ACCA
Paper F7
Financial Reporting (International) Tuition Mock Examination
June 2012
Answer Guide
Health Warning!
How to pass Attempt the mock examination under exam
conditions BEFORE looking at these suggested answers. Then constructively compare your
answer, identifying the points you made well and identifying those not so well made.
If you got basics wrong then re-revise by re-writing them out until you get them correct.
How to fail Simply read or audit the answers congratulating
yourself that you would have answered the questions as per the suggested answers.
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Question 1
Tutorial Help and Key Points
This is a typical CSFP with Associates. Follow the procedure from the Class
Notes: ie the group structure, the consolidation adjustments and net assets list
and thereafter value the associate and do goodwill, NCI, and consolidated
reserves.
Watch out for impairment in respect of the Associate as the examiner sees it as
relating to the entire value, not just goodwill. It is absolutely crucial to take the
impairment figure given by the examiner in the question and not the group
percentage.
Also, when taking the difference between the date of acquisition and date of
consolidation net assets, multiply by the group percentage and it is this figure
that must be shown in the Associate valuation and in consolidated reserves.
Don’t forget accumulated depreciation is needed on fair value adjustments for
the subsidiary.
Marking Guide
Marks
Statement of financial position:
Property plant and equipment 2 Investments 1 Inventory ½ Receivables 1
Cash 1 Ordinary share capital 1 Loan notes 1
Payables ½ Taxation ½ Overdraft ½ _______
9
Goodwill in Sally:
Investment at cost (consideration) ½
Net assets acquired calculated as: Share capital ½ Retained earnings ½
Fair value adjustment – PP+E 1 Goodwill impairment ½ FV of NCI at acquisition ½ Goodwill impairment (NCI) ½ _______
4
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Investment in associate:
Group share of Andy’s net assets at CSFP 1 Net assets at acquisition calculated as: Share capital ½ Retained earnings ½
Goodwill on acquisition 1 Goodwill impairment 1 _______
4
NCI:
NCI at FV at acqn ½ NCI share of post-acqn 1
NCI impairment ½ _______
2
Group reserves:
Parent 1 Group share of subsidiaries post acquisition 1
Group share of goodwill impairment in subsidiary 1 Group share of associate’s post acquisition 2 Goodwill impairment of associate 1 _______
6
Total marks 25
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Helen Group Statement of Financial Position as at 31 March 2012
$000 Non-current assets Property, plant and equipment (18,112.5 + 8,100 + 405[W2]) 26,617.5
Investments (9,000 +2,047 - 7,290 – 1,417.5) 2,339.5 Investment in associate (W) 1,590 Goodwill (W) 2,728 ________
33,275 ________
Current assets
Inventory (1,867.5 + 765) 2,632.5 Receivables (1,170 + 652.5 - 90) 1,732.5 Cash (540 + nil + 90) 630 ________
4,995 ________
Total assets 38,270 _______
Equity and liabilities
Equity Ordinary share capital 11,250
Retained earnings (W) 19,770 ________
31,020
Non-controlling interest (W) 995.5 ________
32,015.5 Non-current liabilities
10% loan notes (1,125 + 540) 1,665 Current liabilities
Payables (945 + 2,160) 3,105 Taxation (495 + 562) 1,057 Overdraft 427.5 ________
4,589.5 ________
Total equity and liabilities 38,270 _______
Working 1 - Group structure
Andy Associate
Helen
Sally Subsidiary
90%
1,620 _____
1,800
30%
270 _____
900
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Working 2 - Net assets and consolidation adjustments
Per Q
(i) Fair value adjustment for PP+E in S:
$000
Fair value adjustment at acquisition 675 Post acquisition depreciation (675/5 yrs x 2 yrs) (270) _____
Fair value adjustment at consolidated SFP date 405 _____
(ii) Intra-group balances:
Cash in transit (direction of transfer - Sally to Helen)
Dr Cash $90,000
Cr Receivables $90,000
(iii) Pre-acquisition retained earnings – Andy:
$000 Retained earnings b/f 1,800 Pre-acquisition profit for the year (Apr – Sept 09) 675 _____
($1,350 x 6/12) 2,475 _____
Net assets list
Sally Andy
At acq'n At CSFP At acq'n At CSFP
$000 $000 $000 $000
Share capital 2,700 2,700 1,350 1,350
Retained earnings 1,800 5,175 2,475 3,150
Property (FV adj) 675 675 - -
Depreciation - -270 - -
5,175 8,280 3,825 4,500
For G/W For G/W
Difference of $3,105 to NCI
& consol reserves Difference of $675 to Assoc
Valn & cons res
Investment in associate - Andy
$000 Investment at cost ($5.25 x 270,000) 1,417.5
Plus: Grp share of post-acq Res = Net Assets change 30% x 675 202.5 Less: G/W Impairment (30) _________
Valuation of associate in CSFP 1,590 _________
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Working 3 – Goodwill, NCI and Consolidated Reserves
Goodwill in Sally – (CI)
$000 Investment at cost ($4.50 x 1,620,000) 7,290
Fair value of NCI at acq’n ($3.85 x 180 shares) 693 ________
7,983 Less: net assets at acq’n (5,175) ________
2,808 Less: goodwill impairment (80)
Goodwill at net book value 2,560.5 ________
Goodwill at NBV in CSFP 2,728 ________
Non-controlling Interest
$000
Fair value of NCI at acq’n ($3.85 x 180 shares) 693 Plus: NCI 10% x 3,105 (8,280 – 5,175) 310.5 Less: Impairment of Goodwill (10% x 80) (8) ________
NCI (CSFP) 995.5 ________
Consolidated Reserves
$000 Helen (Parent) 16,875 Group share of Sally’s post acquisition ($3,105 x 90%) 2,794.5
Less: Group share of goodwill impairment in Sally ($80 x 90%) (72) Share of Andy’s post acquisition ($675 x 30%) 202.5 Less: Goodwill impairment in Andy (30) ________
Total to CSFP 19,770 ________
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Question 2
Tutorial Help and Key Points
Master the formats for the income statement and SFP – remember that
dividends and retained profits brought forward are not shown in the income
statement but either in a SOCIE or through workings.
In the other comprehensive income section, don’t forget to show revaluations –
tutorial note: if you get investment properties in the exam, this is not shown in
OCI, but in the main income statement.
Cost of sales is much bigger than most students realise, ie includes research
and development, depreciation, etc.
It is easier to do finance costs as a working, otherwise the income statement
might become untidy.
Development costs are amortised but research is always written off.
Marking Guide
Marks
Presentation of both financial statements 1
Statement of comprehensive income:
Revenue ½
Cost of sales 3 Investment income ½ Administration costs ½ Distribution costs ½
Finance costs 1 Taxation 2 Other comprehensive income (revaluation reserve) 1 _______
9
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Statement of financial position:
Property, plant and equipment 3 Investments ½ Development costs 2½ Inventory ½
Receivables ½ Bank ½ Ordinary share capital ½ Share premium ½
Retained earnings 2 Revaluation reserve 1 Debentures ½
Deferred tax 1 Trade payables ½ Current tax ½ Accruals 1 _______
15
Total marks 25
Glee Products Statement of Comprehensive Income for the year to
31 March 2012
$000
Revenue 22,578
Less: Cost of Sales (W1) (11,574) ______
Gross Profit 11,004
Investment income 187
Administration costs (4,235)
Distribution costs (4,373) ______
Operating Profit 2,583
Finance costs (W3) (248) ______
Profit before tax 2,335
Taxation (W4) (964) ______
Profit after tax 1,371
Other comprehensive income:
Revaluation reserve (W2) 1,615 ______
Total comprehensive income for the year 2,986 ______
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Glee Products Statement of Financial Position as at 31 March 2012
$000 $000
Non-current assets
Property, plant and equipment (W2) 15,330
Investments at fair value 4,813
Capitalised development costs (W5) 545 ______
20,688
Current assets
Inventory 3,630
Receivables 4,070
Bank and cash 2,251 ______
9,951 ______
Total assets 30,639 ______
Equity and liabilities
Equity
Ordinary share capital 12,375
Share premium 3,795
Retained earnings (W6) 1,682
Revaluation reserve (1210 + 1615) 2,825 ______
20,677
Non-current liabilities
6% Debentures 4,134
Deferred tax (W4) 2,229 ______
6,363
Current liabilities
Trade payables 2,805
Current tax 670
Accruals (W3) 124 ______
3,599 ______
Total equity and liabilities 30,639 ______
Workings
W1 Cost of sales
$000
Opening inventory 2,000
Purchases 11,153
Closing inventory (3,630)
Depreciation (W2) 1,221
Research costs (W5) 327
Amortisation (W5) 503
Total 11,574
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W2 PP+E
Land Buildings Equipment Total
$000 $000 $000 $000
Cost per TB 5,500 8,773 9,350 23,623
Accumulated depreciation nil (4,125) (4,562) (8,687)
NBV b/f 5,500 4,648 4,788 14,936
Charge for the year:
(4788 x 20%) nil (263) (958) (1,221)
(8773 x 3%)
NBV at date of revaluation 5,500 4,385 3,830 13,715
Revaluation surplus (Bal fig) nil 1,615 nil 1,615
Valuation to SFP 5,500 6,000 3,830 15,330
W3 Finance costs
$000
Debenture interest paid 124
Accrual (Bal fig) 124 ___
Finance cost for the year ($4,134 x 6%) 248 ___
W4 Taxation
$000
Expense:
Current tax 670
Under-provision b/f 17
Deferred tax movement* 277 _____
Tax charge for the year 964 _____
* Deferred tax provision
$000
Provision b/f 1,952
Movement (Bal fig) 277 _____
Provision c/f ($7,430 x 30%) 2,229 _____
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W5 R&D
$000
Capitalised development costs at 1 April 2011 2,384
Accumulated amortisation at 1 April 2011 (1,468)
Development costs incurred in the year to 31 March 2012 132 _____
1,048
Amortisation for the year [(2,384+132) x 20%] (503) _____
Carrying value to SFP 545 _____
Research costs of $327,000 will be written off to cost of sales.
W6 Retained earnings
$000
Retained earnings b/f 1,067
Profit for the year 1,371
Dividends paid (756) _____
1,682 _____
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Question 3
Tutorial Help and Key Points
Learn the format for the statement of cashflow – note that the operating
activities category is divided into three parts.
1 The add backs of depreciation, amortisation, etc (but don’t forget
Government Grant amortisation is a credit in the income statement,
the opposite of depreciation).
2 Next comes the working capital section – the secret here is to
imagine the movements happen as if they are cash inflows and
outflows, and each movement happens in isolation.
3 Finally, we have the section that deals with items such as tax paid,
interest paid, etc – remember that dividend paid can be shown either
here or in the later category financing.
When dealing with non-current assets, even though revaluation is non-cash, it
must be brought into the calculation so as to isolate the pure cash movement.
Similarly, when dealing with share issues and share premium, bonus issues are
again non-cash, and must be included to isolate pure cash.
With written parts, follow the answer guide to pick up ideas – traditionally these
parts are ignored by weaker students, but they are the most generously marked
– a rough guide is 1 mark per relevant point.
Marking Guide
This is set out within the answer.
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(a)
Statement of cash flows for Grebden for the year ended 30 September
2012
$m Marks
Profit before tax 870 ½ Finance costs 30 ½ Depreciation 320 ½
Loss on disposal 50 ½ Amortisation of development expenditure (W1) 130 1½ Government grant release (W2) (90) 1½
Goodwill impairment 20 _____
½
1,330 Increase in inventory (480) ½
Increase in receivables (310) ½ Increase in payables 145
_____ ½
Cash generated from operations 685 Interest paid (W3) (20) 1½ Income taxes paid (W4) (130)
____ 2
Net cash from operating activities 535 Cash flows from investing activities
Purchase of PPE (250) ½ Development expenditure (500) ½ Proceeds of sale of PPE (W5) 20 2½
Grant received 50 ½
_____
Net cash used in investing activities (680)
Cash flows from financing activities Issue of share capital (W6) 450 3 Proceeds from long-term borrowings (300 – 100) 200 1
Dividends paid (320) ____
½
Net cash used in financing activities 330
Net increase in cash and cash equivalents 185 Cash and cash equivalents at beginning of period (115)
_____ ½
Cash and cash equivalents at end of period 70 ½
Workings
(W1) Development expenditure
$m Balance b/f 100 Capitalised 500
Amortisation charge (β) (130) _____
c/f 470
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(W2) Government grant
$m Balance b/f (900 + 400) 300
Awarded in year 50 Amortised (β) (90)
_____
c/f (1,400 + 600) 260
(W3) Loan interest $m Accrual b/f 5
Income statement 30 Paid (β) (20)
_____
Accrual c/f 15
(W4) Tax
$m
Balance b/f (160 current + 140 deferred) 300 Income statement 270 Paid (β) (130)
_____
c/f (130 + 310) 440
(W5) PPE
$000
Balance b/f 1,830 Revaluation 200
Additions 250 Depreciation (320) Disposal CV (70)
_____
c/f 1,890 Proceeds of sale = 50 loss + 70 CV = $20m
(W6) Share issue
$m
Revaluation reserve b/f - Revaluation 200 Transfer (10) Bonus issue (β) 50
____
Revaluation reserve c/f 140 Share
capital $m
Share
premium $m
Total
$m
c/f 750 350
Bonus issue (50) Share issue (β) (200)
_____ (250)
_____ 450
b/f 500 100
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(b)
Commentary on financial position of Grebden
Grebden has an overall cash inflow of $330m. The main sources of the
cash inflows are:
● $685m cash generated from operations
● $450m proceeds of a share issue
● $200m proceeds of a loan issue.
Of these inflows, the cash generated by operations is sustainable and will
continue in future years, assuming that Grebden continues to trade as
present.
The financing inflows are ‘one-off’ cash flows, and Grebden cannot raise
finance in this way on an ongoing basis.
Whilst the operating cash flows amply cover the ongoing cash outflows of
interest, tax and a dividend, the ‘one-off ‘ cash inflows have been used to
finance ‘one-off’ expenditure, namely the purchase of new plant and
development expenditure.
Both of these items of expenditure are expected to result in future
benefits to Grebden, in the form of revenues, profits and in turn cash
inflows. They are therefore an efficient way to spend the proceeds of the
financing activities.
In terms of cash from operations, an operational profit of $900m ($870m
+ $30m finance costs) equates to a cash flow of $685m. Where
operational cash flow is less than operating profit, explanation should be
sought.
In this case the lower amount is largely due to the management of
working capital and in particular the increases in receivables and
inventory. Although these have a negative impact on cash flow, the
increases may have valid business reasons, for example due to increased
activity or providing extended credit to new customers or stocking up
ahead of a big order. If these reasons are not in existence, the
increases may be evidence of poor working capital management, which
should be addressed.
Finally the issue of the dividend payment should be considered. A
dividend of $320m is paid in the same year that the company has raised
$650m in finance. More efficient management of cash flows would have
seen the dividend withheld for a year and less external financing sought.
1 per
valid
explained
point to a
maximum
of 5
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Question 4
Tutorial Help and Key Points
Part (a)
When dealing with finance leases don’t forget that the user capitalises the asset
in its books. Watch out for whether the payments are in advance or in arrears
as in this question. Clearly, if the payments are made at the end of each year
interest will have accrued for the 12 months leading up to the payment date and
must therefore be added to the opening balance before deducting the payment.
The secret to doing the split between current and non-current correctly, is to
take the figure at the end of the year following the year being reported on as
the non-current liability ($6,327) and when this is compared to the closing
balance of total liability at the end of the reporting year, will reveal the current
liability.
Operating leases are much easier and you must carefully isolate the accrual.
Part (b)
Discussing leasing is easy as the user of the asset behaves like the owner even
though legal title remains with the lessor.
With operating leases the ownership remains with the lessor as risks and
rewards have not passed to the lessee.
Marking Guide
Marks
(a)
Operating lease expense 2 Depreciation expense 1
Finance cost 1 Leased machinery asset 1 Non-current finance lease liability 2 Current finance lease liability 2
Accrual for operating lease 1 _______
10
(b)
Award marks for each relevant point up to a maximum of five 5
Total marks 15
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(a)
Machinery
The item of machinery should be treated as a finance lease because the lease term
is over the majority of the assets useful life.
The lease payments are made at the end of each year of the lease, in arrears.
Liability:
Period Opening Bal Interest (10%) Payment Closing Bal
Year 1 8,700 870 -2,000 7,570 Year 2 7,570 757 -2,000 6,327
Non-current liability at the end of year 1 $6,327 Current liability at the end of year 1 ($7,570 - $6,327) $1,243 _____
Total liability at the end of year 1 $7,570 _____
Depreciation:
$8,700 x 12% $1,044
Photocopier
This photocopier should be treated as an operating lease as it is a short term rental
(3 of the 15 year life).
It should be recognised as an expense in the statement of comprehensive income
on an accruals basis.
Operating lease expense = ($4,500 x 2) $3,000 per annum
3 years
In year 1:
Dr Operating lease rental (SOCI) $3,000
Cr Accruals (SOFP) $3,000
Mayweather Ltd Statement of Comprehensive Income (extract) for the
year ended 30 September 2011
$ Operating lease expense 2,000 Depreciation expense 1,044
Finance costs 870
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Mayweather Ltd Statement of Financial Position (extract) as at
30 September 2011
$ Non-current assets Leased machinery 7,656 ($8,700-$1,044) Non-current liabilities
Amounts due under finance lease 6,327 Current liabilities Amounts due under finance lease 1,243
Accruals 3,000
(b)
In the financial statements we must reflect the commercial substance of
transactions rather than merely their legal form. The leasing of assets is a classic
case of this.
Assets acquired through a finance lease are legally owned by the lessor but in
substance are owned by the lessee because the risks and rewards of ownership
have passed to the lessee. To this extent we must show in the financial statements
the leased asset as a non-current asset and treat it in the same way by
subsequently depreciating the asset over its useful life. We also need to reflect the
fact that an obligation has been created through entering into this lease by way of a
non-current liability.
However, assets acquired through an operating lease are not owned by the lessee
in substance as significant risks and rewards of ownership have not passed to the
lessee. For example, in the Mayweather scenario the company had a maintenance
agreement with the lessor, this means that if the photocopier breaks down the
lessor would need to repair the asset. Therefore the lessee does not bear the risks
associated with the asset. For this reason, assets rented by an operating lease
would not be capitalised in the statement of financial position, but reflected in the
statement of comprehensive income as a simple rental. The expense for each
period then being calculated on an accruals basis.
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Question 5
Tutorial Help and Key Points
This is a standard question, parts of which are always examined as it is a
fundamental skill expected of a qualified accountant – be careful with the date
of the revaluation. If revaluation is at the start of the year it is the revalued
amount that must be depreciated; if revaluation is at the end of the year, first
do depreciation on the opening balance to reduce it to NBV before doing the
revaluation. In other words, carefully follow the instructions in the question.
Revise the straight line and reducing balance depreciation methods as these are
examined in every sitting.
Marking Guide
Marks
Revaluation of land 2 NBV at date of disposal 3½ Capitalised machinery cost 2 Depreciation calculations after disposal and addition 2½
Total marks 10
(i)
Revaluation of land
$
Original cost: 80,000
Accumulated dep'n Nil _______
NBV at date of revaluation 80,000
Increase in asset cost (Bal fig) 70,000
Valuation 150,000 _______
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(ii)
Disposal of delivery vans
Remove the original cost = $16,000
Remove the accumulated depreciation = $7,134*
* Accumulated dep'n (600+2,310+1,964+1,669+591)
$
1.7.05 Cost 16,000
Dep'n up to 30.9.05 ($16,000 x 15% x 3/12) -600 _______
NBV at 30.9.05 15,400
Dep'n for yr to 30.9.06 ($15,400 x 15%) -2,310 _______
NBV at 30.9.06 13,090
Dep'n for yr to 30.9.07 ($13,090 x 15%) -1,964 _______
NBV at 30.9.07 11,126
Dep'n for yr to 30.9.08 ($11,126 x 15%) -1,669 _______
NBV at 30.9.08 9,457
Dep'n up to 1.3.09 ($9,457 x 15% x 5/12) -591 _______
NBV at date of disposal 8,866 _______
(iii)
Capitalise cost
$
Purchase price 25,000
Delivery costs 5,000
Initial testing of the machine 3,000 _______
Increase PP&E 33,000 _______
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(iv)
Depreciation
Land Buildings Plant and machinery
Motor vehicles
$ $ $ $
Cost 80,000 120,000 30,000 37,000
Accum dep'n Nil _______
-96,000 _______
-12,000 ______
-17,640 ______
NBV 80,000 24,000 18,000 19,360
Disposal -8,866
Addition 33,000
Revaluation 70,000 _______
_______
______
______
Sub total 150,000 24,000 51,000 10,494
Charge for the year:
Buildings (120,000 / 50 yrs) -2,400
Plant (30,000 x 20%) -6,000
New machine -6,050
(33,000 x 20% x 11/12)
Motor vehicles -1,574
(10,494 x 15%) _______
_______
______
______
NBV at 30.9.11 150,000 _______
21,600 _______
38,950 ______
8,920 ______
219,470 _______
Total value of PP&E to be shown on the statement of financial position is
$219,470
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