ACCA Paper F7 Financial Reporting December 2014 to June 2015 Interim Assessment Answers To gain maximum benefit, do not refer to these answers until you have completed the interim assessment questions and submitted them for marking.
ACCA F7: FINANCIAL REPORTING Kaplan Financial Limited, 2014 The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing. 2 KAPLAN PUBLISHING
INTERIM ASSESSMENT ANSWERS SECTION A 1 C The total to be capitalised would be the $20 million construction costs plus the present value of the dismantling costs ($5m 1/1.05 20 = $1,884,448), which is $21,884,448. Depreciation would be $21,884,448/20 = $1,094,222 a year. Six months depreciation should be charged, giving $547,111. Also, the discount on the dismantling provision should also be unwound. $1,884,448 5% 6/12 = $47,111 Total expense = $547,111 + $47,111 = $594,222 2 D For an intangible asset to be revalued, an active market must exist. One of the key components for this is that items must be homogenous (identical). Items A and B are specific to Plant and identical items will not exist. Item C cannot be capitalised as an asset as Plant is unable to control the movement of the staff. 3 A An asset will be impaired if its carrying value exceeds its recoverable amount. The recoverable amount is the higher of its value in use and its fair value less costs to sell. 4 A Depreciation should stop on the asset when the asset is classified as held for sale. In this case, depreciation should stop on 1 November 20X6. At this date the asset has been owned for 5 years and 10 months (since January 20X1). As depreciation would be $12,000 a year ($120,000/10 years), accumulated depreciation would be $70,000, making the carrying value $50,000. The asset would be removed from PPE at $50,000 and be held as a non-current asset held for sale at the lower of the carrying value ($50,000) and fair value less costs to sell ($60,000). No profit should be recognised until disposal and therefore the asset should remain at $50,000. 5 B The asset and liability should initially be set up at $862,400. The payment should then be recorded, with interest applied to the remaining balance. The non-current liability should be the figure to the right of the payment in the following year. This shows that after the payment, $515,392 is outstanding, which represents the non-current liability. Year B/fwd Paid Capital o/s Interest 8% C/fwd (6/12) 1 862,400 (200,000) 662,400 52,992 715,392 2 715,392 (200,000) 515,392 41,231 556,623 KAPLAN PUBLISHING 3
ACCA F7: FINANCIAL REPORTING 6 B 7 B 8 D 9 A 10 D 11 D The grant should be recognised on a straight line basis over the three years of employment, at $15,000 a year. Sandstone only received the grant on 1 July, so 6 months must be released, meaning $7,500 is taken to the statement of profit and loss and the remaining $37,500 is held in deferred income. Of the remaining $37,500, $15,000 will be released in a year so is held in current liabilities. This means that $22,500 should be held within noncurrent liabilities. Depreciation should be added back as it is not a cash flow. Proceeds from the sale of noncurrent assets appear under the heading Cash flows from investing activities and are not included as an adjustment to profit in order to reach net cash flows from operating activities. Information's relevance is affected by its materiality. A, B and C are all characteristics contributing to information being a faithful representation of what it purports to represent. Whilst prudence, materiality and measurability are all important within financial statements, they are not enhancing qualitative characteristics of financial information. Due to the suspension of 1 month, the labour and borrowing costs should only be capitalised for 11 months rather than the full year. The total to be capitalised is therefore: Materials: $8,000,000 Labour ($6 million 11/12): $5,500,000 Interest ($600,000 11/12): $550,000 Total: $14,050,000 An entity can initially choose to use either the cost model for assets, or the fair value model permitted per IAS 40. Once a model has been selected, it should be applied to all investment properties which are held. The revaluation model per IAS 16 is not permitted per IAS 40. 4 KAPLAN PUBLISHING
INTERIM ASSESSMENT ANSWERS 12 B 13 C Basic EPS = Earnings/Weighted average number of Ordinary Shares Therefore: 475,000/3,333,333 = 14.3 c The weighted average share calculation is as follows: Date Actual no Period of the year Bonus fraction Weighted ave 1.10.X2 31.1.X3 3,000,000 4/12 1,000,000 1.2.X3 30.9.X3 3,500,000 8/12 2,333,333 Total 3,333,333 The $5,000 costs are going to be incurred regardless, so a provision should be made for these. The $50,000 is possible, so a contingent liability should be included as a disclosure note. 14 D 15 A 16 C $ Current tax 60,000 Less: Overprovision (4,500) Add: Increase in deferred tax (3,200 2,600) 600 56,100 Convertible bond liabilities are valued at the present value of the interest and debt, discounted at a rate of interest for a similar instrument without the option to convert. This is 7% in this scenario. The annual interest is based on the nominal rate of 5%, which is $25,000 annually. Discounted at 7%, the value of the liability is as follows: Time Cashflow DF PV 1 Interest 25,000 0.94 23,500 2 Interest 25,000 0.87 21,750 3 Int and capital 525,000 0.82 430,500 Total 475,750 The first items should remain in inventory as cost as they are for a profitable special order, meaning that the net realisable value will be greater than the cost. The second item has a cost of $12,000 (1,000 $12) but a net realisable value of $9,200 (can sell items for $11,000 less $600 repair work, less $1,200 commission), leading to a write-down of $2,800. Therefore the closing inventory of $500,000 must be reduced by $2,800, making it $497,200. KAPLAN PUBLISHING 5
ACCA F7: FINANCIAL REPORTING 17 D 18 B 19 A 20 B Adjusting events are those which provide evidence of conditions in existence at the year end. The fire did not exist at year end, so does not need adjusting. Whilst the negotiations over the new company purchase were in existence at the year end, there was no control or ownership at 31 December, so this cannot be included. Both of these items are likely to be significant and need disclosing in the financial statements. The final three items all relate to conditions in existence at the year end, and the financial statements will therefore need adjusting to reflect this. The useful life and depreciation methods are both examples of accounting estimates. The move from the cost model to the revaluation model represents a change in accounting policy. Contract price 400,000 Total contract cost (280,000+40,000) (320,000) Estimated total profit 80,000 Stage of completion 280,000/320,000 = 87.5% Profit earned = 80,000 87.5% = 70,000 Recognised in previous year (30,000) Current year profit 40,000 $ Revenue from sale of goods (software) 500,000 Revenue from provision of service (75,000/3 years 6/12) 12,500 Total revenue to be recognised in year ended 31 December 20X3 512,500 6 KAPLAN PUBLISHING
INTERIM ASSESSMENT ANSWERS SECTION B 1 BERNARD Key answer tips This is a statement of cash flows with many of the standard elements such as workings for non-current assets, tax, share issues and loans. While the grant and disposal are less common, focusing on the core areas should mean that a pass on this question is attainable. Statement of cash flow for Bernard Plc for the year ended 31 March 2015 Page 1 Reconciliation $000 $000 Profit from operations (PBT 27,670 + 1,500 finance cost 24,520 4,650 investment income) Adjustments for: Depreciation 16,500 Loss on disposal 1,700 Amortisation of government grant (W5) (4,000) Increase in inventory (6,830) Increase in receivables (5,660) Increase in payables 9,810 Cash generated from operations 36,040 Page 2 Statement of cash flows Cash flows from operating activities Cash generated from operations (from page 1) 36,040 Taxation paid (W1) (2,120) Interest paid (1,500 700 unwinding discount on provision) (800) Net cash from operating activities 33,120 Cash flows from investing activities Dividends received 1,000 Government grant received 40,000 Disposal cost (100) Purchase of property, plant and equipment (W2) (54,250) Purchase of investments (W3) (1,790) Net cash from investing activities (15,140) KAPLAN PUBLISHING 7
ACCA F7: FINANCIAL REPORTING Cash flows from financing activities Shares issued (increase of 20,000 SC, 10,000 SP) 30,000 Loan repaid (36,000) Dividend paid (W4) (1,730) Net cash from financing activities (7,730) Decrease in cash and cash equivalents 10,250 Cash and cash equivalents b/f (2,450 3,520) (1,070) Cash and cash equivalents c/f 9,180 Workings T account format (all in $000s): (W1) Tax payable (β) Cash paid 2,120 Bal b/f (18,800 + 1,200) 20,000 SPL charge 7,760 Bal c/f (18,300 + 7,340) 25,640 27,760 27,760 (W2) Property, plant and equipment (carrying values) Bal b/f 178,600 Disposal (see below) 1,600 Depreciation 16,500 Bal c/f 214,750 (β) Cash paid 54,250 232,850 232,850 Disposal: Asset cost $8 million. 10 year life = $800,000 depreciation per year. By 1 October 2012, Bernard have owned asset for 8 years, so accumulated depreciation is $6.4 million and carrying value is therefore $1.6 million. (W3) Investments Bal b/f 34,210 FV gain (per SPL) 3,650 (β) Cash paid 1,790 Bal c/f 39,650 39,650 39,650 8 KAPLAN PUBLISHING
INTERIM ASSESSMENT ANSWERS (W4) (W5) Retained earnings Bal b/f 122,120 (β) Dividend paid 1,730 Profit for the year 19,910 Bal c/f 140,300 142,030 142,030 Government grant liability Bal b/f 0 (β) Amortisation 4,000 Grant received in year 40,000 Bal c/f (32,000 + 4,000) 36,000 40,000 40,000 Workings columnar format: (W1) Tax paid $000 Provision b/f (18,800 + 1,200) 20,000 Charge to profit or loss 7,760 Tax Paid (Balancing figure) (2,120) Provision c/f (18,300 + 7,340) 25,640 (W2) Non-current assets $000 b/f 178,600 Disposal (1,600) Depreciation (16,500) Cash paid for additions (Balancing figure) 54,250 c/f 214,750 (W3) Investments $000 b/f 34,210 FV Gain (SPorL) 3,650 Cash paid for investments (Balancing figure) (1,790) c/f 39,650 KAPLAN PUBLISHING 9
ACCA F7: FINANCIAL REPORTING (W4) Retained earnings $000 b/f 122,120 Profit for the year 19,910 Dividends paid (Balancing figure) (1,730) c/f 140,300 (W5) Government grants $000 b/f 0 Grant received 40,000 Amortisation of grants (Balancing figure) (4,000) c/f (32,000 + 4,000) 36,000 ACCA marking scheme Marks Statement of cash flows Profit from operations ( adding finance costs, removing inv. Income) 1 Adjustments for: Loss on disposal 1 Grant release 1 Depreciation Changes in working capital ( each) 1 Interest paid 1 Tax paid 1 Purchase of PPE 2 Purchase of investments 1 Dividends received Disposal cost Share issue Dividends paid 1 Loan repaid Reconciliation of cash 1 Total 15 10 KAPLAN PUBLISHING
INTERIM ASSESSMENT ANSWERS 2 RYDER (a) This grant will be a capital grant, as it is a grant received towards the purchase of a non-current asset. There are two alternative treatments for this. The first is the netting off method, where the value of the grant is netted off the cost of the asset, with the reduced cost being depreciated. The second is the deferred income method, where the grant is held in deferred income and released to the statement of profit or loss over the life of the asset. Netting off method: Statement of financial position $000 PPE Cost 6,000 ($8 million less $2 million grant) Accumulated depreciation (1,200) ($6 million/5 years) Carrying value 4,800 Statement of profit or loss Depreciation (1,200) Deferred income method: The $2 million grant, would be held in deferred income, being released to the statement of profit or loss over the 5 year life of the asset, therefore releasing $400,000 a year. At the year-end, $1.6 million would remain in deferred income, with $400,000 being held in current liabilities and $1.2m held within non-current liabilities. Statement of financial position $000 PPE 6,400 ($8m cost less $1.6m depreciation ($8m/5 years) Deferred income (Non-current) 1,200 Deferred income (Current) 400 Statement of profit or loss Depreciation (1,600) Release of grant 400 KAPLAN PUBLISHING 11
ACCA F7: FINANCIAL REPORTING (b) Cup Basic EPS = 77c per share Rights issue steps: (1) Theoretical ex-rights price (TERP) 5 shares @$4.80 $24 2 shares @$2 $4 7 shares $28 TERP = $28/7 = $4 (2) Rights fraction Market value pre rights issue/terp = 4.8/4 (3) Weighted average number of shares (4) EPS Date Number of shares Rights fraction Fraction of year Weighted average 1 April 2014 4,000,000 4.8/4 3/12 1,200,000 1 July 2014 5,000,000 4.8/4 4/12 2,000,000 1 Nov 2014 7,000,000 5/12 2,916,667 TOTAL 6,116,667 EPS = Profit for year/weighted average no. of shares = $4,700,000/6,116,667 = 0.77 = 77c per share (c) McGinley Statement of profit or loss for the year ended 31 March 2015 $000 Revenue (3,000 + 100 (See (W1) step 3) 3,100 Cost of sales (5,000 + 100 (See (W1) step 3)) (5,100) (2,000) Statement of financial position as at 31 March 2015: Gross amount due from customers (500 + 100 (See (W1) step 4)) 600 12 KAPLAN PUBLISHING
INTERIM ASSESSMENT ANSWERS (W1) Construction contract Office Stadium $000 $000 Step 1 Overall Price 10,000 5,000 Costs to date (3,000) (100) Costs to complete (9,000) Unknown Estimated profit (2,000) Unknown Step 2 Stage of completion Work certified/contract price ($3m/$10m) 30% Unknown Step 3 Statement of profit or loss Revenue (30% 10,000) 3,000 100 Cost of sales (Balancing fig) (5,000) (100) Profit to date (2,000) Step 4 Statement of financial position Cost to date 3,000 100 Profit to date (2,000) Cash received (500) ( ) Amount due from customer 500 100 Note: The loss on the head office contract should be recognised in full immediately. Revenue should be recognised on the stage of completion basis, with cost of sales being a balancing figure. With regards to the stadium, revenue should be recognised to the level of recoverable costs. In the absence of other information, this will be taken to be costs spent to date. KAPLAN PUBLISHING 13
ACCA F7: FINANCIAL REPORTING (a) (b) (c) Total ACCA marking scheme Marks Grant/PPE Capital grant Explanation of 2 methods 1 PPE (netting off method) 1 Depreciation (netting off method) PPE (deferred income method) Depreciation (deferred income method Deferred income liabilities 1 Release of deferred income 1 Max 5 EPS Use of profit for the year 1 Calculation of TERP 1 Calculation of fraction 1 Weighted average no of shares ( correct dates, 1 correct application of fraction, correct no of shares) 2 Max 5 Construction contract Revenue (1 per contract) 2 COS (1 per contract) 2 Gross amount (1 per contract) 2 Max 5 15 14 KAPLAN PUBLISHING
INTERIM ASSESSMENT ANSWERS 3 KOLO (a) Kolo statement of profit or loss and other comprehensive income Year ended 31 March 2015 $000 Revenue 278,400 Cost of sales (w (i)) (115,700) Gross profit 162,700 Operating expenses (15,500) 147,200 Investment income (4,500 + 6,300 gain (90,000 7%, note (i))) 10,800 Finance costs (2,000 + 1,000 (w (ii)) + 7,000 (w (iii)) loan (w(ii)) (10,000) Profit before tax 148,000 Income tax expense (28,300 + 1,600 (w(v)) (29,900) Profit for the period 118,100 Other comprehensive income: Revaluation gain (w (iv)) 45,000 Total comprehensive income 163,100 (b) Kolo Statement of changes in equity Year ended 31 March 2015 Equity Revaluation Retained Total shares surplus earnings $000 $000 $000 $000 At 1 April 2014 150,000 Nil 119,500 269,500 Total comprehensive income 45,000 118,100 163,100 Equity dividends paid (15,000) (15,000) At 31 March 2015 150,000 45,000 222,600 417,600 (c) Kolo Statement of financial position as at 31 March 2015 Non-current assets $000 $000 Property, plant and equipment (w (iv)) 434,100 Investment property (90,000 + 6,300 (note (i)) 96,300 530,400 Current assets Inventory 43,200 Trade receivables 53,200 96,400 Total assets 626,800 KAPLAN PUBLISHING 15
ACCA F7: FINANCIAL REPORTING (d) Equity and liabilities Equity (see (b) above) Equity shares of $1 each 150,000 Reserves: Revaluation 45,000 Retained earnings 222,600 267,600 417,600 Non-current liabilities 8% loan note 50,000 Deferred tax (12,500 + 1,600 (w (v))) 14,100 Lease obligation (w (iii)) 55,000 119,100 Current liabilities Trade payables 33,400 Accrued loan interest (w (ii)) 1,000 Bank overdraft 5,400 Lease obligation (w (iii)) 22,000 Current tax payable (w (v)) 28,300 90,100 Total equity and liabilities 626,800 An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Control is an important aspect of the definition, meaning that an asset does not have to be legally owned by an entity for it to be recognised in the statement of financial position. Another important aspect of the definition is the future economic benefits that must be expected to flow to the entity. When considering whether assets should be recognised, entities should consider whether they have the risks and rewards of ownership of the asset. An example of this is in IAS 17 Leases as the definition of a finance lease is based on whether the entity has accepted the risks and rewards of ownership of the asset leased. If so, the entity must recognise the asset together with a liability for the finance lease obligation. Reliability is further enhanced by not allowing entities to reflect assets if their future benefits is not reasonably certain. Entities may try to argue that assets can be recognised in an attempt to inflate profits, as the alternative to asset recognition would be to charge the cost as an expense in the income statement. A specific example of this is in IAS 38 Intangible Assets which requires a strict number of criteria to be satisfied before development costs can be capitalised. Most of these criteria are based on whether the project will be completed and result in future profits, i.e. that there will be future economic benefits. 16 KAPLAN PUBLISHING
INTERIM ASSESSMENT ANSWERS Workings in brackets in $000 (i) (ii) (iii) Cost of sales: $000 Opening inventory 37,800 Purchases 78,200 Depreciation (w (iv)) buildings 5,000 plant: owned 19,500 leased 18,400 Closing inventory (43,200) 115,700 The loan has been in issue for nine months. The total finance cost for this period will be $3 million (50,000 8% 9/12). Kolo has paid six months interest of $2 million, thus accrued interest of $1 million should be provided for. Finance lease: (1) Record asset and liability $000 Dr Vehicles 92,000 Cr Finance lease liability 92,000 (2) Depreciation charge $92 million/5 years = $18.4 million Dr Cost of sales, Cr PPE Carrying value taken to non-current assets: Depreciation charge taken to cost of sales: $73.6 million $18.4 million (4) Finance lease obligation B/f Payment Subtotal Interest 10% C/f $000 $000 $000 $000 $000 92,000 (22,000) 70,000 7,000 77,000 77,000 (22,000) 55,000 5,500 60,500 Finance cost in SPL = $7,000 Non-current liability = $55,000 Current liability = $22,000 (iv) Non-current assets/depreciation Land and buildings: At the date of the revaluation the land and buildings have a carrying amount of $210 million (270,000 60,000). With a valuation of $255 million this gives a revaluation surplus (to reserves) of $45 million. The accumulated depreciation of $60 million represents 15 years at $4 million per annum (200,000/50 years) and means the remaining life at the date of the revaluation is 35 years. The amount of the revalued building is $175 million, thus depreciation for the year to 31 March 2006 will be $5 million (175,000/35 years). The carrying amount of the land and buildings at 31 March 2006 is $250 million (255,000 5,000). KAPLAN PUBLISHING 17
ACCA F7: FINANCIAL REPORTING Plant: owned The carrying amount prior to the current year s depreciation is $130 million (156,000 26,000). Depreciation at 15% on the reducing balance basis gives an annual charge of $19.5 million. This gives a carrying amount at 31 March 2006 of $110.5 million (130,000 19,500). Summary of carrying values: Land and buildings: Plant (owned): Plant (leased): Total: $250 million $110.5 million $73.6 million $434.1 million (v) Tax The tax estimate for the year of $28.3 million should be provided for: Dr Tax expense $28.3m Cr Tax liability $28.3m Also, the deferred tax liability needs to be recorded at the closing amount of $14.1m. As the liability is currently at $12.5m (in the trial balance), the following adjustment is required: Dr Tax expense $1.6m Cr Deferred tax liability $1.6m Therefore the total tax expense in the SPL consists of: Current tax Movement in deferred tax Total: $28.3m $1.6m $29.9m 18 KAPLAN PUBLISHING
INTERIM ASSESSMENT ANSWERS (a) (b) (c) ACCA marking scheme Statement of profit or loss and other comprehensive income: Revenue Cost of sales (Dep n = 1 each, opening inv, purch, closing inv each) Operating expenses Investment income (TB, investment property 1) Finance costs (TB, accrual, lease ) Taxation (current year, def tax movement 1) Marks 4 1 1 1 Maximum 10 Statement of changes in equity Brought forward figures 1 Revaluation 1 Profit for period 1 Dividends paid 1 Maximum 4 Statement of financial position Land and buildings (Revalued amount 1, dep n 1) 2 Plant and equipment (Owned 1, leased 1) 2 Investment property 1 Inventory and trade receivables ( each) 1 8 % Loan Deferred tax 1 Lease obligation: Non-current 1 Current 1 Trade payables and overdraft ( each) 1 Accrued interest Income tax provision Maximum 11 (d) Definition of asset 1 Explanation of control 1 Example of control over ownership 1 Discussion of future economic benefits 1 Example 1 Maximum 5 Total 30 KAPLAN PUBLISHING 19
ACCA F7: FINANCIAL REPORTING 20 KAPLAN PUBLISHING