ACCA F7 - Financial Reporting

F7 Workbook Q & A www.mapitaccountancy.com

ACCA F7 - Financial Reporting

Workbook

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http://www.mapitaccountancy.com


Group Accounts

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Illustration 1

Additional Information

Almeria today acquired all the shares in Murcia for $300m.

The Fair Value of the NCI at acquisition was 0.

Required

Prepare the consolidated statement of financial position for the Almeria group

Almeria Murcia

Non Current Assets

Tangible 100 100

Investment in Murcia 300

Current Assets

Inventory 40 200

Receivables 60 100

Cash 200 200

700 600

Ordinary Shares 160 100

Accumulated Profits 240 200

Equity 400 300

Non Current Liabilities 100 200

Current Liabilities 200 100

700 600

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Pro-Forma

Working 1 - Group Structure

Working 2 - Equity Table

Working 3 - Goodwill

Almeria

Murcia

Date Acquired

Parent Share

NCI

At Acquisition At Year End

Share Capital

Accumulated Profits

Cost of Parent Investment

Fair Value of NCI at acquisition

Less net assets at acquisition (W2)

Goodwill

�4



Working 4 - NCI

Working 5 - Accumulated Profits

$


NCI% of Sub Post-Acq Profits

Value of NCI at Year End

$

Parent’s Accumulated Profits

Add: Parent % of the subsidiary’s post acquisition profits

�5



SFP for Almeria Group

Almeria Murcia Group

Non Current Assets

Goodwill

Tangible 100 100

Investment in Murcia 300

Current Assets

Inventory 40 200

Receivables 60 100

Cash 200 200

700 600



Non Controlling Interest

Equity 400 300



700 600

�6



Solution

Working 1 - Group Structure



Almeria

↓100%

Murcia

Date Acquired TODAY

Parent Share 100%

NCI 0%


Share Capital 100 100


300 300

Cost of Parent Investment 300

Fair Value of NCI 0

Less net assets at acquisition (W2) -300

Goodwill 0

�7



Working 4 - NCI


$

Fair Value of NCI at acquisition 0

NCI% of Sub Post-Acq Profits 0

Value of NCI at Year End 0

$

Parent’s Accumulated Profits 240

Add: Parent % of the subsidiary’s post acquisition profits Nil

240

�8



SFP for Almeria Group

Almeria Murcia Group

Non Current Assets

Goodwill None (W3) Nil

Tangible 100 100 100 + 100 200

Investment in Murcia 300 Cancel out Nil

Current Assets

Inventory 40 200 40 + 200 240

Receivables 60 100 60 +100 160

Cash 200 200 200 + 200 400

700 600 1000

Ordinary Shares 160 100 Parent 160

Accumulated Profits 240 200 W5 240

Non Controlling Interest W4 Nil

Equity 400 300 400

Non Current Liabilities 100 200 100 + 200 300

Current Liabilities 200 100 200 + 100 300

700 600 1000

�9



Illustration 2


Ant today acquired 160m of the 200m shares in Dec.

The Fair Value of the NCI was 50.

Required

Prepare the consolidated statement of financial position for the Ant group

Ant Dec

Assets 500 500

Investment in Dec 350

850 500



Equity 350 300

Liabilities 500 200

850 500

�10



Illustration 2 Pro-Forma

Working 1- Group Structure

Working 2- Equity Table


↓

Date Acquired

Parent Share

NCI


Share Capital

Accumulated Profits




Goodwill

�11



Working 4 - NCI


$




$



�12



Statement of Financial Position for Ant Group

Ant Dec Group

Goodwill

Assets 500 500

Investment in Dec

350

850 500

Ordinary Shares

100 200

Accumulated Profits

250 100

NCI

Equity 350 300

Liabilities 500 200

850 500

�13



Illustration 2 Solution


Working 2- Equity Table


Ant

↓80%

Dec

Date Acquired TODAY

Parent Share 80%

NCI 20%

100%




300 300




Goodwill 100

�14



Working 4 - NCI


$


NCI% of Sub Post-Acq Profits 0


$


Add: Parent % of the subsidiary’s post acquisition profits Nil

250

�15



Statement of Financial Position for Ant Group

Ant Dec Group

Goodwill W3 100

Assets 500 500 500 + 500 1000

Investment in Dec

350 Cancelled in Goodwill W3

Nil

850 500 1100

Ordinary Shares

100 200 Parent Only 100

Accumulated Profits

250 100 W5 250

NCI W4 50

Liabilities 500 200 500 +200 700

850 500 1100

�16



Illustration 3


Evan acquired 150m shares in Dando one year ago when the reserves of Dando were $40m. The Fair Value of the NCI on the date of acquisition was $100m.

Required

Prepare the consolidated statement of financial position for the Evan group.

Evan Dando

Assets 200 350

Investment in Dando 500

Current Assets 200 300

900 650

Ordinary Shares ($1) 200 200


Equity 450 300


Liabilities 170 150

900 650

�17



Solution




↓

Date Acquired

Parent Share

NCI


Share Capital

Accumulated Profits




Goodwill

�18



Working 4 - NCI


$




$



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Statement of Financial Position for Evan Group

Evan Dando Group

Goodwill

Assets 200 350

Investment in Dando

500


900 650

Ordinary Shares ($1)

200 200

Accumulated Profits

250 100

NCI

Equity 450 300

Non Current Liabilities

280 200

Liabilities 170 150

900 650

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Solution




Evan

↓75%

Dando

Date Acquired 1 Year Ago

Parent Share 75%

NCI 25%

100%




240 300




Goodwill 360

�21



Working 4 - NCI


$


NCI% of Sub Post-Acq Profits (25% x 60m) 15


$


Add: Parent % of the subsidiary’s post acquisition profits (75% x 60m) 45

295

�22



Statement of Financial Position for Evan Group

Evan Dando Group

Goodwill W3 360

Assets 200 350 200 + 350 550

Investment in Dando

500 Cancelled out in W3.

Nil

Current Assets 200 300 200 + 300 500

1410


Parent Only 200

Accumulated Profits

W5 295

NCI W4 115

610


280 200 280 + 200 480

Liabilities 170 150 170 + 150 320

1410

�23



Illustration 4


Virtual acquired 60m shares in Insanity one year ago when the reserves of Insanity were $60m. The Fair Value of the NCI at that date was $120m.

Required

Prepare the consolidated statement of financial position for the Virtual group

Virtual Insanity

Assets 1000 800

Investment in Insanity 600


2000 1000



Equity 1550 500


Liabilities 200 200

2000 1000

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SolutionWorking 1- Group Structure



Virtual

↓60%

Insanity


Parent Share 60%

NCI 40%

100%




160 500




Goodwill 560

�25



Working 4 - NCI


$


NCI% of Sub Post-Acq Profits (40% x (500 - 160))

136


$


Add: Parent % of the subsidiary’s post acquisition profits (60% x (500 - 160)

204

954

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Statement of Financial Position for Virtual Group

Virtual Insanity Group

Goodwill W3 560

Assets 1000 800 1000 + 800 1800

Investment in Insanity

600 Cancelled in W3

Nil

Current Assets 400 200 400 + 200 600

2000 1000 2960



Accumulated Profits

750 400 W5 954

NCI W4 256

Equity 1550 500 1954


250 300 250 + 300 550

Liabilities 200 200 200 + 200 400

2000 1000 2960

�27



Illustration 5

Jabba acquired 100% of the shares in Hutt two years ago.

The consideration was as follows:

1. Cash of $36,000.2. 2000 Shares in Jabba (the share price is currently $3).3. $30,000 to be paid four years after the date of acquisition. The relevant

discount rate is 12%4. If the group meets certain targets there will be a further payment with fair

value of $60,000 at a later date.

Required:

(i) Calculate the fair value of the consideration which Jabba has given in purchasing the investment in Hutt.

(ii)Show the value of the liability in the Statement of Financial Position for the deferred consideration at the end of the current year.

(iii)What is the charge to the Statement of Profit or Loss in the current period related to the deferred consideration?

�28




Illustration 6

On 1 October 2012, Paradigm acquired 75% of Strata’s 20,000 equity shares by means of a share exchange of two new shares in Paradigm for every five acquired shares in Strata. In addition, Paradigm issued to the shareholders of Strata a $100 10% loan note for every 1,000 shares it acquired in Strata. The share price of Paradigm on the date of acquisition was $2.

Calculate the consideration paid for Strata.

Solution

Share exchange ((20,000 x 75%) x 2/5 x $2) $12,00010% loan notes (15,000 x 100/1,000) $1,500

$

Cash Amount 36,000

Shares Market Value (2000 x 3) 6,000

Deferred Consideration 30,000 x (1 / (1.124) 19080

Contingent Consideration Fair Value 60,000

Total 121080

Year O’Bal Unwind (12%) C’Bal

1 19,080 2,290 21,370

2 21,370 2,564 23,934

�29



Illustration 7

Jimmy acquired 80% of Gent 1 year ago. The following information relates to Gent at the date of acquisition.

An item of plant was valued at $200 in the Gent’s Financial Statements but had a Fair Value of $300, the plant had a remaining life of 5 yrs at the date of acquisition. Goodwill is to be calculated gross.

Accumulated profits at

acquisition

Cost of investment Fair Value of NCI at acquisition

$ $ $

150 800 160

Jimmy Gent

Investment in Gent 800

Assets 700 700

1500 700



Equity 1200 600

Liabilities 300 100

1500 700

�30





Jimmy

↓80%

Gent


Parent Share 80%

NCI 20%

100%




Fair Value Adjustment 100 100

Additional Depreciation -20

500 680

�31




Working 4 - NCI

Working 5 - Group Accumulated Profit

Cost of Parent’s investment 800

Fair value of NCI at acquisition (Market Value) 160

960

Less 100% net assets at acquisition in W2 -500

Gross Goodwill 460


Plus NCI share of post acquisition profits (680 - 500) x 20% 36

196

$


Add: Parent % of the subsidiary’s post acquisition profits 80% x (680 - 500) (W2)

144

644

�32



Statement of Financial Position for Jimmy Group

Jimmy Gent Group

Goodwill W3 460

Investment in Gent

800 Cancelled Nil

Assets 700 700 700 + 700 + 100 - 20

1480

1500 700 1940


700 250 Parent only 700

Accumulated Profits

500 350 W5 644

NCI W4 196

Equity 1200 600 1540

Liabilities 300 100 300 + 100 400

1500 700 1940

�33



Illustration 8

Devil acquired 90% of Detail 2 years ago. The following information relates to Gent at the date of acquisition.

An item of plant was valued at $300 in the Gent’s Financial Statements but had a Fair Value of $200.

The plant subject to the fair value adjustment had a remaining life of 4 yrs at the date of acquisition. Goodwill is to be calculated Gross.

Accumulated profits at

acquisitionCost of

investmentFair Value of NCI

at acquisition

$ $ $

250 1000 55

Devil Detail

Investment in Detail 1000

Assets 600 800

1600 800



Equity 900 600

Liabilities 700 200

1500 700

�34




Working 2 - Net Assets Subsidiary

Devil

↓90%

Detail

Date Acquired 2 Years Ago

Parent Share 90%

NCI 10%

100%




Fair Value Adjustment -100 -100

Additional Depreciation (2yrs) 50

250 550

300

�35




Working 4 - NCI




1055


Gross Goodwill 805


Plus NCI share of post acquisition profits 10% x 300 (W2) 30

85

$


Add: Parent % of the subsidiary’s post acquisition profits 90% x 300 (W2)

270

520

�36



Statement of Financial Position for Devil Group

Devil Detail

Goodwill 1000 W3 805

Assets 600 800 600 + 800 - 100 + 50

1350

1600 800 2155


650 100 Parent 650

Accumulated Profits

250 500 W5 520

NCI W4 85

Equity 900 600

Liabilities 700 200 700 + 200 900

1500 700 2155

�37



Illustration 9

Evaro Co. Acquired 80% of Stando Co. one year ago and the following detail is relevant:

At the date of acquisition the following was relevant:

i) An item of plant was valued at $100m in the Gent’s Financial Statements but had a Fair Value of $50m, the plant had a remaining life of 10 yrs at the date of acquisition.

ii)Stando Co. owns an internally generated brand worth $20m on the date of acquisition that has a useful economic life of 20 years.

iii)At the date of acquisition a court case against Stando Co. is in process which has resulted in a contingent liability of $25m being disclosed in their financial statements. By the year end Stando Co. had won the court case resulting with no payment as a result.

Required

Compete the Equity Table (W2) based on the above information for Stando. Co.

At Acquisition$m

At Year End$m



�38



Solution

At Acquisition$m

At Year End$m



Fair Value of Plant -50 -50

Remove Depreciation (50/10) 5

Brand 20 20

Amortization on Brand -1

Contingent Liability -25 0

295 574

�39



Illustration 10

Brad acquires 80% of Angelina’s share capital in a share for share exchange. Brad gives Angelina 2 shares for every one in Angelina. Angelina has 100 shares in issue with a nominal value of $1 Angelina’s share price is $8. Brad’s share price is $5. At the date of acquisition the net assets of Angelina are $600.

Calculate the gross goodwill and the NCI.

�40



Solution

Consideration

Brad is purchasing 80% of 100 shares = 80 shares

He is issuing 2 shares for each of the 80 he is purchasing (80 x 2) = 160

Each of the 160 shares is worth $5 so consideration is (160 x 5) = $800

Goodwill



960


Gross Goodwill 360

�41



Illustration 11

Brad acquires 80% of Angelina’s share capital in a share for share exchange. Brad gives Angelina 2 shares for every one in Angelina. Angelina has 100 shares in issue with a nominal value of $1. Brad’s share price is $5. At the date of acquisition the net assets of Angelina are $600, by the year end the net assets are $800.

Calculate the goodwill arising using the proportionate method and the NCI at the year end.

�42




Consideration

Brad is purchasing 80% of 100 shares = 80 shares

He is issuing 2 shares for each of the 80 he is purchasing (80 x 2) = 160

Each of the 160 shares is worth $5 so consideration is (160 x 5) = $800

Goodwill

NCI


Value of NCI (600 x 20%) 120

Net assets at acquisition (W2) -600

Goodwill 320

NCI Value at Acquisition 600 x 20% 120

Share of Post Acquisition Profit (800-600) x 20% 40

160

�43



Illustration 12

(i)Archie acquires 60% of Mitchell’s share capital with consideration of $900. Mitchell has 200 shares in issue with a share price is $5. At the date of acquisition the net assets of Mitchell were $800 and are $950 at the year end. At the year end the retained earnings of Archie were $1,000.

An impairment review has been carried out on the goodwill at the year end which has found it to be impaired by $40.

Calculate the gross goodwill, the retained earnings and the NCI at the year end.

�44



Solution

Goodwill

NCI


Fair value of NCI at acquisition (200 x 40% x $5) 400

1300


Gross Goodwill 500

Impairment -40

Post Impairment Goodwill 460

Dr W4 16

Dr W5 24

Fair Value of NCI at Acquisition 400

NCI% Post Acquisition Profit (950 - 800) x 40% 60

NCI Share of Impairment -16

444

�45



Retained Earnings

Parent 1000

NCI% Post Acquisition Profit (950 - 800) x 60% 90

Parent Share of Impairment -24

1066

�46



Illustration 12 (ii)

French acquired 75% of Shambles several years ago.

If French has $1500 of retained earnings at the year end, calculate the gross goodwill, retained earnings for the group and the NCI at the year end.

Cost of Investment

Fair Value of NCI at

acquisition

Net assets at acquisition

Net assets at year end

Goodwill Impairment at

Y/E

$ $ $ $ $

1,000 300 800 3,000 200

�47



Solution

Goodwill

NCI

Cost of Parent’s investment 1,000


1300


Gross Goodwill 500

Impairment -200


DR W4 50

DR W5 150


Plus NCI share of post acquisition profits 2200 x 25% 550

Impairment -50

800

�48



Retained Earnings

Parent 1500

NCI% Post Acquisition Profit 2200 x 75% 1650

Parent Share of Impairment -150

3000

�49



Illustration 12 (iii)

Pinky acquired 80% of Brain 4 years ago. The following information is relevant:

Goodwill is calculated gross and is subject to an annual impairment review. In the current year goodwill has been impaired by $20.

Net Assets at year end

Net Assets at acquisition

Cost of investment

Fair Value of NCI at

acquisition

$ $ $ $

150 100 175 25

Pinky Brain

Investment in Pinky 175

Assets 100 100

Inventory 140 200

Receivables 160 100

Bank 125 200

700 600



Equity 400 150

Non current liabilities 100 250

Liabilities 300 100

700 600

�50



Solution



Pinky

↓80%

Brain

Date Acquired 4 Years Ago

Parent Share 80%

NCI 20%

100%


Share Capital 50 50


100 150

�51




Working 4 - NCI



200


Gross Goodwill 100

Impairment -20


Dr W4 (20%) 4

Dr W5 (80%) 16


Plus NCI share of post acquisition profits 50 x 20% 10

Less Goodwill Impairment 20 x 20% -4

31

�52




Statement of Financial Position for Pinky Group

$


Less Goodwill Impairment 20 x 80% -16

Add: Parent % of the subsidiary’s post acquisition profits 80% x (100 - 150) (W2)

40

264

Pinky Brain Group

Goodwill W3 80

Assets 100 100 100 + 100 200

Inventory 140 200 140 + 200 340

Receivables 160 100 160 + 100 260

Bank 125 200 125 + 200 325

700 600 1205



Accumulated Profits

240 100 W5 264

NCI W4 31

Equity 400 150 455

Non current liabilities

100 250 100 + 250 350

�53



Illustration 13

George owns 80% of the subsidiary Bungle. Goodwill has been calculated on a proportionate basis and at acquisition was $400m.

During the impairment review in the current year it was found that the carrying value of the goodwill has been impaired by $50m

What is the required treatment to deal with the impairment of goodwill?

Liabilities 300 100 300 + 100 400

700 600 1205

Pinky Brain Group

�54



Solution

Goodwill on Balance Sheet

Proportionate goodwill 400

Impairment -50

Goodwill after impairment 350

Treatment

DR Retained Earnings (W5) 50

CR Goodwill 50

�55



Illustration 14A Parent company has recorded an asset of $300 goods receivable with a subsidiary.

The subsidiary had recorded this as an initial liability payable of $300 but has just recorded and sent a cheque payment to the parent of $50 leaving the payable balance of $250.

How should this be adjusted for on consolidation?

�56



SolutionWhen cross casting assets & liabilities:

Less Payables $250 (DR)

Plus Cash at bank $50 (DR)

Less Receivables $300 (CR)

�57



Illustration 15Parent has been selling goods to subsidiary. The parent has recorded an asset of $500 receivable from the subsidiary.

The $500 includes goods worth $100 sent prior to the year end to the subsidiary who has not received them. As a result the subsidiary has a balance of $400 recorded as a liability in payables.

How should this be treated on consolidation?

�58



SolutionWhen cross casting assets & liabilities:

Less Payables $400 (DR)

Plus Inventory $100 (DR)

Less Receivables $500 (CR)

�59



Illustration 16Arctic is the parent of a subsidiary Monkeys. Extracts of their SFPs are below

The trade payables of Monkeys includes $35m due to Arctic. This was after the deduction of $10m in respect of cash sent by Monkeys but not yet received by Arctic.

The receivables of Arctic at the year end include $70m due from Monkeys. $25m of these goods had been dispatched by Arctic, but were not yet received by Monkeys.

Show the treatment on consolidation.

Arctic Monkeys

Current Assets

Inventory 300 100

Receivables 200 250

Bank 100 50

600 400


�60



SolutionRemember!

Add the goods/cash in transit

Subtract the inter company current accounts

+/- Item Where? $m

+ Cash in transit Cash at Bank 10

+ Goods in transit Inventory 25

- Inter Company Current Account Payables 35

- inter Company Current Account Receivables 70

Arctic Monkeys Group

Current Assets

Inventory 300 100 300 + 100 + Goods in transit of 25

425

Receivables 200 250 200 + 250 - 70 inter company current account

380

Bank 100 50 100 + 50 + cash in transit 10

160

600 400 965

Current Liabilities 420 220 420 + 220 - inter company current account 35

605

�61



Illustration 17Sea is the parent of a subsidiary Lion. Extracts of their SFPs are below

The trade payables of Lion includes $20m due to Arctic. This was after the deduction of $15m in respect of cash sent by Lion but not yet received by Sea.

The receivables of Sea at the year end include $50m due from Lion. $15m of these goods had been dispatched by Sea, but were not yet received by Lion.

Show the treatment on consolidation.

Sea Lion

Current Assets

Inventory 400 250

Receivables 100 100

Bank 150 100

650 450


�62



SolutionRemember!

Add the goods/cash in transit

Subtract the inter company current accounts

+/- Item Where? $m

+ Cash in transit Cash at Bank 15

+ Goods in transit Inventory 15

- Inter Company Current Account Payables 20

- inter Company Current Account Receivables 50

Sea Lion Group

Current Assets

Inventory 400 250 400 + 250 + Goods in transit of 15

665

Receivables 100 100 100 + 100 - 50 inter company current account

150

Bank 150 100 150 + 100 + cash in transit 15

265

650 450 965

Current Liabilities 90 140 90 + 140 - inter company current account 20

210

�63



Illustration 18Inter company sales of $400 have occurred in Attila group at a mark up on cost of 25%. At the year end 1/4 of these goods had been sold on. Attila has an 80% interest in Hun.

I. Calculate the PURP.

II. Show the accounting treatment if the parent company is the seller.

III. Show the accounting treatment if the subsidiary company is the seller.

IV. Do parts I - III if the goods had been sold at a margin of 30%.

�64



Solution (Mark-up)

Parent is seller

Subsidiary is seller

Unsold Inventory Mark-up PURP

(400 x 3/4) = 300 25/125 60

DR/CR Account $ $

DR Accumulated Profits (W5) to decrease 60

CR Inventory to decrease 60

DR/CR Account $ $

DR Accumulated Profits (W5) with parent share to decrease (60 x 80%)

48

DR NCI (W4) with subsidiary share to decrease 12


�65



Solution (Margin)

Parent is seller


Unsold Inventory Margin PURP

(400 x 3/4) = 300 30% 90

DR/CR Account $ $



DR/CR Account $ $

DR Accumulated Profits (W5) with parent share to decrease (90 x 80%)

72

DR NCI (W4) with subsidiary share to decrease 18


�66



Illustration 19Argentina owns an 80% share of Messi which it purchased one year ago.

The information below relates to Messi at the date of acquisition.

The income statements for both are:

Other information

I. Argentina sold goods to Messi during the year at a margin of 40% and worth $100m. Half of these goods have been sold on by Messi by the year end.

II. The fair value of Messi’s net assets were equal to their book value at the date of acquisition, with the exception of some machinery which had a useful life of 5 years.

III. Calculate goodwill using the fair value of the NCI at the date of acquisition. At the year end an impairment review has found that the goodwill has been impaired by 10%.

Produce a consolidated Income Statement for the Argentina group.

Ordinary Share Capital

Reserves Fair Value of the net assets

Fair value of the NCI

Cost of the investment

$m $m $m $m $m

200 400 800 200 1900

Argentina Messi

Revenue 8000 3000

Cost of Sales -4000 -1000

Gross Profit 4000 2000

Operating Costs -1500 -1500

Finance Costs -1000 -200

Profit Before Tax 1500 300

Tax -700 -100

Profit for the year 800 200

�67



Illustration 19 SolutionWorking 1- Group Structure

Working 2 - Inter Company

PURP

As the Parent is seller

Remember to remove the total amount of the sales also from sales and cost of sales

Argentina

↓80%

Messi

Date Acquired 1 Year Ago (No time apportionment)

Parent Share 80%

NCI 20%

100%

Unsold Inventory Margin PURP

(100 x 1/2) = 50 40% 20

DR/CR Account $ $

DR Cost of sales to increase 20


�68




We don’t need the net assets at the year end, but we do need them at acquisition to calculate goodwill. Be careful - we are given the total and told that the difference is machinery - this will lead to an additional depreciation expense.

The $200m asset has a useful life of 5 years so the extra depreciation will be $200m x 1/5 = $40m. The treatment for this is:

We can then use this to calculate the goodwill on acquisition

DR/CR Account $ $

DR Revenue to decrease 100

CR Cost of sales to decrease 100


Share Capital 200 N/A

Accumulated Profits 400 N/A

Fair Value Adjustment (Balancing figure)

200 N/A

800 N/A

DR/CR Account $ $


CR Non current assets to decrease 40




Gross Goodwill 1300

Goodwill impairment

Gross Goodwill 1300

Impairment Loss (1300 x 10%) 130

�69



The treatment for this is:

Working 4 - Cost of Sales

Working 5 - NCI

DR/CR Account $ $


CR Goodwill Intangible Asset to decrease 130

$m

Parent 4000

Subsidiary 1000

Less Inter Company Sales -100

Plus the PURP 20

Plus additional depreciation 40

Plus impairment loss 130

5090

$

NCI % of the subsidiary’s profits in question 200 x 20% 40

Less NCI share of additional depreciation 40 x 20% -8

Less NCI share of Impairment of goodwill 130 x 20% -26

6

�70



Income statement for Argentina Group

Argentina Messi Group

Revenue 8000 3000 8000 + 3000 - 100 inter company sales

10900

Cost of Sales -4000 -1000 W4 -5090

Gross Profit 4000 2000 5810

Operating Costs -1500 -1500 1500 + 1500 -3000

Finance Costs -1000 -200 1000 + 200 -1200

Profit Before Tax 1500 300 1610

Tax -700 -100 700 + 100 -800

Profit for the year 800 200 810

Attributable to Parent (Balancing Figure) 804

Attributable to NCI (W5) 6

810

�71



Statement of Changes in Equity Pro-forma

Share Capital

Share Premium

Revaluation Reserve

Accumulated Profits

NCI Total

O’Balance X X X X X X

Share Issues X X X

Revaluation Gains

X X X

Profit for period

X X X

Less Dividends

(X) (X) (X)

Cl’Balance X X X X X X

�72



Associates(IAS 28)

�73



Illustration 1

3 years ago Star Ltd. bought 25% of the share capital of Wars Ltd. for consideration of $400,000. Since that time Wars Ltd.has had the following results:

Due to poor trading results and customer service issues, Star Ltd feel that in the current year the investment in Wars Ltd. has been impaired by $20,000.

Show the treatment of War Ltd. in the statement of financial position of Star Group and in the Income statement for the 3 years of the investment.

Solution

Year Profit Dividend Paid By Associate

1 $200,000 0

2 $160,000 $150,000

3 $30,000 0

Year 1 Investment In Associate (SFP)

Initial Investment 400,000

Parent Share of Post Acquisition Profit (200,000) x 25% 50,000

Investment in Associate 450,000

Year 1 Income From Associate (Income Statement)

Parent share of Current Year Income (200,000 x 25%) 50,000

�74





Parent Share of Post Acquisition Profit (200,000 + 160,000) x 25% 90,000

Share of Dividend (150,000 x 25%) -37,500



Parent share of Current Year Income (160,000 x 25%) 40,000



Parent Share of Post Acquisition Profit (200,000 + 160,000 + 30,000) x 25% 97,500

Share of Dividend (150,000 x 25%) -37,500

Impairment -20,000



Parent share of Current Year Income (30,000 x 25%) 7500

Impairment -20,000

Loss From Associate -12500

�75



Illustration 2

Inter company sales of $1,300 have occurred in Attila group at a mark up on cost of 30%. At the year end 1/2 of these goods had been sold on. Attila has an 30% interest in Hun.

I. Calculate the PURP.

II. Show the accounting treatment if the parent company is the seller.

III. Show the accounting treatment if the Associate company is the seller.

�76



Solution (Mark-up)

Parent is seller


Unsold Inventory Mark-up PURP Group %

(1300 x 1/2) = 650 30/130 150 45

DR/CR Account $ $


CR Investment in Associate 45

DR/CR Account $ $


CR Group Inventory 45

�77



Illustration 3

On 1 April 2009 Picant acquired 75% of Sander’s equity shares in a share exchange of three shares in Picant for every two shares in Sander. The market prices of Picant’s and Sander’s shares at the date of acquisition were $3·20 and $4·50 respectively.

In addition to this Picant agreed to pay a further amount on 1 April 2010 that was contingent upon the post-acquisition performance of Sander. At the date of acquisition Picant assessed the fair value of this contingent consideration at $4·2 million, but by 31 March 2010 it was clear that the actual amount to be paid would be only $2·7 million (ignore discounting). Picant has recorded the share exchange and provided for the initial estimate of $4·2 million for the contingent consideration.

On 1 October 2009 Picant also acquired 40% of the equity shares of Adler paying $4 in cash per acquired share and issuing at par one $100 7% loan note for every 50 shares acquired in Adler. This consideration has also been recorded by Picant.

Picant has no other investments. The summarised statements of financial position of the three companies at 31 March 2010 are:

Picant Sander Alder

Property, plant & equipment 37,500 24,500 21,000

Investments 45,000

82,500 24,500 21,000

Inventory 10,000 9,000 5,000

Receivables 6,500 1,500 3,000

Total Assets 99,000 35,000 29,000

Ordinary Shares 25,000 8,000 5,000

Share Premium 19,800 0 0

Ret. Earnings B/F 16,200 16,500 15,000

For year to 31/3/10 11,000 1,000 6,000

72,000 25500 26000

7% Loan Notes 14,500 2,000 0

Contingent Consideration 4,200 0 0

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(i) At the date of acquisition the fair values of Sander’s property, plant and equipment was equal to its carrying amount with the exception of Sander’s factory which had a fair value of $2 million above its carrying amount. Sander has not adjusted the carrying amount of the factory as a result of the fair value exercise. This requires additional annual depreciation of $100,000 in the consolidated financial statements in the post-acquisition period.

(ii)Also at the date of acquisition, Sander had an intangible asset of $500,000 for software in its statement of financial position. Picant’s directors believed the software to have no recoverable value at the date of acquisition and Sander wrote it off shortly after its acquisition.

(iii)At 31 March 2010 Picant’s current account with Sander was $3·4 million (debit). This did not agree with the equivalent balance in Sander’s books due to some goods-in-transit invoiced at $1·8 million that were sent by Picant on 28 March 2010, but had not been received by Sander until after the year end. Picant sold all these goods at cost plus 50%.

(iv)Picant’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose Sander’s share price at that date can be deemed to be representative of the fair value of the shares held by the non-controlling interest.

(v)Impairment tests were carried out on 31 March 2010 which concluded that the value of the investment in Adler was not impaired but, due to poor trading performance, consolidated goodwill was impaired by $3·8 million.

(vi)Assume all profits accrue evenly through the year.

Current Liabilities 8,300 7,500 3,000

Total Equity & Liabilities 99,000 35000 29000

Picant Sander Alder

�79




Consideration for Sander

Consideration for Alder

Picant

↓75% ↓40%

Sander Alder

Sander

Date Acquired 1 April 2009 (1 Yr ago)

Parent Share 75

NCI 25

100

Item $‘000

Share Exchange No. Shares Purchased (8000 x 75%) = 6000

Picant Shares Issued ((6000 / 2) x 3) = 9000

Total Value (9000 x 3.20) = $28,800 28,800

Contingent Consideration Fair Value 4,200

Total Consideration 33,000

�80




Working 3 - Goodwill in Sander

Item $‘000

Cash Fair Value (4 x (5000 x 40%)) 8,000

Loan Notes (5000 x 40%) / 50 x 100 4,000

Total Consideration 12,000


Share Capital 8,000 8,000

Accumulated Profits 16,500 17,500

Fair Value of Factory 2,000 2,000

Additional Dep’n -100

Software -500

26000 27400

$‘000 $‘000

Cost of Parent Investment 33,000

Fair Value of NCI at acquisition (8,000 x 25%) x $4.5

9,000

Less NCI% of the net assets at acquisition (W2)

-26,000

Gross Goodwill on Acquisition 16,000

Impairment -3,800

Goodwill at year end 12,200

Impairment to Parent in W5 (3,800 x 75%) 2,850

Impairment to NCI in W4 (3,800 x 25%) 950

�81



Working 4 - NCI

Working 5 - PURP & Group Accumulated Profit

PURP

Group Accumulated Profit

$

Fair Value of NCI at Acquisition 9,000

NCI Share of Post Acq. Profit (25% x 1,400) 350

Goodwill Impairment to NCI (W3) -950

8400

Total Unsold Goods Profit on Goods PURP

1,800 1,800 /150 x 50 600

DR Retained Earnings (W5) 600

CR Inventory (SFP) 600

$

Parent’s Accumulated Profits 27,200

Add: Parent % of Sub’s post acquisition profits (W2) (27,400 - 26,000) x 75%

1050

Add: Parent % of Associate post acquisition profits (6,000 x 6/12) x 40% 1,200

PURP -600

Parent Share of goodwill impairment W3 -2850

Gain on contingent consideration 4,200 - 2,700 1,500

27500

�82



Working 6 - Associate

SFP

$‘000

Cost of Parent’s Investment (W1) 12,000

Post Acquisition Profits ((6000 x 6/12) x 40%) 1,200

13,200

Picant Sander Group

Goodwill W3 12,200

Property, plant & equipment

37,500 24,500 37,500 + 24,500 + 2,000 - 100

63,900

Associate Investment W6 13,200

Investments 45,000 0

82,500 24,500 89,300

Inventory 10,000 9,000 10,000 + 9,000 - 600 +1,800

20,200

Receivables 6,500 1,500 6,500 + 1,500 - 3,400 4,600

Total Assets 99,000 35,000 114,100

Ordinary Shares 25,000 8,000 Parent Only 25,000

Share Premium 19,800 0 19,800

Ret. Earnings B/F 16,200 16,500

For year to 31/3/10 11,000 1,000 W5 27,500

NCI W4 8,400

72,000 25500 80,700

7% Loan Notes 14,500 2,000 14,500 + 2,000 16,500

Contingent Consideration

4,200 0 4,200 - 1,500 2,700

Current Liabilities 8,300 7,500 8,300 + 7,500 - 1,600 14,200

Total Equity & Liabilities 99,000 35000 114,100

�83



Groups Multiple Choice Test

1. Consolidated financial statements are presented on the basis that the companies within the group are treated as if they are a single (economic) entity.

Which of the following are requirements of preparing group accounts?

(i) All subsidiaries must adopt the accounting policies of the parent(ii) Subsidiaries with activities which are substantially different to the activities of other

members of the group should not be consolidated(iii)All entity financial statements within a group should (normally) be prepared to the same

accounting year end prior to consolidation(iv)Unrealised profits within the group must be eliminated from the consolidated financial

statements

A All four B (i) and (ii) only C (i), (iii) and (iv) D (iii) and (iv)

Answer D

2. An associate is an entity in which an investor has significant influence over the investee.

Which of the following indicate(s) the presence of significant influence?

(i) The investor owns 330,000 of the 1,500,000 equity voting shares of the investee (ii) The investor has representation on the board of directors of the investee (iii)The investor is able to insist that all of the sales of the investee are made to a

subsidiary of the investor (iv)The investor controls the votes of a majority of the board members

A (i) and (ii) only B (i), (ii) and (iii) C (ii) and (iii) only D All four

Answer A

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3. On 1 January 2014, Viagem acquired 80% of the equity share capital of Greca. Extracts of their statements of profit or loss for the year ended 30 September 2014 are:

Sales from Viagem to Greca throughout the year ended 30 September 2014 had consistently been $800,000 per month. Viagem made a mark-up on cost of 25% on these sales. Greca had $1·5 million of these goods in inventory as at 30 September 2014.

What would be the cost of sales in Viagem’s consolidated statement of profit or loss for the year ended 30 September 2014?

A $59·9 million B $61·4 million C $63·8 million D $67·9 million

Answer C

Solution

Viagem‘000

Greca‘000

Revenue 64,600 38,000

COS -51,200 -26,000

Parent 51,200

Sub (26,000 x 9/12) 19500

Inter-Co Sales (800 x 9) -7,200

PURP (1,500 x 25/125) 300

63800

�85



4. The Caddy group acquired 240,000 of August’s 800,000 equity shares for $6 per share on 1 April 2014. August’s profit after tax for the year ended 30 September 2014 was $400,000 and it paid an equity dividend on 20 September 2014 of $150,000.

On the assumption that August is an associate of Caddy, what would be the carrying amount of the investment in August in the consolidated statement of financial position of Caddy as at 30 September 2014? A $1,455,000 B $1,500,000 C $1,515,000 D $1,395,000

Answer A

Solution

Parent Investment (240 x 6) 1,440

Share Profit (400 x 30% x 6/12) 60

Dividend Received (150 x 30%) -45

1455

�86



5. The HC group acquired 30% of the equity share capital of AF on 1 April 2010 paying $25,000.

At 1 April 2010 the equity of AF comprised:

$1 equity shares 50,000Share premium 12,500Retained earnings 10,000

AF made a profit for the year to 31 March 2011 (prior to dividend distribution) of $6,500 and paid a dividend of $3,500 to its equity shareholders.

What is the value of HC’s investment in AF for inclusion in HC’s statement of financial position at 31 March 2011.

A $26,950 B $31,500 C $28,000D $25,900

Answer DSolution

Parent Investment 25,000

Share Profit (6,500 x 30%) 1,950

Dividend Received (3,500 x 30%) -1,050

25,900

�87



6. HB sold goods to S2, its 100% owned subsidiary, on 1 November 2010. The goods were sold to S2 for $33,000. HB made a profit of 25% on the original cost of the goods.At the year end, 31 March 2011, 50% of the goods had been sold by S2. The remaining goods were included in inventory.

What is the amount of the adjustment required to inventory in the consolidated statement of financial position at 31 March 2011.

A. $6,600B. $4,125C. $8,250D. $3,300

Answer D

Solution

Unsold Mark up PURP

16,500 25/125 3,300

�88



7. PRT acquired 80% of SUB’s ordinary shares on 1 January 2011 for $1,136,000 when SUB’s retained earnings were $260,000. At 1 January 2011 the fair value of the net assets of SUB exceeded their carrying value by $110,000 and the fair value of the Non-Controlling Interest was $300,000. The remaining useful life of the assets was 11 years from acquisition.

SUB has not issued any new shares since acquisition by PRT. SUB is PRT’s only subsidiary. PRT calculated that goodwill in its subsidiary was impaired by 20% at 31 December 2013. The equity of SUB as at 31 December 2013:

$000 Ordinary share capital 430 Share premium 86 Retained earnings 324

840

The retained earnings of PRT were $2,100,000 at 31 December 2013.

What is the amount that PRT should include in its consolidated statement of financial position as at 31 December 2013 for Goodwill?

A. $250,000B. $200,000C. $440,000D. $528,000

Answer C

Solution




Share Premium 86 86



Additional Depreciation (3yrs) (110/11 x 3) -30

886 920

Post Acq Profit 34

�89






1436


Gross Goodwill 550

Impairment -110

440

�90



8. PRT acquired 90% of SUB’s ordinary shares on 1 January 2012 for $1,250,000 when SUB’s retained earnings were $300,000. At 1 January 2011 the fair value of the net assets of SUB exceeded their carrying value by $90,000 and the fair value of the Non-Controlling Interest was $200,000. The remaining useful life of the assets was 9 years from acquisition.

The equity of SUB as at 31 December 2013:


840


What is the amount that PRT should include in its consolidated statement of financial position as at 31 December 2013 for the Non-Controlling Interest?

A. $250,000B. $204,600C. $205,000D. $204,400

Answer D

Solution

Net Assets Subsidiary



Share Premium 86 86



Additional Depreciation (2yrs) (90/9 x 2) -20

866 910

Post Acq Profit 44

�91



NCI

9. PRT acquired 80% of SUB’s ordinary shares on 1 January 2011 for $1,500,000 when SUB’s retained earnings were $254,000. At 1 January 2011 the carrying value of the net assets of SUB exceeded their fair value by $110,000 and the fair value of the Non-Controlling Interest was $300,000. The remaining useful life of the assets was 11 years from acquisition.

SUB has not issued any new shares since acquisition by PRT. SUB is PRT’s only subsidiary.


850


What is the amount that PRT should include in its consolidated statement of financial position as at 31 December 2013 for Retained Earnings?

A. $2,260,000B. $2,212,000C. $2,236,000D. $2,620,000

Answer A


Plus NCI share of post acquisition profits 10% x 44 4.4

204.4

�92



Solution

Net Assets Subsidiary




Share Premium 26 26


Fair Value Adjustment -110 -110

Additional Depreciation (3yrs) (110/11 x 3) 30

570 770

Post Acq Profit 200

$


Add: Parent % of the subsidiary’s post acquisition profits 80% x 200 160

2260

�93



10. HX acquired 70% of SA’s equity shares on 1 July 2010 for $342,000.

On 1 July 2010 the property plant and equipment of SA had a fair value of $325,000 and a book value of $350,000. On the acquisition date SA also has an internally generated brand name worth $50,000 and disclosed a contingent liability with a value of $20,000. The fair value of the NCI on the 1 July 2010 was 50,000

SA has $200,000 $1 equity shares in issue and at 1 July 2010 its reserves comprised share premium of $40,000 and retained earnings of $62,000.

What is the value of the goodwill arising on the acquisition of SA?

A. $35,000B. $85,000C. $45,000D. $135,000

Answer B

Solution



Share Capital 200,000 N/A

Share Premium 40,000

Accumulated Profits 62,000

Fair Value Adjustment -25,000

Brand 50,000

Contingent Liability -20,000

307,000

�94





Fair value of NCI at acquisition (Market Value) 50,000

392,000

Less 100% net assets at acquisition in W2 -307,000

Gross Goodwill 85,000

�95



The following information relates to questions 11, 12 & 13:

NOV acquired 80% of PA’s equity shares on 1 July 2010 for $550,000.

On 1 July 2010 the property plant and equipment of PA had a fair value of $400,000 and a book value of $325,000. The property plant and equipment had a useful economic life of 5 years at that time. On the acquisition date PA also has an internally generated brand name worth $30,000 which was assessed to have a useful economic life of 30 years. The fair value of the NCI on the 1 July 2010 was $80,000

On 30 June 2013 the goodwill arising on acquisition was impairment tested and found to be impaired by 20%.

PA has $300,000 $1 equity shares in issue at 1 July 2010 and had retained earnings of $162,000. By 30 June 2013 PA had retained earnings of $260,000 and NOV had retained earnings of $827,000

10. What is the value of the goodwill arising on the acquisition of SA?

A. $134,400B. $74,400C. $63,000D. $50,400

Answer D

11. What is the value of the NCI at 30 June 2013?

A. $87,480B. $92,520C. $90,000D. $127,480

Answer A

12. What is the value of the Group retained earnings at 30 June 2013?

A. $877,080B. $867,000C. $856,920D. $866,920

Answer C

�96



Solution




Share Capital 300,000 300,000

Accumulated Profits 162,000 260,000

Fair Value Adjustment 75,000 75,000

Depreciation (75,000 / 5 x 3) -45,000

Brand 30,000 30,000

Amortisation (30,000 / 30 x 3) -3,000

567,000 617,000

Post Acquisition Profit 50,000


Fair value of NCI at acquisition 80,000

630,000

Less 100% net assets at acquisition in W2 -567,000

Gross Goodwill 63,000

Impairment -12,600

Post Impairment 50,400

DR NCI (20%) -2,520

DR Ret Earnings (80% -10,080

�97



NCI


Fair Value of NCI at acquisition 80,000

Plus NCI share of post acquisition profits 20% x 50,000 10000

Goodwill Impairment -2,520

87480

$


Add: Parent % of the subsidiary’s post acquisition profits 80% x 50,000 40000

Goodwill Impairment -10,080

856920

�98



14. On 1 November 2013, Fonula acquired 65% of Astuta 50,000 equity shares by means of a share exchange of three new shares in Fonula for every five acquired shares in Astuta. In addition, Fonula issued to the shareholders of Astuta two $100 10% loan note for every 2,500 shares it acquired in Astuta. The share price of Fonula on the date of acquisition was $5 whilst the share price of Astuta was $2.

What was the value of the consideration paid for Strata?

A. $152,600B. $41,600C. $100,100D. $98,800

Answer C

Solution

Share exchange ((50,000 x 65%) x 3/5 x $5) $97,50010% loan notes (32,500 / 2,500) x 2 x $100 $2,600

Total = $100,100

15. On 1 July 2014, Walter acquired 70% of the equity share capital of White. Extracts of their statements of profit or loss for the year ended 30 September 2014 are:

Sales from Walter to White throughout the year ended 30 September 2014 had consistently been $500,000 per month. Walter made a mark-up on cost of 30% on these sales. White had $260,000 of these goods in inventory as at 30 September 2014.

What would be the cost of sales in Walter’s consolidated statement of profit or loss for the year ended 30 September 2014?

A $27.00 million B $28.56 million C $35.56 million D $27.06 million

Answer D

Walter‘000

White‘000

Revenue 35,000 26,000

COS -23,000 -14,000

�99



Solution

16. On 1 January 2014, Jesse acquired 70% of the equity share capital of Pinkman. Extracts of their statements of profit or loss for the year ended 30 September 2014 are:

Sales from Jesse to Pinkman throughout the year ended 30 September 2014 had consistently been $200,000 per month. At the date of acquisition some plant that was valued at $30m in the Financial Statements of Pinkman had a fair value of $33m and a remaining useful economic life of 10 years.

What would be the cost of sales in Jesse’s consolidated statement of profit or loss for the year ended 30 September 2014?

A $38.450 million B $38.675 million C $41.425 million D $40.250 million

Answer B

Parent 23,000

Sub (14,000 x 3/12) 5,500


PURP (260 x 30/130) 60

27060

Jesse‘000

Pinkman‘000

Revenue 50,000 23,000

COS -32,000 -11,000

�100



Solution

17. On 1 July 2014, Doug acquired 70% of the equity share capital of Carrie. Extracts of the Group statements of profit or loss for the year ended 30 September 2014 are:

At the date of acquisition some plant that was valued at $80,000 in the Financial Statements of Carrie had a fair value of $100,000 and a remaining useful economic life of 5 years. Sales from Carrie to Doug were $134,000 at a margin of 20% since the acquisition of which 40% has been sold on by Doug. These adjustments have already been reflected in the above figures.

What is the Profit attributable to the NCI in the consolidated Statement of Profit or Loss to 30 September 2014?

A $41,700B $35,876C $38,184D $36,576

Answer D

Solution

Parent 32,000

Sub (11,000 x 9/12) 8,250


Depreciation (3,000 / 10 x 9/12) 225

38675

$

Revenue 700,000

Cost of Sales 465,000

Distribution Costs 64,000

Taxation 32,000

�101



$

Revenue 700,000

Cost of Sales 465,000

Distribution Costs 64,000

Taxation 32,000

Group Profit 139,000

NCI Share (139,000 x 30%) 41,700

Extra Dep’n (20,000 / 5 x 3/12) x 30% -300

PURP (134,000 x 60% x 20%) x 30% -4,824

36576

�102



18. HW sold goods to SD, its 100% owned subsidiary on 1 February 2011. The goods were sold to SD for $48,000. HW made a profit of 33.33% on the original cost of the goods.

At the year end, 30 June 2011, 40% of the goods had been sold by SD, the balance were still in SD’s inventory and SD had not paid for any of the goods.

Which ONE of the following states the correct adjustments required in the HW group’s consolidated statement of financial position at 30 June 2011?

A. Reduce inventory and retained earnings by $7,200 and Reduce payables and receivables by $7,200

B. Reduce inventory and retained earnings by $9,600 and Reduce payables and receivables by $9,600

C. Reduce inventory and retained earnings by $7,200 and Reduce payables and receivables by $48,000

D. Reduce inventory and retained earnings by $9,600 and Reduce payables and receivables by $48,000

Answer C

Solution

Unsold Mark up PURP

48,000 x 60% = 28,800 33.33/133.33 7,200

�103



19. DW sold goods to PR. DW is PR’s 80% owned subsidiary on 1 February 2011. The goods were sold to PR for $90,000. HW made a profit of 25% on the original cost of the goods.

At the year end, 30 June 2011, 30% of the goods had been sold by PR, the balance were still in PR’s inventory and PR had not paid for any of the goods.

Which ONE of the following states the correct adjustments required in the HW group’s consolidated statement of financial position at 30 June 2011?

A. Reduce inventory and retained earnings by $12,600 and Reduce payables and receivables by $12,600.

B. Reduce inventory by $12,600, the NCI by $2,520, retained earnings by $10,080 and Reduce payables and receivables by $90,000.

C. Reduce inventory and retained earnings by $15,750 and Reduce payables and receivables by $15,750.

D. Reduce inventory by $15,750, the NCI by $3,150, retained earnings by $12,600 and Reduce payables and receivables by $90,000.

Answer C

Solution

Unsold Mark up PURP

90,000 x 70% = 63,000 25/125 12,600

CR Inventory 12,600

DR NCI (20%) 2,520

DR Ret. Earnings (80%) 10,080

DR Payables 90,000

CR Payables 90,000

�104



20. Which of the following statements relating to the method of consolidation are true?

A. All subsidiaries of the parent are consolidated using equity accounting.B. All associates of the parent are consolidated using equity accounting.C. The only way to gain control of a subsidiary is to purchase 50% or more of the share

capital.D. If a company buys some shares but owns less than 50% of another entity it is

accounted for as a subsidiary.

Answer B

�105



Presentation of Financial Statements

�106



Statement of Financial Position Pro-FormaYZ Group Statement of Financial Position as at 31 December 20X5

Assets

Non-Current Assets

Property Plant & Equipment X

Investments X

Intangibles X

X

Current Assets

Inventories X

Trade Receivables X

Cash & Cash Equivalents X

Total Assets X

X

Equity & Liabilities

Share Capital & Reserves

Ordinary Shares X

Share Premium Account X

Retained Earnings X

Other Components of Equity X

Total Equity X

Non-Current Liabilities X

Long Term borrowings X

Deferred Tax X

Current Liabilities X

Trade Payables X

Short Term Borrowings X

Current Tax Payable X

Short Term Provisions X X

Total Equity & Liabilities X

�107



Statement of Changes in Equity Pro-Forma

Share Capital

SharePremium

RevaluationReserve

RetainedEarnings

TotalEquity

$ $ $ $ $

Balance B/F X X X X X

Change in Accounting Policy/prior year error

(X) (X)

Restated Balance X X X X X

Dividends (X) (X)

Shares Issued X X X

Profit for the Period X X

Revaluation gain/loss X X

Transfer to Retained Earnings

(X) X -

Balance C/F X X X X X

�108



Statement of Comprehensive Income Pro-Forma$

Revenue X

Cost of Sales (X)

Gross Profit X

Distribution Costs (X)

Admin Expenses (X)

Profit from Operations X

Finance Cost (X)

Investment Income X

Profit Before Tax X

Income Tax Expense (X)

Profit For the Year X

Other Comprehensive Income

Gain/Loss on Revaluation X

Gain/Loss on Financial Instruments Through Comprehensive Income X

Total Comprehensive Income for the Year X

�109



IAS 8 Accounting Policies, Estimates & Errors

�110



Illustration 1I. A change in the IFRS relating to leases means that an entity that used to recognise a

lease on an item of plant as an operating lease must now recognise it as a finance lease.

II. Depreciation has previously been charged by the entity at 25% straight line but has decided to change this to 30% reducing balance.

III. The entity had previously charged certain overheads within administration expenses but now has decided to show them within cost of sales.

IV. The method used by the entity to measure the value of it’s inventory has been changed.

For each of the above is it a change in accounting policy or a change in accounting estimate?

Solution

The recognition and presentation of the lease has changed meaning this is a change in accounting policy.

There is no change in recognition, measurement or the basis of measurement so this is a change in an accounting estimate.

The presentation of the overheads has changed so this is a change in policy.

The measurement basis of inventory has changed so this is a change in accounting policy.

�111



Illustration 2A company discovers that items of inventory with a value of £1m were included in the Statement of Financial Position as at 31 December 20X0 even though they were in fact sold prior to the year end.

The figures reported in the year to December 20X0 and the figures for the current year were:

Show the retained earnings for each year and the revised 20X1 Income Statement with comparatives (ignore any tax effects).

20X1 20X0

$‘000 $‘000

Sales 10,000 9,000

Cost of Sales 5,000 3,000

Gross Profit 5,000 6,000

Tax 300 250

Net Profit 4700 5750

Retained Earnings B/F 1st Jan 20X0 $12m

�112



Solution

Income Statement

20X1 20X0

$‘000 $‘000

Sales 10,000 9,000

Cost of Sales

20X1 (5,000 - 1,000) 4,000

20X0 (3,000 + 1,000) 4,000


Tax 300 250

Net Profit 5700 4750

Retained Earnings

20X1 20X0

$‘000 $‘000

Retained Earnings B/F 17,750 12,000

Prior Period Adjustment -1,000

As Restated 16,750 12,000

Net Profit for Period 5,700 4,750

Retained Earnings C/F 22,450 16,750

�113



Multiple Choice Questions

Which of the following would be a change in accounting policy in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors? A. Adjusting the financial statements of a subsidiary prior to consolidation as its accounting

policies differ from those of its parentB. A change in reporting depreciation charges as cost of sales rather than as

administrative expenses C. Depreciation charged on reducing balance method rather than straight line D. Reducing the value of inventory from cost to net realisable value due to a valid

adjusting event after the reporting

Answer B

Although the objectives and purposes of not-for-profit entities are different from those of commercial entities, the accounting requirements of not-for-profit entities are moving closer to those entities to which IFRSs apply. Which of the following IFRS requirements would NOT be relevant to a not-for-profit entity? A. Preparation of a statement of cash flows B. Requirement to capitalise a finance lease C. Disclosure of earnings per share D. Disclosure of non-adjusting events after the reporting date

Answer C

According to IAS 8 Accounting policies, changes in accounting estimates and errors, which ONE of the following is a change in accounting policy requiring a retrospective adjustment in financial statements for the year ended 31 December 2010?

A. The depreciation of the production facility has been reclassified from administration expenses to cost of sales in the current and future years.

B. The depreciation method of vehicles was changed from straight line depreciation to reducing balance.

C. The provision for warranty claims was changed from 10% of sales revenue to 5%.D. Based on information that became available in the current period a provision was made

for an injury compensation claim relating to an incident in a previous year.

Answer A

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The Framework

�115



Illustration 1An important requirement of the IASB’s Framework for the Preparation and Presentation of Financial Statements (Framework) is that in order to be reliable, an entity’s financial statements should represent faithfully the transactions and events that it has undertaken.

Required: Explain what is meant by faithful representation and how it enhances reliability.

(5 marks)

�116




Which of the following is NOT a purpose of the IASB’s Conceptual Framework? A. To assist the IASB in the preparation and review of IFRS B. To assist auditors in forming an opinion on whether financial statements comply with

IFRS C. To assist in determining the treatment of items not covered by an existing IFRS D. To be authoritative where a specific IFRS conflicts with the Conceptual Framework

Answer D

Which of the following criticisms does NOT apply to historical cost accounts during a period of rising prices?

A. They contain mixed values; some items are at current values, some at out of date values

B. They are difficult to verify as transactions could have happened many years ago C. They understate assets and overstate profit D. They overstate gearing in the statement of financial position

Answer B

Which ONE of the following is NOT listed as an element of financial statements by the IASB Framework?

A AssetB EquityC ProfitD Expenses

Answer C

The IASB’s Framework for the preparation and presentation of financial statements lists four qualitative characteristics of financial statements, one of which is reliability.

Which ONE of the following lists three characteristics of reliability?

A. Neutrality, prudence and comparability. B. Prudence, faithful representation and relevance. C. Comparability, relevance and completeness. D. Neutrality, faithful representation and prudence.

Answer D

�117



The following are possible methods of measuring assets and liabilities other than historical cost:

(i) Current cost (ii) Realisable value (iii) Present value (iv) Replacement cost

According to the IASB’s Conceptual Framework for Financial Reporting (2010) (Framework) which of the measurement bases above can be used by an entity for measuring assets and liabilities shown in its statement of financial position?

A (i) and (ii) B (i), (ii) and (iii) C (ii) and (iii) D (i), (ii) (iii) and (iv)

Answer D

�118



IAS 16 & 36Non Current Assets and

Impairment

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Illustration 1ABC Co. has carried out the annual servicing of it’s plant and equipment at a cost of $2m and has also decided that one of the machines should have it’s computer hard drive replaced to increase production by 10% per year at a cost of $50,000.

Is this expenditure revenue expenditure or should it be capitalised?

Solution

The servicing cost of $2m should be expensed in the year as it does not increase the economic benefit derived from the plant.

The cost of the computer hard drive should be capitalised as it enhances the future economic benefit of the asset.

�120



Illustration 2ABC Co. had land and buildings shown at cost less depreciation. The cost was $20m 5 years ago when purchased (land element $5m) and it had a useful economic life of 30 years at that time.

They have decided at the start of the year to revalue the land and buildings to their current value of $30m (land element $7m). It is the company’s policy to make an annual transfer in reserves for excess depreciation.

Solution

Land & Buildings at Cost 20

Accumulated Depreciation ((20 - 5) / 30) x 5 -2.5

Carrying Value 17.5

New Value 30

Revaluation Reserve 12.5

Land & Buildings at Revalued Amount 30

Accumulated Depreciation ((30 - 7) / 25 -0.92

29.08

Depreciation in Year -0.92

Transfer in Reserves

Depreciation on Revalued Amount 0.92

Depreciation on Cost (20 - 5) / 30 0.5

Transfer in Reserves 0.42

�121



Illustration 3

Property, plant & equipment with a total cost of $1m has components of a structure valued at $700,000 with a useful economic life of 20 years and plant worth $300,000 with a useful economic life of 10 years.

Show the depreciation charges in the financial statements in year 1.

Solution

Structure Plant Total

Cost 700,000 300,000 1,000,000

Depreciation (700,000 / 20) = 35,000 (300,000 /10) = 30,000 65,000

NBV 665,000 270,000 935,000

�122



Illustration 4

The carrying value of an item of plant in the financial statements is $400,000. By operating the plant the business expects to earn discounted cash-flows of $350,000 over the rest of it’s useful life. The could sell the plant now for $300,000 with costs to sell of $25,000.

What is the recoverable amount?

Is the plant impaired?

Solution

$m

Value in Use 350,000

Fair Value less cost to sell (300,000 - 25,000) 275,000

Recoverable amount is the higher of these two which is the Value in Use of $350,000.

Carrying Value 400,000

Recoverable Amount 350,000

Impairment 50,000

�123



Illustration 5

A company has an asset for which the following information is relevant:

Carry out the impairment review for the asset.

Solution

$‘000

Carrying amount 400

Fair Value 350

Cost to sell 25

Cash flows expected in each of the next 5 years 90

Discount rate 10%

Annuity rate for 10% over 5 years 3.791

$‘000

Value in Use (90 x 3.791) 341.19

Fair Value less cost to sell (350,000 - 25,000) 325

Recoverable amount is the higher of these two which is the Value in Use of $341,190.

Carrying Value 400

Recoverable Amount 341.19

Impairment 58.81

�124



Illustration 6

A cash generating unit has the assets outlined below. It’s recoverable amount has been assessed as $1,000. Show the treatment for any impairment.

Solution

Assets Carrying Value

Goodwill 100

PPE 800

Intangible 400

1300

Impairment Test

Carrying Value of Assets 1,300

Recoverable Amount 1,000

Impairment 300

Assets Carrying Value Impairment Post Impairment

Goodwill 100 -100 Nil

PPE 800 (200 x 800/1,200) = -133 667

Intangible 400 (200 x 400/1,200) = -67 333

1300 Total Impairment = 300 1000

�125




Which of the following items should be capitalised within the initial carrying amount of an item of plant? (i) Cost of transporting the plant to the factory (ii) Cost of installing a new power supply required to operate the plant (iii) A deduction to reflect the estimated realisable value (iv) Cost of a three-year maintenance agreement (v) Cost of a three-week training course for staff to operate the plant

A (i) and (ii) only B (i), (ii) and (iii) C (ii), (iii) and (iv) D (i), (iv) and (v)

Answer A

Riley acquired a non-current asset on 1 October 2009 at a cost of $100,000 which had a useful economic life of ten years and a nil residual value. The asset had been correctly depreciated up to 30 September 2014. At that date the asset was damaged and an impairment review was performed. On 30 September 2014, the fair value of the asset less costs to sell was $30,000 and the expected future cash flows were $8,500 per annum for the next five years. The current cost of capital is 10% and a five year annuity of $1 per annum at 10% would have a present value of $3·79 What amount would be charged to profit or loss for the impairment of this asset for the year ended 30 September 2014? A $17,785 B $20,000 C $30,000 D $32,215

Answer A

�126



IAS 40 - Investment Property

�127



Illustration 1Which of the following are Investment Property?

• Building used as accommodation for staff.• Land purchased as an investment. No planning consent yet.• New office building purchased for capital appreciation.

Solution

Building used as accommodation for staff. NO

Land purchased as an investment. No planning consent yet. YES

New office building purchased for capital appreciation. YES

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Illustration 2A company has purchased a building for investment purposes on 1st Jan 20X0. The building cost a total of $1.5m with the land element being estimated at $500,000.

The building has a useful life of 30 years. At the 31st December 20X0 the fair value of the building (including the land) was $2m.

Show the treatment of the property for the two methods possible under IAS 40.

Solution

Cost Model

Cost of the Property $1,500,000

Depreciation in Period (1,500,000 - 500,000) / 30 $33,333

Carrying Value at 31 December 20X0 $1,466,667

Fair Value Model

Cost of the Property $1,500,000

Depreciation in Period Not Depreciated $0

Fair Value Adjustment to Income ($2m - $1.5m) $500,000

Carrying Value at 31 December 20X0 $2,000,000

�129



IAS 38 - Intangible Assets

�130



Illustration 1Which of the following should be classified as development?

1. Lion Ltd has spent $200,000 investigating whether a particular substance, drefite, found in the Arctic Circle is resistant to heat.

2. Hoey Ltd has incurred $250,000 expenses in the course of making new material for ski-equipment which will be more durable.

3. Ryan Ltd has found that a chemical compound, mallerite, is harmful to the human body.4. Lion Ltd has incurred a further $300,000 using drefite in creating prototypes of a new

heat-resistant body-suit for humans.

Solution

2 & 4 are development

�131



Illustration 2

Coddy Ltd is developing a new product, the fold-up bicycle. Forecasts are as follows:

Show how the development costs should be treated if:

1. the costs do not qualify for capitalisation2. the costs do qualify for capitalisation.

Solution

Expense Costs

20X5 20X6 20X7 20X8

$ $ $ $

Revenue from other activities 500 700 800 800

Revenue from Fold-up Bicycle 500 700 900

Development costs -600

1. Expense Costs

20X5 20X6 20X7 20X8 Total

Revenue from other activities

500 700 800 800 2800

Revenue from other widgets 500 700 900 2100

Development costs -600 -600

Net Profit/Loss -100 1200 1500 1700 4300

2. Amortise Development Costs

20X5 20X6 20X7 20X8 Total

Revenue from other activities

500 700 800 800 2800

Revenue from other widgets 500 700 900 2100

Development costs 0 -143 -200 -257 -600

Net Profit/Loss 500 1057 1300 1443 4300

Working for Costs 600 x 500/2100

600 x 700/2100

600 x 900/2100

�132



Illustration 3A company has 3 projects in development:Project A is in development and testing of the product has proved successful. Production has begun and some sales have been made to date. The costs have been measured accurately and the project looks likely to be profitable. All costs incurred so far meet the criteria to be capitalised under IAS 38.

Project B is also in development and testing of the product has proved successful. The costs have been measured accurately and the company expects to begin production and sales next year. All costs incurred so far meet the criteria to be capitalised under IAS 38.

Project C was begun in the current period and to date there has been a feasibility study carried out which was inconclusive.

Other Information:

Show how the above will be treated in the current period accounts discussing each project individually.

A B C

Total Costs to the start of the year 600 500

Costs incurred in the period 200 100 150

Total Anticipated Revenues 20,000 30,000 Unknown

Revenue in Period 5,000 0 0

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Solution

Project A

Project A is in production and meets the criteria for capitalisation. All costs to date will be capitalised and amortisation based on sales during the period will be charged

Costs Capitalised to Date 600

Costs in the period 200

Total costs to be capitalised 800

Ammortisation in Period (800 x 5,000/20,000) 200

Intangible Asset Carried Forward 600

Project B

Project B meets the criteria for capitalisation. All costs to date will be capitalised but production has not begun meaning that no amortisation will occur.

Costs Capitalised to Date 500


Total costs to be capitalised 600

Intangible Asset Carried Forward 600

Project C

Project C does not meet the criteria for capitalisation as it is purely research into the feasibility of the project and the outcome was uncertain. All costs to date will be written off to the income statement in the period incurred.


�134




Dempsey’s year end is 30 September 2014. Dempsey commenced the development stage of a project to produce a new pharmaceutical drug on 1 January 2014. Expenditure of $40,000 per month was incurred until the project was completed on 30 June 2014 when the drug went into immediate production. The directors became confident of the project’s success on 1 March 2014. The drug has an estimated life span of five years; time apportionment is used by Dempsey where applicable.

What amount will Dempsey charge to profit or loss for development costs, including any amortisation, for the year ended 30 September 2014? A $12,000 B $98,667 C $48,000 D $88,000

Answer D

Which ONE of the following events would result in an asset being recognised in KJH’s statement of financial position at 31 January 2012?

A. KJH spent $50,000 on an advertising campaign in January 2012. KJH expects the advertising to generate additional sales of $100,000 over the period February to April 2012.

B. KJH is taking legal action against a contractor for faulty work. Advice from its legal team is that it is likely that KJH will receive $250,000 in settlement of its claim within the next 12 months.

C. KJH purchased the copyright and film rights to the next book to be written by a famous author for $75,000 on 1 March 2011.

D. KJH has developed a new brand name internally. The directors value the brand name at $150,000.

Answer C

Which ONE of the following CANNOT be recognised as an intangible non-current asset in GHK’s statement of financial position at 30 September 2011?

A. GHK spent $12,000 researching a new type of product. The research is expected to lead to a new product line in 3 years’ time.

B. GHK purchased another entity, BN on 1 October 2010. Goodwill arising on the acquisition was $15,000.

C. GHK purchased a brand name from a competitor on 1 November 2010, for $65,000. D. GHK spent $21,000 during the year on the development of a new product. The product

is being launched on the market on 1 December 2011 and is expected to be profitable.

Answer A�135



Which one of the following could be classified as deferred development expenditure in M’s statement of financial position as at 31 March 2010 according to IAS 38 Intangible assets?

A. $120,000 spent on developing a prototype and testing a new type of propulsion system for trains. The project needs further work on it as the propulsion system is currently not viable.

B. A payment of $50,000 to a local university’s engineering faculty to research new environmentally friendly building techniques.

C. $35,000 spent on consumer testing a new type of electric bicycle. The project is near completion and the product will probably be launched in the next twelve months. As this project is the first of its kind for M it is expected to make a loss.

D. $65,000 spent on developing a special type of new packaging for a new energy efficient light bulb. The packaging is expected to be used by M for many years and is expected to reduce M’s distribution costs by $35,000 a year.

Answer D

�136



IAS 20 - Government Grants

�137



Illustration 1A company purchases an item of plant on which it receives a government grant of 30% of the purchase price. The plant cost $2m and has no residual value.

The plant is to be depreciated on a straight line basis over it’s 10 year life.

Show the possible accounting treatments for the government grant in the first year.

Solution

DR CR

Plant at Cost 2,000,000

Cash 2,000,000

Income Statement Depreciation 200,000

Accumulated Depreciation 200,000

Cash for Government Grant 600,000

Deferred Income 600,000

Deferred Income Recognition in Year (600,000 / 10) 60,000

Income Statement 60,000

Total charge to Income Statement (200,000 - 60,000) = $140,000

DR CR

Plant at Cost 2,000,000

Cash 2,000,000

Cash 600,000

Plant at Cost 600,000

Income Statement Depreciation ((2m - 600k) /10) 140,000


Total Charge to Income Statement = $140,000

�138



IAS 23 - Borrowing Costs

�139



Illustration 1

A company is building a qualifying asset worth $2.5m and has issued a bond of the same value to do so with an effective interest rate of 6%.

The asset will take 9 months to build and for the first 3 months the company invests the proceeds of the bond and earns interest at 3%.

What borrowing costs should be capitalised?

Solution

$

Total Interest for the Year (2.5m x 6%) 150,000

For 9 months x 9/12 112,500

Temporary Investment Income (2.5m x 3%) x 3/12 -18,750

93,750

�140



Illustration 2A company has a £1m 6% loan and a £2m 8% loan. It builds a building costing £600,000 and it takes 8 months.

What borrowing costs should be capitalised?

Solution

Illustration 3Company buys land on 1/12, a planning application is prepared during December and January. Permission is obtained at the end of January. Payment for the land is made on 1/2. On this date a loan is taken out to pay for the land and building constructionAdverse weather conditions meant a delay in the commencement of work until 15/3.When should interest be capitalised from?

Solution

Total Borrowing Cost Total Cost

$1m 6% 6

$2m 8% 16

$3m At total cost 22

Average Rate therefore is (22/3) = 7.33%

We can capitalise 600,000 x 7.33% x 8/12 = $29,320

Expenses start being incurred 1 December

Borrowing costs incurred 1 February

Activities started 15 March

Start Capitalising on 15 March

�141



Illustration 4

Davos is building an office block and issued a $10 million unsecured loan with a coupon (nominal) interest rate of 6% on 1 April 20X9. The loan is redeemable at a premium which means the loan has an effective finance cost of 7·5% per annum.

The loan was specifically issued to finance the building of the new block which meets the definition of a qualifying asset in IAS 23. Construction of the block commenced on 1 May 20X9 and it was completed and ready for use on 28 February 2010, but did not open for trading until 1 April 20X0.

During the year trading at Davos’ was below expectations so they suspended the construction of the new block for a two-month period during July and August 20X9. The proceeds of the loan were temporarily invested for the month of May 20X9 and earned interest of $40,000.

Calculate the borrowing costs that can be capitalised under IAS 23

SolutionThe effective interest rate is 7.5% which should be used to capitalise the interest as this is a qualifying asset.

The interest cost for the year to 31/03/20X0 would therefore be ($10m x 7.5%) = $750,000.

However the building only began on 1/05/20X9 and was completed on 28/02/20X0 so one month at the start and one month at the end can’t be capitalised.

In addition there were 2 months during which construction was suspended.

8 months interest ($750,000 x 8/12) = $500,000 less the temporary investment income of $40,000 should be caplitalised.

Total = $460,000

The rest of the cost should be written off to the Income statement.

�142



IFRS 5 - Assets Held For Sale and Discontinued Operations

�143



Illustration 1 Archie Co. committed itself at the beginning of the financial year to selling a property that is being under-utilised following the economic downturn. As a result of the economic downturn, the property was not sold by the end of the year. The asset was actively marketed but there were no reasonable offers to purchase the asset. Archie is hoping that the economic downturn will change in the future and therefore has not reduced the price of the asset.

Can Archie Co. classify the property as available for sale under IFRS 5?

SolutionAlthough Archie has a plan to sell, it is available immediately and they are trying to locate a buyer it would appear that they are not marketing the property at a reasonable price.

They have not reduced the price even though there has been a downturn that has presumably reduced prices in general so cannot classify the property under IFRS 5.

Illustration 2 A company has a machine that cost $300,000 to buy two years ago. At the time of purchase the machine had a useful economic life of 30 years and they apply the cost model under IAS 16 (Cost less depreciation).

The company has decided to sell the machine and it’s fair value at this time is $220,000 with additional costs to sell being estimated at $5,000.

Although the machine has not been sold at the year end as the decision was taken that day the company is confident that it will be sold quickly and is committed to selling it having begun to market the machine to potential purchasers.

How should the machine be treated at the year end in the financial statements and at what value will it be included?

�144



Solution

(a)Cost $300,000

Depreciation Year 1 (300,000 / 30) $10,000

Depreciation Year 2 (300,000 / 30) $10,000

Carrying Value of Machine $280,000

Fair Value $220,000

Cost to Sell $5,000

Fair Value less Cost to Sell $215,000

Impairment (280,000 - 215,000) $65,000

The impairment will reduce the carrying value of the machine to $215,000 and the charge will be written off to the income statement.The machine will no longer be depreciated.

�145



Illustration 3A company has two divisions each of which form a major line of business, Division A and Division B.

Mid way through the current period Division A was shut down with losses of $50,000 on the sale of the fixed assets of the business and redundancy costs of $100,000.

Division B was restructured incurring losses of $85,000.

Results in the period included the following information:

Prepare a note to the accounts showing the analysis of the discontinued operation and draft the income statement for the company for the period.

Div A Div B

$‘000 $‘000

Revenue 1,000 2,000

Cost of Sales 750 1,250

Distribution 250 300

Administration 100 50

Finance costs for the business were $40,000 in the period and the tax charge was $32,000.

�146



SolutionDiscontinued Operations Analysis

$‘000

Revenue 1,000

Cost of Sales 750

Gross Profit 250

Admin Expenses 100

Distribution Costs 250

Operating Loss -100

Loss on Disposal of Fixed Assets -50

Redundancy Costs -100

Total Loss -250

Income Statement for Company

$‘000

Revenue 2,000

Cost of Sales 1,250

Gross Profit 750

Admin Expenses 50

Distribution Costs 300

Operating Profit 400

Re-organisation Costs -85

PBIT 315

Finance Costs -40

PBT 275

Tax -32

Profit for Period from Continuing Operations 243

Loss for Period from Discontinued Operations -250

Loss for Period from Total Operations -7

�147




BN has an asset that was classified as held for sale at 31 March 2012. The asset had a carrying value of $900 and a fair value of $800. The cost of disposal was estimated to be $50. The useful economic life of the asset was 10 years.

According to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, which ONE of the following values should be used for the asset in BN’s statement of financial position as at 31 March 2012?

A. $750B. $800C. $810D. $720

Answer A

PQ has ceased operations overseas in the current accounting period. This resulted in the closure of a number of small retail outlets.

Which one of the following costs would be excluded from the loss on discontinued operations?

A Loss on the disposal of the retail outlets B Redundancy costs for overseas staff C Cost of restructuring head office as a result of closing the overseas operations D Trading losses of the overseas retail outlets up to the date of closure

Answer C

�148



IFRS 15 - Revenue I

�149



Illustration 1

Fresco sells an IT system to Dining on the first day of a new accounting period.

The package includes hardware delivered immediately and a contract for support over the next 3 years with that support worth $50,000 p/a.

The total cost of the contract is paid up front and is $300,000.

How much should Fresco recognise as revenue from the transaction in the current year?

SolutionStep 1 - Identify the Contract

Fresco has agreed to supply Dining with goods and services.

Step 2 - Identify the performance obligations

Fresco has promised to do two things:

- Supply the hardware- Supply the support

Step 3 - Determine the transaction price

The total price is $300,000

Step 4 - Allocate price to obligations

Based on the individual prices the support is worth (50,000 x 3) $150,000 leaving the rest of the $300,000 to be for the hardware (300,000 - 150,000) = $150,000.

Step 5 - Recognise the revenue when (or as) the performance obligation is satisfied

The supply of the hardware happens immediately so the revenue for it should be recognised now.

The support is provided over time so should be recognised on that basis i.e. $50,000 per year over the 3 years.

�150



Illustration 2

Jumbo has agreed to sell a piece of complex machinery with two years free servicing to Jet for $441,000. The machine usually sells for $420,000.

The servicing will cost Jumbo $50,000 to provide and they generally include a mark-up of 40% when setting the price to charge customers for servicing.

The two year servicing contract is not available as a stand-alone product.

How should the transaction price be allocated to the machine and servicing?

SolutionWe can see that the machine generally sells for $420,000 but there is no comparable price for the servicing contract.

Based on the cost + mark-up the servicing would be worth (50,000 x 140%) $70,000.

Therefore the total value of the performance obligations is (420,000 + 70,000) $490,000.

The fact that Jumbo is selling these for $441,000 would imply that a 10% discount has been applied.

This should be allocated proportionally to the machine and servicing so the amounts recognised should be:

Goods (420,000 x 90%) $378,000Services (70,000 x 90%) $63,000 (Recognised over 2 years)

Total (378,000 + 63,000) $441,000

�151



Illustration 3

Jumbo has agreed to sell a piece of complex machinery with two years free servicing to Jet for $700,000. The machine usually sells for $600,000 although a 5% discount is often applied to machines of this specification.

The servicing will cost Jumbo $100,000 to provide and they generally include a mark-up of 30% when setting the price to charge customers for servicing.

The two year servicing contract is not available as a stand-alone product but Jumbo has a policy of not offering discounts on servicing contracts.

How should the transaction price be allocated to the machine and servicing?

SolutionWe can see that the machine generally sells for $600,000 but there is no comparable price for the servicing contract.

Based on the cost + mark-up the servicing would be worth (100,000 x 130%) $130,000.

Therefore the total value of the performance obligations is (600,000 + 130,000) $730,000.

The fact that Jumbo is selling these for $700,000 would imply that a $30,000 discount has been applied.

However rather than be allocated proportionally to the machine and servicing the discount should be applied to the machine only because:

- The discount amounts to 5% of the $600,000 for the machine which is the standard discount for this item given generally.

- There is not generally a discount on servicing.

…so the amounts recognised should be:

Goods (600,000 x 95%) $570,000Services (130,000 x 100%) $130,000 (Recognised over 2 years)

Total (570,000 + 130,000) $700,000

�152



Illustration 4

Placo obtained a contract to sell Davo $3m worth of services over a 3 year period. Specific costs that would not have been incurred otherwise amounted to $120,000.

How should the revenue and costs be recognised?

SolutionThe revenue should be recognised in line with the contract terms over 3 years so ($3m / 3) $1m per year.

The costs should be capitalised as they are specific to the contract so…

DR Asset (Costs) $120,000CR Cash $120,000

…then recognised in line with the revenue over 3 years

DR Profit/Loss (120,000 / 3) $40,000CR Asset (Costs) $40,000

�153




LP received an order to supply 10,000 units of product A every month for 2 years. The customer had negotiated a low price of $200 per 1,000 units and agreed to pay $12,000 in advance every 6 months.

The customer made the first payment on 1 July 2012 and LP supplied the goods each month from 1 July 2012.

LP’s year end is 30 September.

In addition to recording the cash received, how should LP record this order, in its financialstatements for the year ended 30 September 2012, in accordance with IFRS 15?

A Include $6,000 in revenue for the year and create a trade receivable for $36,000 B Include $6,000 in revenue for the year and create a current liability for $6,000 C Include $12,000 in revenue for the year and create a trade receivable for $36,000 D Include $12,000 in revenue for the year but do not create a trade receivable or current liability

Answer B

CF, a contract cleaning entity, signed a contract to provide 12 months cleaning of an office block. The contract for $12,000 commenced on 1 June 2012. The terms of the contract provided for payment six monthly in advance on 1 June and 1 December 2012. CF received $6,000 and started work on 1 June 2012.

How should CF account for the contract in its financial statements for the year ended 30 June 2012?

A Debit cash $6,000 and credit revenue $6,000 B Debit cash $6,000, credit revenue $1,000 and credit deferred income $5,000 C Debit cash $6,000, debit receivables $6,000 and credit revenue $12,000 D Debit cash $6,000 and credit deferred income $6,000

Answer B

�154



On 28 September 2011, GY received an order from a new customer, ZZ, for products with a sales value of $750,000. ZZ enclosed a deposit with the order of $75,000.On 30 September 2011, GY had not completed the credit referencing of ZZ and had not despatched any goods.

Which ONE of the following will correctly record this transaction in GY’s financial statements for the year ended 30 September 2011 according to IFRS 15:

A Debit Cash $75,000; Credit Revenue $75,000 B Debit Cash $75,000; Debit Trade Receivables $675,000; Credit Revenue $750,000 C Debit Cash $75,000; Credit Deferred Revenue $75,000 D Debit Trade Receivables $750,000; Credit Revenue $750,000

Answer C

OC signed a contract to provide office cleaning services for an entity for a period of one year from 1 October 2009 for a fee of $500 per month.

The contract required the entity to make one payment to OC covering all twelve months’ service in advance. The contract cost to OC was estimated at $300 per month for wages, materials and administration costs.

OC received $6,000 on 1 October 2009.

How much profit/loss should OC recognise in its statement of comprehensive income for the year ended 31 March 2010?

A. $600 lossB. $1,200 profit C. $2,400 profit D. $4,200 profit

Answer B

�155



IFRS 15 - Revenue II

�156



Illustration 1

Badger Co. manufactures smart phones and sells them through a contractual relationship with Bodger Co. Badger provides Bodger with the phones for a price of $150 payable once the phone is sold on to a customer.

Bodger has also agreed to a clause in the contract of sale that they cannot sell the phone for less than $200.

How should the goods and revenue be treated in the financial statements of Badger and Bodger?

SolutionWhen the goods are provided to Bodger initially they still remain the property of Badger as they have retained control of them by stipulating the price at which they should be soldr

They will stay as part of Badger’s inventory and no revenue recognised until it is sold to an end customer.

Once the goods are sold to the customer for $200 Bodger should only recognise the commission they have received on selling the goods i.e. $50.

The other $150 is paid to Badger and should be recognised as their revenue on the sale.

�157



Illustration 2

Johnston enters into a contract to sell a piece of plant to Paints on 01 Jan 20X6 and delivers the plant on that date for Paints to begin to use. The price agreed in the contract is $400,000 to be paid on 01 Jan 20X8.

The market rate of interest available to this customer is 10%.

How should this transaction be accounted for in the accounts of Johnston?

Solution

Discount the Revenue and recognise a receivable on the discounted amount

DR Receivable ($400,000 x 1 / 1.12) 330,578

CR Revenue 330,578

Unwind the discount over the two years

Year 1

DR Receivable (330,578 x 10%) 33,058

CR Finance Income 33,058

Year 2

DR Receivable ((330,578 + 33,058) x 10%) 36,364

CR Finance Income 36,364

Final Receivable (330,578 + 33,058 + 36,364) 400,000

�158



Illustration 3

Gerry has just completed a contract to supply Roses with 200 pineapple trees over the next 2 years for a set price of $40,000.

As part of the contract Gerry agreed to pay $2,000 to increase the height of the doors at Roses in order to get the trees into the store.

How much revenue should be recognised in year 1 of the contract?

SolutionThe consideration paid to Roses should be treated as a reduction in the transaction price.

The price therefore will be reduced to (40,000 - 2,000) $38,000.

This will be recognised over the term of the contract so in year 1 ($38,000 / 2) $19,000 will be recognised.

�159



Illustration 4

Avon has sold goods to 1000 customers at a price of $400 each. The goods are delivered and control passed to the customer immediately and they are paid for up front. Each good is currently in inventory at a value of $200.

The customers have the option to return the goods to Avon if they are not sold in the next 60 days for a full refund at which stage Avon will be able to sell them on at a profit.

Based on prior experience Avon estimates that 95% of the goods will not be returned.

SolutionBased on the amount of expected revenue Avon should recognise ((1000 x $400) x 95%) $380,000.

A refund liability for the rest ((1000 x $400) x 5%) $20,000 should be created.

The entries for this will be:

DR Cash $400,000CR Revenue $380,000CR Liability $20,000

The inventory will have been derecognised when transferred to customers but an asset should be created for the goods expected to be returned

DR Asset ((1000 x $200) x 5%) $10,000CR COS $10,000

�160



IFRS 16Leases

�161



Illustration 1An asset is leased by a company on the 01/01/X0 over a 3 year period. They pay 3 annual payments of $25,000, the first of which is payable on 31/12/X0. In addition they have an option to extend the lease which they are reasonably certain to do for 1 additional year at a cost of $2,0000.

Direct costs of $2000 were incurred in obtaining the lease and $500 of these were reimbursed by the lessor.

The interest rate implicit in the lease is 12%

Show the treatment in the lessees financial statements over the life of the asset.

Solution

Present Value of minimum lease payments

$ Discount Rate

1 Payment 25,000 1/1.12 22,321

2 Payment 25,000 1/1.122 19,930

3 Payment 25,000 1/1.123 17,795

4 Payment 20,000 1/1.124 12,710

Lessees Liability 72,756

Lease Liability on SFP

Period Opening Bal

Interest Charge(12%)DR Income Statement

CR Lease Liability

Lease PaymentDR Lease Liability

CR Cash

Closing Bal

1 72,756 8,731 -25,000 56,487

2 56,487 6,778 -25,000 38,265

3 38,265 4,592 -25,000 17,857

4 17,857 2,143 -20,000 -0

�162



Right of Use Asset

Present value of minimum lease payments 72,756

Direct Costs 2,000

Reimbursement -500

Right of Use asset 74,256

The asset will be depreciated over the 4 year lease term at (74,256 / 4) $18,689 per yr.

�163



Illustration 2A company takes out a 6 year lease on telephones for their employees.

They pay $1,500 deposit up front on the first day of year one and $2,000 in arrears on the last day of years 1, 2, 3, 4, 5 and 6.

How much will be recognised in the Income Statement and the SFP at the end of year 1 of the lease?

Solution

Total Amount Due Under Lease (1,500 + (2,000 x 6) 13,500

Number of Years 6

Amount to Income Statement each year (13,500 / 6) 2250

Cash Paid in Period 1 (1,500 + 2,000) 3,500

Difference between Income Statement amount and actually paid is a Prepayment (3,500 - 2,250) 1250

Income Statement Amount 2250

Prepayment on SFP 1250

�164



Illustration 3A company enters into a sale and finance agreement on 1/1/X1 when the Carrying Value of the asset was $70,000. The sale proceeds were $120,000, which was the fair value of the asset, with the remaining useful economic life of the asset being 5 years.

The lease was for 5 annual rentals of $20,000 in arrears. Implicit interest rate of 8% (5 year annuity 3.99).

How should the lease be recognised in the financial statements?

Solution

Right of use Asset

PV Minimum Payments (20,000 x 3.99) 79,800

Fair Value on Sale 120,000

Carrying Value before Sale 70,000

Right of Use Asset (79,800 / 120,000) x 70,000 46,550

Gain on Sale

Total Gain (120,000 - 70,000) 50,000

Fair Value of Machine 120,000

Liability remaining 79,800

Rights Transferred to Lessor (120,000 - 79,800) 40,200

Gain to P/L 50,000 x (40,200 / 120,000) 16,750

�165



Entries

DR Cash Amount Received 120,000

DR Right of Use Asset W1 46,550

CR Machine W1 70,000

CR Lease Liability W1 79,800

CR P/L (120,000 - 70,000) / 120,000) 16,750

�166



Financial Instruments I

�167



Illustrations

Examples of Amortised Cost Financial Assets

Stated maturity date with fixed, variable or mixed interest cash flows

Stated maturity date where principle and interest are linked to the same currency inflation index.

Stated maturity date which pays a variable market rate of interest subject to a cap.

A full recourse loan secured by collateral.

NOT!!!

Convertible Debt

FInancial Asset Classification

Amortised Cost FVPL FVOCI

Debt

Business Model Test Result Hold to get interest and capital rather than sell.....and..... Any Other

Both Hold & Sell for

Business Model TestContractual Cash Flows Test

Only Interest and Capital repaid

Equity Never Held For Trading Any Other

FInancial Liability Classification

Amortised Cost FVPL FVOCI

All All Others Held For Trading Never

�168



Financial Instruments II

�169



Illustration 1

A company invests $100,000 in a 3 year redeemable 12% bond.

The bond consists of interest payments and principle only and the company intends to hold it until it is redeemed.

Show the treatment for the bond over the 3 year period.

Solution

O’Bal Interest (12%)DR Financial Asset

CR Income Statement

Cash Rec’d (12% x 100,000)

DR CashCR Financial Asset

Cl’bal

100,000 12,000 -12,000 100,000

100,000 12,000 -12,000 100,000

100,000 12,000 -12,000 100,000

At the end of the term the bond is repaid and the company receives $100,000.

�170



Illustration 2A company invests $10,000 in a 3 year redeemable 10% bond which is redeemable at a premium of $675.

The bond consists of interest payments and principle only and the company intends to hold it until it is redeemed.

The effective interest rate on the bond is 12%.


Solution

O’Bal Interest (12%)DR Financial Asset

CR Income Statement

Cash Rec’d (10% x 10,000)

DR CashCR Financial Asset

Cl’bal

10,000 1,200 -1,000 10,200

10,200 1,224 -1,000 10,424

10,424 1,251 -1,000 10,675

The Premium payable at the end of the term means that the company receives $10,675.

�171



Illustration 3A company issues a $30,000 3 year 7% redeemable bond at a discount of 10% with issue costs of $1,000.

The bond is redeemable at a premium of $1,297.

The effective interest rate is 14%.


$

Issue Proceeds 30,000

Discount -3,000

Issue Costs -1,000

Net Proceeds 26,000

O’Bal Interest (14%)DR Income StatementCR Financial Liability

Cash Paid (7% x 30,000)DR Financial Liability

CR Cash

Cl’bal

26,000 3,640 -2,100 27,540

27,540 3,856 -2,100 29,296

29,296 4,101 -2,100 31,297

�172



Illustration 4VB acquired 40,000 shares in another entity, JK, in March 2012 for $2.68 per share. The investment was held for trading purposes on initial recognition. The shares were trading at $2.96 per share on 31 July 2012.

Show the treatment to record the initial recognition of this financial asset and its subsequent measurement at 31 July 2012

Solution

$

As the shares are held for trading they will be classified as Fair Value through Profit & Loss

Recognition of Financial Asset (40,000 x $2.68) 107200

Fair Value on 31 July 2012 (40,000 x $2.96) 118400

Movement to Income Statement (Gain) 11200

�173



Illustration 5QWE issued 10 million 5% convertible $1 bonds 2015 on 1 January 2010. The proceeds of $10 million were credited to non-current liabilities and debited to bank. The 5% interest paid has been charged to finance costs in the year to 31 December 2010.

The market rate of interest for a similar bond with a five year term but no conversion terms is 7%. (The annuity rate for 5 years at 7% is 4.100 with the discount rate in year 5 being 0.713).

Show the split of the compound instrument between debt and equity and the treatment of the debt portion in the first year.

Solution

$

First Step is to calculate debt value (Present Value of interest & Capital)

Interest for 5 Years at 5% ($10m x 5%) 500,000

Discounted Cash Flows

Discount Interest Payment at effective rate (500,000 x 4.100) 2,050,000

Discount Capital Repayment ($10m x 0.713) 7130000

Total Debt Portion 9180000

The difference between the issued value of the convertible debt and the present value of the interest and capital is the EQUITY portion of the debt

Total Convertible Debt 10,000,000

Present Value of Interest and capital from above 9180000

Total Equity Portion 820000

O’Bal Interest (7%)DR Income Statement CR Financial Liability

Cash Paid (5% x 10m)

DR Financial Liability CR Cash

Cl’bal

9,180,000 642,600 -500,000 9,322,600

�174




TS purchased 100,000 of its own equity shares in the market and classified them as treasury shares. At the end of the accounting period TS still held the treasury shares.

Which ONE of the following is the correct presentation of the treasury shares in TS’s closing statement of financial position in accordance with IAS 32 Financial Instruments – Presentation?

A As a current asset investment B As a non-current liability C As a non-current asset D As a deduction from equity

Answer D

�175



IAS 2 - Inventories

�176



Illustration 1

ABC Co. has the following items in inventory:

i) Goods purchased for resale at a cost of $40,000. The recent downturn in the economy has meant that these goods will now sell for $42,000 with costs to sell of $2,500.

ii)Materials purchased at a cost of $30,000 per tonne which will be sold at a profit. The manufacturer of the materials has just announced that from now on they will sell these materials to you at a lower price of $28,000 per tonne.

iii)Plant constructed for a specific customer at a cost of $50,000 and an agreed price to the customer of $60,000. New health and safety requirements mean that the plant will need to be modified at a cost to ABC Co. of $4,000 before it can be delivered to the customer.

At what value should each of the above be included in the inventory of ABC Co.

Solution

Goods at $40,000

Cost 40,000

Net Realisable Value ($42,000 - 2,500) 39,500

Use Lower so value at... 39,500

The value of inventory will be reduced by $500 and this will be written off to the income statement.

Materials at $30,000 per tonne

The fact that the manufacturer has changed the cost price is irrelevant.

The goods will be sold at a profit and thus will be valued at $30,000 per tonne cost.

Plant at $50,000

Cost 50,000

Net Realisable Value ($60,000 - 4,000) 56,000

Use Lower so value at... 50,000

The value of the inventory will remain at $50,000.

�177



Construction Contracts Under IFRS 15

�178



Illustration 1

ABC Co. is building a football stadium under a construction contract.

The estimated costs to complete the stadium are $400,000.

The costs to date have been $350,000.

The total estimated revenue is $1,000,000.

It is estimated that the contract is 50% complete.

(i) What amounts of revenue, costs and profit will be recognised in the income statement?

(ii) If the expected revenue from the contract was $500,000 show the amounts of revenue, costs and profit that would be recognised in the income statement?

Solution

Expected Profit

$

Total Expected Revenue 1,000,000

Total Expected Costs (400,000 + 350,000) 750,000

Total Expected Profit 250,000

Recognised this year (250,000 x 50%) 125,000

Revenue (1,000,000 x 50%) 500,000

Costs (750,000 x 50%) 375,000

125,000

Total Loss expected to be recognised immediately

$

Total Expected Revenue 500,000

Costs (400,000 + 350,000) 750,000

�179



Loss -250,000

Revenue (500,000 x 50%) 250,000

Costs (750,000 x 50%) 375,000

Provision for loss -125,000

-250,000

Total Loss expected to be recognised immediately

$

�180



Illustration 2

ABC Co. is building a football stadium under a construction contract.

The estimated costs to complete the stadium are $400,000.

The costs to date have been $350,000.

It is estimated that the contract is 50% complete.

The company is not able to reliably estimate the outcome of the contract but believes it will recover all costs from the customer.

What amounts of revenue, costs and profit will be recognised in the income statement?

Solution

$

Costs to date 350,000

Revenue (Costs to be recovered) 350,000

Profit 0

�181



Illustration 3A construction company has the following contracts in progress:

Profit is accrued on the contracts as a percentage of completion derived by comparing work certified to the total sales value.

Contracts X and Z have been in progress for several years and the following amounts have been recognised to date:

Calculate the figures to be included in the financial statements in relation to the above contracts.

X Y Z

Costs Incurred to Date 350 200 600

Costs to complete 50 800 900

Work Certified to date 400 300 1000

Contract Price 500 600 2000

Cash Received on Contract 300 200 1200

X Z

Revenue 100 300

Costs 80 250

�182



SolutionStep 1 - Calculate the expected profit on each contract

Step 2 - Percentage completion

Step 3 - Profit to be recognised

X Y Z


Costs to complete 50 800 900

Total Costs Expected 400 1000 1500


Profit Expected 100 -400 500

X Y Z

Work Certified to date 400 300 1000


Percentage complete 80% 50% 50%

X Y Z

Profit Expected 100 -400 500

Percentage Completion 80% 50% 50%

Profit/Loss 80 -400 250

�183



Step 4 - Income Statement Figures

Step 5 - Bal. Sheet Figures

X Y Z Total

Sales by % 400 300 1000 1700

Recognised to Date -100 0 -300 -400

Recognise this Year 300 300 700 1300

Costs by % 320 500 750 1570

Recognised to Date -80 0 -250

Recognise this Year 240 500 500

Provision For Loss 200

Profit/Loss 60 -400 200 -70

X Y Z

Revenue Recognised to Date 400 300 1000

Cash Received 300 200 1200

Receivable/(Payable) 100 100 -200

Costs Recognised to Date (COS) 320 500 750


Balance (WIP if Incurred Greater) 30 - -

�184



Illustration 4On 1 October 20X9 Mocca entered into a construction contract that was expected to take 27 months and therefore be completed on 31 December 20X1.

Details of the contract are:$’000

Agreed contract price 12,500 Estimated total cost of contract (excluding plant) 5,500

Plant for use on the contract was purchased on 1 January 20X0 (three months into the contract as it was not required at the start) at a cost of $8 million. The plant has a four-year life and after two years, when the contract is complete, it will be transferred to another contract at its carrying amount. Annual depreciation is calculated using the straight-line method (assuming a nil residual value) and charged to the contract on a monthly basis at 1/12 of the annual charge.

The correctly reported income statement results for the contract for the year ended 31 March 20X0 were:

$‘000Revenue recognised 3,500Contract expenses recognised (2,660)Profit recognised 840

Details of the progress of the contract at 31 March 20X1 are:$’000

Contract costs incurred to date (excluding depreciation) 4,800Agreed value of work completed and billed to date 8,125Total cash received to date (payments on account) 7,725

The percentage of completion is calculated as the agreed value of work completed as a percentage of the agreed contract price.

Required:

Calculate the amounts which would appear in the income statement and statement of financial position of Mocca for the year ended/as at 31 March 20X1 in respect of the above contract.

(10 marks)

�185



Solution

Percentage Completion

Value of Work Completed to date 8,125

Contract Value 12,500

Percentage Completion (8,125 / 12,500) 65%

Expected Total Profit

Total Costs Expected 5,500

Depreciation (8/48 x 24) 4000

Total Costs 9,500

Total Revenue 12,500

Expected Total Profit (12,500 - 9,500) 3,000

Recognise to date (3,000 x 65%) 1,950

Recognised Last Year 840

Recognise this year (1,950 - 840) 1,110

Income Statement Extracts

Revenue (12,500 x 65%) - 3,500 4,625

Costs (9,500 x 65%) - 2,660 3,515

Gross Profit Recognised 1,110

SFP Amounts

Revenue Recognised to Date (12,500 x 65%) 8,125

Cash Received to Date 7,725

Receivable due from customers 400

Costs Recognised to Date (9500 x 65%) 6,175

�186



Costs Incurred to Date (8000/48 x 15) + 4800 7,300

Work In Progress 1,125

SFP Amounts

SFP Extracts

Non Current Asset (8,000 - 2,500) 5500

Receivables (8,125 - 7,725) 400

Work In Progress 1,125

�187




TY has a construction contract in progress. The contract commenced on 1 April 2011 and is scheduled to run for two years. The contract has a fixed price of $9,000,000. TY uses the value of work completed method to recognise attributable profit for the year.

At 31 March 2012 the proportion of work certified as completed was 35%.

$000Cost incurred during year to 31 March 2012 4,000 Estimated cost to complete contract 6,000 Cash received on account from contract client 3,250

Which of the following would appear in the financial statements of TY (all figures in $‘000)?

A. Revenue $3,150, COS $3,500 and Payable to customers $250B. Revenue $3,150, COS $4,150 and Payable to Customers $100C. Revenue $4,500, COS $3,500 and Receivable from Customers $360D. Revenue $6,000, COS $3,250 and Receivable from customers $650

Answer B

$

Total Expected Revenue 9,000

Costs (4,000 + 6,000) -10,000

Loss -1,000

Revenue (9,000 x 35%) 3,150

Costs (10,000 x 35%) -3,500

Provision for loss (Include in COS) Bal -650

Total For COS -4150

From Above -1,000

SFP Amounts

Revenue Recognised to Date 3,150

Cash Received to Date 3,250

Payable due from customers -100

�188



Costs Recognised to Date 4,150

Costs Incurred to Date 4,000

Work In Progress -

SFP Amounts

�189



IAS 37Provisions

�190



Illustration 1ABC Co. does not offer warranties with the radio’s it sells to customers, however if a customer is dissatisfied with the product for any reason they provide a refund with ‘no questions asked’. This policy is generally known by customers to be the case.

Should any provision for refunds be made at the year end?

Solution

There is no legal obligation to refund customers.

However:

This looks like a constructive obligation as the customers know of the policy creating a valid expectation.

We could estimate the returns based on past experience.

There will probably be some refunds made.

Therefore a provision should be created.

�191



Illustration 2A company has entered into a contract to pay for specialist engineering support over the next 3 years for annual payments with a present value of £100,000. Unfortunately due to a change in the trading environment the support is no longer needed but the contract cannot be changed. The directors feel they may be able to sell the contract to another business for $50,000 but are unsure whether this is possible.

How should this be treated in the financial statements?

Solution

The onerous contract means that a provision should be recognised for the $100,000.

It would need to be assessed if the $50,000 was probable or virtually certain.

If virtually certain create an asset.

If only possible then disclose a contingent asset.

If neither then no action is required for the $50,000.

�192



Illustration 3A company with a year end of 30th April has decided to re-organise trading in it’s UK division closing several outlets. It made the decision on the 30th April 2010 at a board meeting where the directors decided that a detailed plan for the re-structuring would be created as soon as possible. Employees affected by the re-structuring were sent notice on the 31st May 2010.

Should a provision for re-structuring be created in the financial statements at the year ended 31 April 2010?

Solution

There is no detailed plan available at 30th April 2010.

Employees were not informed until 31st May 2010.

No constructive obligation therefore exists and no provision should be made.

�193



Illustration 4A company sells radios with a warranty offering instant replacement of any defective goods for the first year.

Sales in the year to date were $4,000,000 and past experience suggests that 1.7% of the radios sold will be replaced in the first year by the company.

What provision should be included in the financial statements?

Solution

A provision of (4m x 1.7%) $68,000 should be made.

�194



Illustration 5A power generating company has just won a contract to build a new power station at a cost of $12m. The terms of the contract state that the company is not responsible for any environmental damage caused around the site such as pollution to the local environment.

It is estimated by the company that by the end of the useful economic life of the power station in 25 years time it will cost $2m to rectify any environmental impact of the plant. The company has a very clear environmental charter that has targets for limiting environmental impact and a policy of rectifying any environmental damage caused by their operations.

The company has a cost of capital of 10%

What entries should be included in the financial statements to deal with the above in the first year?

Solution

Journal Entries

DR CR

Non Current Asset (12m + (2m x 1 / 1.125)) 12,184,592

Cash 12,000,000

Environmental Provision (2m x 1 / 1.125) 184,592

Depreciation (12,184,592 / 25) 487,383


Finance Cost (Unwind Discount) (184,592 x 10%) 18,459

Environmental Provision 18,459

�195




TY has recently completed a contract replacing a roof on the local school. Despite this, the roof has been leaking and some sections are now unsafe. The school is suing TY for $20,000 to repair the roof.

TY used a sub-contractor to install the roof and regards the sub-contractor’s work as faulty.

TY has raised a court action against the sub-contractor claiming the cost of the school’s action plus legal fees, a total of $22,000.

TY has been informed by legal advisers that it will probably lose the case brought against it by the school and will probably win the case against the sub-contractor.

How should these items be treated in TY’s financial statements?

A. A provision should be made for the $20,000 liability and the case against the sub- contractor ignored.

B. A provision should be made for the $20,000 liability and the probable receipt of cash from the case against the sub-contractor disclosed as a note.

C. No provisions should be made but the $20,000 liability should be disclosed as a note. D. A provision should be made for the $20,000 liability and the probable receipt of cash

from the case against the sub-contractor recognised as a current asset.

Answer B

MN obtained a government licence to operate a mine from 1 April 2011. The licence requires that at the end of the mine’s useful life, all buildings must be removed from the site and the site landscaped. MN estimates that the cost of this decommissioning work will be $1,000,000 in ten years’ time (present value at 1 April 2011 $463,000) using a discount factor of 8%.

According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets how much should MN include in provisions in its statement of financial position as at 31 March 2012?

A. $100,000B. $463,000C. $500,000D. $1,000,000

Answer C

�196



IAS 12Deferred Tax

�197



Illustration 1An entity has profit before tax of $1,000 in it’s financial statements in each of years 1, 2, 3 and 4.

Tax allowances are allowed on an item of plant purchased for $1,000 at the start of year 1 over 3 years straight line.

The company charges depreciation on the asset at a rate of 25% straight line.

The tax rate is 30%

Solution

Net Book Value in FInancial Statements

Year 1 2 3 4

Cost 1,000 1,000 1,000 1,000

Depreciation 250 250 250 250

Accumulated Depreciation 250 500 750 1,000

Net Book Value 750 500 250 0

Tax Base

Year 1 2 3 4

Cost 1,000 1,000 1,000 1,000

WDAs 333 333 333 0

Total WDAs 333 667 1,000 1,000

Net Book Value 667 333 0 0

�198



Compare

Year 1 2 3 4

Financial Statements NBV 750 500 250 0

Tax Base 667 333 0 0

Difference (More Asset) 83 167 250 0

Deferred Tax Liability (30%) on SFP 25 50 75 0

Movement to I/S in yearDR Income Statement Tax Chg.CR Deferred Tax Liability...or opposite to reduce...

25 25 25 -75

Tax Computation

Year 1 2 3 4

Profit Before Tax 1,000 1,000 1,000 1,000

Add Back Depreciation 250 250 250 250

WDAs -333 -333 -333

Taxable Profit 917 917 917 1,250

Tax at 30% 275 275 275 375

�199



Income Statement Comparison

Ignoring Deferred Tax

Year 1 2 3 4 Total

Profit Before Tax 1,000 1,000 1,000 1,000 4,000

Tax (W1) 275 275 275 375 1,200

Profit After Tax 725 725 725 625 2,800

With Deferred Tax

Profit Before Tax 1,000 1,000 1,000 1,000 4,000

Tax (W1) 275 275 275 375 1,200

Deferred Tax 25 25 25 -75 0

Profit After Tax 700 700 700 700 2,800

�200



Illustration 2At the year end ABC Co. has non current assets that have a carrying amount of $2,000,000 but a tax base of $1,400,000.

There is currently a deferred tax liability carried forward of $250,000 and the tax rate is 30%.

Tax for the year has been estimated as $500,000.

Show the treatment for deferred tax in the period and the effect this has on the financial statements.

Solution

Carrying Value of Asset 2,000,000

Tax Base 1,400,000

Difference (More Asset) 600,000

Deferred Tax Liability Required (600,000 x 30%) 180,000

Current Deferred Tax Liability 250,000

Movement Required -70,000

Treatment DR CR

Deferred Tax Liability (To reduce) 70,000

Income Statement (Income Tax Charge) 70,000

Amounts in Financial Statements

Income Statement Tax Charge (500,000 - 70,000) 430,000

Deferred Tax Liability 180,000

Income Tax Due 500,000

�201



Multiple Choice QuestionsDF, a small entity resident in Country X, purchased its only item of plant on 1 October2011 for $200,000.

DF charges depreciation on a straight line basis over 5 years and receives a first year WDA of 50% with 25% WDAs available from then on a reducing balance basis. The tax rate is 25%.

DF’s deferred tax balance as at 30 September 2013, in accordance with IAS 12 Income Taxes is:

A $3,750 B $11,250 C $18,750 D $45,000

Answer B

F. Statements Tax Base

Cost 200,000 200,000

Dep’n 2012 (200/5) -40,000

FYA -100,000

Dep’n 2013 (200/5) -40,000

Annual WDA -25,000

Balance 120,000 75,000

Deferred Tax 45,000 x 25% = $11,250

�202



IAS 33 EPS

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Illustration 1An entity issued 300,000 shares at full market price on 1st July 2009. The year end of the entity is 31st December.

There were 900,000 shares in issue on 1st Jan 2009 and the profit for the year to 31st December 2009 was $1,000,000.

Calculate the EPS at 31st December 2009.

Solution

Date Shares Months Fraction Ave

1/01/09 900,000 6/12 - 450,000

1/07/09 1,200,000 6/12 - 600,000

1,050,000

EPS = 1,000,000 / 1,050,000 = 95.24c

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Illustration 2ABC Ltd. makes a bonus issue of 1 for 6 on 1st July 2009. The year end of the entity is 31st December.


Calculate the EPS at 31st December 2009.

Solution


1/01/09 900,000 6/12 7/6 525,000

1/07/09 1,050,000 6/12 525,000

1,050,000

EPS = 1,000,000 / 1,050,000 = 95.24c

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Illustration 3ABC Ltd. makes a rights issue of 1 for 3 on 1st July 2009. The current share price is $4 and the rights issue is at a price of $3 The year end of the entity is 31st December.


Last year’s earnings were $900,000

Calculate the EPS at 31st December 2009 and the new EPS for 2008.

Solution

No. Shares Price Total

3 4 12

1 3 3

4 15

THERP = (15 / 4) = $3.75 so rights fraction is: 4/3.75


1/01/09 900,000 6/12 4/3.75 480,000

1/07/09 1,200,000 6/12 600,000

1,080,000

December 2009 EPS = 1,000,000 / 1,080,000 = 92.59c

c

December 2008 EPS (900,000 / 900,000) 100

Inverted Fraction 3.75/4

Comparable EPS 93.75

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Illustration 4

An entity issued a bonus issue of 1 for 5 of it’s shares on 1st July 2009. The year end of the entity is 31st December.

There were 1,000,000 shares in issue on 1st Jan 2009 and the profit for the year to 31st December 2009 was $1,000,000.

The entity also has convertible loan stock that if converted would create 100,000 new shares.

The interest paid on the loan each year is $90,000 with tax benefits associated of $20,000

Calculate the EPS at 31st December 2009 and the Diluted EPS.

Solution


1/01/09 1,000,000 6/12 6/5 600,000

1/07/09 1,200,000 6/12 - 600,000

1,200,000

EPS = 1,000,000 / 1,200,000 = 83.33c

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Diluted EPS

Earnings

$

Basic Earnings 1,000,000

Interest Saved on Loan 90,000

Tax Benefit Lost -20,000

1,070,000

No. Shares

Basic number of shares 1,200,000

New shares created on conversion 100,000

1,300,000

Diluted EPS

Diluted Earnings 1,070,000

Diluted No. Shares 1,300,000

Diluted EPS 82.31c

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Illustration 5

An entity has a basic weighted average number of shares of 2m and earnings of $1.5m. It also has in issue 300,000 share options with an exercise price of $5. The average market value of the shares in the year was $6.

Calculate the basic EPS for the entity and the diluted EPS.

Solution

Basic EPS (1,500,000 / 2,000,000) 75c

Cash Inflow (Number of Share Options x Exercise Price)

(300,000 x $5) $1,500,000

Non Dilutive Shares (Cash Inflow / Average Market Value of Share)

(1,500,000 / $6) 250,000

Dilutive Shares (No. Options - Non Dilutive Shares)

(300,000 - 250,000) 50,000

Basic Number of Shares 2,000,000

Total Shares for diluted EPS 2,050,000

Diluted EPS (1,500,000 / 2,050,000 73.2c

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Which TWO of the following events which occur after the reporting date of a company but before the financial statements are authorised for issue are classified as ADJUSTING events in accordance with IAS 10 Events after the Reporting Period? (i) A change in tax rate announced after the reporting date, but affecting the current tax

liability (ii)The discovery of a fraud which had occurred during the year (iii)The determination of the sale proceeds of an item of plant sold before the year end (iv)The destruction of a factory by fire

A (i) and (ii) B (i) and (iii) C (ii) and (iii) D (iii) and (iv)

Answer C

IAS 10 Events after the reporting period distinguishes between adjusting and non-adjusting events.

Which ONE of the following is an adjusting event in XS’s financial statements?

A. A dispute with workers caused all production to cease six weeks after the year end. B. A month after the year end XS’s directors decided to cease production of one of its

three product lines and to close the production facility. C. One month after the year end a court determined a case against XS and awarded

damages of $50,000 to one of XS’s customers. XS had expected to lose the case and had set up a provision of $30,000 at the year end.

D. Three weeks after the year end a fire destroyed XS’s main warehouse facility and most of its inventory.

Answer C

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Which ONE of the following would be classified by WDC as a non-adjusting event according to IAS 10 Events After The Reporting Period? WDC’s year end is 30 September 2011.

A. WDC was notified on 5 November 2011 that one of its customers was insolvent and was unlikely to repay any of its debts. The balance outstanding at 30 September 2011 was $42,000.

B. On 30 September WDC had an outstanding court action against it. WDC had made a provision in its financial statements for the year ended 30 September 2011 for damages awarded against it of $22,000. On 29 October 2011 the court awarded damages of $18,000.

C. On 5 October 2011 a serious fire occurred in WDC’s main production centre and severely damaged the production facility.

D. The year end inventory balance included $50,000 of goods from a discontinued product line. On 1 November 2011 these goods were sold for a net total of $20,000.

Answer C

On 1 October 2013, Hoy had $2·5 million of equity shares of 50 cents each in issue. No new shares were issued during the year ended 30 September 2014, but on that date there were outstanding share options to purchase 2 million equity shares at $1·20 each. The average market value of Hoy’s equity shares during the year ended 30 September 2014 was $3 per share. Hoy’s profit after tax for the year ended 30 September 2014 was $1,550,000.

In accordance with IAS 33 Earnings per Share, what is Hoy’s diluted earnings per share for the year ended 30 September 2014? A 25·0 cents B 22·1 cents C 31·0 cents D 41·9 cents

Answer A

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Interpretation of Financial Statements

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Illustration 1

All sales are made on credit.

Required:

Calculate the Inventory, Receivables and Payables days for Inter Ltd. in each of the 2 years as well as the current and quick ratios.

2011 2010

ASSETS $‘000 $‘000

Non Current Assets 1000 1000

Inventory 300 400

Receivables 200 300

Cash 300 200

1800 1900

LIABILITIES


Reserves 200 100

Long term Liabilities 700 900

Payables 100 100

Overdraft -

1800 1900

$‘000 $‘000

Revenue 1000 1200

COS 800 1100


Other Costs 100 90

Net Profit 100 10

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Solution

Item Working 2011 Working 2010

Inventory Period 300/800 x 365

137 400/1100 x 365

133

Collection Period 200/1000 x 365

73 300/1200 x 365

92

Payables Period 100/800 x 365

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Illustration 2

X1 X2 X3

Non Current Assets 500 700 1000

Current Assets 150 200 300

650 900 1300

Ordinary Shares ($1) 300 300 300

Reserves 100 280 430

Loan Notes 150 200 300

Payables 100 120 270

650 900 1300

Revenue 3000 3500 4200

COS 2000 2400 3200


Admin Costs 300 350 400

Distribution Costs 200 250 300

PBIT 500 500 300

Interest 100 150 220

Tax 120 90 50

Profit After Tax 280 260 30

Dividends 100 110 30

Retained Earnings 180 150 0

Share Price $3.30 $4.00 $2.20

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Using the information on the previous page calculate and comment on the following Ratios:

I. Return on Capital EmployedII. Return on EquityIII. Gross MarginIV. Net MarginV. Operating MarginVI. Revenue GrowthVII. GearingVIII. Interest CoverIX. Dividend CoverX. Dividend YieldXI. P/E Ratio

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SolutionROCE

X1 X2 X3

Equity + LT Liabilities

Shares 300 300 300


LT Loan Notes 150 200 300

Capital Employed 550 780 1030

Non Current Assets + Net Current Assets

Non Current Assets 500 700 1000

Net Current Assets (Current Assets - Current Liabilities)

(150 - 100) = 50 (200 - 120) = 80 (300 - 270) = 30


Total Assets - Current Liabilities

Total Assets 650 900 1300

Current Liabilities 100 120 270


PBIT 500 500 300

Return on Capital Employed

PBIT / Capital Employed

(500 / 550) = 90.91%

(500 / 780) = 64.10%

(300 / 1030) = 29.13%

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ROE

X1 X2 X3

Return on Capital Employed (ROCE) 90.91% 64.1% 29.13%

In the first year the ROCE was 90.91%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.

In year X2 the ROCE is 64.10%. This is a fall of 29.5% from the previous year indicating that the business in not able to make the same return on it’s assets that it has previously been able to do.

In the year X3 the ROCE is 29.13%. This is a fall of 54.55% indicating that there may be some serious underlying problems which are affecting the ability of the business to generate the return on capital previously generated.

X1 X2 X3


Ordinary Shares 300 300 300


Total 400 580 730

Return on Equity (PAT / Ord Shares + Reserves)

(280 / 400) = 70%

(260 / 580) = 44.8%

(30 / 730) = 4.1%

In the first year the ROE was 70%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.

In year X2 the ROE is 44.8%. This is a fall of 36% from the previous year indicating that the business in not able to make the same return on the shareholders funds that it has previously been able to do.

In the year X3 the ROE is 41%. This is a fall of 8.4% indicating that the business may be having difficulty generating the returns it was able to do previously.

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Margins

X1 X2 X3

Revenue 3000 3500 4200


PAT 280 260 30

PBIT 500 500 300

Gross Margin (Gross Profit / Revenue) (1000 / 3000) = 33.33%

(1100 / 3500) = 31.42%

(1000 / 4200) = 23.89%

Net Margin (PAT / Revenue) (280 / 3000) = 9.3%

(260 / 3500) = 7.4%

(30 / 4200) = 0.7%

Operating Margin (PBIT / Revenue) (500 / 3000) = 16.66%

(500 / 3500) = 14.28%

(300 / 4200) = 7.1%

The Gross Margin is 33.33% in X1 and holds reasonably steady in X2 at 31.42%. However in X3 the Gross Margin falls to 23.89% indicating that the business has either had to cut prices to sell the greater volume it has, or the cost of it’s purchases have gone up.

The Net Margin is 9.3% in X1 but begins to fall in X2 with 7.4% achieved, before falling dramatically to 0.7% in X3. The main reason for this is the fall in Gross Profit as other costs have risen in line with expectations given the increase in sales. However another point to note is that interest costs have risen with the increase in long term loans. The extra interest costs have put pressure on the business.

The Operating Margin dropped slightly in X2 to 14.28% from 16.66% the previous year - a fall of almost 15%. In X3 the Operating Margin fell away to 7.1%, a decrease of over 50%. This is due to the decreasing Gross Margin achieved as well as rises in the other expenses.

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Gearing

X1 X2 X3

Debt 150 200 300

Equity Number of Shares

300 300 300

Share Price 3.3 4 2.2

Market Value (300 x 3.30) = 990

(300 x 4) = 1200

(300 x 2.20) = 660

Gearing (Debt / Equity) (150 / 990) = 15%

(200 / 1200) = 16.66%

(300 / 660) = 45.45%

Gearing levels in year X1 are 15%. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem excessive.

In year X2 gearing increases slightly to 16.66%, an increase of 11% from year X1. This is due to debt levels increasing to 200 from 150, although this is offset by the increase in the share price from $3.30 to $4.

In year X3 gearing increases dramatically to 45%, an increase of over 180%. This is due to debt levels rising to 300 from 200 and the share price dropping to $2.20 due to the deteriorating results of the business.

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Interest Cover

Dividend Cover

X1 X2 X3

PBIT 500 500 300

Interest 100 150 220

Interest Cover (PBIT / Interest) (500 / 100) = 5 times

(500 / 150) = 3.33 times

(300 / 220) = 1.36 times

Interest coverage in year X1 is 5 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.

In year X2 interest coverage falls to 3.33 times. This has occurred due to the interest charge increasing in the period while PBIT has remained constant.

In year X3 interest coverage has decreased again to 1.36 times. This is caused by the PBIT achieved decreasing to 300 combined with the increase in the interest charge to 220. The increase in interest is caused by the increase in the long term debt of the company as shown by the gearing ratios calculated above.

X1 X2 X3

PAT 280 260 30


Dividend Cover (PAT / Dividends) (280 / 100) = 2.8 times

(260 / 110) = 2.36 times

(30 / 30) = 1 time

Dividend coverage in year X1 is 2.8 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.

In year X2 dividend coverage falls to 2.36 times. This would not concern investors as although coverage has gone down slightly, the dividend paid this year is greater than last.

In year X3 dividend coverage has decreased to 1 time. This is caused by the decrease in profit achieved by the company restricting the level of dividend payable. This will be of concern to investors and their concern is reflected in the fall in the share price from $4 in year X2 to $2.20 in year X3.

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Dividend Yield

P/E Ratio

X1 X2 X3

Number of Shares (300 / 1) 300 300 300


Dividends Per Share (100 / 300) = 33c (110 / 300) = 36c (30 / 300) = 10c

Dividend Yield (Dividends Per Share / Share Price)

(33 / 330) = 10% (36 / 400) = 9% (10 / 220) = 4.5%

The Dividend Yield is 10% in year X1. Whilst we do not have comparatives, this seems a reasonable return.

In year X2 the Dividend Yield falls to 9%. This will not be overly concerning to investors as the increase in share price over the year will have more than made up for the slightly lower yield.

In year X3 the Dividend Yield has fallen to 4.5% which is 50% lower than the previous year. This, combined with the fall in share price and reduced profitability will be a major concern to investors.

X1 X2 X3

Share Price $3.30 $4 $2.20


No. Ordinary Shares 300 300 300

EPS (280 / 300) = 93c (260 / 300) = 86c (30 / 300) = 10c

P/E Ratio (Share Price / EPS) (330 / 93) = 3.54 (400 / 86) = 4.65 (220 / 10) = 22

The P/E Ratio in year X1 is 3.54. We do not have industry comparatives or prior year information with which to compare this.

In year X2 the P/E Ratio increases to 4.65. This indicates that the market expectations for this share have risen since X1 and that investors are now willing to pay 4.65 times what the business earns in a year to own the share.

In year X4 the P/E ratio has increased dramatically to 22. This is unusual as the earnings have decreased to 12% of the previous year. The share price has fallen to reflect this, but not by as much as would be expected. This may indicate that the market feels that the results in year X3 were perhaps a one-off and that next years results will improve.

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Multiple Choice Questions1. Quartile is in the jewellery retail business which can be assumed to be highly seasonal. For the year ended 30 September 2014, Quartile assessed its operating performance by comparing selected accounting ratios with those of its business sector average as provided by an agency. You may assume that the business sector used by the agency is an accurate representation of Quartile’s business. Which of the following circumstances may invalidate the comparison of Quartile’s ratios with those of the sector average?

(i) In the current year, Quartile has experienced significant rising costs for its purchases (ii)The sector average figures are complied from companies whose year end is between 1

July 2014 and 30 September 2014 (iii)Quartile does not revalue its properties, but is aware that other entities in this sector do (iv)During the year, Quartile discovered an error relating to the inventory count at 30

September 2013. This error was correctly accounted for in the financial statements for the current year ended 30 September 2014

A All four B (i), (ii) and (iii) C (ii) and (iii) only D (ii), (iii) and (iv)

Answer C

2. The following information has been taken or calculated from Fowler’s financial statements for the year ended 30 September 2014. Fowler’s cash cycle at 30 September 2014 is 70 days. Its inventory turnover is six times.Year-end trade payables are $230,000.Purchases on credit for the year were $2 million. Cost of sales for the year was $1·8 million.

What is Fowler’s trade receivables collection period as at 30 September 2014?

All calculations should be made to the nearest full day. The trading year is 365 days.

A 106 days B 89 days C 56 days D 51 days

Answer D

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3. Trent uses the formula:

(trade receivables at its year end/revenue for the year) x 365

to calculate how long on average (in days) its customers take to pay.

Which of the following would NOT affect the correctness of the above calculation of the average number of days a customer takes to pay?

A Trent experiences considerable seasonal trading B Trent makes a number of cash sales through retail outlets C Reported revenue does not include a 15% sales tax whereas the receivables do include the tax D Trent factors with recourse the receivable of its largest customer

Answer D

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Cash Flow Statements

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Illustration 1An entity has the following results in their financial statements:

2011 2010

ASSETS $‘000 $‘000

Non Current Assets 1000 1000

Inventory 300 400

Receivables 200 300

Cash 300 200

1800 1900

LIABILITIES


Reserves 200 199

Long term Liabilities 700 801

Payables 100 100

1800 1900

$‘000 $‘000

Revenue 1000 1200

COS 800 1100


Profit on Sale of Non Current Asset 30 0

Other Costs 70 90

PBIT 100 10

Interest Cost 10 7

PBT 90 3

Tax 30 2

PAT 60 1

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Other Information:

I. Within cost of sales is depreciation of $40,000 and amortisation of an intangible asset of $30,000.

II. Within other costs is an increase in accrued admin expenses of $5,000.

Perform the reconciliation of Profit Before Tax to Cash Generated From Operations for 2011.

Solution

Profit Before Tax 90,000

Finance Costs (Often accrued - not cash so add back)

10,000

Depreciation (Not Cash - add back) 40,000

Ammortisation (Not Cash - add back) 30,000

Profit On Sale of NCA (Not Cash - exclude) -30,000

Increase in Accruals (Not Cash Expenses - add back)

5,000 55,000

Operating cash flow before working capital changes 145,000

Decrease in Inventory (Sold more so cash in)(400 - 300)

100,000

Decrease in Receivables (Collecting cash more quickly = cash in)(300 - 200)

100,000

No Change in Payables - - 200000

Cash Generated from Operations 345000

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Illustration 2An entity has the following information in their financial statements:

Other information:

I. The entity disposed of a piece of plant during the year with a carrying value of $300 for a profit of $50.

II. Intangible assets are made up of qualifying development expenditure on a product currently being sold, with amortisation in 2011 of $100.

What cash flows will appear in the statement of cash flows for the entity in the year 2011?

Solution

2011 2010

PPE 2,000 1,100

Intangible Assets 500 400

Property Plant & Equipment

Opening Balance 1,100

Closing Balance -2,000

Disposal (Remove Carrying Amount) -300

Balance -1200

This difference needs to increase the amount of PPE from 800 to 2000 to balance the account so must be additions - A CASH FLOW

We have also sold some PPE & so received cash.The amount received will be the carrying value plus the profit made.

(300 + 50) 350

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Intangible Assets

Opening Balance 400

Closing Balance -500

Amortisation (Reduces the balance) -100

Balance -200

This difference needs to increase the amount of Intangible Asset by 200 to balance the account so must be development expenditure - A CASH FLOW

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Illustration 3Statement of Financial Position 2011 2010

Non Current Assets

PPE (note (i)) 32,600 24,100

Financial Assets (note (ii)) 4,500 7,000

37,100 31,100

Current Assets

Inventory 10,200 7,200

Receivables 3,500 3,700

Bank 1,400

13,700 12,300

Total Assets 50,800 43,400

Equity & Liabilities

Ordinary Shares of $1 (note (iii)) 14,000 8,000

Share Premium (note (iii)) 2,000

Revaluation Reserve (note (iii)) 2,000 3,600

Retained Earnings 13,000 10,100


Finance Lease Obligations 7,000 6,900

Deferred Tax 1,300 900

Current Liabilities

Tax 1,000 1,200

Bank Overdraft 2,900

Prov’n for warranties (note (iv)) 1,600 4,000

Finance Lease Obligations 4,800 2,100

Trade Payables 3,200 4,600

Total Equity & Liabilities 50,800 43,400

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Note (i) - Property Plant & Equipment

The property disposed of was sold for $8.1 million.

Note (ii) - Investments/Investment Income

During the year an investment that had a carrying amount of $3 million was sold for $3.4 million. No investments were purchased during the year.

Investment income consists of:

Income Statement 2011 2010

$‘000 $‘000

Revenue 58,500 41,000

Cost of Sales -46,500 -30,000


Operating Activities -8,700 -4,500

Investment Income (note (ii)) 1,100 700

Finance Costs -500 -400

Profit Before Tax 3,900 6,800

Income Tax -1,000 -1,800

Profit For the year 2,900 5,000

Cost

$‘000

Accumulated Depreciation

$‘000

Carrying Amount

$‘000

At 30 September 2010 33,600 -9,500 24,100

New finance lease additions 6,700 6,700

Purchase of new plant 8,300 8,300

Disposal of property -5,000 1,000 -4,000

Depreciation for the year -2,500 -2,500

At 30 September 2011 43,600 -11,000 32,600

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Note (iii)

On 1 April 2011 there was a bonus issue of shares that was funded from the share premium and some of the revaluation reserve. This was followed on 30 April 2011 by an issue of shares for cash at par.

Note (iv)

The movement in the product warranty provision has been included in cost of sales.

Required:

Prepare a statement of cash flows for Mocha for the year ended 30 September 2011, in accordance with IAS 7 Statement of cash flows, using the indirect method.

(19 marks)

Year to 30 September 2011 2010

$‘000 $‘000

Dividends received 200 250

Profit on sale of investment 400 0

Increases in fair value 500 450

1100 700

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Solution

$‘000 $’000


Finance Costs 500

Finance Income -1,100

Depreciation Note (i) 2,500

Profit On Sale of NCA (8,100 - 4,000) -4,100

Increase in Warranty Provision

(4,000 - 1,600) -2,400 -4600

Operating cash flow before working capital changes -700

Increase in Inventory (10,200 - 7,200) -3,000

Decrease in Receivables (3,700 - 3,500) 200

Decrease in Payables (4,600 - 3,200) -1,400 -4200

Cash Generated from Operations -4900

$‘000 $’000


Finance Costs 500

Finance Income -1,100

Depreciation Note (i) 2,500

Profit On Sale of NCA (8,100 - 4,000) -4,100

Increase in Warranty Provision

(4,000 - 1,600) -2,400 -4600

Operating cash flow before working capital changes -700

Increase in Inventory (10,200 - 7,200) -3,000

Decrease in Receivables (3,700 - 3,500) 200

Decrease in Payables (4,600 - 1,600) -1,400 -4200

Cash Generated from Operations -4900

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W1 - Financial Assets

Interest Paid -500

Income Tax Paid (W4) -800

Net Cash Deficit from operating activities -6200

Cash flows from investing activities

Purchase of Property Plant & Equipment -8,300

Disposal of Property Plant & Equipment 8,100

Disposal of Investment 3,400

Dividends Received 200

Net cash from investing activities 3400

Cash flows from financing activities

Shares Issued (W2) 2,400

Payment of Finance Lease obligations (W3) -3,900

Net cash from financing activities -1,500

Net decrease in cash and cash equivalents -4300

Cash and cash equivalents brought forward 1,400

Cash and cash equivalents carried forward -2900

$‘000 $’000

Financial Assets

Opening Balance 7,000

Closing Balance -4,500

Sale of Asset -3,000

Increase in Fair Value 500

Total 0

No Cash flows to deal with in Financial Assets

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W2 - Shares Issued

W3 - Finance Leases

Ordinary Shares of $1 (note (iii)) 8,000

Share Premium (note (iii)) 2,000

Revaluation Reserve (note (iii)) 3,600

Ordinary Shares of $1 (note (iii)) -14,000

Share Premium (note (iii)) 0

Revaluation Reserve (note (iii)) -2,000

Balance -2400

The difference is the shares issued for cash in the year which is a cash flow

Opening Balance (Current Leases) 2,100

Opening Balance (Non Current Leases) 6,900

Closing Balance (Current Leases) -4,800

Closing Balance (Non Current Leases) -7,000

New Leases in Year 6,700

Balance 3,900

The difference is the leases REPAID in the year which is a cash flow

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W4 - Income Tax

Opening Balance (Income Tax) 1,200

Opening Balance (Deferred Tax) 900

Closing Balance (Income Tax) -1,000

Closing Balance (Deferred Tax) -1,300

Income Statement Charge (Increase tax due) 1000

Balance 800

The difference is the tax PAID in the year which is a cash flow

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Agriculture (IAS 41)

�237



Illustration 1A farmer purchased a flock of 50 5 year old sheep on 1 February 20X4 and on 31 July 20X4 purchased another flock of 20 5.5 year old sheep.

The following fair values less estimated ‘point of sale’ costs were applicable:

- 5 year old sheep at 1 February 20X4 $70.- 5.5 year old sheep at 31 July 20X4 $77.- 6 year old sheep at 31 January 20X5 $80.

Required:

Calculate the amount that will be taken to the statement of profit or loss for the year ended 31 January 20X5.

Solution

$

Purchase of 50 sheep on 1 Feb 20X4 (50 x $70) 3500

Purchase of 20 sheep on 31 July 20X4 (20 x $77) 1540

Total Purchased Value 5040

Value at 31 January 20X5 (70 x $80) 5600

Increase in FV to P/L (5,600 - 5,040) 560

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Illustration 2Jimmy owns a farm with a herd of 300 goats worth $40 each on 1 January 20X4. At 31 December 20X4 the goats have reproduced and he now has 345 goats worth $42 each. At the local market the goats are sold with a commission of 3% on each sale. In addition Jimmy sold 3000 litres of goats milk at an average selling price of $1.20 per litre.

Required:

Calculate the amounts that will be taken to the statement of profit or loss for the year ended 31 December 20X4 and extracts from the Statement of Financial position.

Solution

$

Value of Goats at 1 Jan 20X4 (300 x $40) 12000

Estimated ‘point of sale’ costs (12,000 x 3%) -360

11640

Value of Goats at 31 Dec 20X4 (345 x $42) 14490

Estimated ‘point of sale’ costs (14,490 x 3%) -435

14,055

Increase in FV to P/L (14,055 - 11,640) 2,415

Sale of Milk (3,000 x $1.20) 3,600

Total to P/L 6,015

Non Current Assets

Herd of Goats 14,055

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IAS 21 Foreign Currency

�240



Illustration 1Which of the following statements relating to IAS 21 The effects of changes in foreign exchange rates is correct?

A. The functional currency of a foreign subsidiary is the currency that the group financial statements are presented in.

B. A foreign subsidiary must present it’s financial statements in the presentational currency of the parent.

C. Consideration will be given to the currency of the costs and sales of the entity when determining it’s functional currency.

D. The more autonomous a subsidiary, the more likely it’s functional currency is that of the parent entity.

Answer C

Illustration 2Bulldog Ltd has a year end of 31 January.

On 13th October Bulldog Ltd buys goods from Eagle Inc. a US supplier for $250,000.

On 24th November Bulldog settles the transaction in full.

Exchange rates

13th October £1 : $1.45

24th November £1 : $1.55

Show the accounting entries for these transactions.

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Agreeing Transaction Working £

On date of agreeing the transaction use the spot rate to record it

250,000 / 1.45

172,414

DR Purchases 172,414

CR Payables 172,414

On Settlement Working £

On date of agreeing the transaction use the spot rate to record it

250,000 / 1.55

161,290

DR Payables 172,414

CR Cash with amount actually paid 161,290

CR FX Gain with the difference 11,124

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Illustration 3Jeff Ltd. purchases an item of plant on 1st June from a foreign supplier on one month’s credit for €100,000. Jeff is a US company.

Exchange rates

1st June $ = €1.50

21st June $ = €1.40

How will this transaction be dealt with in the accounts for the year to 21st June?

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Solution to Illustration 3

At Purchase Date Working $

The rate at the time of purchase is $ : €1.50 €100,000 / 1.50 66,666

DR Asset 66,666

CR Payables 66,666

At 21st June Working $

The rate at this time is $ : €1.40 €100,000 / 1.40 71,429

The payable must be retranslated at the year end as it is a monetary balance. So........

DR FX Loss (71,429 - 66,666) 4,763

CR Payables (71,429 - 66,666) 4,763

The $4,763 is unrealised so is included in Other Comprehensive Income.

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Disposal of Subsidiary

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Illustration 1Inter purchased 70% of the shares in Milan several years ago. At that time goodwill of $80,000 arose. The net assets of Milan are currently $100,000 and the NCI is $18,000.

I. Calculate the gain arising on disposal if Inter sells it’s entire holding for $350,000.

II. Calculate the gain arising on disposal if Inter sells it’s entire holding for $550,000.

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Solution 1I.

II.

$

Sale Proceeds 350,000

Less net assets of sub at date of disposal -100,000

Less all goodwill remaining at disposal -80,000

Plus all NCI at date of disposal 18,000

Gain to group 188,000

$

Sale Proceeds 550,000

Less net assets of sub at date of disposal -100,000

Less all goodwill remaining at disposal -80,000

Plus all NCI at date of disposal 18,000

Gain to group 388,000

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ACCA F7 - Financial Reporting

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