54831594-Saa-Group-Acca-P2-Mock-2011

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Mock Examination : aper

Corporate Reporting

Session : June 2011

Set by : Mr Ben Lee

Your Lecturer

Mr Goh Sher Wee

Mr Ben Lee

Your Mailing Address : ______________________________________

______________________________________

Your Contact Number : ______________________________________

I wish to have my script marked by my lecturer and

collect the marked script at the SAA-GE Reception Counter

have the marked script returned to me by mail

(Please submit your script latest by 6th May 2011 for marking)

SAA GLOBAL EDUCATION CENTRE PTE LTD

Company Registration No. 201001206N

20 Aljunied Road, #01-04, CPA House,

Singapore 389805

Tel: (65) 6744 9700 Fax: (65) 6744 9796

Website: www.saa.org.sg Email: [email protected]



Mock Examination

June 2011

Time allowed: 3 Hours plus 15 Minutes reading time



Question 1

Uzielli, a public limited company in the house-building trade, acquired the following shareholdings inWalker and Oglesby:

Date of acquisition Retained earnings Share capital Fair value of netat acquisition acquired assets atacquisition

$m $m $mWalker 1 November 20X7 120 200 450Oglesby 1 November 20X6 260 300 700

The following statements of financial position relate to Uzielli, Walker and Oglesby as at 31 October20X8.

Assets Uzielli Walker Oglesby

$m $m $mNon-current assetsProperty. Plant and equipment 310 300 400Investment in Walker (at cost) 380Investment in Oglesby (at cost) 550Held to maturity financial asset 62.5

1,302.5 300 400Current assets

Inventories 400 150 300Trade receivables 160 80 190Cash and cash equivalents 140 90 110

700 320 600TOTAL ASSETS 2,002.5 620 1,000

Equity

Share capital of $1 500 250 400Share premium 100 50 40Retained earnings 652.5 180 310Total equity 1,252.5 480 750Non-current liabilities 400 40 100Current liabilities 350 100 150Total liabilities 750 140 250TOTAL EQUITY AND LIABILITIES 2,002.5 620 1,000

The following information is relevant to the preparation of the group financial statements for theUzielli Group:

(a) There have been no new issues of shares in the group since 1 November 20X6 and the fairvalue adjustments have not been included in the individual companies’ financial records. The



group policy is to value non-controlling interests at the date of acquisition at the proportionateshare of the fair value of the acquiree’s assets acquired and liabilities assumed.

(b) Any increase in the fair value of the Walker’s and Oglesby’s’ net assets over their carryingvalues at acquisition is attributable to plant and equipment which had a remaining useful life of

6 years at 1 November 20X7

(c) On 10 September 20X8, Uzeilli sold inventories to Oglesby at an agreed price of $5 million, ata mark up of 25% on cost. Oglesby had sold half of these goods to third parties by the year endand had settled all amounts owing to Uzielli.

(d) Uzielli had purchased a debt instrument with five years remaining to maturity on 1 November20X6. The purchase price and fair value was $60 million at the date. The instrument will berepaid on 31 October 20Y1 at an amount of $75 million. The instrument carries fixed interestof 4.7% per annum paid annually on 31 October on the principal of $75 million and has aneffective interest rate of 10% per annum. In the current period the fixed interest has been

received and accounted for as finance income, but no other accounting entry has been made.

(e) Uzielli recognized a trade receivable on 1 November 20X6 due from its customer Thompson at$51,542,000 payable in three annual instalments of $20,000,000 commencing 31 October 20X7discounted at a market rate of interest adjusted to reflect the risks to Thompson of 8%. DuringNovember 20X8 (before Uzielli’s financial statements were authorized for issue), Thompsonentered into liquidation and the liquidator notified Uzielli the creditors would receive80% of amounts owed on original payment dates. An appropriate market rate of interest(adjusted asabove) was 9% at the year end.

(f) Walker entered into a features contract during the year to hedge a forecast sale in the yearended 31 October 20X9. The futures contract was designated and documented as a cash flowhedge. At 31 October 20X8, had the forecast sale occurred, Walker would have suffered a lossof $1.9m and the futures contract was standing at a gain of $2m. No accounting entries havebeen made to record the futures contract.

(g) At 31 October, Uzielli conducted an impairment test on Walker and Oglesby, which are bothcash-generating units in their own right. The recoverable amount of Walker was found to be$520 million (excluding any effect on net assets of the cash flow hedge) and there had been noimpairment of Oglesby.

(h) On 31 October 20X8, Uzielli sold to some of its land (which had cost $8 million) to HendrixBank for $10 million, its open market value determined by an independent surveyor. The termsof the agreement were as follows:

• Uzielli has the right to develop the land at any time during the bank’s ownership. For

this right, Uzielli has to pay all the outgoings on the land plus an annual fee of 5% of

the purchase price;

• Hendrix Bank maintains a memorandum account for the purpose of determining the

price to be paid by Uzielli, should Uzielli ever re-acquire the land or any adjustments be



necessary to the original purchase price. In this account will be entered the purchase

price, any expenses incurred by Hendrix Bank in relation to the transaction, a sum

added quarterly (or on the sale by Hendrix Bank of the land), calculated by reference to

Hendrix Bank’s lending rate plus 2% per annum applied to the daily balance on the

account; and from the account will be deducted the annual fees paid by Uzielli to

Hendrix Bank;

• Uzielli has the option to acquire the land at any time within 5 years from the date of

sale; the acquisition price is to be the balance on the memorandum account at that time;

• On the expiry of 5 years from the date of acquiring the land, Hendrix Bank will offer it

for sale generally; and at any time prior to that it may with the consent of Uzielli, offer

the land for sale;

• In the event of Hendrix Bank selling the land to a third party, the proceeds of the sale

shall be deducted from the memorandum account and the balance shall be settled

between Uzielli and Hendrix Bank in cash, as a retrospective adjustment to the price at

which Hendrix Bank originally purchased the land from Uzielli;• The finance director of Uzielli entered into this transaction to raise finance without

increasing the gearing ratio of Uzielli. He has recorded the transaction as a normal

disposal of property, plant and equipment.

(i) On 31 July 20X8, Uzielli sold 140 million of their 300 million shares in Oglesby for

consideration of $300m. Subsequent to the disposal, Uzielli maintained significant influence

over Oglesby. Their fair value of the remaining shareholding at 31 July 20X8 was $340m.

Oglesby’s profit (and total comprehensive income) for the year ended 31 October 20X8 was

$20 million and no dividends were paid or declared in the year. This disposal has not yet been

accounted for.

Required:

(a) Prepare the consolidated statement of financial position of the Uzielli group as at 31 October20x8.Work to the nearest $0.1m. (35 marks)

(b) Discuss whether the finance director’s proposed accounting treatment of the sale and therepurchase of land (item (h) above) is correct. (7 marks)

(c) Discuss briefly the importance of ethical behaviour in the preparation of financial statementsand whether the finance director’s proposed accounting treatment for the sale and repurchase of the land could constitute unethical behaviour. (8 marks)

Note: Requirement (c) includes two professional marks for the development of the discussion of theethical responsibilities of the Uzielli group. (Total = 50 marks)



Question 2

Tele2 is a company in the telecommunications industry providing landline and mobile telephoneconnections and equipment and other telecommunications services such as internet access. The

company is currently preparing its consolidated financial statements for the year ending 31 December2008.

When Tele2 charge a connection fee to a customer together with the related equipment, the entireconnection fee is recognized at the date of connection even if the length of the customer relationship isexpected to span a number of accounting periods. (2 marks)

The purchase of licence for operations from governments are treated as intangible assets and arecapitalized at their initial cost. In cases where Tele2 is confident that the licence will be renewed (at noadditional cost) then the licence will not be amortised. (3 marks)

Tele2 has recently been suffering a shortage of cash and to help to alleviate this had sold one of theiroffice buildings to a third party institution on 1 January 2008 and then leased it back for a period of 15years. The sale price of the building and its fair value are $8.5 million which is the present value of theminimum lease payments. At the end of the agreement the building will be transferred back to Tele2 atnil cost. At 31 December 2007 the carrying value of the building was $7 million. The rental under thelease agreement is $0.8 million per annum payable in advance and the interest rate implicit in the leaseis 5.44%. The directors of Tele2 are proposing to include the profit in disposal of $1.5 million in profitor loss for the year and to treat the lease as an operating lease. (9 marks)

On 1 January 2008 Tele2 held a 30% holding in a communications software development companyCSD, which originally cost $24 million a number of years ago. On 31 March 2008, Tele2 sold a 15%holding in CSD reducing its investment to a 15% holding meaning that Tele2 no longer exercisessignificant influence over CSD. Before the sale of the shares the net asset value of CSD at 31 March2008 was $100 million, rising from $70 million on the date of the original acquisition. Tele2 received$20 million for its sale of the shares in CSD and the fair value of its remaining holding in CSD at 31March 2008 was $17 million. At 31 December 2008 the fair value of this holding was $19 million.

(7 marks)

Tele2 has a number of properties held under finance leases which are surplus to requirements.Although every effort has been made to sub-let these premises in the current economic climate it isrecognized that it may not be possible to do so immediately. Therefore there will be a shortfall arisingfrom sublease rental income being lower than the lease costs being borne by Tele2. (2 marks)

Effective communication to the directors. (2 marks)

Required:

Write a report to the directors of Tele2 explaining how each of these matters should be dealth with inthe group financial statements for the year ending 31 December 2008.

(25 marks)



Question 3

One of the greatest challenges facing the accountancy profession today is the accounting treatment of financial instruments. Internationally, IAS 39 deals with the recognition and measurement of financial

instruments, IAS 32 deals with presentation, while IFRS 7 deals with the disclosure aspects.

Revisions were made recently to IAS 32 and IAS 39 aimed at streamlining and simplifying thestandards. The IASB has indicated that the revised IAS 32 and IAS 39 will remain in place as part of the ‘stable platform’ developed for 2005 for some time.

Draft financial statements have been prepared for JJW, a public limited company, and these show aprofit before tax of $1,110,000 for the year ended 30 September 20X6, but no accounting entries havebeen made in respect of the financial instruments.The following information relates to the financial instruments held by JJW during the year:

(i) $1,200,000 6% 4 year bonds issued by JJW at a discount of 31 / 3 % on 1 October 20X5. Theinternal rate of return of the debt is 7%.

(ii) 6% debentures in LKW, redeemable at par on 30 September 20X7 with interest paid annuallyon 30 September. JJW had paid $500,000 (the nominal value) for the debentures on 1 October20X5. JW intends to hold these debentures until their maturity date. Market rates for similardebentures were 7% on 30 September 20X5 and throughout the year to 29 September 20X6 and7.5% on 30 September 20X6.On 16 October 20X6, JJW was notified that due to financial difficulties, LKW will only beable to repay $400,000 on the original maturity date. All interest will however be paid in full.

(iii) 150,000 $1 ordinary shares issued at par when JJW was set up in 20X4 and a further 50,000 $1ordinary shares issued on 1 January 20X6 at $2.40 per share. Issue costs amounted to $2,000 in20X4 and $1,500 in 20X6. Market value of each share was $3.00 at 30 September 20X5 and$3.50 at 30 September 20X6.

(iv) 250,000 $1 redeemable preference shares issued at par by JJW on 1 October 20X5 with adividend rate of 7%. Market interest rates on similar shares were 7% throughout the year ended30 September 20X6. Open market value of the shares is equal to book value.

(v) Shares held as an investment in another company BCW. The shares were bought in March20X5 for $99,000 inclusive of transaction costs of $1,000. Open market value of the shareswas $120,000 at 30 September 20X5. The shares were sold for $114,000 in August 20X6.

JJW’s accounting policy states that fair values are determined by reference to open market valueswhere available and where not available by discounting the relevant cash flows at a market rate of interest on similar instruments.



Required

(a) Prepare a calculation of the revised profit before tax after making the necessary adjustmentsin respect of the financial instruments. Include an explanation of the treatment of each of thefinancial instruments. (11 marks)

(b) There has been a great deal of debate over the accounting treatment of financial instruments,particularly over the increased use of fair values. Discuss the benefits and drawbacks of usingfair values to measure financial instruments and how these remeasurements are presented in thestatement of comprehensive income. (6 marks)

(c) The directors of JJW have asked for your advice on the accounting implications of twotransactions.(i) JJW (whose currency is $) is negotiating a contract to sell components to a French

purchaser, whose currency is FFranc . The contract is denominated in FFranc This is thefirst contract that JJW has entered into with this purchaser but the terms relating to

physical delivery of the components are identical to those of their normal sales.(ii) JJW is considering leasing a property. Under the terms of the agreement the rentalpayments are contractually fixed for the first year but thereafter fluctuate in line withthe increase or decrease in the company’s share price.

Required

Explain the principles outlined in the IAS 39 Financial Instruments: Recognition and Measurement inrespect of embedded derivatives and how the two transactions should be reflected in the financialstatements of JJW for the year ended 30 September 20X6. (6 marks)Appropriateness and quality of discussion. (2 marks)

Work to the nearest $’000. Ignore deferred tax. (Total = 25 marks)

Present values

Period 6% 7% 71 / 2 % 8%1 0.943 0.935 0.930 0.9262 0.890 0.873 0.865 0.8573 0.840 0.816 0.805 0.7944 0.792 0.763 0.749 0.735

Present value of annuities

Period 6% 7% 71 / 2 % 8%1 0.943 0.935 0.930 0.9262 1.833 1.808 1.796 1.7833 2.673 2.624 2.601 2.5774 3.465 3.387 3.349 3.312



Question 4

In October 2005, the IASB issued a discussion paper entitled Management Commentary.

Required

(a) Why is a management commentary accompanying a set of financial statements considerednecessary? (5 marks)

(b) Identify and explain the key contents of a management commentary. (5 marks)

(c) Critically appraise the following extract from a company’s management commentary sectionon business performance and prospects: (7 marks)

Business performance

Sales revenues from the Group’s continuing businesses rose to $59 million in 20X5, an increase of 12% in local currencies (9% in dollars); these results exclude the results of businesses which were soldin 20X4. Both of the Group’s divisions, Office products and Office systems, grew significantly fasterthan the global market. The Office products division sales advanced 13% in local currencies (10% indollars). In the Office systems division sales rose 8% in local currencies (6% in dollars), which postedgrowth significantly above the market average.

Operating profit from continuing businesses was up substantially for the year, advancing 24% in localcurrencies (20% in dollars) to nearly $14 million (before exceptional items). The operating profitmargins in both divisions again increased sharply. In the office products division the operating profitmargin rose 1.9 percentage points to 25.7%, while the margin in the office systems division gained 2.4percentage points to reach 21.4%. Strong sales growth, productivity improvements and the gainsrealized on the disposal of non-core products and technologies as the group continued to realign itsproduct portfolio were major contributors to the Group’s improved profitability. Together these factorsmore than offset increased costs for new product launches and expenditures on licensing agreementsfor products and technologies. Even excluding gains from the disposal of products, the operatingmargin improved significantly.

Thanks to the strong operating performances of the Group’s continuing businesses, EBITDA fromthese businesses increased by 15% to $9.2 million. The EBITDA margin in the Office productsdivision reached 32.6%, compared with 31.5% the year before, and in the Office systems division theEBITDA margin advanced 2.7 percentage points to 31.2%.

The sale of non-core areas of the Office products division resulted in an exceptional pre-tax gaintotalling $4.6 million.

The Group also completed a major acquisition during the year, purchasing Tentax in the United Statesin early 2005 for a total consideration of $3.6 million.



Future prospects

In 20X6 the results in the Office products division will be influenced by the expiry of the US patent fora key product and by costs for product launches in key markets and significant development activities.

As an overall outcome we anticipate local-currency sales growth above the world market and anoperating profit margin (before exceptional items) broadly in line with that for 20X5.

In 20X6 the office systems division expects to outgrow the world market again in terms of local-currency sales. The division also expects further progress towards its goal of an operating profit margin(before exceptional items) of around 23% in 20X7.

The United Nations Conference on Trade and Development (UNCTAD) published a review looking atpractical issues relating to the implementation of IFRS, highlighting some of the benefits arising, andproblems encountered, as the use of IFRS becomes more widespread. The report has a particular focuson issues facing developing countries.

Required

(d) Discuss the main advantages to developing countries of adopting IFRS and some of thepractical difficulties they may face. (6 marks)

Appropriateness and quality of discussion of items in (a) – (d) (2 marks)(Total = 25 marks)

54831594-Saa-Group-Acca-P2-Mock-2011

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