ACCA

Paper P2 (International)
Corporate Reporting
Revision Mock Examination
December 2016
Question Paper

Time Allowed 15 minutes Reading and planning

3 hours Writing

This paper is divided into two sections:

Section A This ONE question is compulsory and MUST be attempted
Section B TWO questions ONLY to be attempted

Do NOT open this paper until instructed by the supervisor.

During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet
until instructed by the supervisor.
 Interactive World Wide Ltd, June 2016
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 This is a blank page.
The question paper begins on page 4.

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Section A This ONE question is compulsory and MUST be
attempted

1 The following draft financial statements relate to Squirrel, a public limited

company:

Draft group statement of financial position at 30 November

Current Comparative
Non-current assets $m $m
Intangible 180 65
Tangible 2,430 2,110
Investment in associate 235 250
Retirement benefit asset 70
_____ 60
_____
2,915
_____ 2,485
_____
Current assets
Inventories 1,110 1,060
Trade receivables 1,560 1,160
Cash at bank and in hand 290
_____ 480
_____
2,960
_____ 2,700
_____
Total assets 5,875
_____ 5,185
_____
Capital and reserves
Nominal share capital ($1) 300 270
Share premium 160 30
Revaluation reserve 192 286
Accumulated profits 503
_____ 586
_____
1,155
_____ 1,258
_____
Non-controlling interest 240 222
Non-current liabilities 1,600 1,300
Provisions for deferred tax 310 161
Current liabilities 2,570
_____ 2,330
_____
4720
_____ 3,927
_____
Total equity and liabilities 5,875
_____ 5,185
_____

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 Draft group income statement for the year ended 30 November
$m
Revenue 8,000
Cost of sales (5,370)
_____
2,630
Distribution and administrative expenses (1,630)
_____
Profit from operations 1,000
Share of operating profit in associate 100
Interest expense (85)
_____
Profit before tax 1,015
Income tax expense (including tax on associate $17million) (200)
_____
Profit for the period 815
_____
Attributable to:
Equity holders of the parent 723
Non-controlling interest 92
_____
Profit for the period 815
_____

Draft movement in accumulated profits for the year ended 31 May

$m
Opening 586
Profit for period 723
Dividends paid (830)
Foreign exchange difference of associate 24
____
Closing 503
____

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 The following information relates to Squirrel:
(i) Squirrel acquired a seventy per cent holding in Nut, a private limited
company, during the year. The fair values of the net assets acquired
were as follows:
$m
Tangible non-current assets 170
Inventories and work in progress 190
Receivables 120
Payables (290)
Provisions for onerous contracts (130)
____
60
____

The purchase consideration was $300 million in cash and $50 million
deferred consideration which is payable next year. The deferred
consideration attracts market rate interest which has been paid and
included in interest expenses. The provision for the onerous
contracts was no longer required at the year end as Squirrel had paid
compensation of $130 million in order to terminate the contract
during the year. The contract was related to an onerous lease on a
useless factory. The intangible asset in the group statement of
financial position comprises goodwill only. An impairment loss has
been recognised during the year in respect of goodwill and charged to
the income statement within cost of sales. It is the groups policy to
value the non-controlling interest at its proportionate share of the fair
value of the subsidiarys net assets.
(ii) There had been no disposals of tangible non-current assets during
the year. Depreciation for the period charged in cost of sales was $29
million.
(iii) Current liabilities comprised the following items:
Current Comparative
$m $m
Trade payables 2,000 1,700
Interest payable 5 4
Taxation 565 626
_____ _____
2,570 2,330
_____ _____

(iv) Non-current liabilities comprised the following:

Current Comparative
$m $m
Deferred consideration for purchase of 50 -
sub
Liability for the purchase of tangible 55 -
non-current assets
Loans 1,495
_____ 1,300
_____
1,600
_____ 1,300
_____

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 (v) The retirement benefit asset increased due to a substantial cash
investment during the year. The only other retirement benefit issue
was a charge of $21m to the income statement.

Required:
(a) Prepare a group cash flow statement using the indirect method
for Squirrel group for the year ended 30 November. (35 marks)
The note regarding the acquisition of the subsidiary is not required.
As noted above, it is the groups policy to value the non-controlling interest at
its proportionate share of the fair value of the subsidiarys net assets.
However, an independent specialist assisting Squirrel on the acquisition of Nut
advised that the fair value of the non-controlling interest at acquisition was
$100m.

Required:
(b) Calculate the full goodwill that would arise on this acquisition
had Squirrel applied a policy of valuing non-controlling interest
at fair value. Explain the difference between the two goodwill
figures and explain why a policy is not required. (5 marks)
The above financial statements are in draft.

Required:
(c) Identify presentational issues that could be applied to improve
the primary financial statements. (5 marks)
One of the non-executive directors is against the enormous dividend. He
believes it is unsustainable and so unethical.

Required:
(d) Comment on the concerns raised by the non-executive director
regarding the dividend. (5 marks)
(50 marks)

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Section B TWO questions ONLY to be attempted

2 (a) Lao, a public limited company, has three business segments which are
currently reported in its financial statements. Lao is an international
hotel group which reports to management on the basis of region. It
does not currently report segmental information under IFRS 8 Operating
Segments. The results of the regional segments for the year ended 31
October are as follows:
Segment results Segment Segment
Region Revenue
profit/(loss) assets liabilities
External Internal
$m $m $m $m $m
China 300 3 (10) 300 200
South
East 200 2 60 800 300
Asia
Other
500 5 105 2,000 1,400
regions
There were no significant inter company balances in the segment assets
and liabilities. The hotels are located in capital cities in the various
regions, and the company sets individual performance indicators for
each hotel based on its city location.

Required:
Discuss the principles in IFRS 8 Operating Segments for the
determination of a company's reportable operating segments
and how these principles would be applied for Lao plc using the
information given above. (11 marks)

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 (b) (i) One of the hotels owned by Lao is a hotel complex which includes a
theme park, a casino and a golf course, as well as a hotel. The theme
park, casino, and hotel were sold in the year ended 31 October to Mao,
a public limited company, for $200 million but the sale agreement stated
that Lao would continue to operate and manage the three businesses for
their remaining useful life of 15 years. The residual interest in the
business reverts back to Lao after the 15 year period. Lao would receive
75% of the net profit of the businesses as operator fees and Mao would
receive the remaining 25%. Lao has guaranteed to Mao that the net
minimum profit paid to Mao would not be less than $15 million.
(4 marks)
(ii) Lao has recently started issuing vouchers to customers when they
stay in its hotels. The vouchers entitle the customers to $30 discount on
a subsequent room booking within three months of their stay. Historical
experience has shown that only one in five vouchers are redeemed by
the customer. At the company's year end of 31 May 2008, it is
estimated that there are vouchers worth $20 million which are eligible
for discount. The income from room sales for the year is $300 million
and Lao is unsure how to report the income from room sales in the
financial statements. (4 marks)
(iii) Lao has obtained a significant amount of grant income for the
development of hotels in Europe. The grants have been received from
government bodies and relate to the size of the hotel which has been
built by the grant assistance. The intention of the grant income was to
create jobs in areas where there was significant unemployment. The
grants received of $70 million will have to be repaid if the cost of
building the hotels is less than $500 million. (4 marks)
Appropriateness and quality of discussion. (2 marks)

Required:
Discuss how the above income would be treated in the financial
statements of Lao for the year ended 31 October.
(25 marks)

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3 Handrew, a public limited company, is adopting International Financial
Reporting Standards (IFRS) in its financial statements for the year ended 31
May. The directors of the company are worried about the effect of the move
to IFRS on their financial performance and the views of analysts. The
directors have highlighted some 'headline' differences between IFRS and their
current local equivalent standards and require a report on the impact of a
move to IFRS on the key financial ratios for the current period.

Differences between local Generally Accepted Accounting Practice

(local GAAP) and IFRS

Leases
Local GAAP does not require property leases to be separated into land and
building components. Long-term property leases are accounted for as
operating leases in the financial statements of Handrew under local GAAP.
Under the terms of the contract, the title to the land does not pass to
Handrew but the title to the building passes to the company.
The company has produced a schedule of future minimum operating lease
rentals and allocated these rentals between land and buildings based on their
relative fair value at the start of the lease period. The operating leases
commenced on 1 June at the start of the current financial year when the value
of the land was $270 million and the building was $90 million. Annual
operating lease rentals paid in arrears commencing on 31 May at the year end
are land $30 million and buildings $10 million. These amounts are payable for
the first five years of the lease term after which the payments diminish. The
minimum lease term is 40 years.
The net present value of the future minimum operating lease payments as at
1 June year start was land $198 million and buildings $86 million. The
interest rate used for discounting cash flows is 6%. Buildings are depreciated
on a straight line basis over 20 years and at the end of this period, the
building's economic life will be over. The lessor intends to redevelop the land
at some stage in the future. Assume that the tax allowances on buildings are
given to the lessee on the same basis as the depreciation charge based on the
net present value at the start of the lease, and that operating lease payments
are fully allowable for taxation.

Plant and equipment

Local GAAP requires the residual value of a non-current asset to be
determined at the date of acquisition or latest valuation. The residual value of
much of the plant and equipment is deemed to be negligible. However, certain
plant (cost $20 million and carrying value $16 million at 31 May year end) has
a high residual value. At the time of purchasing this plant (1 June prior year
start), the residual value was thought to be approximately $4 million.
However, the value of an item of an identical piece of plant already of the age
and in the condition expected at the end of its useful life is $8 million at 31
May current year end ($11 million at 1 June current year start). Plant is
depreciated on a straight line basis over eight years.

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 Investment properties
Local GAAP requires investment property to be measured at market value and
gains and losses reported in equity. The company owns a hotel which
consists of land and buildings and it has been designated as an investment
property. The property was purchased on 1 June current year start. The hotel
has been included in the statement of financial position at 31 May current
year end at its market value on an existing use basis at $40 million (land
valuation $30 million, building $10 million). A revaluation gain of $5 million
has been recognised in equity. The company could sell the land for
redevelopment for $50 million although it has no intention of doing so at the
present time. The company wants to recognise holding gains/losses in profit
and loss. Local GAAP does not require deferred tax to be provided on
revaluation gains and losses.
The directors have calculated the following ratio based on the local GAAP
financial statements for the year ended 31 May.
Return on capital employed
Profit before interest and tax $130m
100% ie 25%
Share capital reserves and non-current liabilities $520m
The issued share capital of Handrew is 200 million ordinary shares of $1.
There is no preference capital. The interest charge and tax charge in the
income statement are $5 million and $25 million respectively. Interest and
rental payments attract tax allowances in this jurisdiction when paid. Assume
taxation is 30%.

Required:
Write a report to the directors of Handrew:
(a) Advising directors briefly on the process of first time adoption
under IFRS 1 First time adoption of International Financial
Reporting Standards. (3 marks)
(b) Discussing the impact of the change to IFRS on the reported
profit and statement of financial position of Handrew at 31 May
2005. (Equal marks are allocated to each of the three issues).
(15 marks)
(c) Discussing the impact of the change to IFRS on the Return on
Capital Employed performance ratio. (Candidates should show
calculations in an appendix). (7 marks)
(25 marks)

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4 Alumanu, a public limited company, has prepared its financial statements for
the year ended 31st October. The following information relates to those
financial statements.
This year Last year
$m $m
Group revenue 250 201
Gross profit 45 35
Profit from operations 10 9
Profit before taxation 12 8
Net profit for the period 5 4
Non-current assets 42 36
Current assets 55 43
Current liabilities 25 24
Non-current liabilities long-term loans 13 9
Capital and reserves 59 46
The company expects to achieve growth in retained earnings of about 20% in
the year to 31 October. Thereafter retained earnings are expected to
accelerate to produce growth of between 20% and 25%. The growth will be
generated by the introduction of new products and business efficiencies in
manufacturing and in the companys infrastructure.
Alumanu manufactures products from aluminium and other metals and is one
of the largest producers in the world. Production for this year increased by
18% through the acquisition of a competitor company, increased production
at three of its plants and through the regeneration of old plants. There has
been a recent growth in the consumption of its products because of the
substitution of aluminium for heavier metals in motor vehicle manufacture.
Cost reductions continued as a business focus and Alumanu has implemented
a cost reduction programme to be achieved by within three years. Targets for
each operation have been set.
Alumanus directors feel that its pricing strategy will help it compensate for
increased competition in the sector. The company recently reduced the price
of its products to the motor vehicle industry. This strategy is expected to
increase demand and the usage of aluminium in the industry. However, in
spite of the environmental benefits, certain car manufacturers have formed a
cartel to prevent the increased usage of aluminium in car production.
In the next few years, Alumanu expects to spend around $40 million on
research and development and investment in non-current assets. The focus
of the investments will be on enlarging the production capabilities. An
important research and development project will be the joint project with a
global car manufacturer to develop a new aluminium alloy car body.
In January of the current year, Alumanu commenced a programme of
acquisition of its own ordinary shares for cancellation. At 31 October current
year end, Alumanu had purchased and cancelled five million ordinary shares
of $1. In addition, a subsidiary of Alumanu had $4 million of convertible
redeemable loan notes outstanding. The loan notes mature on in four years
and are convertible into ordinary shares at the option of the holder. The
competitive environment requires Alumanu to provide medium and long-term
financing to its customers in connection with the sale of its products.
Generally the financing is placed with third party lenders but due to the higher
risks associated with such financing, the amount of the financing expected to
be provided by Alumanu itself is likely to increase.

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 The directors of Alumanu have attempted to minimise the financial risk to
which the group is exposed. The company operates in the global market
place with the inherent financial risk that this entails. The management have
performed a sensitivity analysis assuming a 10% adverse movement in
foreign exchange rates and interest rates applied to hedging contracts and
other exposures. The analysis indicated that such market movement would
not have a material effect on the companys financial position.
Alumanu has a reputation for responsible corporate behaviour and sees the
work force as the key factor in the profitable growth of the business. During
the year the company made progress towards the aim of linking
environmental performance with financial performance by reporting the
relationship between the eco-productivity index for basic production, and
water and energy costs used in basic production. A feature of this index is
that it can be segregated at site and divisional level and can be used in the
internal management decision-making process.
The directors of Alumanu are increasingly seeing their shareholder base widen
with the result that investors are more demanding and sophisticated. As a
result, the directors are uncertain as to the nature of the information which
would provide clear and credible explanations of corporate activity. They wish
their annual report to meet market expectations and not just the basic
requirements of company law. They have heard that many companies deal
with three key elements of corporate activity, namely reporting business
performance, the analysis of the financial position, and the nature of
corporate citizenship, and have asked your firms advice in drawing up the
annual report.

Required:
Draft a report to the directors of Alumanu setting out the nature of
information which could be disclosed in annual reports in order that
there might be better assessment of the performance of the company.
Candidates should use the information in the question and produce
their report under the headings:
(i) Reporting business performance; (10 marks)
(ii) Analysis of financial position; (7 marks)
(iii) The nature of corporate citizenship. (6 marks)
Marks will be awarded for the presentation and style of the report.
(2 marks)
(25 marks)

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