answer p2

Interim Assessment

KAPLAN PUBLISHING of 10

ACCA INTERIM ASSESSMENT

Corporate Reporting

QUESTION PAPER Time allowed Reading time: 15 minutes Writing time: 3 hours This paper is divided into two sections Section A This ONE question is compulsory and MUST be

answered Section B Answer BOTH questions Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall

DECEMBER 2008

Kaplan Publishing/Kaplan Financial

ACCA P2 (INT) Corporate Reporting

of 10 KAPLAN PUBLISHING

© Kaplan Financial Limited, 2008 All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing.

Interim Assessment


SECTION A

This ONE question is compulsory and MUST be answered QUESTION 1 The following draft financial statements relate to the Baron Group. Draft consolidated statement of comprehensive income for the year ended 30 November 20X1

$m

Revenue 5,721 Cost of sales (4,560) _____ Gross profit 1,161 Distribution costs (309) Administration expenses (285) _____ 567 Income from interests in joint venture 75 Defence costs of takeover bid (20) Loss on disposal of tangible non-current assets (7) Loss on disposal of discontinued operations (Note (a)) (25) Interest receivable 27 Interest payable (19) _____ Profit before tax 598 Income tax expense (Note (e)) (191) _____ Profit for the year 407 _____

Attributable to:

Equity holders of the parent 332 Minority interest (75) _____ Profit for the year 407 _____

Consolidated statement of changes in equity for the year ending 30 November 20X1

$m

Opening capital and reserves 1,319 Profit for the year 332 Equity dividends paid and proposed (130) Deficit on revaluation of land and buildings (30) Deficit on revaluation of land and buildings in joint venture (15) Gain on revaluation of loan 28 _____ Closing capital and reserves 1,504 _____



Draft consolidated statement of financial position as at 30 November 20X1

20X1 20X0 $m $m

ASSETS Non-current assets Tangible assets (Note (f)) 1,415 1,800 Intangible assets (Note (b)) 60 144 Investments (Notes (c) and (d)) 600 _____ − _____ 2,075 _____ 1,944 _____ Current assets Inventories 720 680 Short term investments (Note (d)) 152 44 Trade receivables (Note (g)) 680 540 Cash 24 _____ 133 _____ 1,576 _____ 1,397 _____ Total assets 3,651 _____ 3,341 _____ EQUITY AND LIABILITIES Capital and reserves Share capital 440 440 Reserves 134 151 Retained earnings 930 _____ 728 _____ 1,504 _____ 1,319 _____ Minority interest 330 570 Non-current liabilities Interest-bearing borrowings 186 214 Provisions – takeover bid defence costs 30 _____ 15 _____ 216 _____ 229 _____ Current liabilities Trade payables 1,300 973 Income tax 181 150 Dividends proposed before the year-end 80 70 Interest payable 40 _____ 30 _____ 1,601 _____ 1,223 _____ Total equity and liabilities 3,651 _____ 3,341 _____

Interim Assessment


Notes: The following information is relevant to the Baron Group. (a) The group disposed of a major subsidiary Piece on 1 September 20X1. Baron held an

80% interest in the subsidiary at the date of disposal.

The group required the subsidiary Piece to prepare an interim statement of financial position at the date of the disposal. The consolidated carrying values of the net assets at the date of disposal are set out below in the summarised statement of financial position at 1 September 20X1.

$m $m

Tangible non-current assets (depreciation 30) 310 Current assets Inventories 60 Trade receivables 50 Cash 130 ___

240 ___ 550 ___ Share capital 100 Retained earnings 320 ___ 420 Trade payables 105 Tax payable 25 ___

130 ___ 550 ___

The depreciation charge in the statement of comprehensive income of Piece for the period was $9 million.

(b) The carrying amount relating to goodwill in the group accounts arising on the acquisition of Piece was $64 million at 1 December 20X0. The loss on sale of discontinued operations in the group accounts comprises:

$m

Sale proceeds 375 Net assets sold (80% × 420) (336) Goodwill (64) ___ (25) ___

The consideration for the sale of Piece was 200 million ordinary shares of $1 in Meal, (the acquiring company) at a value of $300 million and $75 million in cash. During the year, the group recognised an impairment loss of $20m arising on other intangible assets.



(c) During the year, Baron had transferred several of its tangible assets to a newly created company, Kevla which is owned jointly by three parties. The total investment at the date of transfer in the joint venture by Baron was $225 million at carrying value comprising $200 million in tangible non-current assets and $25 million in cash. The group has used equity accounting for the joint venture in Kevla. No dividends have been received from Kevla but the land and buildings transferred have been revalued at the year-end.

(d) The investments included under non-current assets comprised the joint venture in

Kevla ($265 million), the shares in Meal ($300 million), and investments in corporate bonds ($35 million). The bonds had been purchased in November 20X1 and were deemed to be highly liquid, although Baron intended to hold them for the long term as their maturity date is 1 January 20X9.

The short term investments comprised the following items:

20X1 20X0 $m $m

Government securities (repayable 1 April 20X2) 51 23 Cash on seven day deposit 101 _____ 21 _____ 152 _____ 44 _____

(e) The taxation charge in the statement of comprehensive income is made up of the

following items:

$m

Income tax 171 Tax attributable to joint venture 20 ___ 191 ___

(f) The movement on tangible non-current assets of the Baron Group during the year

was as follows:

$m

Cost or valuation 1 December 20X0 2,100 Additions 380 Revaluation (30) Disposals and transfers (680) _____ At 30 November 20X1 1,770 _____ Depreciation 1 December 20X0 300 Charged during year 150 Disposals and transfers (95) _____ At 30 November 20X1 355 _____ Carrying value at 30 November 20X1 1,415 Carrying value at 1 December 20X0 1,800

Interim Assessment


(g) Interest receivable included in trade receivables was $5 million at 30 November 20X1 ($4 million at 30 November 20X0).

Required:

(a) Prepare a consolidated cash flow statement for the Baron Group for the year ended

30 November 20X1, including the note relating to the disposal of Piece, in accordance with the requirements of IAS 7 Cash Flow Statements. (35 marks)

You are required to use the ‘indirect method’ to produce the cash flow statement.

Other notes to the cash flow statement are not required. (b) The Finance Director is proposing set up a company, River, through which conducts

its investment activities. Baron is proposing to pay $400 million to River during the year. The money will be invested in a specified portfolio of investments. Ninety-five per cent of the profits and one hundred per cent of the losses in the specified portfolio of investments will be transferred to Baron. An investment manager has charge of the company’s investments and will owns all of the share capital of River. An agreement between the investment manager and Baron sets out the operating guidelines and prohibits the investment manager from obtaining access to the investments for the manager’s benefit. An annual transfer of the profit/loss will occur on 30 June annually and the capital will be returned in four years’ time.

Discuss the issues which would determine whether River would be consolidated by Baron in the group financial statements. (9 marks)

(c) `Discuss briefly the importance of ethical behaviour in the preparation of financial

statements and whether the creation of River could constitute unethical practice by the finance director of Baron. (6 marks)

Two marks are available for the quality of the discussion of the issues regarding the consolidation of River and the importance of ethical behaviour.

(Total: 50 marks)



SECTION B

Answer BOTH questions QUESTION 2 The following draft statements of financial position relate to Long, a public limited company, Foot, a public limited company and Short, a public limited company, as at 30 November 20X3:

Long Foot Short $m $m $m

Non-current assets Property, plant and equipment 329 185 64 Investment in Foot 345 − − Investment in Short 69 50 − Investment in Micro 11 ___ − ___ − ___ 754 235 64 Current assets 120 ___ 58 ___ 40 ___ 874 ___ 293 ___ 104 ___ Capital and reserves Called up ordinary share capital of $1 460 110 50 Share premium account 264 20 10 Retained earnings 120 ___ 138 ___ 35 ___ 844 268 95 Non-current liabilities – deferred tax 20 20 5 Current liabilities 10 ___ 5 ___ 4 ___ 874

___ 293 ___

104 ___

The following information is relevant to the preparation of the group financial statements: (i) Long acquired ninety per cent of the ordinary share capital of Foot and twenty-six per

cent of the ordinary share capital of Short on 1 December 20X2 in a share for share exchange when the retained earnings were Foot $136 million and Short $30 million. The fair value of the net assets at 1 December 20X2 was Long $650 million, Foot $315 million and Short $119 million. Any increase in the consolidated fair value of the net assets over the carrying value is attributable to property held by the companies. There had been no new issue of shares since 1 December 20X2.

(ii) Foot had acquired a sixty per cent holding in Short on 1 December 20W9 for a

consideration of $50 million when the retained earnings of Short were $10 million. The fair value of the net assets at that date was $80 million with the increase in fair value attributable to property held by the companies. Property is depreciated within the group at five per cent per annum.

Interim Assessment


(iii) Long purchased a forty per cent interest in Micro, a limited liability investment company on 1 December 20X2. The only asset of the company is a portfolio of investments which is held for trading purposes. The stake in Micro was purchased for cash for $11 million. The carrying value of the net assets of Micro on 1 December 20X2 was $18 million and their fair value was $20 million. On 30 November 20X3, the fair value of the net assets was $24 million. Long exercises significant influence over Micro. Micro values the portfolio on a ‘mark to market’ basis.

(v) Foot has included a brand name in its property, plant and equipment at the cost of $9

million. The brand earnings can be separately identified and could be sold separately from the rest of the business. The fair value of the brand at 30 November 20X3 was $7 million. The fair value of the brand at the time of Foot’s acquisition by Long was $9 million.

Required: Prepare the consolidated statement of financial position of the Long Group at the year-end of 30 November 20X3 in accordance with International Financial Reporting Standards. The Long group use the proportionate consolidation method to calculate non controlling interest. (25 marks) QUESTION 3 Walsh, a public limited company, acquired 80% of the ordinary share capital of Marsh, a public limited company, on 1 April 20X3 when the retained earnings of Marsh were $350 million (credit). The cost of the shares of Marsh was $544 million and the share capital acquired by Walsh was 120 million of the $1 ordinary shares. On 1 July 20X6, Walsh sold 20 million shares of $1 of Marsh for $350 million. There has been no change in the ordinary share capital of Marsh since 1 April 20X3. On 1 April 20X6, Walsh acquired 85% of the 200 million ordinary shares of $1 of Short, a public limited company at a cost of $900 million. The draft income statements for the year ended 31 December 20X6 are:

Walsh plc Marsh plc Short plc $m $m $m

Revenue 10,000 8,000 2,000 Cost of sales (7,000) ______ (5,500) _____ (800) _____ Gross profit 3,000 2,500 1,200 Administrative expenses (880) (570) (180) Distribution costs (1,310) ______ (830) _____ (240) _____ Profit from operations 810 1,100 780 Interest payable (7) – (4) Bank interest receivable 5 ______ − _____ – _____

Profit before tax 808 1,100 776 Tax (250) ______ (350) _____ (200) _____ Profit for the year 558 ______ 750 _____ 576 _____



Walsh plc Marsh plc Short plc $m $m $m

Notes:

Dividends paid in the year (85) ______ – _____ – _____ Retained earnings at 1 Jan 20X6 1,500 ______ 1,650 _____ 675 _____

The following information is relevant to the preparation of the group accounts. (i) The goodwill relating to the acquisition of Short has been impaired by $11m in the

current period. The goodwill relating to the acquisition of Marsh has been fully written off in the previous year.

(ii) The sale of the shares in Marsh plc has not been accounted for in the accounting

records of Walsh plc (ignore the taxation aspects of the sale). (iii) Short plc sold goods to Walsh plc to the selling value of $80 million on 1 August 20X6

at cost plus 20%. Walsh plc had sold $62 million of these goods at the year end. (iv) Assume that the fair values of the net assets of the subsidiary companies were the

same as the book values at the date of acquisition. (v) Assume that profits accrue evenly and that there are no other reserves than the

retained earnings. Required: Prepare a consolidated income statement for the Walsh Group plc for the year ended 31 December 20X6. (25 marks)

answer p2

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