liabilities in the consolidated financial statements (excluding goodwill and non-controlling interests) at 1 July 2013 was: Property, plant and equipment 76,400 Customer relationships 540 Inventories 10,430 Trade receivables 14,770 Cash and cash equivalents 2,960 Current and deferred tax payable (7,220) Trade payables (15,880) 82,000 The following information related to the original acquisition of Plato on 1 January 2010: Carrying amount of net assets 72,100 Fair value adjustments (customer relationships) 1,800 Non-controlling interests (measured at fair value) 16,060 Consideration transferred 64,240 The customer relationship assets are amortised over a 5-year useful life to a zero residual value. No impairment losses were recognised in respect of Nito Holdings plc's investment in Plato. ICAEW\DIPLOMA IN IFRSs\May14 Page 8 of 11
The profit or loss for the period until sale, and the profit or loss on the sale of the shares of Plato, have been classified as a discontinued operation in the consolidated financial statements. The profit for the year (excluding the profit or loss on sale of the investment) is made up as follows: Profit before tax 18,400 Income tax expense (5,520) Profit for the year 12,880 Plato paid no dividends in the year ended 31 December 2013. There were no other acquisitions or disposals of group companies during the year. All companies in the group use the same accounting policies as those used in the consolidated financial statements. No tax was payable on the profit or loss on sale of the shares in Plato. (ii) (iii) The Group policy is to measure land and buildings using the revaluation model. The land and buildings of the parent and some subsidiaries (excluding Plato) required revaluation during the year. Other than due to the disposal of Plato, there were no other disposals of property, plant and equipment or other intangible assets. The Group makes a transfer from revaluation surplus to retained earnings on disposal of assets. Revaluation surpluses relating to property held by Plato amounted to $2.24 million (net of deferred tax and non-controlling interests) at the date of disposal. Nito Holdings plc owns investment property which it lets to third parties. The company uses the fair value through profit or loss policy. No other group companies own investment property. Both the rental income of $780,000 received and receivable and the change in the property's fair value of $420,000 have been included in 'investment income'. (iv) The investment in equity instruments relates to shares held by Nito Holdings plc (and still held at the year end). There were no disposals during the year, but some purchases were made. The carrying amount is broken down as follows at 31 December 2013 and 31 December 2012: 2013 2012 Investments in equity instruments held at fair value through 1,160 830 profit or loss Investments in equity instruments held at fair value through other comprehensive income 12,980 2,740 14,140 3,570 The investments in equity instruments reserve relates only to investments in equity instruments held at fair value through other comprehensive income. Changes in the fair value of investments in equity instruments held at fair value through profit or loss amounted to gains of $180,000 in the year ended 31 December 2013 and were recognised in 'investment income'. Other than the items mentioned above there were no other items of investment income. ICAEW\DIPLOMA IN IFRSs\May14 Page 9 of 11
(v) Nito Holdings plc made a share issue at market price during the year. There were no other changes in share capital or share premium and no other group companies issued shares during the year. (vi) Other than the transfer mentioned in note (ii) above, the only other changes in retained earnings are profit for the year and dividends paid by Nito Holdings plc. Dividends were also paid by some subsidiaries. (vii) Nito Holdings plc operates a defined benefit pension plan for employees of some group companies. Current and past service costs charged to cost of sales in the year amounted to $4.82 million. Contributions were paid by the company into the pension plan. Net interest on the net pension plan liability of $450,000 was recognised in 'finance costs'. Remeasurements of plan assets and obligations were correctly recognised in other comprehensive income. There were no other items affecting the net pension liability during the year. (viii) Nito Holdings plc handles all finance at a group level. The company issued loan notes on 1 January 2012 at par value of $60 million and paid issued costs of $300,000 to the financial institution that assisted in their placement. The loan notes pay a 2.0% coupon on par value every half year on 30 June and 31 December. The loan notes will be redeemed at a premium and are measured at amortised cost, with an effective semiannual interest rate of 3.5%. The 'long-term borrowings' figure is comprised solely of these loan notes. On 31 December 2013, after the interest for the year had been paid, Nito Holdings plc made a repayment of some of the outstanding loan notes. (ix) The 'long-term provisions' relate to a dismantling provision for a property owned by Nito Holdings plc. Interest of 6% was applied during the year and an adjustment was made at the year end to reflect a change in the estimate of the discounted amount of the dismantling costs. The 'short-term provisions' relate to restructuring costs that met the criteria for recognition at the year end. (x) Expenses charged to profit or loss include: Depreciation expense 24,220 Amortisation of intangible assets 1,720 (xi) The income tax recognised in other comprehensive income relating to items that will not be reclassified is broken down as follows: Deferred tax charge on gain on investment in equity instruments (90) Deferred tax charge on gain on property revaluation (3,720) Deferred tax credit on defined benefit pension plan losses - (3,810) The 'share of profit of associate' and 'share of gain on property revaluation of associate' figures are after-tax figures. ICAEW\DIPLOMA IN IFRSs\May14 Page 10 of 11
(xii) One of Nito Holdings plc's subsidiaries Cerny (in which Nito has a 100% holding), is located abroad and has been retranslated for consolidation purposes. The exchange differences recognised in other comprehensive income are broken down as follows: Property, plant and equipment 1,520 Other intangible assets 220 Inventories 240 Trade receivables 260 Cash and cash equivalents 40 Current and deferred tax payable (80) Trade payables (200) 2,000 There was no goodwill relating to the investment in Cerny at 31 December 2012 or 31 December 2013. Prepare the consolidated statement of cash flows for Nito Holdings plc for the year ended 31 December 2013 (in so far as the information provided allows) using the indirect method. Work to the nearest $1,000. Notes to the statement of cash flows are not required. The reconciliation of profit before tax to cash generated from operations should be presented within the statement of cash flows. (Total: 45 marks) ICAEW\DIPLOMA IN IFRSs\May14 Page 11 of 11