CORPORATE REPORTING PROFESSIONAL 1 EXAMINATION - APRIL 2013 NOTES: You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5. (If you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through the answer not to be marked. Otherwise, only the first answer to hand for Question 4 or 5 will be marked.) Provided are pro-forma: a) Statement of Comprehensive Income By Nature, Statement of Comprehensive Income By Function, and Statement of Financial Position. IAS 1 Presentation of Financial Statements permits the use of these for annual periods commencing prior to, or on, 30 June 2012. AND b) Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss and Other Comprehensive Income By Function, and Statement of Financial Position. These incorporate the June 2011 amendments to IAS 1 and are effective for annual periods commencing on, or after, 1 July 2012. Candidates may opt to answer questions to which these are relevant using either a) the formats permissible up to 30 June 2012 or b) those that are effective for annual periods commencing on, or after, 1 July 2012. TIME ALLOWED: 3.5 hours, plus 10 minutes to read the paper. INSTRUCTIONS: During the reading time you may write notes on the examination paper, but you may not commence writing in your answer book. Please read each Question carefully. Marks for each question are shown. The pass mark required is 50% in total over the whole paper. Start your answer to each question on a new page. You are reminded to pay particular attention to your communication skills, and care must be taken regarding the format and literacy of the solutions. The marking system will take into account the content of your answers and the extent to which answers are supported with relevant legislation, case law or examples, where appropriate. List on the cover of each answer booklet, in the space provided, the number of each question(s) attempted. The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND CORPORATE REPORTING PROFESSIONAL 1 EXAMINATION APRIL 2013 Time allowed 3.5 hours, plus 10 minutes to read the paper. You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5. (If you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through the answer not to be marked. Otherwise, only the first answer to hand for Question 4 or 5 will be marked.) You are required to answer Questions 1, 2 and 3. 1. Capplin plc (Capplin) purchased 80% of the issued share capital of Power plc (Power) on 1 April 2012, and 30% of the issued share capital of Light plc (Light) on 30 September 2012. The market price of Capplinʼs shares at both 1 April 2012 and 30 September 2012 was 3.00. Capplin paid for the purchase of its holding in Power by issuing: 3 of its equity shares for every 5 shares acquired in Power; plus 100 (par value) in 6% loan notes for every 250 shares acquired in Power. The loan notes are redeemable at par on 31 March 2014. The market price of Powerʼs equity was 2.10 per share at 1 April 2012. Capplin paid for the purchase of its holding in Light by issuing 2 shares for every 3 shares acquired in Light. The market price of Lightʼs shares at the date of acquisition was 2.60. The summarised draft statements of financial position of the three companies at 31 March 2013 are as follows: Capplin Power Light m m m Non-current assets: Property, plant and equipment 2,228 810 400 Investment in Power 160 - - Other investments 350 40-2,738 850 400 Current assets: Inventories 160 84 80 Trade receivables 320 147 90 Bank 62 40 30 542 271 200 Total assets 3,280 1,121 600 Equity: Ordinary share capital 50 cent each 1,040 250 120 Retained earnings: Balance at 1 April 2012 720 610 310 Year to 31 March 2013 210 160 90 1,970 1,020 520 Non-current Liabilities: 8% Debenture 850 6% Loan notes 160 1,010 Current liabilities: Trade payables 300 101 80 Total Equity and Liabilities 3,280 1,121 600 Page 1
Additional information: (i) (ii) Capplin has to date recorded only the issue of the 6% loan notes in respect of the acquisitions. The shares issued have not yet been recorded. At the date of acquisition, the fair values of Powerʼs assets were equal to their carrying value with the exception of two assets: (1) certain plots of land had a fair value of 20 million below their carrying value. This is not reflected in the financial statements provided on Page 1; (2) the inventory of Power had a fair value of 12 million in excess of its carrying value. This inventory has been sold by 31 March 2013. (iii) On 30 September 2012, Capplin sold an item of plant to Power at its fair value of 60m, an increase of 20m on its carrying value. The estimated remaining life of the asset was 4 years at that date, and the plant was depreciated on a straight-line basis. (iv) (v) (vi) (vii) (viii) During the year, Power sold goods to Capplin for 54m, including a mark up of 50%. Two thirds of these goods were sold by Capplin to third parties by 31 March 2013. Capplin has 2m trade payables owing to Power at the year end. The 8% Debenture was issued by Capplin on 1 April 2012 at its par value of 850m. However, it is redeemable at a premium of 20%. The effect of the premium is to increase the effective finance cost to 10%. The 8% interest coupon has been paid and accounted for to date; however, no accounting adjustment has been made to reflect the redemption premium. Capplin has adopted a policy of valuing non-controlling interests (NCI) at fair value at the date of acquisition. For the purpose of assessing fair value of the NCI in Power, the share price of Power should be used. Consolidated goodwill was reviewed for impairment at 31 March 2013 and an impairment of 30 million was found to be necessary. The investment in Light was reviewed for impairment at the same date and no impairment was found to be necessary. REQUIREMENT: (a) Prepare, in accordance with IFRS, the consolidated statement of financial position of Capplin plc as at 31 March 2013. (24 marks) Format & Presentation (1 mark) (b) Explain and justify briefly how IFRS 10 Consolidated Financial Statements determines which entities need to be consolidated into group financial statements. (5 marks) [Total: 30 MARKS] Page 2
2. The following information has been taken from the financial statements for Payne plc (Payne) for the year ended 31 March 2013. *Statement of Profit or Loss and Other Comprehensive Income (extracts) for year ended 31 March 2013: ʼ000 Profit before interest & tax 981 Finance costs (108) Profit before tax 873 Income tax expense (305) Profit for the year 568 Other comprehensive income Revaluation surplus on property, plant and equipment 418 Total comprehensive income 986 Statements of Financial Position as at 31 March 2013 2012 ʼ000 ʼ000 ASSETS Non-current assets: Property, plant and equipment 11,250 10,500 Intangibles 500 452 11,750 10,952 Current assets: Inventories 840 1,125 Trade and other receivables 260 210 Investments 38 18 Cash and cash equivalents 5 30 1,143 1,383 Total assets 12,893 12,335 EQUITY AND LIABILITIES Equity: Ordinary share capital 6,000 5,250 Share premium account 1,800 1,425 Revaluation surplus 750 356 Retained earnings 2,011 3,369 10,561 10,400 Non-current liabilities: Preference share capital (redeemable) 760 600 Current liabilities: Trade and other payables 222 210 Taxation 600 525 Ordinary dividend payable 750 600 1,572 1,335 Total equity and liabilities 12,893 12,335 Statement of Changes in Equity for the year ended 31 March 2013 (extract) Retained Revaluation Earnings Surplus ʼ000 ʼ000 Balance at 1 April 2012 3,369 356 Dividends declared (1,950) Total comprehensive income for the year 568 418 Transfer from revaluation surplus to retained earnings 24 (24) Balance at 31 March 2013 2,011 750 * In June 2011, the IASB issued amendments to IAS 1 Presentation of Financial Statements. One of these proposed the adoption of the title Statement of Profit or Loss and Other Comprehensive Income for the performance statement. The title Statement of Comprehensive Income could have been used above. Page 3
The following additional information is relevant: (i) During the year Payne issued both ordinary shares and redeemable preference shares for cash. The latter were issued at par. (ii) Investments classified as current assets are held for the short term and are readily convertible into the stated amounts of cash on demand. (iii) During the year, Payne sold plant and equipment with a carrying amount of 840,500 for 900,000. Total depreciation charges for the year amounted to 1,100,000. Plant costing 50,000 was purchased on credit. The amount is included within trade and other payables. (iv) Trade and other payables include accrued interest of 5,000 as at 31 March 2013 (2012: 10,000). (v) Intangibles relate to development costs capitalised in accordance with IAS 38 Intangible Assets. Costs amounting to 70,000 were capitalised during the year. REQUIREMENT: (a) Prepare a Statement of Cash Flows for Payne for the year to 31 March 2013 in accordance with IAS 7 Statement of Cash Flows. (15 marks) Format & Presentation (1 mark) (b) You have been provided with the following additional information in relation to Payneʼs trading performance for the years ended on the stated dates: 31/3/2013 31/3/2012 ʼ000 ʼ000 Revenue 3,400 2,800 Cost of sales (2,040) (1,400) Operating expenses (379) (357) Write a report concisely analysing the cash flow, profitability and working capital management of Payne Ltd during the year ended 31 March 2013. Your report should be supported by appropriate ratios (a total of 4 marks is available for the calculation of ratios). (14 marks) [Total: 30 MARKS] Page 4
3. The following multiple-choice question contains eight sections, each of which is followed by a choice of answers. Only one of each set of answers is strictly correct. Each question carries equal marks. REQUIREMENT: Record your answer to each section on the answer sheet provided. [Total: 20 MARKS] 1. Margertate plc produces financial statements for the year ended 31 March 2013 which are expected to be approved for publication on 30 April 2013. According to IAS 10 Events After the Reporting Period, which of the following would normally be treated as an adjusting event in the financial statements for the year ended 31 March 2013? (i) Communication from a customer (owing an amount of 22,000 to Margertate) received on 15 April 2013 that they have been placed into liquidation. (ii) The directors declare a dividend of 8 cents per ordinary share on 24 April 2013 in respect of the year ended 31 March 2013. (iii) An insurance claim is agreed in April 2013 relating to a fire in February 2013. (iv) Investments held by the company at 31 March 2013 had fallen by 8% by 30 April 2013. (a) (b) (c) (d) (i), (ii) and (iii) (i) and (iii) (ii) and (iv) (i) and (iv) 2. A company has 2 lines of goods in its inventory at 31 March 2013. Details are as follows: A B Cost 500 800 Net realisable value 460 960 What figure should appear as closing inventory in the financial statements drawn up to 31 March 2013? (a) 1,260 (b) 1,300 (c) 1,420 (d) 1,460 3. On 31 March 2013, Peter plc sold goods to Cathy Ltd, an unrelated company, for 900,000. The goods are sold at cost plus 50%. Cathy Ltd has been granted interest free credit and will pay for these goods in full on 31 March 2014. At 31 March 2013, the present value of the amount receivable was 860,000. In accordance with IAS 18 Revenue how much revenue should be included in Peter plcʼs Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 March 2013? (a) 860,000 (b) 600,000 (c) 450,000 (d) 900,000 4. A company, Huden plc, has the following properties: (i) A building that is vacant but is held with the intention of being leased out under an operating lease to an unconnected party; (ii) A building being constructed by Huden plc on behalf of third parties; (iii) Land that is held for a currently undetermined future use; (iv) Property that is leased out under a finance lease. According to IAS 40 Investment Property, which of the above should be classified as investment property? (a) (b) (c) (d) (i), (iii) and (iv) (i) only all of the above (i) and (iii) Page 5
5. According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which one of the following should be recognised as a provision in the accounts for the year ended 31 March 2013? (a) The board decided to close down a division in January 2013, agreed a detailed closure plan on 15 March 2013 and details were given to customers and employees immediately afterwards. Redundancy and other relevant costs were expected to be 2 million. (b) Under new legislation, smoke filters must be fitted in its operating plants by 30 July 2013. The expected cost of complying with this law is 1 million. No action has yet been taken to implement it. (c) The directors have received a letter from a former employee claiming unfair dismissal. Legal advice received is of the opinion that the employee would not be successful in the claim. (d) Inventory with a cost value of 340,000 is expected to sell for 400,000. 6. Mike plc purchased a piece of equipment for 930,000 on 1 April 2008. Depreciation was charged at 12.50% per annum on a straight-line basis from the date of purchase until 1 April 2012. The equipment was revalued under IAS 16 Property, Plant and Equipment on 1 April 2012 to its fair value of 415,000 and the remaining useful life is assessed at four years from that date. The residual value is estimated to be zero. What is the amount charged to profit or loss in respect of the above transactions for the year ended 31 March 2013? (a) Expense 50,000 (b) Expense 103,750 (c) Expense 153,750 (d) None of the above 7. At 31 March 2012, Dalian Limited had in issue 4m in equity share capital of 50 cent each, and 1m in 6% noncumulative, non-redeemable preference shares of 1 each. On 1 January 2013, the company made a 1 for 2 rights issue at full market value. The profit for the year ended 31 March 2013 was 3m. Preference dividends were paid in full. There were no other changes to the issued share capital. Calculate the basic earnings per share for year ended 31 March 2013 in accordance with IAS 33 Earnings Per Share. (a) (b) (c) (d) 25 cent 33.3 cent 32.7 cent 50 cent 8. Which of the following considerations would not be relevant in determining an entityʼs functional currency? (a) (b) (c) (d) The currency in which prices are settled. The currency of the parent company. The currency of the country where competition and regulation mainly determine the selling price of the goods. The currency in which receipts from operating activities are usually retained. Page 6
Answer either Question 4 or Question 5 4. IFRS 5 Non-current Assets Held for Sale and Discontinued Operations provides guidance on the accounting treatment of discontinued operations and non-current assets held for sale. (a) Fish plc purchased a machine at a cost of 220,000 on 1 January 2009. The machine was being depreciated under the cost model of IAS 16 Property, Plant and Equipment on a straight-line basis over five years assuming a zero residual value. On 30 June 2012 the machine was classified as held for sale. Its fair value was estimated at 80,000 and costs to sell at 4,000. At 31 December 2012, the reporting date, the machine had not been sold. At that date the fair value was estimated to be 62,000 and the estimate of costs to sell was unchanged. On 31 March 2013, the machine still remained unsold and the decision was taken to withdraw it from sale, and to redeploy the machine to another part of the business, where it is expected to recover more than 58,000. REQUIREMENT: (i) Discuss the IFRS 5 criteria which must be satisfied in order for a non-current asset to be classified as held for sale. (3 marks) (ii) (b) Calculate the amounts that should be recognised in respect of this machine in Fish plcʼs * Statements of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2012 and three months ended 31 March 2013 and in its Statements of Financial Position as at the same dates. (8 marks) An extract from the draft * Statement of Profit or Loss and Other Comprehensive Income of Pascal plc for the year ended 31 December 2012 is shown below: ʼ000 Revenue 1,116 Cost of sales (375) Gross profit 741 Investment income 25 Distribution costs (110) Administration expenses (300) Profit before tax 356 Taxation (89) Profit for year 267 Pascal plc is an Irish company with several divisions, all of which are reported separately and represent major distinctive components of the company. During the year ended 31 December 2012, Pascal plc carried out a reorganisation as follows: The activities of Division East were moved to a new factory in Eastern Europe. Management of this division remains in Ireland. Division West has been wound down. The company has decided to outsource this part of the business to an external distributor from 1 January 2013. The results of Divisions East and West are set out below, and are included in the above figures. Division East Division West ʼ000 ʼ000 Revenue 73 200 Cost of sales (26) (80) Distribution costs (13) (5.5) Administration expenses (20) (24) Taxation charge (12) (20) REQUIREMENT: (i) What is meant by a ʻdiscontinued operationʼ? Assess whether either Division East or Division West of Pascal plc should be treated as a discontinued operation under IFRS 5. (4 marks) (ii) Redraft the extract from the above * Statement of Profit or Loss and Other Comprehensive Income to comply with IFRS 5. Show the required note in respect of any discontinued operation. (5 marks) [Total: 20 MARKS] * In June 2011, the IASB issued amendments to IAS 1 Presentation of Financial Statements. One of these proposed the adoption of the title Statement of Profit or Loss and Other Comprehensive Income for the performance statement. The title Statement of Comprehensive Income could have been used above. Page 7
OR 5. You are employed as the financial accountant for Moore plc, an Irish manufacturing company located in Donegal. The financial controller, Paul Clancy, has asked you to advise him on matters relating to the reporting and disclosure of lease transactions in the financial statements for the year ending 31 March 2013. You have recently returned from a one-day training course on IAS 17 Leases, and are keen to show Paul how much you have learned. Moore plc has entered into the following lease contracts: (i) Moore plc leased a new piece of equipment from Sinnott plc for three years commencing on 30 September 2012. The fair value of the equipment is 70,000. A deposit of 4,000 was payable on 30 September 2012 followed by six half-yearly payments of 13,500, payable in arrears, and commencing on 31 March 2013. Moore plc allocates finance charges on a sum of the digits basis. (ii) (iii) On 30 September 2012, Moore plc entered into a two-year agreement to lease a new high-performance machine for a lease payment of 1,500 per month in arrears. A non-refundable deposit of 5,000 has to be paid on order. The machine has an expected useful life of five years, and the lessor remains liable for maintenance. Moore plc entered into a 50-year lease for land and buildings on 30 September 2012. Moore plc will have to make lease payments of 60,000 per annum in advance. The fair value of the land and buildings is 800,000 of which 80,000 relates to land. The building has a 50-year useful economic life. REQUIREMENT: Prepare a memorandum for the financial controller in which you: (a) (b) (c) Describe how IAS 17 defines a finance lease and list the main characteristics which would normally lead to a lease being classified as a finance lease. (4 marks) Prepare the financial statement extracts and supporting disclosure notes that show how the lease transaction in (i) above should be presented in the financial statements of Moore plc for the year ended 31 December 2012. (10 Marks) Advise, with reasons, how leases (ii) and (iii) above should be dealt with in the financial statements for the year ended 31 December 2012. Disclosure notes are not required. (6 marks) [Total: 20 MARKS] END OF PAPER Page 8
SUGGESTED SOLUTIONS Solution 1 Marking Scheme: THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND CORPORATE REPORTING PROFESSIONAL 1 EXAMINATION APRIL 2013 (a) Basic consolidation (100% C + 100% P + 0% Light) 4 Calculation of cost of investment in Power 2 Goodwill 2 Investment in associate 2 Fair value adjustments and post acq movements 2 Intra-group sale of plant 2 Intra group sale of inventory 2 Intra group balance outstanding 1 Debenture amortised cost adjustment 2 Reserves calculation and consolidation 3 NCI calculation 2 Presentation 1 Subtotal 25 (b) 5 relevant points at 1 mark each 5 [Total: 30 Marks] Page 9
(a) Suggested solution Group structure: Capplin 80% ownership in Power for full year Subsidiary Capplin 30% ownership in Light for half year - Associate Consolidated statement of financial position of Capplin Group plc as at 31 March 2013 M Non-current assets: Property, plant and equipment (2,228 +810-20 (W6 (ii)) -17.5 (W6(iii)) 3,000.5 Goodwill (W2) 208 Associate (W3) 157.5 Other investments (350 + 40) 390 3,756 Current assets: Inventories (160 + 84-6 (W6(iv))) 238 Trade receivables (320 +147-2 (W6(v))) 465 Bank (62 + 40) 102 805 Total assets 4,561 Equity: Equity shares (1,040 + 120 (W1) + 24 (W1)) 1,184 Share premium (600 (W1) +120 (W1)) 720 Retained earnings (W4) 998.6 2,902.6 Non-controlling interest (W5) 232.4 3,135 Non-current Liabilities 8% Debenture (850 + 17 (W6 (vi))) 867 6% Loan stock 160 Current liabilities Trade payables (300 +101-2 (W6(v))) 399 Total equity & liabilities 4,561 W1 Acquisition of Power plc and Light plc (equity issues not recorded yet) Power (m) Light (m) Total equity capital (per SOFP) 250 120 Number of shares ( 0.50 each) 500 240 percentage acquired by parent 80% 30% Number acquired by Capplin 400 72 Exchange arrangement 3/5 2/3 Number of Capplin shares issued in consideration 240 48 Fair value of shares issued in consideration ( 3 each) 720 144 Nominal value to equity share capital ( 0.50 each) 120 24 Balance to share premium account 600 120 Journals: Dr Goodwill 720, Cr Equity share capital 120, Cr Share premium 600 Dr Investment in associate 144, Cr equity share capital 24, cr share premium 120. Page 10
W2 Calculation of Goodwill million Consideration Equity shares (W1: 240 *3.00) 720 6% Loan stock (500 shares *80% *100/250) 160 880 FV of NCI (500 shares * 20% * 2.10) 210 FV of net assets acquired Equity shares 250 Pre-acquisition reserves 610 FVA Inventory 12 FVA - Land (20) (852) Goodwill 238 Impairment loss (30) Balance 208 W3 Investment in associate Cost of investment (W1) 144 Add: Share of post-acquisition earnings (90 * 6/12 *30%) 13.5 157.5 W4 Group retained earnings at 31 March 2013 Capplin Power Light m m m Balance per SOFP (total at y/e) 930 770 400 Less balance at acquisition (310 + (90 * 6/12)) (610) (355) Movement on FVA (inventory) (W6 ii) (12) URP in intra-group transfer of plant (W6 iii) (17.5) URP in intra-group sale of goods in inventory (W6 iv) (6) Additional finance cost on 8% debenture (W6 vi) (17) Adjusted reserves for consolidation 895.5 142 45 Consolidate Power (80% * 142)` 113.6 Consolidate Light (30% * 45) 13.5 Goodwill impairment (80% * 30) (24) Group total 998.6 W5 Non-controlling interest at end of the year Balance at acquisition (fair value) 210 Share of post-acquisition reserves (142 (W4) * 20%) 28.4 Share of goodwill impairment (20% * 30) (6) Total 232.4 Page 11
W6 Adjustments Note (ii) Fair value adjustments: At acquisition Movement At rep. date Land (20) ---- (20) Inventory 12 (12) 0 Total (8) (12) (20) Note (iii) Intra group transfer of plant Unrealised profit on transfer (recognised by Capplin) 20 Excess depreciation to be eliminated (1/4 * 6/12) (2.5) Adjustment to reduce reserves (Capplin) and PPE 17.5 Note (iv) Intra-group trading of goods Unrealised profit on goods held in closing inventory: 54m * 50/150 * 1/3 (sold by Power therefore NCI affected) 6 Adjustment to reduce reserves (Power) and Inventory Note (v) intra-group balance outstanding 2 Adjustment to reduce receivables and payables Note (vi) 8% debenture Finance cost for year should be (850 * 10%) 85 Finance cost recognised per note (850 * 8%) 68 Amount remaining to provide for 17 Adjustment to reduce reserves (Capplin) and increase debenture Note (viii) Goodwill impairment Amount of impairment 30m. This reduces the balance of goodwill. As the goodwill was calculated using the full fair value method, the charge is shared between the parent and NCI in their profit-sharing proportion 80/20. Hence 24 is charged to group reserves, and 6 to NCI. Would also accept an adjustment to Powerʼs reserve prior to consolidation. (c) IFRS 10 requires that any entity that is a parent must prepare consolidated financial statements except in four specific situations. These are: (i) (ii) (iii) (iv) it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and all its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements; its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); it did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; and its ultimate or any intermediate parent produces consolidated financial statements that are available for public use and comply with IFRSs. An entity is a parent if it controls another entity. Control exists when an investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee (IFRS 10 para 6). Power is defined as the ability to direct the relevant activities. The important point is that control is not determined by a percentage holding, but by the ability to affect returns through the exercise of power. Page 12
Solution 2 Marking Scheme: (a) Cash generated from operations 5 Interest paid 1 Income tax paid 1 Purchase of PPE 2 Purchase of intangibles 1 Proceeds from sale of PPE 1 Proceeds from issue of equity shares 1 Proceeds from issue of preference shares 1 Dividends paid 1 Opening cash / cash equivalents 1 Presentation 1 Subtotal 16 (b) Calculation of appropriate ratios (4 separate ratios required) 4 Analysis at appropriate level 10 Subtotal 14 Total 30 (a) Statement of cash flows for the year ended 31 March 2013 ʻ000 ʻ000 Cash flows from operating activities Cash generated from operations 2,245.5 Interest paid (W2) (113.0) Income tax paid (W1) (230.0) Net cash from operating activities 1,952.5 Cash flows from investing activities Purchase of property plant and equipment (W3) (2,222.5) Purchase of intangibles (note v) (70.0) Proceeds from sale of property plant and equipment (note (iii)) 900.0 Net cash used in investing activities (1,442.5) Cash flows from financing activities Proceeds from issue of ordinary share capital (6,000+1,800)-(5,250+1,425) 1,125.0 Proceeds from issue of redeemable preference share capital (760-600) 160.0 Dividends paid (W6) (1,800.0) Net cash used in financing activities (515.0) Net increase in cash and cash equivalents (5.0) Cash and cash equivalents at beginning of period (30 + 18) 48.0 Cash and cash equivalents at end of period (38 + 5) 43.0 Note: Reconciliation of profit before tax to cash generated from operations Profit before tax (SOCI) 873.0 Finance cost (SOCI) 108.0 Depreciation charge (note iii) 1,100.0 Amortisation charge (W4) 22.0 Profit on disposal of property plant and equipment (900-840.5) (note iii) (59.5) Decrease in inventories (1,125-840) 285.0 Increase in trade and other receivables (210-260) (50.0) Increase in trade and other payables (W7) 33.0 Cash generated from operations 2,245.5 Page 13
W1 Income Tax ʻ000 ʻ000 Cash β 230 Bal b/d 525 Bal c/d 600 Income statement 305 830 830 W2 W3 W4 Finance Cost ʻ000 ʻ000 Cash β 113 Bal b/d 10 Bal c/d 5 Income statement 108 118 118 PPE ʻ000 ʻ000 Bal b/d 10,500.0 Disposals 840.5 Revaluation surplus (W5) 418.0 Income statement 1,100.0 Purchased on credit 50.0 Bal b/d 11,250.0 Cash β 2,222.5 13,190.5 13,190.5 Intangibles ʻ000 ʻ000 Cash 70 Bal b/d 500 Bal b/d 452 Income statement β 22 522 522 W5 W6 W7 Revaluation Surplus ʻ000 ʻ000 Retained earnings 24 Bal b/d 356 Bal c/d 750 PPE 418 774 774 Ordinary Dividends ʻ000 ʻ000 Cash 1,800 Bal b/d 600 Bal c/d 750 Retained earnings 1,950 2,550 2,550 Trade and other payables (excluding interest accrual and payables in respect of PPE) Opening 210,000 10,000 = 200,000 Closing 222,000 5,000 50,000 = 167,000 Increase = 33,000 Page 14
(b) 2013 2012 Gross profit % 1,360* 100 = 40% 1,400*100 = 50% 3,400 2,800 Inventory days 840*365 = 150 days 1,125 * 365 = 293 days 2,040 1,400 Trade receivables 260 * 365 = 28 days 210* 365 = 27 days Average collection 3,400 2,800 Trade payables 167*365 = 29.87 days 200*365 = 52.14 days Average payment 2,040 1400 Trade payables 222*365 = 40 days 210*365 = 55 days Average payment 2,040 1400 Current Ratio 1,143 : 1,572 1,383:1,335 0.72:1 1.03:1 Profitability Sales have increased by 21% and cost of sales has risen by 46%, resulting in a fall of 3% in the gross profit. This could be explained by a strategy of lowering sales prices to boost volumes. If so, it did not succeed, either in terms of gross profit amount, or gross margin. However, operating costs have increased by just 22,000 or 6% - much less than the percentage increase in revenue. As a result, the ratio of expenses as a % of revenue has fallen from 12.75% to 11.1%. Working capital management Cash, including the short term investments, has reduced by 5,000, a fall of 10%. However this is not material in the context of the large sums invested in non-current assets and paid out as dividends. Operating cash flow is healthy. A big improvement is evident in the inventory days ratio from 2012 to 2013. However it would seem reasonable to expect further improvement, as 6 months is rather a long time to be carrying inventory. Trade receivables and payables are reasonable consistent, with a significant improvement noteworthy in the case of the payables days. Current ratios seem rather weak, however a cessation of dividends would be a simple way to boost cash flow should an emergency present. Profit vʼs cash issue Cash flow, as noted previously, is healthy. Operating cash flow in particular is strong. It is positive to note that the future of the business is being invested in through investment in non-current assets. However, it seems a little strange for the entity to raise almost 1.3 million in new capital, and immediately pay out 1.8 million in dividends. It is normal for an entity to use its own resources to the fullest extent before diluting existing shareholders or asking them to contribute new cash. It may be tax-inefficient as well as being costly to the entity. Page 15
Solution 3 Each correct mark gains 2.5 marks. No partial marks are awarded. Workings are not marked. 1 Answer (b) (i) IAS 10 clearly indicates that a bankruptcy after the reporting date is normally regarded as an adjusting event. (ii) only dividends declared and approved before the year-end are recognised as liabilities. (iii) The fire happened during the reporting period. The outcome agreed in the period after the reporting date is an adjusting event resolving the uncertainty which existed at the reporting date. (iv) A fall in investments occurring after the year end is normally a non-adjusting event. The only exception would be if the valuation at the reporting date was erroneous due to an information deficit at the reporting date. 2. Answer (a) Line A 460 Line B 800 Total 1,260 3. Answer (a) The revenue from the sale should be measured at the fair value, at the date of sale, of the amount receivable. This is deemed to be the present value. 4. Answer (d) (i) It is the purpose of holding the asset that determines its status under IAS 40. As the intention is to lease out the property to an unconnected party it is deemed an investment property even though the lease has not yet commenced. (ii) This in held within inventory as work in progress. It is not an investment property. (iii) IAS 40 provides that an asset whose use has yet to be determined is held as investment property. (iv) Any asset leased out under a finance lease is not recognised in the books of the lessor as by definition the risks and rewards relating to the asset have been transferred to the lessee. 5. Answer (a) (a) In order for a redundancy plan to be considered an obligating event, IAS 37 requires that a detailed plan be agreed AND the affected parties be notified. Both of these have occurred by the reporting date, therefore a provision should be made for the expected costs of 2m. (b) As no action has been taken to implement the legislation, no obligating event has occurred, therefore no obligation exists. (c) The advice given to the directors seems to indicate the likelihood of a transfer of economic benefits as a result of this obligation is not probable. Therefore no provision is made. Disclosure in the notes would be appropriate. (d) The net realisable value is likely to be greater than cost, therefore no adjustment should be made. 6. Answer (c) Carrying value 1 April 2012: = 930,000 (930,000*12.5%*4) = 465,000 Revaluation loss 2012-13 = 465,000-415,000 = 50,000 loss to P/L Depreciation 2012-13: = 415,000 /4 years remaining = 103,750 loss to P/L Total charge to P/L = 153,750 Page 16
7. Answer (c) Earnings relevant to the calculation are: 3,000,000-60,000 = 2,940,000. Number of shares is increased by the rights issue, but on a time-weighted basis. The 4,000,000 additional shares (1 for every 2) were issued on 1 January 2013; therefore they were in issue for three months. This increases the weighted average by 1,000,000 shares (4m * 3/12). There is no retrospective effect as rights issue shares are issued at full market value (TERP is the same as the market value). EPS therefore = 2,940,000 (8,000,000+1,000,000) 32.7cent 8. Answer (b) IAS 21 gives the factors to be taken into account in the determination of functional currency. All statements given are included except (b). Page 17
Solution 4 (a) (i) A non-current asset is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. For this to be the case, the asset must be available for immediate sale in its present condition and the sale must be highly probable. IFRS 5 lists the conditions which must be met if a sale is to be considered highly probable. Management is committed to a plan to sell the asset and an active programme has been initiated to locate a buyer and complete the plan; and The asset is being actively marketed at a sale price that is reasonable in relation to its current value; and A completed sale is expected within one year from the date of classification (may be extended if any delay is caused by circumstances beyond entityʼs control); and It is unlikely that there will be any significant changes to the plan or that the plan will be withdrawn. If these criteria are not satisfied at the end of the reporting period, the asset should not be classified as held for sale. If the criteria are satisfied after the reporting period but before the financial statements are authorised for issue, the fact that the asset is now classified as held for sale should be disclosed in the notes to the financial statements. (3 marks) (ii) Cost 220,000 Depreciation to 31 December 2011 (220,000 * 3/5) (132,000) Carrying amount 1 January 2012 88,000 Depreciation to 30 June 2012 (22,000) Carrying value 30 September 2012 66,000 On classification as held for sale on 30 June 2012 the carrying value of 66,000 is compared to the fair value less costs to sell 76,000 (80,000-4,000). The transfer to current assets takes place at the lower of these figures, 66,000. At 31 December 2012, the fair value less costs to sell is reassessed at 58,000 (62,000-4,000). The lower of the carrying value at date of transfer and the fair value less costs to sell is now 58,000. Accordingly, a loss of 8,000 is recognised in profit or loss for year ended 31 December 2012 as the carrying value is reduced from 66k to 58k. On 31 March 2013, the asset no longer qualifies to be classified as held for sale. Therefore it is reclassified back to non-current assets. The carrying value is now the lower of (i) its previous carrying value less subsequent depreciation (amount which would have been charged had the classification to held for sale not occurred) and (ii) its recoverable amount at the date of reclassification. Further depreciation is charged (in 2013) to cover the period from 30 June 2012 to 31 March 2013. This amounts to 220,000 * 1/5 * 9/12 or 33,000. Hence the carrying value is now 66,000 33,000 or 33,000. 31 Dec 2012 31 Mar 2013 SPLOCI: Depreciation charged (22,000) (33,000) Loss on classification to held for sale (8,000) Reversal of loss on classification to held for sale 8,000 SOFP: Current Assets: NCA Held for Sale 58,000 Non-current assets Property Plant & Equipment 33,000 Page 18 (8 marks)
(b) (i) A discontinued operation is a component of an entity that either has been disposed of or is classified as held for sale. For this purpose, a component consists of operations and cash flows that can be clearly distinguished from the rest of the entity and usually comprises a single cash-generating unit or a group of cash-generating units. To be considered a discontinued operation, the operation to be discontinued must represent a separate geographical area of operations or major line of business. Both divisions meet the definition of a component as they have both been reported separately. The closure of Division East is not a discontinued operation. This is because it is not a cessation of a separate major line of business as its operations have moved to another location. Neither does it represent a cessation of Irish operations. Division West does represent a discontinued operation, as distribution operations, a major line of business, have ceased internally. (4 marks) (ii) Revised extract from Statement of Profit or Loss and Other Comprehensive Income ʼ000 Continuing operations Sales revenue (1,116 200) 916 Cost of sales (375 80) (295) Gross profit 621 Other income 25 646 Distribution costs (110 5.5) (104.5) Administration expenses (300 24) (276) Profit before tax 265.5 Taxation (89 20) (69) Profit for the year from continuing operations 196.5 Discontinued operations Profit for the year from discontinued operations (note 1) 70.5 Profit for the year 267 Note 1 re discontinued operations ʼ000 Sales revenue 200 Cost of sales (80) Gross profit 120 Distribution costs (5.5) Administration expenses (24) Profit before tax 90.5 Taxation (20) Profit for the year 70.5 (5 marks) [Total: 20 Marks] Page 19
SOLUTION 5 (a) IAS 17 defines a finance lease as one which transfers substantially all the risks and rewards associated with the leased asset to the lessee. The main characteristics of a contract that could lead one to conclude that it is most likely a finance lease are: Lease transfers ownership of the asset to the lessee by the end of the lease term, either free of charge or for an amount substantially less than the fair value of the asset at the date of transfer; The lessee has the option to purchase the asset at a price expected to be sufficiently lower than the assetʼs fair value on exercise date to ensure the option will be exercised; Lease term is for a major portion of the economic life of the leased asset; The present value of minimum lease payments which the lessee must make over the lease term amounts to substantially all of the fair value of the asset; The leased assets are of such a specialised nature that only the lessee can use them without major modifications. (4 marks) (b) Lease (i) Calculation of finance charge Deposit 4,000 Lease payments (6 X 13,500) 81,000 Fair value of asset (70,000) Finance charges in total 15,000 Interest calculation Sum of Digits = n (n +1) 2 = (6 x 7)/2 = 21 Period ended 31 March 2013 6/21 x 15,000 4,286 Of which to 31 December 2012 3/6 2,143 30 September 2013 5/21 x 15,000 3,571 31 March 2014 4/21 x 15,000 2,857 30 September 2014 3/21 x 15,000 2,143 Liability b/f Interest Payment Capital 31 December 2012 66,000 2,143 0 68,143 31 March 2013 2,143 (13,500) 56,786 30 September 2013 56,786 3,571 (13,500) 46,857 31 December 2013 46,857 1,429 0 48,286 31 March 2014 48,286 1,428 (13,500) 36,214 30 September 2014 36,214 2,143 (13,500) 24,857 Total liability at 31 December 2012 = 68,143 Capital > 1 year = 48,286 (due 31 December 2013) Due < 1year = 19,857 (balancing figure) 68,143 Page 20
Statement of profit or loss and other comprehensive income Depreciation 70,000/3 * 3/12 ( 5,833) Finance charge ( 2,143) Statement of financial position as at 31 December 2012 Non-current assets 70,000-5,833 64,167 Current liabilities Finance lease liabilities 19,857 Non-current liabilities Finance lease liabilities 48,286 (10 marks) (c) Lease (ii) Clearly an operating lease as the lessor is responsible for maintenance, and the lease term is a low proportion of the assetʼs UEL. As the lessor is responsible for maintenance the risks have not been transferred to the lessee. The total lease payments should be recognised on a straight line basis over the lease term. Amount payable = 5,000 + (24 X 1,500) = 20,500 per annum Life of lease 2 years Amount recognised in the year ended 31 December 2012 is 3 months rentals. Dr profit or loss (20,500 * 3/12) 6,125 Dr trade and other receivables (balancing figure prepaid) 3,375 Cr Cash (5,000 + 3*1,500) 9,500 (3 marks) Lease (iii) Under IAS 17 the land and buildings element would be dealt with separately. The lease of the land is an operating lease, as land has an indefinite useful economic life. The lease on the buildings is assessed on its own merits. Here, it seems likely that it is a finance lease as the UEL of the building is entirely taken up by the lease term. The lease payments are split in proportion to the fair values of the respective assets. Buildings: (720/800) x 60,000 = 54,000 Land: (60,000 54,000) = 6,000 6,000 would be treated as an operating lease rental and expensed to statement of comprehensive income on a straight line basis. 3 monthsʼ worth of lease payments should be charged in the period to 31 December 2012. 54,000 would be treated as repayment of a finance lease using either the effective interest rate or sum of the digits methods. (3 marks) [Total: 20 Marks] Page 21