CORPORATE REPORTING PROFESSIONAL 1 EXAMINATION - APRIL 2009 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 Questions 4 or 5 will be marked.) Note: Students have optional use of the Extended Trial Balance, which if used, must be included in the answer booklet. PRO-FORMA INCOME STATEMENT BY NATURE, INCOME STATEMENT BY FUNCTION AND BALANCE SHEET ARE PROVIDED 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 that candidates are expected to pay particular attention to their 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 the candidates' 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 2009 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 Questions 4 or 5 will be marked.) You are required to answer Questions 1, 2 and 3. 1. Green PLC prepares its financial statements to 31 December each year. Green PLC has investments in two companies, Blue Ltd and Red Ltd. Extracts from the draft financial statements of the three companies for the year ended 31 December 2008 are shown below: Draft Income Statements Green PLC Blue Ltd Red Ltd 000 000 000 Revenue 25,900 14,400 6,800 Cost of sales (19,500) (10,256) (3,400) Gross profit 6,400 4,144 3,400 Operating expenses (2,995) (1,036) (1,260) Operating profit 3,405 3,108 2,140 Interest payable and similar charges (120) (30) (20) Investment income 350 - - Profit on ordinary activities before tax 3,635 3,078 2,120 Income tax expense (890) (770) (530) Profit on ordinary activities after tax 2,745 2,308 1,590 Extract from Draft Statement of Changes in Equity (retained earnings) Green PLC Blue Ltd Red Ltd 000 000 000 Net profit for period 2,745 2,308 1,590 Dividends on ordinary shares (1,200) (300) - 1,545 2,008 1,590 Balance brought forward 2,000 2,000 3,800 Balance carried forward 3,545 4,008 5,390 Additional Information: 1. Green PLC acquired 75% of the 1 ordinary shares in Blue Ltd on 1 January 2005. At that date the balance on Blue Ltd s retained earnings was 1 million credit and its share capital was 2million. On 1 January 2008, Green PLC acquired 60% of the ordinary 1 shares in Red Ltd for 9m. At that date the balance on retained earnings of Red Ltd were 3.8 miilion credit and its issue shared capital was 3 million. 2. Green PLC charges Blue Ltd an annual fee of 15,000 for management services. This has been recognised by Green PLC in investment income. 3. Green PLC has recognised its dividend received from Blue Ltd in investment income. 4. Green PLC disposed of its entire share holding of Red Ltd for 8 million on 3o June 2008. No entries have been made in the accounts of Green PLC for this disposal. Profits in Red Ltd have accrued evenly throughout the year. Page 1
5. Details of intra-group trading are as follows: Sales by Green PLC to Blue Ltd 2,590,000 Costs to Blue Ltd of inventory items purchased from Green PLC At 31 December 2007 288,000 At 31 December 2008 576,000 Green PLC has a standard mark-up on cost of 20% for sales to Blue Ltd. 6. During the acquisition process, the management of Green PLC identified a number of intangibles which were not recognised in the financial statements of Blue Ltd. The fair value of these was measured reliably at 200,000. The useful life of these intangible assets was estimated at 20 years. In addition, the fair value of equipment of Blue Ltd was 400,000 in excess of its carrying value at the date of acquisition. The remaining useful life of the equipment was assessed at five years from that date. No other fair value adjustments were identified. 7. Blue Ltd has two contracts in progress at 31 December 2008 and the entries for 2008 have not yet been included in the draft income statement. Blue Ltd has a policy of recognising profit on contracts once the contracts have reached a minimum of 25% completion. Contract XY commenced during 2007 and at 31 December 2007 was 50% complete with appropriate revenue and profits included in 2007. Contract WT commenced on 1 January 2008. Contract details are as follows: Contract XY WT 000 000 Total contract value 40,000 60,000 Costs incurred to date 22,000 10,000 Estimated cost to completion 8,000 28,000 Completion 75% 15% Progress payment received 18,000 7,000 (Assume no change in taxation) REQUIREMENTS: (a) Prepare the consolidated income statement of Green Group PLC for the year ended 31 December 2008 in a form suitable for publication. Note: You should assume that the disposal of Red Ltd constitutes a discontinued operation in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. (20 Marks) Presentation (1 Mark) (b) Explain the purpose of group financial statements and the concepts underlying their preparation. (6 Marks) Outline the implications for Green PLC under IFRS 3, assuming that on the acquisition of Blue Ltd, it pays less than the fair value of the net assets. (3 Marks) [TOTAL : 30 MARKS] Page 2
2. The trial balance of Pulsar Ltd as at 30 November 2008 is as follows: 000 000 Revenue 1,520 Purchases 850 Returns outwards 31 Debenture interest paid 1 Royalties earned 15 Administrative salaries 149 Operating lease rentals 5 General administrative expenses 19 Selling and marketing costs 10 Advertising 60 Development expenditure capitalised 60 Freehold Land and buildings at cost ( land 250,000) 450 Land and buildings accumulated depreciation 01.12.07 80 10% Preference share capital (redeemable 2012)- 1 nominal value 30 Trade receivables 380 Trade payables 242 Wages of factory staff 49 Retained earnings 90 Inventories 49 Dividend received from Ask Ltd 8 General reserve as at 30.11.08 10 Income tax 8 Plant and machinery at cost 80 Plant and machinery accumulated depreciation on 01.12.07 24 Share premium 10 Bank 7 Allowance for doubtful debts 4 Government grant 5 10% Loan note 20 Cash 12 2007 ordinary dividends paid 14 Ordinary share capital 50c nominal value 100 2,196 2,196 The following information has also been provided: 1. Inventories held at 30 November 2008 are valued at cost of 61,000. Included in this amount are 500 units of finished goods valued at 25 each. These units are now expected to sell at a price of 20 each and incur 50p selling costs per unit. 2. During the year the Directors transferred 5,000 to the general reserve. 3. Land and buildings were revalued for the first time on 1 December 2007. The valuer estimated an alternative use valuation of 650,000 (including 350,000 for the land) and an existing use valuation of 550,000 (including 300,000 for the land). Buildings are to continue to be depreciated on a straight line basis at a rate of 4% but Pulsar Ltd makes no transfer between the revaluation reserve and retained earnings in respect of this. 4. Plant and machinery includes an item purchased during the year at a cost of 20,000. A government grant of 5,000 was received in respect of this purchase. Plant and machinery is depreciated on a straight line basis at the rate of 20% per annum. 5. The development expenditure relates to a new product developed during the year. Development of the new product will be completed in 2009. The Directors of Pulsar Ltd believe there is a reasonable expectation of future benefits but have been unable to demonstrate this. 6. One of Pulsar Ltd s customers was declared bankrupt on 22 December 2008. The customer owed Pulsar Ltd 16,000 at 30 November 2008. The allowance for doubtful debts is to be adjusted to 4% of trade receivables. 7. The Directors of Pulsar Ltd wish to propose a final ordinary dividend of 14,000 which will be paid on 26 February 2009. The 2008 preference dividends have been declared but not yet paid. Page 3
8. The balance on the income tax account is an under-provision brought forward from the year ended 30 November 2007. The Directors have estimated that tax for the year ended 30 November 2008 will amount to 11,500. 9. During 2008, one of Pulsar Ltd s customers initiated a legal claim for damages against Pulsar Ltd. At the year end the matter remains unresolved. Pulsar Ltd s legal advisors have advised that there is a 40% chance that the claim can be defended at no cost. Otherwise, damages are estimated at 45,000. 10. In May 2008, Pulsar Ltd paid 60,000 for a television advertising campaign for its products that will run for six months from 1 September 2008 to 28 February 2009. The Directors are adamant that increased sales as a result of the publicity will continue for two years from the start of the advertising campaign. REQUIREMENTS: (a) Prepare the Income Statement of Pulsar Ltd for the year ended 30 November 2008 together with a Balance Sheet at that date. Your answer should be presented in accordance with International Financial Reporting Standards. Presentation (20 Marks) (1 Mark) (b) Prepare the Statement of Changes in Equity for the year ended 30 November 2008. (5 Marks) Write a brief memo to the Financial Controller of Pulsar Ltd, explaining the required accounting treatment of item 4 above. Your memo should also include a non-current asset note. (4 Marks) [TOTAL: 30 MARKS] 3. The following multiple choice questions contains eight sections, each of which are followed by a choice of answers. Only one of each set of answers is strictly correct. REQUIREMENTS: Give your answer to each section in the answer sheet provided. [TOTAL: 20 MARKS] 1. Carmichael PLC, a large widget manufacturer acquired a multi-storey car park in Limerick for 6m in 2007. An independent valuation at 31 December 2008 placed a fair value of 5.2m on the car park. The valuer estimates the car park to have a useful life of 14 years with a residual value of 1.2m. What figure should be included in the income statement for the year ended 31 December 2008, if the Directors decided to treat the multi-storey car park using the fair value model under IAS 40 Investment Properties? (a) (b) (d) nil 800,000 loss 400,000 gain 1,200,000 loss 2. During the year ended 31 December 2008, Noel Ltd revalued its buildings by 150,000, giving rise to an increase in the annual depreciation charge of 5,000. In accordance with IAS16 Property, Plant and Equipment which of the following statements on the disclosure of these items is true? (a) (b) (d) The statement of changes in equity will show an increase in the revaluation reserve of 150,000 and a reserves transfer of 5,000. The revaluation reserve in the statement of changes in equity will only disclose 150,000 in respect of the revaluation. The income statement will only disclose an amount of 150,000 in respect of the revaluation. The income statement will disclose an amount of 150,000 in respect of the revaluation and an additional depreciation expense of 5,000. Page 4
3. Meadows Ltd had the following balances on its accounts at 30 November 2008 and 30 November 2007. 30 Nov 2008 30 Nov 2007 Cash in hand 2,000 2,200 Bank overdraft nil 52,142 Cash at bank 41,804 nil Long term bank loan 85,000 55,000 In accordance with IAS 7 Statement of Cash Flows, what amount should be shown under net change in cash and cash equivalents in the company s cash flow statement for the year 30 November 2008? (a) 10,138 (b) 93,746 10,338 (d) 40,138 4. The financial statements of Y PLC were approved by the Board of Directors on 1 March 2009. According to IAS 10 Events after the Balance Sheet date, which of the following would be a non-adjusting item in the financial statements at 31 December 2008? (i) A debtor owing 52,000 at the year end was declared bankrupt in January 2009. (ii) Stock realising 110,000 in February, was disclosed at a cost of 125,000 on 31 December 2008. (iii) On 1 February 2009, a fraud carried out by the Trade Receivables Clerk was discovered. The Trade Receivables were overstated by 30,000 at 31 December 2008. (iv) A fall in market value of investments after the year end. (a) (b) (d) All of the above (i) and (iv) only (iii) and (iv) only (iv) only 5. According to IAS 1 Presentation of Financial Statements, which of the following statements are correct? (i) (ii) (iii) (a) (b) (d) The accounting policies adopted by a company must be disclosed in the notes to the financial statements. Inappropriate accounting policies can be rectified by disclosure of the policies used or by the inclusion of explanatory material. Companies may choose to prepare their financial statements (except for the cash flow statement) on either the accruals or the cash basis. All of the above (i) and (ii) (ii) and (iii) (i) only 6. At 30 November 2007 Butler PLC had 4m 50 cent ordinary shares in issue and 1m 8% preference shares at 1 each. On 1 September 2008 the company made a 1 for 4 bonus issue. The profit after tax for the year ended 30 November 2008 was 750,000, and for the year ended 30 November 2007 it was 650,000. Calculate the EPS at 30 November 2008 and 2007: 2008 2007 (a) 6.7 cents 7.1 cents (b) 7.5 cents 5.7 cents 6.7 cents 5.7 cents (d) 9.4 cents 8.2 cents Page 5
7. Sean and Marie are in partnership sharing profits equally. On January 1 2008 Deirdre is admitted to the partnership and profits will be shared 2:2:1 (Sean : Marie : Deirdre) under the new partnership. Deirdre is to introduce capital of 45,000. Goodwill, which is not to be disclosed in the books, is valued at 15,000. The capital at 31 December 2007 for Sean and Marie was 100,000 and 50,000 respectively. Show the closing capital account balances after Deirdre was admitted: Sean Marie Deirdre (a) 100,000 50,000 45,000 (b) 107,500 57,500 30,000 101,500 51,500 42,000 (d) 100,000 50,000 30,000 8. Which of these considerations would not be relevant in determining an entity s functional currency? (a) (b) (d) The currency that influences the costs of the entity. The currency in which finance is generated. The currency in which receipts from operating activities are retained. The currency that is most internationally acceptable for trading. ANSWER EITHER QUESTION 4 OR 5. 4. IAS 17 Leases sets out the accounting treatment and the disclosure requirements for leases. REQUIREMENTS: (a) Distinguish between the characteristics of a finance and an operating lease. (5 Marks) (b) Patrick PLC prepares its financial statements for the year ended 31 October 2008. On 1st November 2005, they entered into a lease agreement for an item of plant on the following terms: Term of lease 5 years Rental The rental is 4,000 per annum payable at the start of the year. Original cost price of plant 14,800 The interest rate implicit in the agreement is 18% per annum. Patrick PLC has the option to acquire the plant for 5 at the end of the contract. Patrick PLC is responsible for all the repairs and maintenance of the plant. The useful economic life of the plant is expected to be six years with a nil residual value and the present value of the minimum lease payments is 15,000. i. Show the entries that should be made in the income statement and the Balance Sheet for the year ended 31 October 2008 using the actuarial method. (7 Marks) ii. Show the relevant notes to the financial statements for the year ended 31 October 2008 (5 Marks) Mile PLC is a manufacturing company and has entered a lease agreement on 1 January 2008 under the following terms: Term of lease 3 years Estimated useful life of machine 9 years Age of machine at start of lease 2 years Purchase price of new machine 86,000 Annual payments 8,000 How would the above lease be accounted for and disclosed in the financial statements for the year ending 31 December 2008? (3 Marks) Page 6 [TOTAL: 20 MARKS]
5. IAS 37 Provisions, Contingent Liabilities and Contingent Assets sets out the principles for accounting for provisions and contingences. REQUIREMENTS: (a) Explain the objectives of IAS 37 Provisions, Contingent Liabilities and Contingent Assets concerning the recognition of provisions and outline the recognition criteria. (5 Marks) (b) Set out the circumstances in which a company would recognise a contingent liability. (2 Marks) Albertstones PLC, a manufacturer of moulding products, prepares its financial statements to 31 December 2008. The Board of Directors are finalising the financial statements and need assistance on the treatment of the following issues: (i) (ii) (iii) The company manufactures and sells Product X with a one year repair warranty. It is estimated that 70% of the goods sold in 2008 will have no defects, 22% will have minor defects and 8% will have major defects. It is estimated that it would cost the company 150,000 if all the goods sold had minor defects. This figure would rise to a 1m if all the goods had major defects. The warranty provision at 1 January 2008 was 102,000 with a claim of 96,000 settled during the year. (4 marks) Smith PLC purchased and used a batch of Product Y in its production in August 2008, which Smith PLC is claiming caused major damage to its production equipment. Albertstones PLC is being sued for damages. Lawyers have advised that there is a 40% change of successfully defending the claim. If the claim is successful, damages are estimated at 2m with a present value of 1.8m. The investigative team of accident consultants have concluded that part of the reason for the defective product produced by Albertstones was the supply of faulty parts by a supply company, Glen Ltd. The legal team estimate Glen Ltd s contributory negligence amounts to 10% of the damages and they believe a claim against Glen Ltd is likely to succeed. (4 marks) The Directors decided in October 2008 to restructure the production division to reduce costs and improve efficiencies. This plan was initiated in November 2008 with full staff consultation. At 31 December 2008 the anticipated costs are: Redundancy costs 400,000 Lease cancellations 75,000 Retraining 60,000 Investment in new systems 25,000 Prepare a memorandum to the Board of Directors of Albertstones PLC stating how the above issues should be reflected in the company s published financial statements for the year ended 31 December 2008. Assume all items are material and ignore taxation. (4 Marks) Memo, Layout & Structure (1 Mark) [TOTAL: 20 MARKS] END OF PAPER Page 7
SUGGESTED SOLUTIONS THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND CORPORATE REPORTING PROFESSIONAL 1 EXAMINATION APRIL 2009 SOLUTION 1 (a) Consolidated income statement for the year ended 31 December 2008 000 Continuing operations Revenue (W2) 37,729 Cost of sales(w2) (27,321) Gross profit 10,408 Operating expenses(w2) (4,016) Interest payable and similar charges (150) Investment income(w2) 110 Profit before tax 6,352 Income tax expense (W2) (1,660) Profit for period from continuing operations 4,692 Discontinued operations Loss for period from discontinued operations (795-1,477)W7 & W9 (682) Profit for period 4,010 Attributable to equity holders of Green plc 3,137 Minority interest(w3) 873 4,010 Workings W1 Group structure Green plc 75% 60% Disposal of 30 June 2008 Blue Ltd Red Ltd Page 9
W2. Consolidated schedule for continuing operations Green plc Blue Ltd Adjs Consol 000 000 000 000 Revenue (W10) 25,900 14,419 (2,590) 37,729 Cost of sales Per question (19,500) (10,256) 2,590 Contract (W10) (16.5) Inventory(W4) (48) Amortisation of intangibles (10) Dep Adj(W6) (80) (27,321) Operating expenses (2,995) (1,036) 15 (4,016) Interest payable and similar charges (120) (30) (150) Investment income Per question(350 75% x 300) 125 (15) 110 Tax (890) (770) (1,660) PAT 2,200.5 W3 Minority Interest Blue Ltd 25% X 2,200.5 = 555.12 Red Ltd 40% X 795(W7) = 318 873.12 W4 Unrealised profit in inventories % Opening Closing Movement SP 120 288,000 576,000 Cost (100) (240,000) (480,000) GP 20 48,000 96,000 48,000 W5 Intangible amortisation Intangible FV adjustment 200,000 Amortisation b/f (200,000 X 3/20) (30,000) 170,000 Amortisation in the current year (200,000 x 1/20) (10,000) 160,000 W6. Depreciation adjustment The fair value adjustment needs to be depreciated. The uplift is 400,000 so the depreciation charge is 80,000 per annum. At start of year accumulated depreciation is 240,000 and it will be 320,000 at end of the year. Page 10
W7. Profit for Red Ltd for period until disposal. PAT 1,590,000 X 6/12 = 795,000 W8. Goodwill Red Ltd 000 000 Cost of investment 9,000 Less: Share of fair value of net assets acquired Share capital 3,000 Retained earnings 3,800 6,800 X 60% (4,080) Goodwill at date of disposal 4,920 W9. Group loss on disposal of Red Ltd Sale proceeds 8,000 Less: Share of net assets at date of disposal Share capital 3,000 Earnings (3,800 + 795(W7)) 4,595 7,595 X60% (4,557) Less Carrying value of goodwill (4,920) Loss on disposal (1,477) W10 XY WT Total Revenues recognised to date 75% * 40m 30 15% * 60m 9 Revenues previously recognised 50% * 40m 20 Revenue recognised in this period 10 9 Contract profits and losses Total contract value 40 60 Total contract costs 30 38 Expected contract profits 10 22 Profits recognised to date 7.5-75% * 10 Amount previously recognised 50% * 10 5 - Profit in this period 2.5 - Revenue 10 9 19 Cost of sales (balance) 7.5 9 16.5 Contract profits 2.5 nil 2.5 Contract WT is less than 25% complete, so no profit is recognised. Page 11
(b) Purpose of group financial statements: Provide information to investors on a company which uses resources to invest in other companies. Group financial statements give information to users on abilities of management to provide evidence of an acceptable return on capital employed. Managers held accountable for their performance after acquisition and not on profits bought in. Concepts underlying their preparation: The two key concepts underlying the preparation of group financial statements are: o o The single entity concept; The principle of substance over form. Group financial statements are presented as a single economic unit. All resources at group s disposal and return on those resources can be seen in a single set of financial statements. Presentation of group financial statements underlines the concept of substance over form which is fundamental in preparation of financial statements. Single entity concept means that all effects of intra-group trading are eliminated, so only the results of trading with entities outside the group are shown; this provides a more meaningful basis for assessing management s performance. Other relevant comments. A discount on acquisition arises if the share of the fair value of the net assets acquired exceeds the cost of the acquisition i.e. there is negative goodwill. IFRS 3 is based on the assumption that this usually arises because of errors in measurement of the acquiree s net assets and/or of the cost of the combination. First action is always to reassess the identification and measurement of the net assets and the measurement of the cost of combination. If the discount still remains once these reassessments have been made, then it is attributable to a bargain purchase. This discount does not meet the IASB s Framework definition of a liability, so it must be recognised in a profit or loss in the same accounting period as the acquisition is made. Page 12
SOLUTION 2 Pulsar Income Statement for the year ended 30 November 2008 Workings Revenue 1,520 Cost of sales W1 (874) Gross profit 646 Other operating income 15 Distribution costs W1 (127) Administrative expenses W1 (230) Profit from operations 304 Finance cost (3+2) (5) Investment income 8 Profit before tax 307 Income tax W3 (19.5) Profit for period 287.5 Net profit for period 287.5 Dividends paid (14) Retained profit for year 273.5 Page 13
Pulsar Ltd Balance Sheet as at 30 November 2008 ASSETS 000 000 Non-current assets Property, plant and equipment* 678 Intangibles - 678 Current assets Inventories 58 Trade receivables (380-16 -15) 349 Prepayment 30 Cash 12 449 Total assets 1,127 EQUITY and LIABILITES Capital and reserves Ordinary share capital ( 0.50p shares) 100 Share premium account 10 General reserve 10 Revaluation reserve 280 Retained earnings 363.5 763.5 Non-current liabilities Preference share capital 30 Loan notes 20 Deferred income 3* 53 Provisions 45 Current liabilities Trade payables (242 +3) 245 Taxation W3 11.5 Accrual Interest ** 1 Deferred income 1 Bank 7 265.5 Total equity and liabilities 1,127 * Above based on treating grant as deferred credit. ** Some candidates may have treated the debenture interest as an additional charge Page 14
W1 Allocation of costs C of S Admin Dist 000 000 000 Opening inventory 49 Purchases returns (850-31) 819 Administrative salaries 149 Operating lease rentals 5 General administrative expenses 19 Selling and marketing costs 10 Closing inventories ( 61.000- (500X 5.50) (58) Legal claim- damages 45 Advertising 60-30 30 Bad debt 16 Increase in provision for doubtful debts 11 Government grant (1) Depreciation plant (20% X 80) 16 Depreciation Buildings 12 Wages factory staff 49 Development expenditure written off 60 874 230 127 W2 Freehold Land and buildings 000 Cost b/f 450 Revaluation 200 Alternative Use 650 Accum Depn b/f 80 Revaluation (80) Charge ( 300 X 4%) 12 NBV b/f 638 Note: Under IAS16 the market value would take account of the possibility of redevelopment, almost certainly leading to a higher value. IAS 16 s fair value will take account of possible alternative values. W3 Income statement Under provision 8 Tax for year 11.5 19.5 Balance sheet 11.5 Page 15
(b) S.O.C.E. Ordinary Share Revaluation General Retained Total share capital prem reserve earnings 000 000 000 000 000 000 Transfer between reserves - - 5 (5) - Revaluation 280 280 Profit for period - - - - 287.5 287.5 - - 280 5 282.5 567.5 2007* ordinary dividends (14) (14) 280 5 268.5 553.5 Balance b/f 100 10-5 95 210 Balance c/f 100 10 280 10 363.5 763.5 * 2008 dividend not yet approved therefore not provided for. Memorandum To From Date Subject i.) Government grants IAS20 Accounting for Government Grants and Disclosure of Government Assistance covers this area. The general principle is that a government grant should be recognised as income in the periods in which the costs that it is intended to compensate are recognised. There are two permitted treatments. Where the grant has been received towards the cost for a piece of machinery, the grant should be recognised as income when depreciation is charged in respect of the asset. The purpose of this treatment is to provide a matching effect. Non-current asset note Plant/Equipment 000 Cost b/f 60 Additions 20 Revaluation - 80 Accum depn 24 Revaluation - Charge for year 16 40 NBV 30/11/08 40 * Based on treating the grant as a deferred credit.. Page 16
SOLUTION 3 1 b ( 6m 5.2m) 2 a The revaluation gain is taken direct to reserves. The additional deprecation is transferred from retained earnings to the revaluation reserve. 3. b Decrease in cash in hand = (200) Increase in cash in bank = 93,946 93,746 4 d 5 d 6 c Profit after tax 750,000 less preference dividend 80,000 670,000 670,000 10 million shares = 6.7 cents Comparatives 650,000 80,000 = 5.7 cents 10 million shares 7 c. Old ratio New ratio Adjustment Op cap Cl. cap Sean 7,500 cr 6,000 dr 1,500 cr 100,000 101,500 Marie 7,500 cr 6,000 dr 1,500 cr 50,000 51,500 Deirdre 3,000 dr 3,000 dr 45,000 42,000 8. d Page 17
SOLUTION 4 a. A finance lease Substantially transfers all the risks and rewards to the lessee. Substance of the transaction is paramount. Payment by the lessee for the assets, at full cost plus an interest charge. Lease transfers ownership to lessee at end of lease. Lessee has the option to purchase asset. Lease term forms the major part of the asset life. PV of the minimum lease payments amount to the majority of the assets. An operating lease Lessor retains the majority of the risks and rewards of the assets. The PV of the minimum payments does not equal the bulk of the fair value of the asset. The life of the lease will be a small part of the life of the asset. Lessee pays a rental for the use of the asset. NB IAS 17 provides list situations indicating existence of Finance lease. b. Workings Year Opening Payment Capital Accrued int Closing 31 Oct Balance charge 18% bal 2006 14,800 (4,000) 10,800 1,944 12,744 2007 12,744 (4,000) 8,744 1,574 10,318 2008 10,318 (4,000) 6,318 1,137 7,455 2009 7,455 (4,000) 3,455 622 4.077 2010 - - Income statement (extract) 2008 Finance charge 1,137 Depreciation charge 2,467 * Total charge 3,604 Balance sheet (extract) 31 October 2008 Non-current assets Leasehold plant 7,400 * Non current liabilities Net obligation under finance lease 3,455 Current liabilities Net obligation under finance lease 4,000 * 14,800 (3 X 2,467) * The longer period of the economic life of the asset is taken as it is reasonably certain that he asset will be acquired by the lessee. Page 18
ii: Accounting Policy note- statement of accounting treatment. Notes to the Income statement The profit from operations is stated after charging depreciation on leased assets of 2,467 and finance charge of 1,137. Notes to the Balance Sheet as at 31 October 2008 Property, Plant and equipment Plant Cost 1 Nov 2007 14,800 Additions - Disposals - 14,800 Accumulated depreciation 1 Nov 2007 4,933 Charge for the year 2,467 7,400 Carrying amount At 31 Oct 2008 7,400 At 31 Oct 2007 9,867 Analysis of finance lease liabilities Amount due within One year 4,000 Two to five years 3,455 c. This is an operating lease as the lease does not represent substantially all of the fair value. The income statement will show an annual rental charge of 8,000. The minimum lease payments under non-cancellable operating lease are as follows: Within one year 8,000 Within two to five years 8,000 Page 19
SOLUTION 5 a) IAS 37 has greatly restricted the instances in which provisions should be recognised in the balance sheet. This is to prevent the misuse of provisions; where in the past companies may have created big bath provisions and provisions against future costs which could realistically be avoided. A provision is a provision for an event, the timing of which is uncertain and the exact amount is not known. Recognition criteria: Obligation The company must have done something in the past which means it has no realistic alternative to paying out cash. e.g. If it has announced publicly its commitment (a constructive obligation) or if it has a legal contractual obligation. Probability There is more than 50% chance that the obligation resulting in a cash payout ( more likely than not ). Measurement The cost can be measured (or estimated) reliably. b. A contingent liability is 1. a possible obligation arising from past events, its realisation is dependent on the occurrence or non occurrence of one or more future events not wholly within the control of the organisation or 2. a present obligation arising from past event but is not recognised as it is not probable that a transfer of economic benefit will occur or the amount cannot be determined with sufficient certainty. c. i) ( 70% * 0) + (22% * 150,000) + (8% * 1,000,000) = 113,000 The expected costs are repairs of 113,000. A provision is required as this represents a probable cost which can be quantified. Balance sheet under Provision of Liability and Charges: 113,000 Income statement Provision for warranty: 107,000 Note to the financial statement as at 31 December 2008 Provision: This provision is in respect of expected costs of repairs under warranties on product X sold in 2008. It represents an amount based on previous claims. At 1 Jan 102,000 Utilised in the year (96,000) IS charge 107,000 At 31 December 113,000 Page 20
ii) A provision of 1,800,000 is required as there is 60% change of the damages being awarded. Balance sheet under Provision of Liability and Charges: Income statement: 1.8m 1.8m Note: The compensation claim provision is in respect of a claim made by a customer for damages allegedly caused in its production line caused by using product Y. It represents the present value of the amount the legal team estimate as the likely settlement. Contingent asset (disclose) A counter claim in respect of the compensation claim provided for above has been made against the supplier of parts used in product Y. Legal advice indicates a high chance of success with an expected settlement of 180,000. iii) A provision is only required for those costs which directly relate to the restructuring activity and not incurred with ongoing activities. A discussion (including numbers) of whether retraining and new system can be avoided and the fact that leases are contractual etc. Note: During the year the company announced and commenced a restructuring of the production division, with full communication to those affected. The cost of restructuring is estimated at 475,000 which must be provided for. Page 21