P1 - Corporate Reporting August 08

8/6/2019 P1 - Corporate Reporting August 08

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CORPORATE REPORTING

PROFESSIONAL 1 EXAMINATION - AUGUST 2008

NOTESYou 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 theanswer not to be marked. Otherwise, only the first answer to hand for Questions 4 or 5 will be marked.)

PRO-FORMA INCOME STATEMENT BY NATURE, INCOME STATEMENT BY FUNCTIONAND 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.


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THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTINGPROFESSIONAL 1 EXAMINATION AUGUST 2008

Time allowed 3.5 hours, plus 10 minutes to read the paper. Answer Questions 1 to 3 andQuestion 4 or 5.

You are required to answer Questions 1, 2 and 3.

1. The Finance Director of Rivervale PLC, a company that collects and recycles household waste, has provided youwith the two most recent income statements and balance sheets with a view to you preparing cash flowinformation for the Board of Directors.

Income Statements for the year ended 31 December2007 2006

m mRevenue 5,600 3,900Cost of sales (3,360) (2,340)Gross profit 2,240 1,560

Operating expenses (870) (920)1,370 640

Gain on disposal of intangible assets 10 -Operating profit 1,380 640Finance costs (160) (90)Profit before tax 1,220 550Income tax expense (450) (190)Profit after tax 770 360

Balance Sheets as at 31 December2007 2006

Assets m m

Non-current assetsProperty, plant and equipment (Note 1) 5,870 4,100Intangible assets 730 570

6,600 4,670Current assets

Inventories 1,300 820Receivables 840 400Short term equity investments 60 120Cash 10 20Bank deposit accounts - 80

2,210 1,440

Total Assets 8,810 6,110

Equity and LiabilitiesEquityOrdinary share capital 1 2,800 2,400Share premium 400 200Revaluation reserve 840 540Retained earnings 1,750 1,120

5,790 4,260Non-current liabilities9% Debentures 2011 1,150 1,050Provision for liabilities 30Finance lease obligation 180 60

1,360 1,110

Current liabilities (Note 2) 1,660 740Total Equity and Liabilities 8,810 6,110


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Extract from notes to financial statements.

1. Property, plant and equipmentLand & Plant & Motor

Buildings Equipment Vehicles Total m m m m

Cost 1 January 2007 9,950 1,400 700 12,050Revaluation 200 - - 200Additions 320 1,560 500 2,380

Disposals - (180) - (180)Cost 31 December 2007 10,470 2,780 1,200 14,450

Depreciation 1 January 2007 6,600 850 500 7,950Disposals - (140) - (140)Revaluation (100) - - (100)Charge for year 220 400 250 870Depreciation 31 December 2007 6,720 1,110 750 8,580

Net Book Value 31 December 2006 3,350 550 200 4,100

Net Book Value 31 December 2007 3,750 1,670 450 5,870

2. Current liabilities 2007 2006 m m

Trade payables 600 340Payable on plant & equipment 350 150Finance lease obligation 60 20Income taxation 360 180Dividends 120 40Interest accrual 20 10Bank overdraft 150 -

1,660 740

Additional information:

(a) Some plant and equipment was disposed of during the year for 60 million. Plant and equipment additionsinclude some machinery purchased on a finance lease. The finance lease capital obligation element of the leaserental payments amounted to 40 million in 2007. Lease interest paid is included in finance costs.

(b) During March 2007, the company made a bonus issue from the share premium account of one new ordinaryshare for every eight held at that date. A further share issue for cash was made in October 2007.

(c) A dividend of 120 million was declared by the Directors and approved by Shareholders before the 31 December2007 year end. An interim dividend of 20 million was paid in June 2007.

(d) In June 2007, Rivervale PLC sold a waste iron collection licence for 30 million. There were no other disposalsof intangibles. All intangible assets are amortised over 5 years, including a full year in year of purchase and nonein year of disposal. Amortisation is included in cost of sales.

(e) The provision for liabilities relates to a court case for illegal dumping initiated by a local county council againstRivervale PLC in April 2007.

REQUIREMENTS:

(a) Prepare the cash flow statement for the year ended 31 December 2007 of Rivervale PLC in accordance with IAS7 Cash Flow Statements.

(23 Marks)Presentation (1 Mark)

(b) Prepare a brief report on the liquidity position of Rivervale PLC for the Non-Executive Directors on the board whoare concerned about the drastic fall in cash and cash equivalents during 2007.

(6 Marks)

[TOTAL: 30 MARKS]


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6. The dividends included in the Current Liabilities of Tony Ltd and Tardy Ltd are the final declared dividendsfor 2007, which were approved by their respective shareholders before the year end. Trappa PLC has notyet included its share of any dividends receivable in its financial statements.

7. Assume the profits and dividends of all three companies are earned evenly over the financial year and thatthere have been no recent issues of share capital in either Tony Ltd or Tardy Ltd.

REQUIREMENTS:

(a) Prepare the Consolidated Balance Sheet of the Trappa Group PLC as at 31 December 2007 in a format suitablefor publication under International Financial Reporting Standards.

(20 Marks)Presentation (1 Mark)

(b) The Trappa Group PLC are considering the acquisition of 100% of the ordinary share capital of a company basedin London, Brady Ltd., whose functional currency is the pound () sterling. The Trappa Group would expect thatBrady Ltd would continue to operate and be managed independent of its parents operations, subject to overallhead office control.

Set out briefly the impact on the consolidated financial statements of Trappa Group PLC of acquiring a foreignsubsidiary such as Brady Ltd.

(4 Marks)

(c) (i) Explain what is meant by the term Associate and when one should be recognised in the consolidatedfinancial statements.

(2 Marks)

(ii) Set out briefly the accounting impact of an Associate on a consolidated income statement and balancesheet.

(3 Marks)

[TOTAL: 30 MARKS]

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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.

REQUIREMENTS:Give your answer to each section in the answer sheet provided.

[TOTAL: 20 MARKS]

1. Smart PLC has an issued ordinary share capital of 2,000,000 shares of 1 each. During the financial year to 31

December 2007 they paid an interim dividend of 4c per share. On 10 December the Directors also proposed thatthe final dividend for the year would be 6c per share. The dividend was approved by the shareholders on 31March 2008 and paid on 10 April. In the 31 December 2007 financial statements the following amounts wouldappear in respect of dividends -

Statement of Changes in Equity Balance Sheet(a) 200,000 120,000(b) 120,000 -(c) 120,000 120,000(d) 80,000 -

2. Buildup Ltd is an established company in the construction industry and undertook a 15-month contract to buildan apartment block, which was almost complete at the year-end. Details of the contract as at their year end 31stMay 2008 are as follows:

Apartment Contract 000Cost of work done 4,050Cost of work certified 3,840Progress payments invoiced and received 3,250Estimate of final total cost, including futurecosts of rectification and guaranteed work 4,500Final contract price 6,400

It is company policy that profit is to be recognised on a percentage completion basis, being calculated as the costsincurred to date as a proportion of total estimated costs. How much (in 000) should Buildup Ltd include inRevenue in the income statement in relation to the above contract for the year ended 31st May 2008

(a) 3,250.(b) 5,350.(c) 5,760.(d) 5,461.

3. XPRS Ltd is showing a gross profit of 300,000 in its Income Statement for the year ended 31 March 2008. Thisincludes a closing inventory valuation of 50,000. It has been discovered that an item of stock included in year

end inventory at its cost of 5,000 is now obsolete and may only be sold for 4,200. It would cost 200 toadvertise and 300 to deliver this item. The correct gross profit amount in the Income Statement of XPRS Ltd forthe year ended 31 March 2008 is:

(a) 301,300.(b) 298,700.(c) 300,800.(d) 299,200.

4. Which of the following does not meet the definition of a financial asset?

(a) Trade receivables.(b) Cash.(c) Equity shares in another entity.(d) Inventories.


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5. For its 31 March 2008 year end, an entity has decided, for cost-benefit reasons, to calculate the finance costs inrespect of all new finance leases using the sum of the digits method as opposed to the actuarial method whichit has used up to now. In the financial statements for the year end 31 March 2008 this is disclosed as:

(a) a change in accounting estimate.(b) a prior year adjustment for a material error.(c) a change in accounting policy with retrospective application.(d) a change in accounting policy with prospective application.

6. Katies Kitchens Ltd, a bespoke kitchens manufacturer prepares its financial statements to 31 December eachyear. On 1 January 2007 the company commenced the five year lease of a specialised timber cutting machine.The lease rental consists of five payments of 24,000, paid in advance. The purchase price of this type ofmachine was 104,000 at the date of the lease commencing and the rate of interest inherent in the lease is7.75%. Katies Kitchens Ltd has an option to purchase the machine outright for 1 at the end of the five years. Itis estimated that the useful life of the machine is eight years with no residual value.

If the lease is to be accounted for as a finance lease under IAS 17 Leases, the effect of the lease on the IncomeStatement and Balance Sheet of Katies Kitchens Ltd at 31 December 2007 would be:

Profits Non-current Assets Liabilities(a) Decrease by 6,200 Increase by 83,200 Increase by 80,000(b) Decrease by 24,000 Increase by 104,000 Increase by 104,000(c) Decrease by 19,200 Increase by 91,000 Increase by 86,200(d) Decrease by 21,060 Increase by 91,000 Increase by 88,060

7. On 31 December 2007, its financial year end, Diggers PLC formally decided to sell a factory building that it is nolonger using. The company is confident that it will be sold quickly. The building originally cost 650,000 on 1January 2000 and was depreciated at 2% per annum. It was revalued to 1,000,000 on 1 January 2003 and hada useful life of 40 years at that date. The company has engaged a commercial property selling agent who hasvalued the property at 900,000 at 31 December 2007. The agent charges 1% commission and it would cost

20,000 to advertise the factory.

The carrying value of the factory in the balance sheet of Diggers PLC at 31 December 2007 should be:

(a) 875,000.(b) 871,000.(c) 546,000.(d) 900,000.

8. Which of the following will NOT lead to a foreign exchange gain or loss being presented in the income statement?

a) A difference between the exchange rate at which goods are recorded as purchased and the rate on the

day when payment is made.b) A difference between the rate of exchange on the date on which goods are sold and the rate of exchangeon the date when the foreign currency receipt is lodged.

c) A difference between the exchange rate when the goods are purchased and recorded in Inventory and therate at the balance sheet date.

d) A difference between the exchange rate when the goods are purchased and recorded in Payables and therate at the balance sheet date.


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4. IAS 38 Intangible Assets sets out the rules for the recognition, measurement, presentation and disclosure of allintangible assets including goodwill.

REQUIREMENTS:

(a) Define what is meant by an intangible asset and set out the criteria to be satisfied so that costs (excludingdevelopment expenditure) may be recognised as an intangible asset on an entitys balance sheet.

(7 Marks)

(b) Explain how the criteria in (a) above apply to the accounting treatment of:

(i) Internally generated intangibles; and(ii) Separately purchased intangibles.

Illustrate your answers with an example in each case. (6 Marks)

(c) The Directors of Speakalot PLC, a telecoms and broadband company, wish to include the following itemsof expenditure in 2007 as intangible assets in their balance sheet as at 31 December 2007:

G A new five year broadband licence for the Dublin region, for which they paid 800,000 to thegovernment on 1 January 2007.

G The 500,000 cost of the two year staff training and development campaign commenced by thecompany during the year. The company expects the training and development to achieve costsavings of 200,000 per annum over the next three years.

G The broadband brand name Connectalot was valued by an external brand management companyat 3 million. This brand has been supported during the year by a door to door marketing campaigncosting 300,000. The company expects to achieve a market share of 10%, which will yield profitsof about 400,000 annually for five years.

Write a brief memo to the Finance Director explaining how the above expenditures should be accountedfor in the financial statements of Speakalot PLC for the year ended 31 December 2007, in accordance withIAS 38 Intangible Assets.

(7 Marks)

[TOTAL: 20 MARKS]


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5. IAS 8 Accounting Policies, Accounting Estimates and Errors sets out the criteria for selecting, applying andchanging accounting policies as well as relevant disclosures. It also sets out how to account for and present fraudand errors in the financial statements.

REQUIREMENTS:

a) Outline the meaning of the following terms:

G Accounting policy.G Accounting estimate. (4 Marks)

b) Set out the circumstances in which a company is allowed to make a change in accounting policy.(3 Marks)

c) Set out the required accounting treatment where a company discovers an error in the financial statementsin:

(i) The current accounting period; and(ii) A previous accounting period. (4 Marks)

d) Explain, with the aid of any relevant calculations, how the following independent scenarios should be

presented in the financial statements of Robots PLC for the year ended 31 December 2007:

(i) At 31 December 2007, Robots PLC decided to revalue all of its property for the first time. Therevaluation surplus was 1 million.

(ii) At 1 January 2007, the company decided to extend the useful life of all its vans and trucks by twoyears. This has a material effect on its profit for 2007.

(iii) In November 2007, the company discovered that the Sales Director had been creating falsesales on credit to fictitious customers. This took place in a sales channel where his son was theManager. The sales amounted to 120,000 in 2007, 180,000 in 2006 and 90,000 in 2005.These sales were not picked up by the credit control department and the receivables were alloutstanding at 31 December 2007.

(9 Marks)

[TOTAL: 20 MARKS]

END OF PAPER

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THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTINGPROFESSIONAL 1 EXAMINATION AUGUST 2008

SOLUTION 1(a) Cash Flow statement for the year ended 31 December 2007

m Marks

Cash flow from operating activities

Profit before taxation 1,220.0 0.5

Adjustments

Gain on disposal of intangible assets (10) 0.5

Finance cost 160 0.5

Depreciation of PPE 870 0.5

Amortisation of Intangible assets W1 216.9 1

Provision for liabilities 30 0.5

Profit on disposal of PPE W2 (20) 1,246.9 1Operating Profit before working capital changes 2,466.9

Movements in Working capital

Inventory increase (1300-820) (480.0) 0.5

Receivables increase (840-400) (440.0) 0.5

Payables increase (600-340) 260.0 0.5

Cash generated from operations 1,806.9

Interest paid W4 (150.0) 1

Taxation paid W5 (270.0) 1

Dividend paid [or Financing activities] W6 (60.0) 1.5

Net Cash flows from operating activities 1,326.9

Cash flows from Investing activities

Proceeds from disposal of PPE 60.0 0.5

Purchase of PPE W2 (1,980.0) 4

Purchase of Intangible assets W1 (396.9) 3

Proceeds from disposal of intangible assets 30.0 0.5

Disposal of equity investments (120-60) 60.0 1

(2,226.9)

Cash flow from financing activities

Proceeds from issue of share capital 600.0 2Increase in long term borrowings (1150 - 1050) 100.0 1

Payments of finance lease liabilities [Capital element] (40.0) 0.5

660.0

Net decrease in cash and cash equivalents (240.0)

Cash and cash equivalents 31/12/2006 100.0 0.5

Cash and cash equivalents 31/12/2007 (140.0) 0.5

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SUGGESTED SOLUTIONS


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Note to cash flow statement

2007 2006 Movement

m m m

Cash 10 20 (10)

Bank (150) 80 (230)

(140) 100 (240)

Presentation: 1 Mark

(24 Marks)

Workings

W1 Intangible assets

Balance b/d 570.0 Disposal* 20.0

Acquired for cash less 2007 amort *** 317.5 Amortisation c/f 2006** 137.5

Balance c/d 730.0

887.5

m

* Intangible asset disposal proceeds 30

Gain on disposal (10)

Book value of license sold 20

** Amortisation of Intangibles: - c/f 2006

Opening balance 570

Disposal @book value (20)

550

Amortisation @ 4years 137.50

NOTE: Assumes that the unsold intangible assets carried forward from 2006 were purchased in that

year.

*** Amortisation of 2007 purchases of intangible assets.Cash paid less amortisation 317.5

=> gross cash paid for intangibles = 317.5/0.8 396.9 = investing cash flow

Amortisation = difference 79.4

Total amortisation in 2007

Intangibles c/f prior year 2006 137.5

Intangibles purchased in 2007 79.4

216.9

W2 Property, plant & equipment

m m

Gain on disposal:

Proceeds 60

Cost 180

less: Accum. Depreciation (140) (40)

Gain on disposal 20

PPE Payments for additions:

Land & buildings 320

Plant & equipment (see below) 1,160

Motor vehicles 500

To CF Statement 1,980

Plant & equipment additions gross 1,560Less: Finance Lease additions W3 (200)

1,360

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Capital payables account

Payments to acquire PPE - BAL 1,160 Balance b/d - CL 150

Balance c/d - CL 350 P & E additions 1,360

1,510

W3 Lease obligation

Balance b/d - CL 20

Payments 40 Balance b/d - NCL 60

Balance c/d - CL 60 Asset additions - Balancing figure 200Balance c/d - NCL 180

280

W4 Interest payable

Balance b/d - CL 10

Payments - Balancing figure 150 IS charge

160

Balance c/d - CL 20

170

W5 Taxation payable

Balance b/d - CL 180Payments - Balancing figure 270 IS charge 450

Balance c/d - CL 360

630

W6 Dividends payable

Balance b/d - CL 40

Payments - Balancing figure 60 SOCE total - see below 140

Balance c/d - CL 120

180

mFinal dividend accrued 120

Interim dividend paid 20

140

W7 Share capital

Balance b/d - 2,400

Bonus issue (1/8)

to Share Premium 300

Balance c/d - CL 2,800 Cash Issue - Balancing figure 100

2,800

Share premium

Bonus issue - Share Capital 300 Balance b/d 200

Cash issue - Balancing figure 500

Balance c/d 400

700

Total Issue for cash: m

Share capital 100

Share premium 500

600

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(b)

Report on Liquidity of Rivervale PLC

To: Non-executive Directors

From: Financial Controller

Re: Liquidity position of Rivervale PLC

Introduction

The short-term cash position of the company has been in free fall over the period 2006-07 from positive cashand bank balance of 100m in 2006 to a net overdraft situation of 140m in 2007, a negative movement of

240m in one year. Following are some of the main causes of this negative cash situation.

Key Issues:

The main cause of this loss of cash is the dramatic growth in the period yielding sales growth of 43%. The

company is profitable but liquidity indicators such as the current and acid test ratios have disimproved

dramatically (see Appendix).

The company has expanded very quickly with 1,980m paid for property, plant and equipment additions in

order to generate the sales growth. Intangible assets purchases cost 397m. This was financed mainly

through a share issue of 600m and an increase in long-term borrowings of 100m. Operating cash flows

were positive but short-term borrowings, such as the overdraft, were also used to finance this growth.

In its quest to expand, the company has relaxed its control over working capital matters with receivables

days increasing by 18 days to 55 days. This was partly covered by taking 13 days longer to cover payables.

We need to be careful not to endanger further growth with supply problems due to slow payment.

Operating cash flows were positive and this needs to continue in order to pay for the 2007 expansion and

any future growth. Interest cover based on profits has increased and is well covered by operating cash flows.

Gearing has actually fallen from 25% to 20% which indicates a capacity to take on more long term funding.

Conclusion

Share capital funding increased in the period but the bonus issue could be seen to be unnecessary. Alsoin a period of high growth, it could also be thought unnecessary to triple the declared final dividend to

120m. This puts further pressure on short term cash.

The short-term borrowings should be replaced by longer term debt if the company wishes to continue to

expand in a controlled manner and not fall into the trap of overtrading. Operating cash flows are also

financing the growth but working capital is close to spiralling out of control as the company has concentrated

on expansion. This will need to be corrected. Short-term dividend policy should also be reviewed.

Appendix: Key ratios

Ratio 2007 2006

Current ratio 1.33: 1 1.95: 1

Acid test ratio 0.55: 1 0.83: 1

Interest cover 4.81 times 4 times

Receivables days 55 days 37 days

Payables days 65 days 53 days

Gearing 20% 25%

Report presentation 0.5 marks

Key ratios 2 marks

Discussion 3.5 marks

(6 Marks)

[Total : 30 Marks]

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SOLUTION 2

Trappa Group PLC

Consolidated Balance Sheet as at 31 December 2007

m

Assets Marks

Non-current assets

Property, plant and equipment W8 1,032.0 1.5

Investment in Associates W5 98.0 1.51,130.0

Current assets

Inventories W9 354.0 1.5

Trade and other receivables W10 374.0 1.0

Dividends receivable from associate W13 3.0 0.5

Cash and cash equivalents [80+15+6] W10 101.0 1.0

832.0

Total Assets 1,962.0

Equity and LiabilitiesEquity

Ordinary share capital 1 400.0 0.5

Retained earnings W3 530.0 6.5

930.0

Minority Interest W4 107.0 2.5

1,037.0

Non-current liabilities

Loans [400+130-40 intercompany] 490.0 1.0

Current liabilitiesTrade Payables W11 310.0 1.0

Other payables [60+15] 75.0 0.5

Dividends payable to equity W13 40.0 0.5

Dividend payable to minority W13 10.0 0.5

435.0

Total liabilities 925.0

Total Equity and Liabilities 1,962.0

Presentation : 1 mark

(21 Marks)

Workings

1. Group structure Group Minority

share Interest

Tony - subsidiary 75% 25%

Tardy - Associate 30% -

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2. Goodwill - subsidiary

Cost of Control Account - Tony Ltd

Cost of investment 180.0 Share capital - 75% x 120m 90.0

Retained earnings -75% x100m 75.0

Goodwill - gain to IS 15.0 Fair value adjs (W12) 30.0

195.0 195.0

Note: Per IFRS 3 - 'Negative' Goodwill is to be treated as a gain and credited to income.

3. Consolidated Retained Earnings

Consolidated Retained Earnings

Cost of control - pre-acquisition 75.0 Trappa 340.0

Tony 280.0

Depreciation on FV adj (W12) 6.0 Interest in associate

Unrealised Inventory profit - 75% 3.0 [30% x (120 - 60) - 2] (W6, 7) 16.0

Minority interest - 25% x 280m 70.0 Goodwill - gain (W1) 15.0

Subsidiary dividends (W13) 30.0

Balance Sheet 530.0 Associate dividends (W13) 3.0

684.0 684.0

4. Minority Interest

Minority Interest

Depreciation on FV adj (W12) 2.0 Share capital - 25% 30.0

Unrealised Inventory profit 1.0 Retained earnings 70.0

Fair value adjs (W12) 10.0

Balance Sheet 107.0

110.0 110.0

5. Investment In Associate

Method 1 Investment in AssociateCost of investment 80.0

Retained Earnings * 18.0 Balance Sheet 98.0

98.0 98.0

* Post acquisition retained Earnings = 30% x (120 - 60) = 18.0

Method 2 m

Group share of net assets of Associate [30% x 220m] 66.0

Goodwill 32.0

98.0

6. Goodwill in Associate

Cost of Control Account - Tony Ltd

Cost of investment 80.0 Share capital - 30% x 100m 30.0

Retained earnings -30% x60m** 18.0

Goodwill 32.0

80.0 80.0

** Retained earnings at date of acquisition 1 January 2007

m

Retained earnings 31 December 2007 120.0

Profit for year (70.0)Dividends for year 10.0

Retained earnings 1 January 2007 60.0

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7. Sale of goods from Associate to Parent

m m

Dr Income of Associate/ Retained earnings 2.0

Cr Inventory 2.0

[ 30% x (60m x 50/150 x 1/3)]

Note:

The upstream transaction of the sale of goods from Tony Ltd to Trappa Plc can be treated in one of two ways

as IAS 28 is not completely clear on the issue:

(a) Dr Share of income of associates (IS), Cr Inventories or

(b) Dr Share of income of associates (IS), Cr Investment in Associate (BS) with the group share in the

associate x unrealised profit on the transaction.

Neither the revenue amount nor the trading balance are removed as IAS 28 is clear that an associate is not

part of the group in the same was that a subsidiary is and therefore neither Inter-company balances nor

trading revenues are removed.

8. Property Plant and Equipment

mBalance per BS - Trappa 640.0

Balance per BS - Tony 360.0

Fair value adjustment (W12) 40.0

Depreciation on FV adj (W12) (8.0)

1,032.0

9. Inventories m

Balance per BS - Trappa 240.0


Unrealised Inventory profit [ 32m x 1/2 x 25%] (4.0)

Unrealised Inventory profit - associate W7 (2.0)354.0

Note: Unrealised profit in inventory - sale of goods from Tony Ltd to Trappa Plc

m m

Dr Retained Earnings - 75% 3.0

Dr Minority Interest - 25% 1.0

Cr Inventory [ 32m x 1/2 x 25%] 4.0

10. Trade and other receivables

m



Inter-company trading balance (26.0)

374.0

Note: Inter-company trading balance with subsidiary

m m

Dr Bank 6

Dr Payables 20

Cr Receivables 26

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11. Trade Payables m



Inter-company trading balance (see W10 above) (20.0)

310.0

12. Fair Value adjustment (ii)

Tutorial note: The PPE fair value adjustment should be reflected in the value of

Tony Ltd PPE and therefore the Consolidated PPE. m m

Dr Property Plant and Equipment 40.0

Cr Cost of control - 75% 30.0

Cr Minority interest - 25% 10.0

Depreciation must be charged on the additional value.

Dr Retained Earnings - 75% 6.0

Dr Minority Interest - 25% 2.0

Cr Property Plant and Equipment [40m/20 x 4years] 8.0

13. DividendsSubsidiary Dividends not accounted for by Parent

m m

Dr Dividends payable (75% x 40 m) 30.0

Cr Retained earnings 30.0

Dividends receivable from associate not accounted for by Parent

Dr Dividends receivable (30% x 10 m) 3.0

Cr Retained earnings 3.0

Dividend payable to minority interest

Total dividend - Tony Ltd 40.0Dividend to Parent (30.0)

10.0

(b) Acquisition of a foreign currency subsidiary:

Students should include the following key points in their memo:

1. As Brady Ltd would be run semi-autonomously its functional currency would continue to be sterling.

2. The closing rate method of foreign currency translation would be required to consolidate Brady Ltd

under IAS 21, as the presentation currency of Brady Ltd is different to its functional currency.

3. The closing rate method involves the following:

i. The net assets and the goodwill on acquisition are translated at the rate ruling on the date of

acquisition.

ii. The balance sheet assets and liabilities of the subsidiary are re-translated annually at the

closing rate on the balance sheet date, i.e. 31 December.

iii. The income statement of the subsidiary is translated at the rate ruling on the date of the

transaction, however the average exchange rate for the financial year is usually used for

practical purposes.

iv. Foreign exchange gains or losses which arise on the re-translation of the net investment in thesubsidiary are included in equity until the disposal of the subsidiary. This is usually done through

the mechanism of a Foreign Exchange Translation Reserve.

(4 Marks)

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(c)

(i) An Associate is an entity, including an unincorporated entity such as a partnership, over which the

investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.

Circumstance where an associate is recognised in consolidated financial statements:

G Where an entity holds 20% or greater of the voting power of the investee it is deemed to hold

significant influence unless it can be clearly demonstrated otherwise.

G If less than 20% of the voting power of the investee is held then significant influence can be

demonstrated in one or more of the following ways:

o Board of directors representation;

o Participation in the policy making process, including dividend policy;

o Material transactions with the investee;

o Interchange of material personnel;

o Provision of essential technical information.

(2 Marks)

(ii) Equity accounting is used to include an associate in the consolidated income statement and balance sheet.

The impact of an associate using the Equity method is as follows:

Consolidated income statement

The Group share of the profit after tax of the associate is shown as a single line item before the group profit

before taxation.

Consolidated balance sheet

A non-current asset, called the Investment in Associate, is calculated as the original cost of the investment

plus (or less) the groups post acquisition share

of retained profits (losses) less impairment losses on any goodwill in the associate.

The group retained earnings includes the group share of post acquisition retained earnings less goodwill

impairments.

(3 Marks)

[Total : 30 Marks]

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SOLUTION 3

1. Solution (d)

As the 6c per share dividend was only proposed by the directors and not approved by the shareholders pre

year end it does not meet the definition of a liability under IAS 37 Provisions, Contingent Liabilities and

Contingent Assets.

2. Solution (c)

Cost to date/Estimate of final cost x 6,400 = 5,760

3. Solution (b) 298,700

Valuation of inventory = lower of cost and net realisable value (NRV)

Cost 5,000

Selling Price 4,200

Selling costs (200+300) 500

NRV (3,700)

Inventory write-down 1,300

If closing inventory valuation decreases so does gross profit, therefore

Correct Gross profit = 300,000 - 1,300 = 298,700.

4. Solution (d) Inventories

5. Solution (a) - a change in accounting estimate.

6. Solution (c)

Decrease by 19,200 Increase by 91,000 Increase by 86,200

Opening Rental Capital Finance Capital Interest TotalPeriod Balance in advance Payment Cost 7.75% Bal o/s accrual Liabil

2007 1 104,000 24,000 24,000 6,200 80,000 6,200 86,200

2008 2 80,000 24,000 17,800 4,821 62,200 4,821 65,021

Depreciation on finance lease [104,000/ 8 years] 13,000

Total impact on profits [6,200 + 13,000] 19,200

Net Book Value of Asset 31 /12/07 [104,000-13,000] 91,000

7. Solution (b) 871,000

IFRS 5 Qualifies as asset held for sale

New Carrying amount is to be lower of NBV and fair value less costs to sell

Revalued amount 1/1/2003 1,000,000

Depreciation per annum (40 years) 25,000

NBV at 31/12/2007 [5 yrs Deprec] 875,000

Fair value less costs to sell = 900,000

Less Commission 1% (9,000)

Less Advertising (20,000)

871,000

8. Solution (c) A difference between the exchange rate when the goods are purchased and recorded in

Inventory and the rate at the balance sheet date.

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SOLUTION 4

(a) An asset is defined in the IASB Framework for the Preparation and Presentation of Financial Statementsas

a resource controlled by the entity as a result of past events and from which economic benefits are

expected to flow to the entity.

IAS 38 Intangible Assets defines and intangible asset as an identifiable non-monetary asset with out

physical substance.

(1 Mark)IAS 38 states that an intangible asset is recognised if the asset is

(i) Identifiable

(ii) Controlled by the entity

(iii) Leads to future economic benefits.

(i) Identifiable

The key determination here is of the existence of the asset. The standard states that it must be separately

identifiable from other assets or Goodwill. Otherwise it should arise from contractual or other legal rights.

(ii) Controlled by the entity

Control over the asset must be protected by legal rights, e.g. technical knowledge. Skills of employees and/

or training costs are not normally recognised as an intangible asset as the company cannot control the futureactions of its staff.

(iii) Leads to future economic benefits

It is necessary and probable that future economic benefits can be attributed to the asset and will flow to the

entity. These future economic benefits can be due to the future sale of the asset, through annual revenues

or through cost savings generated by the asset. It is also necessary that the cost of the asset can be

measured reliably.

(3 x 2 Marks = 6 Marks)

(7 Marks)

(b)(i) Internally generated intangibles;

Expenditure generated internally, such as training costs, cannot be separately identified as being directly

related to an intangible asset and not just normal operating costs. Therefore it is impossible to measure the

cost of the intangible asset reliably. Also, it is impossible to state that any future economic benefits

generated are due to the specific expenditure in question.

(3 marks including 1 mark for example)

(ii) Separately purchased intangibles

The cost of intangibles, such as a licence or a brand name, can be reliably measured as the price paid. The

item can also be separately identifiable. If acquired as part of a business combination, the asset must be

identified and its fair value determined based on an active market or arms length transaction.

(3 marks including 1 mark for example)

(6 Marks )

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(c) MEMO

To: The Finance Director of Speakalot PLC

From: A. Consultant

Re: Expenditure on Intangible Assets

I will set out below the proper accounting treatment of the three items of expenditure that you are

considering accounting for as intangible assets in the financial statements for the year ended 31 December

2007.

The accounting treatments set out below follow the requirements of IAS 38 Intangible Assets.

G The new five year broadband licence for the Dublin region, which cost 800,000 on 1 January 2007

can be accounted for as an intangible asset and presented on the face of the balance sheet under the

heading of Non-current assets. The asset is amortised over its useful economic life which in this case

is five years. The asset is therefore presented at a carrying amount of 640,000 with the amortisation

of 160,000 being charged to the income statement in 2007 as an expense.

(2 Marks)

G The 500,000 cost of the two year staff training and development campaign commenced by the

company during the year cannot be treated as an asset as it cannot be separately identified ascreating an asset (as opposed to being operating expenditure). Also, the staff who are being trained

and developed cannot be controlled by the company. The 500,000 is therefore treated as

expenditure charged to the income statement in the appropriate period. If the full two year campaign

is paid in advance during 2007, then a prepayment of 250,000 in relation to 2008 may be shown in

current assets as long as the campaign will be completed or the amount is recoverable.

(2.5 Marks)

G The broadband brand name Connectalot was valued by an external brand management company at

3 million. This brand has been supported during the year by the door to door marketing campaign

costing 300,000. IAS 38 does not permit the recognition of internally generated brand names. Thecompany expects to achieve a market share of 10% which is worth profits of about 400,000 annually

for five years. The cost of the advertising campaign cannot be seen as the sole reason for the

generation of the 400,000 profits and be separately identifiable as doing so. It is also impossible to

differentiate between expenditure that is normal operating expenditure and that which may lead to

future economic benefits. Any supporting expenditure must be charged to the income statement. It is

also impossible to put a reliable cost (measurement) on the brand.

(2.5 Marks)

(7 Marks)

[Total : 20 Marks]

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SOLUTION 5

IAS 8 Accounting policies, accounting estimates and errors

a) G Accounting policy

An accounting policy is a specific principle, base, convention, rule or practice that has been adopted by a

reporting entity when preparing and presenting its financial statements.

G

Accounting estimate

An accounting estimate is the method by which accounting policies are applied in order to calculate the

carrying value of an asset or liability or the amount of the periodic consumption of an asset. Accounting

estimates involve the use of professional judgement.

(2 x 2 Marks = 4 Marks)

b) Changes in accounting policy should be rare and can only occur in the following circumstances:

G Where there is a change in legislation;G Where there is a change in the requirements of an accounting standard as adopted by an accounting

standard setting body; andG If the change results in a more appropriate presentation of the particular events or transactions in the

entitys financial statements.

(3 x 1 Mark = 3 Marks)

c) Set out the required accounting treatment where a company discovers an error in the financial statements

in:

(i) Error discovered in the current accounting period; and

The error is corrected in the financial statements in the current accounting period. (1 Mark)

(ii) Error discovered relating to a previous accounting period

IAS 8 requires that these are corrected retrospectively, i.e. that the financial statements (including the

corresponding period) are now presented as if the error never occurred.

This involves:

(a) restating the comparative amounts for the prior period in which the error occurred; or

(b) where the error occurred before the earliest period presented, the opening balances of the assets,

liabilities or equity affected must be restated for that period.

The item is then accounted for correctly in the financial statements from that point on. Full disclosure of the

issue is also provided.

Only where it is impractical to determine the cumulative effect of any error on prior periods is it permissible

to account for the error on a prospective basis (i.e. treated correctly from the point at which the error was

discovered.

(3 Marks)

(4 Marks)

(d)

(i) Dr PPE Cr Revaluation Reserve. The revaluation is a change in accounting policy and should be disclosed

as such in the notes to the financial statements. Details of the revaluation should be provided and the assets

are depreciated based on their new valuations.

2 Marks

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(ii) This is a change in accounting estimate with the depreciation amount being revised prospectively. The

depreciation charge is calculated as the current carrying amount of the assets divided by the new expected

useful life. As the change has a material affect on profits this should be disclosed in the notes.

2 Marks

(iii) The fraud created false revenue and a false receivable. The impact of the fraud on the financial statements

is that the overall company retained profit is overstated and the carrying amount of the receivables balance

in the financial statements is also overstated.

The fraud / error will be corrected as follows:

G The opening balance of receivables as at 1 January 2006 is restated to its correct amount deducting

the 2005 sales of 90,000.

G The opening balance of retained earnings brought forward at 1 January 2006 is reduced by 90,000.

This change is highlighted separately in either the Statement of Changes in Equity or in the Note on

Reserve Movements.

G The income statement revenue and the receivables balance in the 2006 comparative figures are

corrected. This will reduce the 2006 profits by 180,000. The carrying amount of the receivables will

be reduced by a total of 270,000 [2005 +2006 amounts].

G The corrected retained earnings balance at 1 January 2007 is carried forward and income statement

revenue for 2007 is reduced by 120,000. This carrying value of the 2007 receivables is now reduced

by 390,000 [120,000+ 180,000 + 90,000].

G The detail of the above is disclosed in the notes to the financial statements.

5 Marks

(9 Marks)

[TOTAL : 20 MARKS]

P1 - Corporate Reporting August 08

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